1.15 Query: Inclusion of goods-in-transit, pending payment, in the inventory.
1. A company imports components and raw-materials for use in the manufacture of vehicles against letter of credit on FOB foreign port basis. The bill of lading, alongwith other shipping documents, is negotiated by the overseas suppliers against the letter of credit opened by the company. The bill of lading is made to the order of the shippers (overseas suppliers). The foreign banks, after effecting the payment to the overseas sellers, forward these documents for reimbursement to the concerned Indian bank in New Delhi, through which the company opens the letter of credit. The Indian bank, after reimbursing the amount to the foreign bankers by debiting the company’s account, releases the documents to it. Insurance is also undertaken by the company and the responsibility of claiming the insured amount lies on the company in the case of loss of goods owing to any unforeseen circumstances. The company accounts for the transaction after the retirement of shipping documents from the concerned Indian bank. Thus, at the year end, there are certain consignments in respect of which the documents have not been retired and have not been accounted for by the company. The Government auditors have commented upon this practice and have stated that where shipments take place before the year-end but the documents have not been retired the amount should be included under goods-in-transit and liability provided for it.
2. The querist has sought the opinion of the Committee as to whether the company should include in goods-in-transit, those consignments which have been shipped before the year-end but in respect of which documents have not been retired from the concerned Indian bank.
Opinion October 7, 1992
1. The Committee notes that para 9.14 and 9.16 of the Statement on Amendments to Schedule VI to the Companies Act, 1956, issued by the Institute of Chartered Accountants of India, recommends as below, although in the context of disclosure of the value of imports of raw-materials etc., to fulfill the requirements under clause 4 (D)(a) of Part II of Schedule VI:
“9.14 The value of imports should include goods which are in transit on the balance sheet date, provided that the property in those goods has already passed to the purchasing company. For the purpose of determining whether or not the property has passed, reference may be made to the terms of the import contract, and recognised legal principles, relating to this matter.
9.16 Since the requirement is to disclose the value of imports during the accounting year, it may be necessary to determine when the title to the goods has passed from the overseas exporter to the Indian importer. The question as to when the title to the goods has passed should be determined in accordance with the well recognised legal principles relating to this matter. The disclosure should be restricted to imports where the title has passed within the accounting year irrespective of whether or not payment has been made during the year and irrespective of whether or not the goods have been physically received during the year.”
2. The Committee further notes that in the context of recognition of revenue from sale of goods, it has been well established from the accounting point of view that in case there has been a transfer of significant risks and rewards of ownership in the goods, revenue can be recognised even though transfer of property in goods has not taken place. In this regard, the Committee notes para 6.1 of Accounting Standard (AS) 9 on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, as below:
“6.1 A key criteria for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration. The transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. However, there may be situations where transfer of property in goods, does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer. Such cases may arise where delivery has been delayed through the fault of either the buyer or seller and the goods are at the risk of the party at fault as regards any loss which might not have occurred but for such fault. Further, sometimes the parties may agree that the risk will pass at a time different from the time when ownership passes.”
The Committee is of the view that the abovementioned recommendation recognises the primacy of substance over form which should also be applied in case of purchases.
3. On the basis of the above, the Committee is of the opinion that the company should recognise consignments as goods-in-transit which have been shipped on FOB basis, before the year-end, and in respect of which significant risks and rewards of ownership have passed to the company. However, whether singificant risks and rewards of ownership in goods have been transferred in a given case is a question of fact to be determined on the basis of the circumstances of each case including the terms of contract, negotiation of the bill of lading against the letter of credit etc. ____________________________ |