1.27 Query: Write back of unclaimed credit balances, excess provisions and unpaid wages/salary/bonus etc. 1. A state government corporation is engaged in the manufacture of cotton and synthetic yarn. The company had established its mills between 1984 to 1987 and in the beginning, in most of the cases, 90% payment was released against machinery/stores and balance 10% was retained for satisfactory performance/approval. This balance amount has not been claimed by some parties since then.
2. The company has recognised certain price escalation claims by some parties in its books of account, but these have not been paid so far. There are no claims for the last 7 years. In case of one party, official liquidator has been appointed.
3. In another case, a wrong credit of Rs. 9 lacs was given by a banker in 1986. The company has kept the amount in Suspense Account. The bank has not claimed the amount so far and the account is inoperative.
4. In yet another case, a raw material supplier has allowed the company a wrong credit of Rs.8 lacs. The supplier’s account is reconciled except for this wrong credit.
5. The company has other liabilities such as excess provisions, credit balances of workers/staff and unpaid wages/salary/bonus etc.
6. In this context, the querist has raised the following issues for the opinion of the Expert Advisory Committee:
(i) Whether the unclaimed credits of aforesaid nature can be written back?
(ii) If the answer to (i) above is in the affirmative, what are the formalities/precautions required before writing back the aforesaid amounts?
(iii) Whether there is any time limit before which such credits cannot be written back.
(iv) If the answer to (i) above is in the negative, what will be the ultimate treatment of such credits?
Opinion March 13, 1995
1. The Committee notes that the querist has sought opinion of the Committee on the accounting treatment in respect of (a) unclaimed credit balances on account of machinery purchases and price escalation claims accepted but not paid, (b) wrong credits allowed by a banker and raw material supplier, (c) unpaid wages/salary/bonus, and (d) excess provisions.
2. As far as unclaimed credit balances of suppliers of machinery and the unpaid wages/salary/bonus and other credit balances towards workers and staff are concerned, the Committee is of the view that the legal position in this regard should be determined considering all the relevant laws applicable, e.g., the Limitation Act, 1963, the Companies Act, 1956, the Payment of Wages Act, 1936, etc. The Committee has not attempted to interpret the legal position in view of Rule 2 of the Advisory Service Rules. The accounting treatment in this regard suggested hereafter would be relevant in case it is determined that the balances are no longer payable.
3. The Committee notes para 9.1 of Accounting Standard (AS) 10 on Accounting for Fixed Assets, issued by the Institute of Chartered Accountants of India, which provides as follows: “9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:
(i) site preparation; (ii) initial delivery and handling costs; (iii) installation cost, such as special foundations of plant; and (iv) Professional fees, for example fees of architects and engineers.
The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.” 4. As regards the wrong credit given by a banker and the wrong credit allowed by a raw material supplier, the Committee is of the view that the same should be intimated to the parties concerned to settle the matters and accounting entries passed accordingly.
5. The Committee also notes para 7(2) of Part III of Schedule VI to the Companies Act, 1956, which is reproduced below:
“(2) Where-
(a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or
6. The Committee is of the view that if a company makes a provision which is considered reasonably necessary in a year but subsequently in any later year, the provision becomes excessive, the excess may be written back to the profit and loss account of the subsequent year. If it is not so written back, the excess provision would be treated as ‘Reserve’ in the balance sheet as required by para 7(2) of Part III of Schedule VI to the Companies Act, 1956.
7. On the basis of the above, the Committee is of the following opinion in respect of the issues raised in para 6 of the query:
(a) If the unclaimed credit balances of suppliers of machinery are determined as no longer the liabilities of the company on the basis of the considerations mentioned in para 2 above, the same should be adjusted in the cost of the relevant assets. The wrong credits allowed by a banker and a raw material supplier should be treated as mentioned in para 4 above. The unpaid wages/salary/bonus should be dealt with in accordance with the requirements of the relevant law and the necessary accounting treatment made accordingly. For the treatment of excess provisions, kindly refer to para 6 above.
(b) Kindly see (a) above.
(c) Kindly see (a) above.
(d) Kindly see (a) above. ____________________________
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