1.13   Query:

Accounting of loan transactions relating

to petroleum products.

1. Under the administered pricing mechanism applicable to petroleum/oil industry, the Oil Coordination Committee (OCC) is the apex body to regulate and control the allocations of crude oils and supply plans of petroleum products to various refineries. A government corporation is the canalising agency for import of crude oil and petroleum products (other than those decanalised) for the entire industry. Under the system, which is prevalent since past several years, some of the shipments of crude oil and products are shared as per the allocation decided by OCC between the oil companies based on the stock position and needs. These sharings are often treated in the category of loan for the purpose of accounting. Under the system, the lender company (i.e., the company in whose name the bill of lading has been made) treats these sharings as loan given inventory in the books of account. The loanee company, on the other hand, reflects the same as the loan received stock and also deposits an equivalent amount representing the crude oil value with lender company one day before the date of final payment to the supplier. Therefore, there is no financial burden involved either for the lender company or for the loanee company.

2. The querist has informed that, as far as the disclosure of the above transactions in the company’s books is concerned, the total quantity of loan given as on 31^st March is shown as part of the inventory with the disclosure that the inventory includes quantity given on loan to other oil companies, valued at cost. Similarly, the crude oil/products taken on loan from other oil companies and outstanding as at the end of the year, is adjusted against own inventory and only the net inventory is valued and shown as inventory in the balance sheet. The manner of disclosure illustrated by the querist is as follows:

The deposits taken from other oil companies against crude oil/product given on loan is shown as ‘current liability’ and the deposits given against crude oil/products received on loan form part of ‘loans and advances’. The crude/product loan transactions are being operated on a continuous basis and reconciled between the oil companies at frequent intervals and the quantities and values are generally tied up at the close of annual accounts.

3. The querist has further clarified that as per the system, the parcels of receipts of loan quantity and repayment of loan quantity are adjusted between the oil companies on first-in-first-out basis. In other words, for the purpose of value accounting, FIFO principle is followed as the cost for each shipment varies from others depending upon the international price of crude oil. Therefore, the quantities are squared of between a loaner company and loanee company on first-in-first-out basis. At the end of the year, individual accounts of the other oil companies are drawn to show whether the company is a net lender or borrower against each other oil company. Such loan balance is valued at the appropriate shipment parcels rate, if the company is a net lender against the other oil company or at the rate of the deposits paid to the other oil company, if the company is a net borrower against that company. The querist has also subsequently clarified that the B/L holder is the owner of the crude oil and for any loss arising during transit, the claim can be lodged only by B/L holder. However, when the material is received by the loanee, for any loss during the storage of such crude oil, the loss is to be absorbed by loanee company and the company is bound to return the crude oil to the loaner company on tonne to tonne basis. The crude oil received on loan by the loanee company is intended for processing by that company and can not be sold or otherwise disposed of. The crude oil is required to be returned on tonne to tonne basis by the loanee company by importing crude oil and diverting the consignment to the loaner company. All such crude oil transactions are coordinated by the Oil Coordination Committee, a wing of Ministry of Petroleum and Natural Gas, depending upon the requirement and exigencies of the refineries.

4. According to the querist, a question has arisen as to whether the accounting treatment given by the corporation to reflect the loan transactions as inventory in the balance sheet is appropriate or not. One view is that such transactions of crude/products given on loan and outstanding should be reflected under ‘Loans and Advances’ rather than the same being reflected as ‘Inventory’. According to the querist, this view is based on the fact that the loanee company might have consumed/processed the crude/products received on loan, though the company remains accountable for the same quantity out of their own stocks.

5.  In this context, the querist has sought the opinion of the Expert Advisory Committee as to whether the disclosure of above mentioned loan transactions as inventory in the balance sheet is appropriate.

1. The Committee notes that para 6.6 of the ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’, issued by the Institute of Chartered Accountants of India, inter alia, states, “…Any raw materials which have been consumed would, accordingly, require disclosure irrespective of whether they have been purchased or whether they have been acquired through some other means. Consequently, in addition to purchased raw materials which are consumed, disclosure would also extend to raw materials which are consumed but which were acquired on a loan basis…..”

2. The Committee further notes that the term “Advances” is defined by Black’s Law Dictionary as “Money or Commodities furnished on credit.”

3. The Committee also notes that Part I of Schedule VI to the Companies Act, 1956 requires ‘advance recoverable in cash or in kind or for value to be received’ to be shown separately under the heading ‘Loans and advances’. Accordingly, the Committee is of the view that the materials given on loan by the company, should be shown under this heading.

4. The Committee is of the view that, where the crude oil/petroleum products received on loan are consumed by the company in question, the same should be disclosed as part of raw material consumed in the profit and loss account. The Committee is of the view that closing stock should be disclosed as follows in the balance sheet, whether or not the crude obtained on loan is consumed:

5. The Committee is, accordingly, of the opinion that the mode of disclosure regarding the loan transaction of crude oil/petroleum products as mentioned in para 2 of the query is not appropriate.

6. While suggesting the above the Committee has not considered the issue of entries of individual transactions which have to be in accordance with provisions of Section 209 of the Companies Act, 1956. The Committee has also not considered the matter of price differential in case the rate at which the crude was loaned is different from the rate at which the crude is returned to the lender.

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