1.16  Query:  

  Basis of inventory valuation of books by a publishing company.

1. A company is engaged in the business of publishing books. According to the querist, there are some special features relating to this trade which should be looked into for the purpose of valuation of inventories.

2. The company is publishing books consisting of thesis and reference books. The books are targeted for the university and college libraries and are generally not purchased by individuals. The orders of the libraries are subject to the availability of grants by the Government and University Grants Commission. A major part of the books published are sold in the first year of publication.

3. On the basis of the past history and experience of the trade it is assumed that generally 50% of the books published are sold. The querist has made a presumption of the total number of books that would be sold as below:

            Books will be sold                                                        50%

            Complementary, authors, press and review copies         10%

            Production wastage                                                      2%

            Soiled & damaged in transit                                          5%

4. The book are generally sold to the traders on ‘Sale or Return’ basis. The trader returns the books whenever he thinks that the same would not be sold or does not have any demand.

5. The traders supply the books to the libraries on approval. The process of approval is time consuming and sometimes takes months.

6. According to the querist, the books once returned have little or no shelf value due to the fact that they are badly handled during transportation by railways and get soiled and torn.

7. The stock which is returned or is unsold after the first year is generally dead stock and the market does not accept the old edition which reduces the sales possibility.

8. According to the querist, based on the facts stated above and the perishable nature of the books, the valuation of the stocks at close has been done on a very conservative basis keeping in view the fact that the books would not be sold in the near future and also based on the trade practices.

9. The basis of valuation of stock has been followed on consistent basis over the years by the company. The stocks have been valued at a price lower than the cost mainly because the saleability of the same is not certain. The company feels that some books might be sold in future which is uncertain and the stock is otherwise dead. The valuation is not done by treating it scrap but in a graduated manner by which after the completion of third year the stock is scrap. According to the querist, the basis of valuation of stock is as under:

            Ist year of publication                                        @ 20% of the cost

            IInd year of publication                                     @ 7.5% of the cost

            IIIrd year of publication                                     @ 3.75% of the cost

            IVth year of publication                                     @ Re. 1/- each

10. The querist has sought the opinion of the Expert Advisory Committee whether the basis of valuation of stock followed by the company is correct.

                                                                          Opinion                              September 24, 1996

1. The Committee notes paras 24, 6.9 and 17 of Accounting Standard (AS) 2 on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, which are reproduced below:

“24.      Subject to the exceptions stated in para 29.1 to 29.4 inventories should be valued at lower of historical cost and net realisable value.

6.9       ‘Net Realisable Value’ is the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale.

17.       The historical cost of inventories may at times not be realised e.g., if their selling prices have significantly declined, or if they become wholly or partially obsolete, or if the quantity of inventories is so large that it is unlikely to be sold/utilised within the normal turnover period and there exists a genuine risk of physical deterioration, obsolescence or loss on disposal. In such circumstances, it becomes necessary to write down the inventory to ‘net realisable value’, in accordance with the principle of conservatism which requires that current assets should not be carried in the financial statements in excess of amounts expected to be realised in the ordinary course of business.”

2.  The fundamental principle of valuation of inventories is that these should be valued at the lower of historical cost and net realisable value. The Committee notes from the facts of the query that the company in question is reducing the value of the inventory below cost in a graduated manner. However, it is not clear whether the percentages at which the value is reduced are based on a rational estimate of the net realisable value, e.g., it takes into account past experience.

3. On the basis of the above, the Committee is of the opinion that the practice of reducing the value of its inventories of books below cost would be proper if the reduced values are based only on a rational estimate of the net realisable value.

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