1.13 Query: Value of intervening waste products.
1. The Expert Advisory Committee had earlier given an opinion on the value of intervening waste products (published at page XI-22 of Compendium of Opinions, Volume XI). The querist has desired further clarifications.
2. According to the querist, it appears from the opinion expressed by the Expert Advisory Committee that the waste products are coming out of the manufacturing process regularly which would be in stock at the end of the year. It also appears from the opinion that the product is having a uniform selling price either in the form of a rate contract or based on regular tenders. As per the querist, the opinion expressed based on the above criteria was that the quantity of the waste products at the end of the financial year should be valued at realisable price and taken into account, since the accounts are maintained on accrual basis. According to the querist, however, the correct state of affairs of the process and nature of waste products referred to is as explained below:
(a) The process of
conversion of raw iron ore into sponge iron involves feeding of iron ore as
received from mines into the process kilns, for the purpose of de-oxidising for
removal of oxygen from iron ore.
(b) In the above process the coal char and char fines will be generated. In addition, in the process of preparation of iron ore and coal being the basis raw-material, some fines and shale will be generated in iron ore and coal. This would be before the raw material is fed into the process.
3. Although rates have been fixed for disposal of char, iron ore and coal fines, the same are with reference to particular quality levels. Customers prefer only such of the items with the acceptable quality levels which are generally found only in the current generations. Inspite of this the off-take during the year is generally less than the quantity generated. Thus, a part of the quantity even out of the current generation may get added to the previous stock and carried over to the subsequent years. It is, therefore, evident that the stock at the end of the year comprises accumulation of unsold materials relating to different years. Thus, the stock at the end of the year consists of varying quality levels, since it relates to different years.
4. The stock accumulation as stated above is disposed of through tenders on as-is-where-is basis. Thus, for the product accumulated over the years which contains no uniform quality, there cannot be any precise rate. In fact the average quality level also cannot be determined.
5. The generation of waste products is not uniform in respect of quantity, since the same depends on quality of input coal where the chemical composition of ash, volatile and carbon will always be varying substantially depending on the product received from the collieries as the natural product from the earth. The querist has also stated that no quantity records are maintained as there is no uniformity in generation and quality of waste products deteriorated with efflux of time.
6. According to the querist, there is no uniformity in quality or quantity in respect of waste products so accumulated and left in stock at the end of the year. In may be observed that it is not in the nature of uniform input-output process where the output of both quality and quantity can be precisely determined like in case of engineering industry. Value of disposal during the year at the prescribed rate, which normally relates to fresh generation, is being taken credit for.
7. The querist has stated that with regard to coal fines there is no uniformity in quality as the same depends on quality of material as stated above. The coal fines are mostly disposed of to State Electricity Boards. The payment for the same would be made by the Electricity Board based on the quality of coal received with reference to its average calorific value. Thus, for the stock lying at the end of the year, the rates and value are not determinable as the same are identified only on receipt by State Electricity Board. In regard to the iron ore fines also the quality and quantity will be varying substantially depending on the extent of necessary crushing and also the source from which the ore is received from time to time. Since waste products cannot be stocked separately with reference to their individual quality levels the same are all mixed and stocked together. Thus, it would be difficult to identify the quality in regard to its quantity and also no records can be maintained since the generation is not uniform and quantity cannot be identified.
8. According to the querist, it is imminent that at the end of the year, some stock of the above waste products is available. However, the quantity and the quality of the same cannot be determined with any degree of accuracy. The approximate price also cannot be determined since it depends on the quality at the date of disposal. The products are such that the quality would be deteriorating with efflux of time. Most of them, especially, the old accumulations, are disposed of on lumpsum basis on as-is-where-is condition. Keeping in view all the above features of waste products, the company has been accounting for the same on cash basis at the time of actual disposal. This has been the policy practised consistently over the years.
9. The querist is of the view that taking into consideration the recommendations of the Institute of Chartered Accountants of India in its Accounting Standard (AS) 9 on ‘Revenue Recognition’, the basic criteria are the possibility of reasonable determination of the value of the product and the measurability of the same. However, in the particular instance, in the background explained above, the income basically cannot take the character of income accrued as it becomes recognisable only at the time of sale. It is possible that some of the entire quantity accumulated over the years may remain unsold. The rate cannot be determined with any reasonable accuracy.
10. The government audit has suggested that value of such waste products may be taken into account with some estimation of both quantity and rate. In the opinion of the querist, this is not desirable as it may amount to taking credit for a notional income with uncertainty about quantity and value which may not be prudent.
11. The querist has sought the opinion of the Expert Advisory Committee with regard to accounting of the waste products.
Opinion September 24, 1996
1. The Committee reiterates its earlier opinion based on the general principle of valuation of inventories of waste products, as per Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, that “inventory of non-reuseable waste or inventory of reuseable waste for which facilities for reprocessing do not exist should be valued at net realisable value.” This principle would normally be applicable even in circumstances where the waste products are not regularly coming out of the manufacturing process and the product does not have a uniform selling price either in the form of a rate contract or based on regular tenders.
2. The Committee notes from the facts of the query, as stated by the querist, that no quantity records are maintained. The Committee is of the opinion that the company should maintain appropriate records of waste products. The company should make a reasonable estimate of the net realisable value on appropriate basis (which may often be based on past experience). ________________________________
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