Expert Advisory Committee
ICAI-Expert Advisory Committee
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Query No. 6

 

Subject:   

   Disclosure of provision for bank deposits doubtful of recovery.[1]

A. Facts of the Case

1. A public sector company which undertakes projects in various fields of telecommunication executed a project in Nigeria.  For local currency transactions, the company opened a bank account with a local bank in Nigeria.

 

2. The bank has gone into liquidation and liquidators have been appointed.  The liquidators shall be distributing the sums to depositors in instalments on disposal of assets from time to time.  The company has a deposit equivalent to US $ 50,000 (approx.) with the bank.

 

3. In the year 1997-98, the company created a provision for the amount of deposit considering it as doubtful and disclosed it under the head ‘Provisions’ in the balance sheet.

 

4. According to the querist, the branch auditors in Nigeria and the statutory auditors of the company agreed with the above disclosure.  The government auditors were, however, of the view that the amount of provision should be deducted from ‘Cash and Bank Balances’ on the assets side.

B. Query

5. The querist has sought the opinion of the Expert Advisory Committee as to whether the disclosure of the full amount of deposits under ‘Cash and Bank Balances’ and of the provision created there against under the head ‘Provisions’ is proper or whether the company should show the amount of provision as a deduction from the Cash and Bank Balances.

C. Points Considered by the Committee

6. The Committee notes that paragraph 7(1)(a) of Part III of Schedule VI to the Companies Act, 1956, states as follows:

 

“7(1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires, -

 

(a)  the expression “provision” shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.”

 

The Committee is of the view that the amount set aside by the company in respect of the estimated diminution in the value of bank balances satisfies the above definition of the expression ‘provision’.

 

7. The Committee notes that Part I of Schedule VI to the Companies Act, 1956, requires disclosure of provision created for diminution in the value of debtors as a deduction from the amount of the concerned asset (viz., ‘Sundry Debtors’).  The Committee also notes that the various provisions required by Schedule VI to be disclosed under the head ‘Provisions’ relate to expenses/liabilities and not to the diminution in the value of any asset.

 

8. As per the generally accepted accounting principles, current assets are valued at the lower of cost and net realisable value.  As the disclosure of bank balance without deduction of the related provision would amount to showing the bank balance (a current asset) at a value higher than its net realisable value, the Committee believes that this manner of presentation is not appropriate.  Instead, the amount of the provision should be shown as a deduction from Cash and Bank Balances.

 

D. Opinion

9. On the basis of the above, the Committee is of the opinion that the provision for bank deposits that are doubtful of recovery should be shown in the balance sheet as a deduction from ‘Cash and Bank Balances’ on the assets side.

 

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[1] Opinion finalised by the Committee on 4.3.1999.