1.12Query:

Valuation of in-process material of calcined alumina and

aluminum hot (molten) metal in a continuous process.

1. A public sector company, under the administrative control of Ministry of Mines, Government of India, is engaged in manufacturing of alumina and aluminium, generation of power in the captive power plant for use in the smelter and selling aluminia and aluminium both in domestic and international market. It has a capacity to produce 8,00,000 MT of calcined alumina and 2,30,000 MT of aluminium ingots per annum.

2. For production of 8.00 lakhs MT of calcined alumina, the company has installed two streams of calcination plant of 4 lakhs tpa each. Calcined alumina is produced from bauxite through a chemical process called “Buyer’s System”. In this process, the bauxite, after grinding to desired size, is sent to the silo and ballmilled using green liquor (caustic soda). After ballmilling, the slurry is digested under atmospheric pressure at 105 degree C. The digested slurry is diluted and descillicated at 103 degree C to precipitate out the reactive silica. The descillicated slurry is sent to the settler to separate the mud (undigested bauxite) and the liquor (saturated with alumina). The liquor is sent to the Security Filtration to remove any impure particles prior to precipitation. The clear overflow is cooled down to about 60 degree C for precipitation of aluminum hydroxide. Such precipitation takes place in about 12-13 numbers of precipitation tanks in each phase and after about 40-48 hours of precipitation time; the slurry is filtered at the desk filter to separate the hydrate from liquor. The hydrate cake is washed and again filtered in drum filter to make it caustic free. The filtered cake is sent to the calciner for producing calcined alumina at 950-1000 degree. A part of filtered hydrate is also used as seed for continuous precipitation. Such process takes about 5 days and contains about 77000 MT of in-process material at different stages of completion starting from bauxite grinding to calcination.

3. For production of 2.30 lakhs MT of aluminum per annum, the company has installed smelting plant having 480 pots. The pots are nothing but aluminum reduction cells in which metallic aluminium is produced commercially by the electrolysis of alumina in a liquid bath cryolite. Each pot consists of a steel shell set up on substantial foundation and a carbon lining. The space within the lining is usually about half a metre deep. For electrolytic process electric current is passed through anodes suspended from above and partly dipped in the liquid bath of cryolite. The pot cells act as a cathode. These pots were capitalised in a phased manner and the last batch of such capitalisation of 52 pots was made during the year 1995-96.

4. According to the querist, in line with the Guidance Note on Treatment of Expenditure during Construction Period, issued by the Institute of Chartered Accountants of India, the expenses incurred on start up and commissioning of the pots including the expenditure incurred on trial runs and revenue earned out of sale of metal produced during the trial run are accumulated under ‘Incidental Expenditure During Construction Account’ (IEDC). Once the process gives stabilised production, the net of expenses/income under IEDC are capitalised along with the cost of plant.  Here, it has been further clarified by the querist that the debits to the IEDC account on account of trial production are of two types, i.e., the cost of raw material which is one time and cost of raw material which is recurring. Similarly, the credit to IEDC Account are of two types, i.e., sale and accretion of stock of metal produced out of trial run. However, the in-process material available inside the pot on the date of declaration of commercial production is neither valued nor credited to IEDC Account. In other words, cost of in-process material forms part of capital cost. Based on this principle, the company has declared its accounting policy on valuation of in-process of material as mentioned below:

“In-process materials are not valued in view of the fact that the entire initial fill for the process has already been capitalised, the quantum thereof at the opening and closing date of the year remains more or less at the same level and such stocks are not measurable accurately.”

5.  In case of calcination plant, the movement of in-process material from one process to the other is continuous and automatic and, therefore, remains more or less at the same level. On the other hand, in the smelting plant the hot metals are tapped at intervals from the pots for casting ingots, wire rods and billets.

6. The life of pots varies between 6 to 8 years and in some cases even shorter period. In order to give new life to the pots, these are relined. On an average, 50 to 70 pots are relined in a year. For relining purposes, the in-process hot metal inside the pot is drained out and cast either as ingots or put into the nearby operating pots. Once relining is completed, the hot metal to the extent required is poured from the adjoining pots to make the pots again ready for operation. This indicates that at any point of time, some pots are temporarily always out of operation. The statistics of number of pots temporarily out of operation at the end of each year since beginning are furnished below:

7. The company is not passing any accounting entries in the books of account for increase/decrease in quantum of in-process material of calcined alumina and aluminium hot metal at the end of the year consistently over the years as per the accounting policy laid down above, as per the querist, because of the following principles:

(i)         The original cost of in-process material is capitalised as explained in para 4.

(ii)        The measurement of in-process material at the end of the financial year is difficult as correct volumetric measurement is not possible because of unknown volume of side fridge, bottom sludge and cavities.

(iii)       Variation in number of pots in operation as compared to the beginning of the year is marginal. It may be noted that there was abnormal fluctuation in the year 1989-90 and 1993-94 due to power problem in the captive power plant and inability of the State Electricity Board to supply such huge quantity of power.

(iv)       Pot shut down and recharge is a normal activity in a smelter plant, consequently leading to fluctuation of quantum of in-process material.

(v)        Accounting entries for decapitalisation for temporary period when the pots are undergoing relining process and again recapitalisation, after putting the pot in operation will be a cumbersome process.

(vi)       The new pots are recharged by putting bath metal out of in-process material of adjoining operating pots.

(vii)      The relining expenses are charged to revenue account as and when required.

8.During the course of audit of accounts for the year 1995-96, the Government auditor has raised a query on the existing accounting policy followed by the company stating that in case of reduction in number of pots commissioned, the in-process materials have been taken out and utilised in production thereby increasing the revenue of the year. The Government auditor’s comments and the management’s reply thereto are given below:

9. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i)         Is the accounting policy on valuation of in-process material followed by the company, proper, keeping in view the facts and circumstances mentioned above?

(ii)        If the number of pots fluctuate at the end of a financial year in comparison with the opening number of pots in operation, should the treatment be different?

                                                                     Opinion                                              May 19,1997

1. The Committee notes that Part II of Schedule VI to the Companies Act, 1956, requires the following disclosure to be made as per clause 3 (iii):

“In the case of all concerns having work in progress, the amounts for which such works have been completed at the commencement and at the end of the accounting period.”

2. In view of the above, it is a statutory requirement to disclose the value of the opening and closing work-in-progress. In case of difficulties in determining the exact quantity of work-in-progress, the Committee is of the view that proper technical estimates in this regard may have to be obtained.

3. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in para 9 of the query:

(i)         The accounting policy on valuation of work-in-progress followed by the company is not proper.

(ii)        The work-in-progress has to be valued at the end of a financial year irrespective of the fluctuations in the opening and closing number of pots.

_______________________________