Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 10

 

Subject:     

Disclosure of provisions for certain expenses.[1]

A. Facts of the Case

 

1. A company is engaged in the manufacture and trading of pharmaceuticals and chemicals.  It also exports certain bulk drugs and formulations.

 

2. According to the querist, the company makes provisions for the following in the books of account as at the end of an accounting period.

 

      (i) Since 1994, the company, though disputing, has been providing for Entry Tax as per the provisions of the Karnataka Tax On Entry of Goods Act, 1979.  As per the querist, this matter is at various stages of appeal in the court, both by the company and by the government.

 

      (ii) The sales personnel of the company are sent abroad on a business meet in the ensuing year for their performance in the current year.  The travel expenditure is provided for in the current year on the basis of a reasonable estimate.

 

      (iii) Leave encashment is provided for on the basis of actuarial valuation of the leave days outstanding as on the closing date in accordance with the provisions of Accounting Standard (AS) 15, ‘Accounting for Retirement Benefits in the Financial Statements of Employers’.

 

3. As per the querist, all the above provisions are stated separately in one of the Schedules to Accounts, viz., ‘Schedule 11: Provisions’ under the sub-heading ‘Other Provisions’.  According to the querist, this disclosure is being made in accordance with the requirements of Schedule VI to the Companies Act, 1956.

 

4. During the audit for the year 1997, the company had a difference of opinion with the auditors regarding the disclosure of the above provisions.  According to the querist, the auditors were of the opinion that apart from being disclosed in Schedule 11, the above provisions should also be disclosed as a note under the respective schedules to accounts viz., ‘Schedule 15: Materials’ and ‘Schedule 16: Operating and Other Expenses’.  As per the auditors, the note should state that ‘Materials include a provision of Rs. xxx’ (in respect of entry tax) and ‘Operating and Other Expenses include a provision of Rs. xxx’ (in respect of travel expenditure and leave encashment).

 

B. Query

 

5. The querist has sought the opinion of the Expert Advisory Committee as to whether the disclosure of the above provisions is required at two places, viz., once under ‘Schedule 11: Provisions’ and again under the respective expense schedule, viz., ‘Schedule 15: Materials’ and ‘Schedule 16: Operating and Other Expenses’.

 

C. Points Considered by the Committee

 

6. The Committee notes that the querist has sought the opinion with regard to disclosure of provisions for certain expenses in respective schedules.  The Committee, in expressing its opinion, is restricting itself only to this issue and is not expressing any opinion on the appropriateness of making a provision with regard to these expenses.

 

7. The Committee notes that Schedule VI to the Companies Act, 1956, lays down the disclosure requirements in relation to balance sheet and profit and loss account.  Apart from these legal requirements, the disclosures to be made in the financial statements are also affected by generally accepted accounting principles, e.g., the accounting standards issued by the Institute of Chartered Accountants of India contain requirements for certain disclosures in addition to those required by Schedule VI.  Accounting Standard (AS) 1, ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India, deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements.  This Standard requires, inter alia, that financial statements should disclose all ‘material’ items, i.e., items the knowledge of which might influence the decisions of the users of the financial statements.

 

8. The Committee notes that Part II of Schedule VI to the Companies Act, 1956, which lays down the disclosure requirements relating to the profit and loss account, requires the disclosure of expenditure under various account heads.  The Schedule does not require separate disclosure, under each respective head, of the provisions made in relation to that account head.  For example, under the head “salaries, wages and bonus”, all salaries, wages and bonus pertaining to the year have to be included, irrespective of whether they have been actually paid during the year or accounted for as a provision; the Schedule does not require disclosure of the amount of any provision included under the aforesaid head.

 

9. The query relates to separate disclosure of provisions made in respect of entry tax, travel expenditure and leave encashment, under the relevant expense schedule (viz., ‘Schedule 15: Materials’ and ‘Schedule 16: Operating and Other Expenses’).  The Committee is of the view that as per the legal requirements discussed above and also on consideration of materiality as per AS 1, separate disclosure of the provisions under the respective expense schedule is not required.

 

D. Opinion

 

10. On the basis of the above, the Expert Advisory Committee is of the opinion that the disclosure of provisions under ‘Schedule 11: Provisions’ under the sub-heading ‘Other Provisions’ is adequate.  The disclosure of the same again under the respective expense schedule, i.e., ‘Schedule 15: Materials’ and ‘Schedule 16: Operating and Other Expenses’ is not required.

 

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[1] Opinion finalised by the Committee on 4.3.1999.