1.7 Query: Inclusion of internal transfers in turnover.
1. A government of India company is engaged in the field of electronics trade and technology development. It has also diversified its activities in other fields like manufacturing of personal computers and exportable CTV sets, in the recent years. To facilitate the manufacturing activities, it has acquired the factory assets including plant and machinery at Bhiwadi from a state financial corporation. It is an assembly line whereat the company is getting PC and TV sets manufactured for sales in domestic market. The company has also made a major breakthrough in the export market. It has been exporting 14” CTV sets to Germany. To facilitate export, it has set up an Electronic Hardware Technology Park (EHTP) at Bombay wherein exportable CTV sets are made and exported from there.
2. As a matter of practice, goods manufactured at Bhiwadi are transferred at ex-factory price (which includes profit margin) to different regional offices wherefrom actual sales take place (no sales invoice raised for this). Therefore, in the accounts of Bhiwadi Unit there is no sales turnover as actual sales do not take place in Bhiwadi. Similarly, the entitlement sales in domestic tariff area are also made by different branch offices and not by the EHTP Unit. At EHTP Unit, 40% of the total production (as per Import-Export Policy), is allowed for domestic sales on compliance with certain value addition norms. The company is fulfilling the value addition norms and, therefore, entitled to make domestic tariff area (DTA) sales upto the extent of 40% of total CTV production at EHTP, and stock transferred at ex-factory price (which includes profit) to different regions wherefrom actual sales take place (no sales invoice raised for this).
3. At present, in terms of accounting practice followed by the company, the material stock transferred to other units at ex-factory price is accounted ‘as per contra’ while consolidating the accounts. The value of goods manufactured and transferred from Bhiwadi factory and from EHTP Unit are shown in ‘Turnover Schedule’ under the heading ‘Inter-Unit Transfers as per contra’ and also shown in the ‘Direct Expenses Schedule’ under the heading ‘Transfer as per contra’. At the year end, in the valuation of inventory, the profit element is ignored. This has been a consistent practice being followed by the company for the last two accounting years. In this regard, the company has framed the accounting policy as under:
4. The management of the company is of the opinion that the manufacturing of goods at Bhiwadi and in EHTP, Bombay, for domestic market requires use of manpower and capital. It also requires working capital which is assessed by the banks on the basis of sales, stock and book debts. As the sales are not effected by the individual production unit, the economic activities are not recognised for working capital requirements. The management is also of the opinion that the accounting treatment given in the consolidated accounts as per contra does not inflate the profit as it has no impact on the profitability. The transfers have been distinctively disclosed as ‘Transfer of manufactured goods as per contra’.
5. The Government auditor has observed that this accounting treatment amounts to overstatement of sales and cost.
6. In the above context, the querist has sought the opinion of the Expert Advisory Committee as to what should be the correct accounting practice to be followed by the company as per the requirements of Schedule VI to the Companies Act, 1956?
Opinion July 11, 1995
The Committee is of the view that the term ‘turnover’ should include only the sales made by an enterprise to other entities. The Committee is accordingly of the opinion that the inclusion of internal transfers to other divisions under ‘turnover’ and the contra entry under ‘direct expenses’ is not proper. _____________________________
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