Query No. 13 Subject: Accounting policy in respect of export sales whether required to be disclosed.[1] A. Facts of the Case
1. A public sector company manufactures zinc, lead, silver and cadmium metals for which it mines the ore, processes it to convert it into concentrate and then further refines it at smelters to extract the metal. While the company mainly sells metal only, during the last 2-3 years, surplus zinc concentrate has also been exported. According to the querist, though there is no established market for zinc concentrate in India, there exists an established international market.
2. As per the querist, the export is carried out on the basis of global tender enquiry. The following factors are considered in arriving at the price of zinc concentrate in line with internationally accepted practice:
(i) The weight of the concentrate is taken at load port. Moisture is determined and dry weight is arrived at under supervision of a mutually agreed internationally accredited agency.
(ii) Samples are also taken at load port and analysed by the buyer and the seller for determining the percentage of payable metals and impurities for calculating penalties, if any, as per the terms of contract.
(iii) In case analyses done by buyer and seller differ beyond pre-decided limits, the samples are sent to an ‘umpire’ for analysis. The umpire’s analysis is final.
(iv) The quality and quantity of the metal for which final payment has to be made are arrived at on the basis of steps (i) to (iii) above.
(v) Average London Metal Exchange (LME) quotation for the month following the month of shipment as published in ‘Metal Bulletin’ is taken for working out the value of payable metal content for final invoice.
(vi) From the value so arrived at, treatment charges and penalty as per the terms of contract are deducted to arrive at the final price of the concentrate.
3. A provisional invoice is prepared on the basis of payable metal content as per seller’s analysis based on LME price of the day prior to the shipment date. 90% payment is released by the buyer based on the provisional invoice. Balance payment is settled based on final invoice after considering steps in paragraph 2 above.
4. As per the querist, the terms and conditions of various contracts may differ from party to party and from period to period depending upon the international trade practices.
5. The final settlement of the price in the manner stated in paragraph 2 above normally takes 3 to 6 months from the despatch of the material. Under these circumstances, as per the querist, the consignments despatched during the last quarter have to be accounted for on an estimated basis. The company is consistently following a cut-off date for recognising revenue based on the information available till such date.
6. The difference between the value accounted for on an estimated basis and the value as per final settlement is accounted for at the time of final settlement.
7. According to the querist, trends are normally available before the cut-off date and as such, the difference between estimated accounted price and final price is not material.
8. According to the querist, the company is following the provisions of Accounting Standard (AS) 9, ‘Revenue Recognition’, to recognise the sales and the provisions of Accounting Standard (AS) 11, ‘Accounting for the Effects of Changes in Foreign Exchange Rates’, to account for exchange difference.
9. According to the querist, generally only one shipment despatched in the last quarter of the financial year has to be accounted for on the basis of the estimated price. In these circumstances and in view of the fact that the terms and conditions may vary from contract to contract, the company did not consider it necessary to disclose the accounting policy for export sales. However, during the audit of accounts for 1997-98, the government auditors have opined that the accounting policy in this respect is required to be disclosed as per the provisions of Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’.
B. Queries
10. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether, as per the provisions of AS 1, it is necessary to disclose the accounting policy in respect of export sales.
(b) Whether the fact that a part of export sales, where final settlement is pending, is accounted for on an estimated basis is required to be disclosed and quantified in annual accounts.
C. Points Considered by the Committee
11. Paragraphs 11 and 24 of Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, state as below:
“11. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by the enterprise in the preparation and presentation of financial statements.”
“24. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.”
12. From the above, the Committee notes that AS 1 requires disclosure of ‘significant’ accounting policies. (The Standard, however, does not define what constitutes a significant accounting policy.)
13. The Kohler’s Dictionary for Accountants (6th Edition) assigns, inter alia, the following meanings to the word ‘significant’: “Significant -
- of sufficient magnitude, as measured by a departure from some norm,
- of sufficient importance to warrant disclosure or the treatment accorded to larger or more important items,
- likely to influence judgements or decisions,
- other events or conditions peculiar to a given establishment.”
14. From the facts of the query, the Committee observes that in respect of those consignments the pricing of which is not final as on the cut-off date, the company recognises the revenue on the basis of estimated price which is arrived at on the basis of the information available till the cut-off date.
15. The Committee is of the view that estimates are an integral part of accounting process and the mere fact that an item appearing in the financial statements is based wholly or partly on an estimate is not in itself a matter of sufficient importance to warrant disclosure as an accounting policy. In the instant case, while a very substantial part of total sales is recorded on the basis of actual realisation, only a small part is apparently being accounted for on the basis of estimates. Further, the experience of the company suggests that the difference between the amounts recorded as sales on estimated basis and the amounts finally settled is not material. The Committee is of the view that under these circumstances, the disclosure of the said accounting policy is not necessary.
D. Opinion
16. On the basis of the above, the Committee is of the following opinion on the queries raised in paragraph 10:
(a) AS 1 requires that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Whether the accounting policy in respect of export sales warrants disclosure or not would depend on its significance under the facts and circumstances of a particular case.
(b) Under the facts and circumstances of the case, the disclosure of the accounting policy relating to the export sales is not necessary in terms of the requirements of AS 1. The question of quantification, therefore, does not arise.
[1] Opinion finalised by the Committee on 15.1.1999.
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