1.24 Query: Accounting for depreciation where customs duty on a fixed asset is capitalised in a subsequent year.
1. A public sector undertaking under the Ministry of Surface Transport was incorporated on 29th March, 1976, under the Companies Act, 1956. The main objective of the company is to provide integrated dredging services to all major and minor ports, Indian navy, fishing harbour and other maritime organisations. The dredging is mainly carried out by two types of dredgers, viz., (1) Trailer Suction Hopper Dredgers (SHDs) and (2) Cutter Suction Dredgers (CSDs).
2. The company procured two ocean going Trailer Suction Hopper Dredgers – One in 1990 and the other in 1991, which were cleared by the customs without lavy of customs authorities. However, vide their letters dated 8.9.1995 and 19.4.1996, they demanded a total sum of Rs. 1,136.86 lakhs payable on the initial spares brought on board both these dredgers, under Section 28 of the Customs Act. In the first case, the customs authorities alleged willful misstatement and suppression of facts and in the second case, miscalculation of value and suppressing the facts by the company. Copies of the orders of customs and replies given by the company have been submitted by the querist for the perusal of the Committee. The company disputed the allegations of the customs authorities and is in the process of taking necessary action for appeal etc. Based on the show cause notice of the customs authorities, as a matter of caution, the amount of customs duty sought to be levied on the respective dredgers has been capitalised and a provision for customs duty of Rs. 1,136.86 lakhs was made in the books of account for the year 1995-96.
3. During the course of their audit of the accounts for 1995-96, the Govt. auditor observed that depreciation on the customs duty now capitalised should be charged with retrospective effect, i.e., from the date on which the respective dredger was originally capitalised and not prospectively from 1995-96 as was done by the company. The auditor observed that para 26 of Accounting Standard (AS) 6 on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, would apply only in cases where the historical cost of depreciable asset has undergone a change due to increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors. It is the view of the Govt. auditor that the customs duty levied subsequently on items in respect of which facts were allegedly suppressed or involving misstatement of fact cannot be brought within the purview of Para 26 of Accounting Standard 6.
4. During the discussions with the Member, Audit Board, Hyderabad, on the accounts of the company for the year 1995-96, the particular provisional comment of the Govt. auditor was dropped, with a stipulation that a reference as to the correct treatment of depreciation on customs duty now levied would be made to the Institute of Chartered Accountants of India for their opinion and that necessary adjustment, if any, will be made in the accounts of the company in the next year based on the opinion of the Institute. The querist has, accordingly, sought the opinion of the Expert Advisory Committee on this issue.
Opinion December 31, 1996
1. The opinion of the Committee given hereafter is only on the question of the accounting for depreciation in respect of the amount capitalised on account of customs duty. The Committee has accordingly not gone into other accounting issues, e.g., the propriety of the capitalisation of the customs duty claims since the querist has not raised this issue.
2. The Committee notes para 25 of Accounting Standard (AS) 6 (Revised) ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, which is reproduced below:
“25. Where the historical cost of a depreciable asset has undergone a change due to increase or decrease in long term liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors, the depreciation on the revised depreciable amount should be provided prospectively over the useful life of the asset”.
The above para of Revised AS 6 replaces para 26 of the former Accounting Standard (AS) 6.
3. The Committee is of the view that the standard stipulates charging of depreciation on prospective basis where the change in historical cost of the asset is due to change in liability on account of exchange fluctuations, price adjustments, changes in duties or similar factors. The Committee notes that aforesaid changes in historical cost are caused by factors which are basically beyond the control of the management at the time the change takes place as these are triggered by market forces, suppliers, government etc. In other words, the changes in historical cost are not brought about by the actions or omissions to act on the part of the management. Thus, the Committee is of view that the nature of change in historical cost of the fixed asset as envisaged in para 25 is different from that of the revision of the historical cost as in the present case, i.e., it is not a situation of a change in the duty as such, but it is a case of an asset escaping payment of duty.
4. On the basis of the above, the Committee is of the opinion that, in the present case, para 25 of AS 6 is not applicable. Accordingly, the depreciation should be worked out on retrospective basis, i.e., the depreciation in respect of the past years since the acquisition of the dredgers should be charged in the profit and loss account of the current year and should be disclosed as a prior period item in accordance with para 9 of Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting policies, issued by the Institute of Chartered Accountants of India, as below:
“Prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on current profit or loss can be perceived.” ____________________________ |