1.24  Query:    

Disclosure of write-off/write-back of accounts receivable

and payable in the profit and loss account.

1. A public limited company is engaged in manufacturing and trading of drugs, pharmaceuticals and chemicals. From time to time, the review of the accounts payable and receivables is carried out to ensure that whatever amounts are not payable or recoverable are written-off/written-back from/to the books of account. Such amounts of receivables and payables written-off/written-back combined together or separately do not constitute a significant value and are less than 1% of the total revenue as stipulated for disclosure under Schedule VI to the Companies Act. The figures for the previous year are as below:

2. During the course of previous year’s audit, a question has arisen whether the amounts so written-off/written-back be disclosed separately in the annual accounts. Hitherto, the company has been following a system of treating these expenses or income, as the case may be, as miscellaneous expenses or miscellaneous income. As per the knowledge of the querist, disclosure of these items separately as bad debts or liabilities written-off/written-back is not necessary as per the Institute’s guidelines.

3.The querist has sought the opinion of the Expert Advisory Committee as to whether such disclosure of advances/receivables written-back/written-off is necessary even if the amount involved does not exceed 1% of the revenue.

                                                                                        Opinion                    February 8, 1995

1.The Committee notes that Part II of Schedule VI to the Companies Act, 1956, does not specifically require write-off/write-back of the account receivables or payables to be disclosed. The matter is, therefore, to be decided on whether the amounts involved are material in nature.

2. The Committee also notes that para 17(c) of Accounting Standard (AS) 1, ‘Disclosure of Accounting policies’, issued by the Institute of Chartered Accountants of India, explains ‘materiality’ as: “Financial statements should disclose all material items, i.e., the items the knowledge of which might influence the decisions of the user of the financial statements.” Whether an item is material or not can be judged by considering the impact that it has on the profit and loss account or the balance sheet. As far as profit and loss account is concerned, the materiality could be evaluated in terms of various relevant factors, such as turnover, net profit (loss) etc. In some cases, the relevant statute lays down criteria for materiality. For instance, in the Companies Act, 1956, materiality in respect of ‘miscellaneous expenses’ has been prescribed in Part II of Schedule VI. Proviso to clause 3(x)(i) of the said Part II states that “any item under which the expenses exceed one percent of the total revenue of the company or Rs. 5000, whichever is higher, shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other item to be shown under ‘Miscellaneous Expenses’. However, the Committee further notes that in case of income items, the law has not laid down the criteria on the lines as given for expenses. The matter has, therefore, to be decided on the basis of the general principle of materiality. While total revenue may be a factor for determination of materiality, there may be certain other relevant factors as stated above.

3. On the basis of the above, the Committee is of the opinion that in case of write-off of receivables, if the amount is less than the higher of Rs. 5000 and 1% of the total revenue, it may be clubbed under ‘Miscellaneous Expenses’. However, in case of write-back of accounts payable, the question should be decided keeping in view the consideration of materiality of the amounts involved.

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