1.36 Query: Deployment of surplus funds- Presentation in balance sheet.
1. A government company is engaged in petroleum refining and manufacturing of certain petrochemical products. The nature of the business is such that, on occasions, there will be surplus funds for short durations which are deployed profitably as part of treasury management.
2. The surplus funds are deployed mainly in the form of short term deposits with various scheduled banks. As banks cannot accept deposits for a period less than 46 days (now reduced to 30 days), on occasions where the availability of funds is less than for this period, the company places funds in the following two forms:
(a) Short term deposits with institutions other than banks – SBI Capital Markets Limited, a subsidiary of State Bank of India (SBI Caps), ICICI Securities and Finance Company Limited (I Sec), and Housing Development Finance Corporation Limited (HDFC) are the institutions with whom the funds are generally placed by the company. These institutions give a Short Term Deposit Receipt for the funds deployed, in which the rate of interest agreed is also mentioned. On maturity the principal amount is returned together with interest.
(b) Inter Corporate Deposits – The company places funds with other companies for short durations, the rate of interest is as mutually agreed. The funds are returned, together with interest, on maturity.
3. On rare occasions where the surplus position permits, the company also deploys its surplus funds in the form of Certificates of Deposits with scheduled banks where the period of deposit is usually 90/91 days. These deposits are made with the issuing banks only and the company does not park its funds in this form in the secondary market.
4. The deposits made with scheduled banks - short term deposits as well as Certificates of Deposits – are disclosed in the accounts under the head ‘Cash and Bank Balances’. Funds deployed with institutions other than banks and inter corporate deposits are classified under the head ‘Loans & Advances – Advances recoverable in cash or in kind or for value to be received’.
5. During the course of audit of accounts for the year 1995-96 by the Member, Audit Board, the presentation of funds deployed with institutions other than banks under the head ‘Loan & Advances’ was objected to. According to the querist, the considered view of the Government Auditors was that such transactions should be classified under the head ‘Investments’. In support of their view, they have quoted, amongst others, opinion of the Expert Advisory Committee of the Institute (1.33 – Compendium of Opinions, Vol. VIII).
6. The company’s justification for the present disclosure is as under:
(a) Deployment of funds with institutions other than banks is with the sole intention of earning interest. The rate of interest is agreed at the time of deployment and there is no possibility of any capital gains/losses. It is just like any term deposit with banks, and the reasons why the company resorts to depositing with these institutions is that banks are either not in a position to accept deposit for less than a specified duration or that they are not able to match the yield offered by other institutions.
(b) These deposits are not ‘Investments in Government or Trust Securities’ or ‘Investments in shares, debentures or bonds’ and hence do not come within the specified categories where disclosure is required to be made under the head ‘Investments’ under Schedule VI to the Companies Act, 1956. (c) As per Accounting Standard (AS) 13, on ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India, the nature of an investment may be that of a debt, other than short or long term loan or a trade debt….. (Para 5). As the funds deployed with institutions other than banks is of the nature of advances given to them, it does not fit-in under the head ‘Investments’.
(d) According to the querist, regarding disclosure of Certificates of Deposits with Scheduled Banks under the head ‘Cash and Bank Balances’, Schedule VI to the Companies Act, 1956, does not permit disclosure under any other head.
7. The querist has sought the opinion of the Expert Advisory Committee on the appropriate disclosure in the balance sheet of the company of:
(i) Amounts deployed as short term deposits with institutions other than banks such as SBI Caps, I Sec., HDFC etc., and other corporate deposits.
(ii) Certificates of Deposits with Scheduled Banks.
Opinion* March 4, 1997
1. The Committee notes that the terms ‘loan’, ‘investment’, and ‘deposit’ have not been defined in general in the Companies Act, 1956. The Committee, however, notes that in the context of section 370 of the Act, an explanation was added in 1988 by way of an amendment according to which “loan includes any deposits of money made by one company with another company, not being a banking company”. The Committee is accordingly of the view that for the purposes of Schedule VI to the Companies Act, 1956, the deposit with a company other than a non-banking company should also be treated as a loan and disclosed under the head ‘Loans and Advances’. On the other hand, in the view of the Committee, a Certificate of Deposit with a bank represents a type of balance with the concerned bank and accordingly should be disclosed under the head ‘Cash and Bank Balances’, just as fixed deposits are shown under that head.
2. On the basis of the above, the opinion of the Expert Advisory Committee on issues raised in para 7 of the query is as follows:
(i) The company is correctly disclosing the amounts deposited with non-banking companies such as SBI Caps, HDFC, etc., and other corporate deposits under the head ‘Loans and Advances’.
(ii) The company is correctly disclosing the certificates of deposits with Scheduled Banks under the head ‘Cash and Bank Balances’. ________________________ * This opinion supersedes the earlier opinion of the Committee on the subject (No. 1.33, Compendium of Opinions, Volume VIII) |