1.6 Query: Accounting treatment of Pass Book Credit under Exim Policy.
1. The querist has explained the Pass Book Credit Scheme under the Exim Policy as below:
(i) The exporters are to apply for a Pass Book which is issued immediately without having any export obligation/import entitlement.
(ii) The exporters can export the goods under the Pass Book Scheme.
(iii) The customs authorities give credit of duty involved in inputs used for exported products on the basis of standard input-output norms.
(iv) Such credit can be utilised for import of duty-paid inputs either for own use or for sale in domestic market.
(v) Such credit lying in the Pass Book is not transferable. Apart from this, there are no other restrictive covenants.
(vi) The Pass Book is valid for 3 years, i.e., within 3 years, the credit lying in the Pass Book can be utlised for imports of duty-paid inputs. In other words, on such imports no duty is to be paid as it is to be adjusted from the credit lying in the Pass Book.
(vii) There is no restriction of type of inputs. An exporter can import any type of inputs which may either be used by him or sold in domestic market.
(viii) According to the querist, in case the exports are effected under the Duty Drawback Scheme, the exporters are allowed to make provision for duty drawback receivables in the books of account. The Pass Book Scheme is similar in the sense that the duty on inputs used in exports of product is credited in the Pass Book for use of duty-paid imports.
2. The querist has further informed that during 1995-96 and 1996-97, the company has been given credit of Rs. 2 crores out which Rs. 1.00 crore has already been utilised by adjusting duty amount on duty-paid material. The company has also sold materials imported and utilised under the Pass Book credit scheme.
3. The querist has also informed that the basic difficulty experienced by the company with customs authorities was non-availability of international price of basic inputs. Further, in view of the various authorities involved in processing documents, such as designated authority, customs authorities and the audit departments, it takes time before a credit is given in the Pass Book.
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether credit lying in the Pass Book can be accounted for in the books of account at the year end.
(ii) Sometimes it happens that export documents are not processed and the customs authorities are still to assess the duty amount for credit in the Pass Book. In such a situation, whether the exporter can account for in the books of account the amount of credit to be given by customs authorities.
Opinion October 17, 1997
1. The Committee notes that Accounting Standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, issued by the Institute of Chartered Accountants of India, defines the term ‘contingency’ as below:
“A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be known or determined or determined only on the occurrence, or non-recurrence, of one or more uncertain future events.”
2. The Committee notes that utilisation of the Pass Book credit is contingent upon the future event of making imports within three years, as per the Pass Book credit scheme, which is uncertain. Although, the uncertainly is diminished due to Pass Book credit being available for unrestricted imports of various types of inputs for self-use or for sale, the Committee is of the view that the Pass Book credit is of the nature of contingent gain.
3. The Committee further notes that para 12 of AS 4 requires that “contingent gains should not be recognised in the financial statements”. However, para 6 of AS 4, inter alia, states that “ when the realisation of a gain is virtually certain, then such gain is not a contingency and accounting for the gain is appropriate”. Thus, in case the company is virtually certain that it would be in a position to utilise the Pass Book credit, the credit may be considered an as asset to the extent that it is considered virtually certain.
4. With regard to export in respect of which the Pass Book credit is pending completion of assessment by customs authorities, the Committee is of the view that unless there is no uncertainly regarding the amount of credit being available, the accounting treatment suggested in paras 2 and 3 above should not be followed. Thus, where any uncertainly exists with regard to the aforesaid, such a possible credit should not be recognised in the books of account on the consideration of ‘prudence’, which is a major consideration in the selection of accounting policies, as per Accounting Standard (AS) 1 on ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India. Para 17 (a) of the aforesaid standard explains ‘prudence’ as below:
“In view of the uncertainty attached to further events, profits are not anticipated but recognised only when realised through not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”
5. On the basis of the above, the opinion of the Expert Advisory Committee, on the issues raised in para 4 of the query, is as below:
(i) Please see paras 2 and 3 above.
(ii) Please see para 4 above. _________________________ |