1.23  Query:    

Accounting for the ‘Rolls’ used in a rolling mill.

1. A private company runs a rolling mill. The rolls used in the mill have a very small life span, say 3 months, if used continuously. However, since a rolling mill does not produce only one size of the finished product, normally more than one set of rolls are used during a particular period. Consequently, one roll may be used for more than one year. Each roll is made to produce a specific size of finished product and the designing of the rolls involves some technical expertise. Normally, it takes 15-30 days to machine the rolls so as to make them usable in the mill. The roll which is developed first time to produce any new range of product, as per the querist, is compulsorily capitalised. Schedule XIV to the Companies Act, 1956, provides for depreciation @ 100% on such rolls.

2. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)        Should the rolls used in a rolling mill be treated as part of fixed assets and capitalised as such each time, since Schedule XIV to the Companies Act, 1956, prescribes special rate of depreciation for such rolls? If yes, what should be their date of capitalisation, the date when they are ready for use or the date when they are actually used?

(b)        If the rolls are to be capitalised, whether depreciation to be charged will be proportionate, particularly, when it may so happen that their actual date of capitalisation falls somewhere in the middle of the year and by the year-end they are totally consumed.

(c)        If the rolls are to be capitalised the gross block will be increased, and in this way it will keep on increasing with every capitalisation. So what should be the basis to reduce the gross block where the company does not opt to sell the scraped rolls? (This problem, as per the querist, is very much serious for units falling under the small scale industry category, since their benefits are lost if the gross block exceeds the prescribed amount while the asset really does not exist).

(d)        Can the rolls be treated as consumables (as stores and spares) and charged to revenue since the life span of each roll is very small and this is replaced for earlier roll in use and thus it does not increase the productive capacity of the plant?  If yes, whether complete rolls can be treated as consumed or closing stock will have to be ascertained.

Opinion                                                                                                                March 7, 1995

1.The Committee notes paras 6.1, 8.1, 24 and 25 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which read as follows:

“6.1      Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.”

“8.1      The definition in paragraph 6.1 gives criteria determining whether items are to be classified as fixed assets. Judgement is required in applying the criteria to specific circumstances or specific types of enterprises. It may be appropriate to aggregate individually insignificant items, and to apply the criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have been included as fixed assets, because the amount of the expenditure is not material.”

“24.      Material items retired from active use and held for disposal should be stated at the lower of their net book value and net realisable value and shown separately in the financial statements.”

“25.      Fixed asset should be eliminated from the financial statements on disposal or when no further benefit is expected from its use and disposal.”

2. The Committee also notes that Item II of Schedule XIV to the Companies Act, 1956, specifically recognises ‘Rolling mill rolls’ as an item of fixed assets and prescribes a special depreciation rate of 100% for such rolls.

3.The Committee further notes note no. 4 of the Notes to Schedule XIV to the Companies Act, 1956, which reads as follows:

“4.  Where during any financial year, any addition has been made to any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such assets shall be calculated on a pro-rata basis, from the date of such addition or, as the case may be, up to the date on which such asset has been sold, discarded, demolished or destroyed.”

4. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist at para 2 of the query:

(a)        Rolls held for use in production of finished goods and not for sale in the normal course of business should be treated as fixed assets. The cost of manufacturing/acquisition of such rolls should be capitalised, like any other asset, when they are ready to be put to use. However, where the amount of expenditure incurred on manufacturing/ acquisition of such rolls is not material, it may be expensed as and when incurred.

(b)        Pro-rata depreciation is required to be charged on the cost of the rolls, in the situations mentioned in note 4 of Notes to Schedule XIV to the Companies Act, 1956. Where such rolls are fully consumed during the same financial year when they are capitalised, strictly as per the requirements of the said note 4, pro-rata depreciation should be provided. However, the net book value of fully consumed rolls will have to be written off in the same year except to the extent of the expected realisation by way of scrap.

(c)        The rolls which are fully consumed during a year and are held for disposal should be stated at the lower of their net book value and net realisable value and shown separately in the financial statements.

(d)        In view of (a) above, rolling mill rolls can not be treated as consumables.

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