1.13   Query

Disclosure of work-in-progress and progress payments

received in a works contract.

1. A company is engaged in manufacturing various electrical equipments including air-conditioning plants. In the course of its business, it undertakes works contracts on turn-key basis, which involve (a) procurement of material from the company’s own sources or from outside, (b) storing/installing thereof at the contractee’s site, (c) engaging labour at the site of the contractee, (d) installing the air-conditioning system and (e) handing it over to the contractee when completed. The normal duration of a works contract is 8-10 months and the company’s obligation ends on the completion of the erection and handing over of the air-conditioning system in good working condition to the contractee

2. The contract value is normally receivable in instalments as follows:

                   (a) 50 per cent of contract value along with the order.

(b)        45 per cent of the contract value pro-rata on intimation that equipment and materials for the execution of contract are ready to be brought to site.

(c)        The balance of 5 per cent within 15 days of commissioning of the plant and in any case not later than 45 days of the intimation that the plant is ready for commissioning.

3. The above mentioned amounts are retained to the credit of the Contractee’s Account and when the invoice is raised, the Contractee’s Account is debited with the invoice value and adjustment is made for the progress payments received from the contractee against the amount of the invoice.

4.In the past, the company disclosed the amounts expended on the incomplete air-conditioning jobs at the balance sheet date as ‘Work-in-progress’ along with other inventory items under the head ‘Current Assets’. The progress payments received from the contractees were shown separately as ‘Advances from Contracts’ under the head ‘Current Liabilities’. The company felt that this presentation did not give a true and fair view of the state of affairs because (i) the amount included in “Inventories” represented goods not strictly belonging to the company and over which the company had no control, and (ii) the amounts included under the head ‘Advances’ on the ‘Liabilities’ side did not exactly represent liabilities as these were not repayable under any circumstances. In view of this, from 1980, the company started disclosing progress payments as a deduction from work-in-progress. The following relevant figures appeared in the balance sheet of the company for the year ended December 31, 1980:

“CURRENT ASSETS, LOANS & ADVANCES

                   (a) INVENTORIES (as certified by the Chairman)

            ………………………………………………..

            Work-in-progress                   Rs 9,77,80,916

            Less: Advance received

there-against (See Note No. 8)

Rs.  7,97,28,283

Rs.  1,80,52,633”

Note No. 8 appeared as follows:

“Work-in-progress consists of engineering contracts not completed and value of work done carried forward. The relevant advances have been deducted therefrom this year”.

5. Another item representing ‘Advance against contracts’ amounting to Rs. 3,32,94,678 appeared under the head ‘Current Liabilities & Provisions’ in the balance sheet as on December 31, 1980. Neither the querist nor the accounts for the year indicated the nature and purpose of such advances.

6.The querist sought the advice of the Expert Advisory Committee on the appropriateness of the new manner of presentation in view of the requirements of Schedule VI to the Companies Act, 1956.

                                                              Opinion                                                      August 13, 1982

 1.  The Committee notes that Schedule VI to the Companies Act, 1956 requires the disclosure of “Advance Payments and Unexpired Discounts for the portion for which value has still to be given………” under the head ‘Current Liabilities and Provisions’. In view of this requirement, the Committee is of the opinion that all advance payments received from the contractees in respect of which the corresponding value has still to be given, e.g., the amount received along with the order, should be shown under the head ‘Current Liabilities and Provisions’, and therefore cannot be deducted from ‘Work-in-progress’ under the head ‘Current Assets, Loans and Advances.’ However, in the case of advances and progress payments in respect of which the corresponding value has been given, the prevailing accounting practice allows the option from the following two alternatives:

(i) Such advances and progress payments may be disclosed as ‘Advances from contractees’ under the head ‘Current Liabilities and Provisions’, and the gross amount of work-in-progress may be disclosed under the head ‘Current Assets’, along with the other inventories; or

(ii) These advances and progress payments may be deducted from the work-in-progress and the net amount may be shown under ‘Current Assets, Loans and Advances’, provided an appropriate disclosure is made of cash received and receivable as progress payments and advances.

2. In view of the above, the Committee is of the opinion that the disclosure practice adopted by the company is in order if the amount deducted from the work-in-progress on account of advances received from the contractee represent advances for which value has been given, and the remaining portion of advances is shown under the head ‘Current Liabilities and Provisions.’

3. The change in the disclosure practice by the company in 1980, in the opinion of the Committee, amounts to a change in the accounting policy. Therefore, it should be disclosed as recommended by AS-1 “Disclosure of Accounting Policies” of the Institute of Chartered Accountants of India.

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