1.16 Query: Accounting treatment of packing material supplied by the customers.
1. A company is engaged is mainly in the production of nitrogenous fertilizers, viz., Urea & C.A.N., which is marketed in packings of 50 Kgs. jute/HDPE bags. The fertilizer being a controlled commodity under the Essential Commodities Act, the price is fixed by the Government of India inclusive of cost of bags as only bagged material can be supplied by manufacture in standard weight packing. As per the querist, the cost of bags is not separately indicated in the notification fixing the price. The company procures bags for all manufacturing units centrally from the corporate office. The company is also supplying urea to some other fertilizer companies under their seeding programme (before commencement of their commercial production). The bags for such supplies are supplied by these fertilizer companies, at the negotiated price of bags. The company packs its products in the packing material supplied by them and sells the same at the price notified by the Government.
2. As per the querist, credit for the negotiated price of the bags, as stated above, is given in the customers’ account maintained with the company on the basis of the consumption of bags and debit is given to the packing material consumed account, where cost of packing material procured directly by the company and consumed during the year is reflected. By adopting the above practice of showing consumption of bags in the packing material consumed account, as per the querist, the correct picture of total bags consumed for sales effected during the year is reflected and at the same time the sales made to the fertilizer companies is made at the government’s notified price.
3. An alternative accounting treatment has been suggested to the querist in this regard. According to this, the cost of the bags procured from other fertilizer companies at the negotiated price should be shown as reduction from the Government’s notified price and, therefore, the billing to these fertilizer companies be done only for the net price. However, the querist is of the view that if done so, the sale price will be reduced by the cost of the bags and at the same time the cost of packing material consumed will not show the correct picture. This practice, therefore, will not only incorrectly disclose the cost of packing material consumed during the year but also infringe the Government’s notification indicating the market price of the fertilizer. The querist feels that since the price of fertilizers is fixed by the Government after taking into account cost of the bag, if the same is not indicated in the packing material consumed account correctly, it may adversely affect the fixation of retention price for the company.
4. The querist has sought the opinion of the Committee as to whether the accounting treatment being followed by the company with regard to the packing material supplied by other fertilizer companies is correct, or the alternative treatment, as stated at para 3 above could be considered for adoption.
Opinion February 3, 1994
1. The opinion of the Committee expressed herein is restricted to the question of the accounting treatment of the packing material supplied by the customers. The Committee has not considered the other issues, e.g., whether the company can raise invoices at prices which are less than the fertilizer prices notified by the Government.
2. The Committee is of the opinion, subject to para 1 above, that in case the supply of packing material by the customers can be considered, in substance, as purchase by the company, the treatment being followed by the company in this regard, i.e., treating the receipt of bags as purchase by the company and invoicing the sales at gross value, would be correct. The supply of packing material by the customers can be considered as purchase if all the significant risks and rewards of ownership of the packing materials are also transferred by the customers to the company, e.g., in case of loss of the packing materials, the company would bear the cost of such loss. However, if the significant risks and rewards of ownership in the bags are not transferred to the company, it would be appropriate to raise invoice against the relevant customers at selling price net of the negotiated cost of the bags. ___________________________ |