Query No. 8 Treatment of export credit receivable under DEPB Scheme.[1] A. Facts of the Case
1. In the Exim Policy 1997-2002, the Ministry of Commerce, Government of India has introduced a new scheme called Duty Entitlement Pass Book (DEPB) scheme in place of old Pass Book Scheme. The highlights of the new DEPB Scheme are as under :-
(a) An exporter can claim credit at a specified percentage of FOB value of exports made in freely convertible currency. The credit is available against export of such products and at such rate as may be specified by the Director General of Foreign Trade (DGFT) by a public notice issued in this behalf.
(b) DEPB may be issued on -
(i) Post-export basis and
(ii) Pre-export basis.
(c) DEPB on post-export basis is granted against export already made.
(d) The DEPB on post-export basis and/or items imported against it are freely transferable.
(e) The DEPB is valid for a period of 12 months from the date of its issuance.
2. As per the Exim Policy, the following are some of the other features of the Scheme:
(a) DEPB on pre-export basis aims to provide the facility to eligible exporters to import inputs which are required for production.
(b) Manufacturer-exporters and merchant-exporters tied with the supporting manufacturer(s) having export performance in the preceding three licensing years are eligible to claim DEPB on pre-export basis.
(c) The credit of DEPB on pre-export basis shall be granted at the rate of 5% of the average export performance of the applicant during the preceding three licensing years.
(d) The DEPB on pre-export basis shall carry an export obligation which has to be offset by the DEPB holder by making exports. The credit entitlement against such exports shall be calculated in accordance with the rate specified in this behalf. When the DEPB holder has made exports of such a value which will entitle him to credit equivalent to the credit already given to him under DEPB on pre-export basis, his obligation against such DEPB shall be offset.
(e) The credit under DEPB on pre-export basis shall be offset within a period of 12 months from the date of issue of such credit.
(f) At the time of issue of certificate of offsetting of the export obligation, the credit earned over and above the credit under DEPB on pre-export basis, is given to the exporter by way of issuance of credit under DEPB on post-export basis.
(g) The export made under the DEPB Scheme shall not be entitled for duty drawback. The additional customs duty paid in cash on inputs under DEPB shall be adjusted as MODVAT credit or duty drawback as per the rules framed by the Department of Revenue.
3. The querist has put forward the following arguments in favour of recognising the credit available under the DEPB Scheme :
(i) The post shipment DEPB Scheme is akin to duty drawback scheme, where provision is allowed in the books of account for refundable duty amount.
(ii) Since post-shipment DEPB credit is freely transferable like old Replenishment licence, the credit amount or net realisable value of post-shipment DEPB credit, whichever is lower, should be accounted for in the books of account.
(iii) The post-shipment DEPB credit is not an incentive, but refund of duty amount involved in respect of raw materials used in the export product. If the same is not considered in the books of account, on one hand the cost of production will get inflated and on the other hand no credit of duty amount will have been considered in books.
(iv) If such credit is not considered in the books of account, it will considerably reduce profitability and even can turn to be a loss. This will further strengthen the views of European countries, who are claiming that Indian manufacturers are dumping their products in the European market, which is not true at all.
4. According to the querist, the following three situations may arise on the last day of the accounting period :
(i) The exporter has not as yet applied for DEPB credit.
(ii) The exporter has applied for DEPB, but credit has not yet been issued by the relevant authority.
(iii) The exporter has received the DEPB credit, but the same has neither been utilised by him nor has been sold to others.
B. Queries
5. The querist has sought the opinion of the Expert Advisory Committee on the following issues :
(a) Whether any credit can be accounted for in the books of account at the time of finalisation of accounts for post shipment DEPB credit in hand which is yet to be sold or utilised.
(b) Whether any credit can be accounted for in the books in respect of the applications for issuance of DEPB credit pending with the authorities, the actual exports having been made during the accounting year under consideration.
C. Points Considered by the Committee
6. The Committee notes that ‘accrual’ is one of the fundamental accounting assumptions as per paragraph 27 of the Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India. Paragraph 10 of the Standard defines ‘accrual’ as under :
“Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate.”
7. The Committee further notes that Accounting Standard (AS) 9, ‘Revenue Recognition’ issued by the Institute of Chartered Accountants of India, deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. This Standard lays down rules for recognition of revenue arising in the course of the ordinary activities of the enterprise from (i) sale of goods, (ii) rendering of services, and (iii) use of resources of the enterprise by others yielding interest, royalties and dividends.
8. The Committee notes paragraph 9.1 of AS 9 which states as below :
“9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.”
Paragraph 9.4 of the same Standard states :
“9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of the goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.” (emphasis added).
9. The Committee notes that as per the EXIM Policy for 1997-2002, the DEPB credit is granted as a specified percentage of FOB value of exports made in freely convertible currency. The Committee further notes that the DEPB credit on post-export basis and/or items imported against it are freely transferable.
10. The Committee also notes that the right to get credit in the DEPB Pass Book arises on the happening of the event of export.
11. Considering the above, the Committee is of the view that the only element of uncertainty associated with the credit is the exporter's inability to utilise the credit or transfer the same within 12 months. In view of the existence of a market for such credit, it is more likely than not that the exporter will be able to transfer the credit to a third party if he is unable to utilise the same. Therefore, the probability of not realising the revenue is remote. Hence, it is reasonably certain that the credit will be granted in the Duty Entitlement Pass Book and the exporter will be able to realise the revenue.
12. The Committee is also of the view that the revenue realisable from the DEPB credit is reasonably determinable as the amount to be credited is calculated at a pre-specified percentage of FOB value of export.
13. The Committee notes that Accounting Standard (AS) 12, ‘Accounting for Government Grants’, deals with government grants which includes ‘duty drawbacks’ etc. (as per paragraph 1 of the Standard). In respect of recognition of government grants, paragraph 13 of the Standard states as below :
“13. Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received.”
Further, paragraph 15 of the Standard states as below :
“15. Government grants related to revenue should be recognised on a systematic basis in the profit and loss statement over the periods necessary to match them with the related costs which they are intended to compensate. Such grants should either be shown separately under ‘other income’ or deducted in reporting the related expense.”
The Committee also notes paragraph 6.2 of the same Standard which is reproduced below :
“6.2 An appropriate amount in respect of such earned benefits, estimated on a prudent basis, is credited to income for the year even though the actual amount of such benefits may be finally settled and received after the end of the relevant accounting period.”
14. (a) In accordance with the above quoted accounting standard and the nature of DEPB credit (post-export scheme), the Committee is of the view that in accounting for those credits a balance has to be drawn between prudence and matching cost principles. In normal circumstances, the earning is reasonably certain and the amount is reasonably determinable; and therefore, this credit should be taken as an income in the year in which the export sale has been accounted for. However, in those situations where either the grant of credit is not reasonably certain or the amount of credit is not determinable, the recognition of the revenue should be postponed.
(b) In case the exporter has transferred the credit to a third party before approval of the financial statements, the income to be recognised should be lower of the amount realised through transfer and the amount credited in the Pass Book. Similarly, if the normal practice as reflected through transactions entered by the exporter in the same or previous year, is to transfer the credit to a third party, the realisable value on the balance sheet date must be estimated and the lower of the estimated realisable value and the estimated/actual credit in the Pass Book should be taken as income.
(c) Though the querist has not raised the issue of accounting for DEPB credit under pre-export scheme, the Committee is of the view that
(i) the credit should be taken only in the year of export.
(ii) before the export obligation is fulfilled, a provision should be made for the amount of pre-export credit and the same should be included in the cost of the imported material, customs duty against which has been fully/partly paid by utilising the credit.
(iii) in case the exporter fulfils the export obligation, credit should be taken to the income statement by writing back the provision in the year in which such export has been accounted for.
(iv) in case the exporter fails to fulfil the obligation the customs duty will be paid against the provision made earlier. Consequential losses including penalty should be charged to the income statement in the year in which the specified period of 12 months expires.
(d) The exporter should disclose information as required under
“23. The following should be disclosed :
(i) the accounting policy adopted for government grants, including the methods of presentation in the financial statements;
(ii) the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.”
D. Opinion
15. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5 :
(a) In those situations where the exporter has received the DEPB credit but the same has neither been utilised nor been transferred, the lower of the credit received and the estimated realisable value should be taken as income.
(b) In those situations where the querist has applied for DEPB credit but the same has not been issued till the date of approval of the financial statements, the reasonable certainty of receiving the credit and its quantification should be assessed with reference to external and internal evidences. If the reasonable certainty of receipt of the credit is established and if the amount is reasonably determinable, the same should be taken as income in the statement of profit and loss. The amount to be taken is lower of the estimated credit and estimated realisable value.
[1]Opinion finalised by the Committee on 13.8.1998
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