1.22 Query: Classification of bridge loans given against central subsidy receivable from the government of India.
1. A company was appointed along with the Maharashtra State Financial Corporation as an agent for disbursement of subsidy under the ‘Central Investment Subsidy Scheme’ of the Government of India. The procedure followed, as per the querist, under this Scheme was as below:
(a) The amount of central subsidy, which was of the nature of a grant, used to be sanctioned by the state level committee. Against such sanctions, the company used to disburse the amounts of central subsidy in advance to the eligible industrial units in Maharashtra.
(b) Subsequently, the company used to claim reimbursement of such amount from the Central Government and square-up the advance account in the books.
2. Although, during initial years, the abovesaid procedure was followed, subsequently, the company started the practice of disbursing the amounts in advance to the eligible units only as ‘bridge loans’ carrying interest, if sanctioned amount in an individual case exceeded Rs. 1.00 lakh. In all other cases (i.e., less than Rs. 1.00 lakh in an individual case) the company continued the practice of disbursing the subsidy in advance (pending reimbursement by the Central Government) without charging any interest on the same. As regards the bridge loans also, the company used to claim the amount as a reimbursement from the Central Government after disbursement of the bridge loan and on receipt of such reimbursement the company used to square-up the bridge loan account.
3. As far as the accounting of the above transaction is concerned, the company was following the practice of showing the bridge loans under the heading ‘Loans to Industrial Units’ under the major heading ‘Loans and Advances’, in the balance sheet. As regards the other amounts (other than bridge loans) receivable, it has been following the practice of showing them under the heading ‘Advances’ till the Amount is reimbursed by the central government. This practice was followed as such advance did not carry any interest. For the accounting year 1990-91, an amount of Rs. 45.12 lakhs was shown by the company under the heading ‘Advances’, pursuant to the above practice.
4. The Comptroller and Auditor General of India (AG), in his comments on the account for the financial year 1990-91, has observed that the amount of bridge loans accounting to Rs. 238.36 lakhs should also have been clubbed with the amount of advance amounting to Rs. 45.12 lakhs referred to above under the heading ‘Advances’. The relevant comment of the CAG and the company’s reply thereto are reproduced hereunder:
Comment: Amount due from the Government of India on account of disbursement of central subsidy made on its behalf (out of this Rs.12.16 lakhs considered doubtful of recovery) Rs.45.12 lakhs. This amount does not include Rs. 238.36 lakhs being the central subsidy receivable from the Government of India (received in 1991-92) in lieu of bridge loans disbursed by the company during the year.
Reply: The amount of Rs. 238.36 lakhs on account of bridge loans is included in the total amount of Rs. 35471.77 lakhs being loans to industrial units as detailed in Schedule No. 8.
5. The querist has further clarified that the Central Government’s subsidy scheme has been abolished with effect from 1.10.1988. However, some of the advances/bridge loans are still outstanding in the company’s books pending receipt of reimbursement from the Central Government.
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting practice followed by the company, with regard to classification of the bridge loans, is correct or the observation of the CAG in respect thereof is correct.
Opinion
1. The Committee is of the view that since the Companies Act, 1956, has not defined the terms ‘loan’ and ‘advance’, the meaning of these terms, for the purpose of classification of a certain item either as loan or advance should be taken as it is understood in common commercial parlance. In this regard, the Committee notes that the two terms, viz., ‘loans’ and ‘advances’ have been defined, by various authors/authorities, as follows:
Loans
“A lending; delivery by one party to and receipt by another party of some money upon agreement, express or implied, to repay it with or without interest”. [Black’s Law dictionary]
Advances
“Money paid or in advance of the proper time of payment, or moneys advanced to be repaid conditionally; a loan or gift”. [Black’s Law dictionary]
“A payment of cash or the transfer of goods for which an accounting must be rendered by the recipient at some later date; A payment on a contract before its completion; the payment of wages, salaries, or commissions before they have been earned”. [A Dictionary for Accountants by E.L. Kohler]
“Payment made on account of, but before completion of a contract, or before acquisition of goods or receipt of services” [Guidance Note on Terms Used in Financial Statements, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India].
2. The Committee is of the view the bridge loans given by the company to various industrial undertakings, which are eligible for grant of central subsidy under the scheme of the Central Government, are meant for the purpose of bridging the gap between the sanction of the subsidy by the Government and the final dispersal thereof. It is a temporary financial arrangement between the company and the eligible industrial undertaking whereby the company gives short term loans to such undertakings which are repayable, with or without interest, depending upon the amount of loan given, on release of the amount of grant sanctioned. Advances are generally understood as the amounts paid toward discharge of liabilities in the ordinary course of business before the performance of the contract is completed by the other parties. Therefore, the bridge loans given by the company are more in the nature of loans rather than advances, as defined in para 1 above.
3. On the basis of the above, the Committee is of the opinion that the amount of ‘bridge loans’ given to various industrial undertakings, against the central subsidy receivable should be classified as a ‘loan’ and disclosed accordingly irrespective of the amounts involved. __________________________ |