Expert Advisory Committee

1.28 Query:

Accounting treatment of interest for usance period.

1. A company is a wholly owned Government of India Undertaking under Ministry of Commerce. It has been appointed as Nodal Agency to arrange export of Vietnamese Rice received from Vietnam under repayment of Government of India debts. The salient features of the transaction are that the company has to pay a pre-determined price to the relevant government department after a period of six months from the date of its realisation of the export proceeds, i.e., the purchase is on deferred basis with six months usance. The price payable is in-built of the interest for the usance period available to the company.

2. The company has arranged to sell the rice to a client in Singapore. The contract with the buyer provides as below: -

“Price @ US $106 PMT on six months usance. In case the buyer opts to pay at site, then rebate on account of usance period interest @ 1% per month (maximum 6%) @ US $ 6 shall be available.”

3. Since the buyer has opted to pay at site, it has opened a letter of credit on cash basis, i.e., at a discounted price. As the relevant purchase has been on deferred basis, the sales in this case has also been booked on deferred basis. Since the buyer has opted to pay at site, necessary adjustment has been made in the interest account for usance period expired upto the year end. For un-expired period, if any, proportionate interest has been kept under pre-paid.

4. The querist has taken the following practical example to show the accounting treatment of the transactions:

A) Where six months usance has fully expired within the financial year.

Pre-determined price payable to

Govt. Deptt. after six months usance. US$ 209

Six months deferred sale price US$ 212

Rebate for six months interest US$ 12

Cash realised US$ 200

In the above case, following entries have been passed:

1.9.94

a) Purchase (Dr) US$ 209

Seller (MOF) (Cr) US$ 209

b) Buyer (Client) (Dr) US$ 200

Interest paid (Dr) US$ 12

Sale (Cr) US$ 212

Note: Here six months usance is to completely expire upto 31^st March, 1995.

B) Where six months usance has remained partly un-expired at the close of the year.

In some cases where six months usance has not completely expired upto the year end, the proportionate interest for the un-expired usance period has been kept under pre-paid.

The querist has taken the above example with different dates. The entries that have been passed are as under: -

1.1.95

a) Purchases (Dr) US$ 209

Seller (MOF) (Cr) US$ 209

b) Buyer (Client) (Dr) US$ 200

Interest paid (Dr) US$ 12

Sales (Cr) US$ 212

31.03.95

C) Interest pre-paid (Dr) US$ 6

Interest paid (Cr) US$ 6

Here six months usance is to expire on 30.06.95. Hence adjustment has been made for three months interest for un-expired usance period.

Note: It is relevant to mention that the subject proposal is not a trading loss proposition and the company is making profit out of it.

5. The querist has stated that the auditor’s view is that the sale should be booked @ US$ 200/- as that is the price at which the letter of credit was established by the buyer. The buyer has specified the rates and terms of payment which the seller accepted and acted accordingly, and the amount of US$ 6.00 as interest should not have been booked as such.

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

(a) Whether the accounting treatment of the said transaction is in order.

(b) In case it is otherwise, what, in the opinion of the Committee, should be the accounting treatment of the above transaction.

Opinion February 7, 1996

1. The accounting treatment depends on terms and conditions of the orders and contracts in each case. The Committee notes from the facts of the query that the company has arranged to sell the rice to a client in Singapore at cash price and, therefore, no interest is receivable. On the other hand, the purchase price is pre-determined price payable to the concerned government department after six months usance, and, as per the querist, the interest is in-built in the price. If the interest amount in the purchase price was separately stated in the purchase invoice then the company should have accounted for the interest on period basis.

2. The treatment of interest on sale of goods from the point of view of the seller (which principle may be relevant from the point of view of the buyer in respect of purchase price), is noted by the Committee from paras 5.4 and 5.5 of the ‘Statement on the Amendments to Schedule VI to the Companies Act, 1956’, which are reproduced below:

“5.4 As regards the value of turnover, a question which may arise is with reference to various extra and ancillary charges. The invoices may involve various extra and ancillary charges such as those relating to packing, freight, forwarding, interest, commission, etc. It is suggested that, ordinarily, the value of turnover should be disclosed exclusive of such ancillary and extra charges, except in those cases where because of the accounting system followed by the company, separate demarcation of such charges is not possible from the accounts or where, the company’s billing procedure involves a composite charge inclusive of various services rather than a separate charge for each service.

5.5 In the case of composite charge invoices, it would not ordinarily be proper to attempt a demarcation of ancillary charges on a proportionate or estimated basis. For example, if a company makes a composite charge to its customer inclusive of freight and despatch, the charge so made should ordinarily be regarded as the invoice price of the goods sold, and should accordingly be disclosed as the value of the turnover. It would not be proper to reduce the value of the turnover by reference to the approximate value of the service relating to freight and despatch. On the other hand, if the company makes a separate charge for freight and despatch, and for other similar services, it would be quite proper to ignore such charges when computing the value of the turnover to be disclosed in the Profit and Loss Account. In other words, the disclosure may well be determined by reference to the company’s invoicing and accounting policy and may thereby vary from company to company. For reasons of consistency, as far as possible a company should adhere to the same basic policy from year to year and if there is any change in the policy, the effect of that change may need to be disclosed if it is material, so that a comparison of the turnover figures from year to year does not become misleading.”

3. Based on the above, the Committee is of the view, that since in the present case, the client in Singapore has opted to pay at site at cash price, the question of payment of interest for the usance period does not arise and, therefore, the sale should be disclosed exclusive of the interest.

4. On the basis of the above, the opinion of the Committee on the issues raised in para 6 of the query is as below:

(i) The accounting treatment of the transaction of sale in question is not in order.

(ii) The sale should have been booked at cash price and in case of such sales the question of interest does not arise.

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