1.12  Query:  

Disclosure of the value of materials given on loan.

The querist has sought the opinion of the Expert Advisory Committee on the matter whether the materials issued on loan to other companies/contractors should be classified along with inventories or under the head ‘loans and advances’.

                                                                           Opinion                                        March 31, 1992

1. The Committee notes that Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, has defined the term ‘inventories’ as follows:

            “6.1      ‘Inventories’ means tangible property held

                        i)          for sale in the ordinary course of business, or

                        ii)         in the process of production for such sale, or

iii)         for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machinery spares.”

2. The Committee further notes that “According to Black’s Law Dictionary, ‘loan’ means a lending, advance of money with absolute promise to repay, a borrowing with a promise to repay, delivery of money by one party and receipt by another on agreement, express or implied, to repay or a deposit. The four elements of loan are (1) an amount, a sum which may be in the shape of money or kind, (2) placing of it with another, called borrower, (3) an agreement to repay, (4) a recognition of liability on the part of the borrower to return it with or without interest.” (Quoted by A. Ramaiya in the Guide to the Companies Act.)

3. On the basis of the above, the Committee is of the view that the materials given on loan cannot be classified as inventories as they do not fulfill the requirements of the definition of the term as per AS-2. The Committee is further of the view that loan can be in cash or in kind. In view of this, the Committee is of the opinion that the materials given on loan should be classified under the head ‘loans and advances’.

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