Expert Advisory Committee

1.7 Query:

Accounting of loan transactions relating to petroleum products:

Appropriate method of setting off deposit and value of materials.

1. The querist has raised the following query in the context of an earlier opinion of the Committee published at page XV-31 of Compendium of Opinions, Volume XV.

2. Under the administered pricing mechanism applicable to petroleum/oil industry, the Oil Coordination Committee (OCC) is the apex body to regulate and control the allocations of crude oils and supply plans of petroleum products to various refineries. A government corporation is the canalising agency for import of curde oil and petroleum products (other than those decanalised) for the entire industry. Under the system, which is prevalent since past several years, some of the shipments of crude oil and products are shared as per the allocation decided by OCC between the oil companies based on the stock position and needs. These sharings are often treated as loan for the purpose of accounting. Under the system, the lender company (i.e., the company in whose name the bill of lading has been made) treats these sharings as loan given inventory in the books of account. The loanee company, on the other hand, reflects the same as the loan received stock and also deposits an equivalent amount representing the crude oil value with lender company one day before the date of final payment to the supplier. Therefore, there is no financial burden involved either for the lender company or for the loanee company. At the year end, it is possible that certain loans given/taken may be outstanding in the company’s books.

3. The querist has mentioned the following two alternatives to adjust deposits taken/given against the value of material given/received as loan:

(a) The deposit given/received is to be set off against the value of material loan taken/given and the net amount so arrived at considered for the purpose of disclosure in the balance sheet, or

(b) The deposits given/received in respect of one company outstanding as on the date of close of accounts is to be set off against each other and the value of materials received/given to that company as loan is to be set-off against each other and the resultant balances so arrived at disclosed separately in the balance sheet.

4. The querist is of the view that the latter method is more appropriate as it is not the normal accounting practice to set off the security deposit collected from contractors against the obligations towards the contractor for the work done. The nature of the loan transaction is such that there is never an intention to square-off the loans against deposits and the only way to discharge the liability is by diverting an equivalent quantity of material. This is also true from the practical point of view as the deposit given is on the basis of the cost for a particular parcel of crude/product, and if deposit adjustment/cash settlement is permitted, the loaner company may have to incur extra expenditure for buying an equivalent quantity of crude/product to make up for the quantity earlier loaned, at a later date, due to fluctuations in crude oil prices/exchange fluctuations. Hence, the querist is of the view that the value of material given on loan to an oil company has to be set-off against the value of material taken on loan and the resultant figure is to be shown under either “Loans and Advances” or “Other liabilities” for the purpose of disclosure in the balance sheet. Similarly, the deposit given to an oil company is to be set off against the deposit received from that oil company and the resultant figure to be disclosed under the head of either “Deposits” or “Other liabilities”.

5. The relevant note for the year 1994-95 in the published accounts of the company is reproduced below:

“(i) Values of crude oil given to an oil company and received from that oil company as loans, have been adjusted against each other and depending on the nature of the resultant balance (if any), included under Loans and Advances (Schedule-11) or Current Liabilities and Provisions (Schedule 4).

Accordingly, Rs. 41642.89 lacs (Rs.67305.83 lacs) is included in Loans and Advances (Schedule 11) and Rs.16332.53 lacs (Rs. 20218.12 lacs) in Current Liabilities and Provisions (Schedule 4).

(ii) Deposits received from an oil company and deposits made to that oil company for crude oil loans, have been adjusted against each other and depending on the nature of the resultant balance (if any), included under Loans and Advances (Schedule 11) or Current Liabilities and Provisions (Schedule 4).

Accordingly, Rs.15701.39 lacs (Rs. 20182.85 lacs) is included in Loans and Advances (Schedule 11) and Rs.42570.92 lacs (Rs.71425.55 lacs) in Current Liabilities and Provisions (Schedule 4).

[NB: Figures in brackets represent corresponding figures for the previous year.]”

The querist has given another view that since the deposit is relatable to the loans it would be only appropriate to show the net balance due/outstanding by setting-off the deposit against the value of material in the balance sheet.

Opinion April 19, 1996

1. The Committee reiterates its earlier opinion with regard to the accounting of materials on loan transactions relating to petroleum products. Therefore, the Committee has not gone into that question, viz., the disclosure of materials on loan as per para 5(i) of the query.

2. The Committee notes that the present query is with regard to whether value of material given on loan to a company can be set-off against the value of material taken on loan, and similarly, whether the deposits received and given can be so set-off or whether the deposits received/given can be adjusted against the materials given/taken on loan.

3. The Committee notes that as per the prevailing accounting principles and practices, setting-off of balances is generally not permitted except in circumstances, such as, when an enterprise has the legal right to receive or pay a single net amount and it intends to do so. Thus, a right of set-off is a legal right, by contract or otherwise, to settle or otherwise eliminate, all or a portion of an amount due to/from another party. The Committee notes from the facts of the query that it is not clear whether the materials given/taken on loan are to be settled contractually or by some other right, by returning/receiving the net amounts of materials. Also, with regard the deposits, it is not clear whether there is any contractual or other right to receive/pay a single net amount.

4. On the basis of the above, the Committee is of the opinion that it would be proper to set-off materials on loan given/taken and set-off of deposits taken/given only if the parties have the contractual or other rights to receive/pay a single net amount.

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