Expert Advisory Committee
ICAI-Expert Advisory Committee
Options:

1.20     Query

 

Valuation of closing stock at market price as on the date of

signing of the accounts.

 

1.A public limited company manufacturing sugar and industrial and potable alcohols, adopted for the year ended 30.6.1978, the policy of valuing the closing stock of sugar at ‘the lower of cost and the approximate realisable value as on the date of signing of the accounts.’ In the past, the company had been following the generally accepted principle of valuing inventories at ‘lower of cost and marker price’. According to the querists, the change in the valuation policy was considered necessary by the company in view of sharp decline in the prices of sugar because of the Government’s decision on 16.8.1978 to decontrol the prices of sugar. Earlier, the prices of sugar were subject to partial control.

 

2. In view of the above, the company valued its closing stock of sugar at Rs.172 per ton which was the market price as on 8.10.1978- the date of signing of the accounts. The market price prevailing on 30.6.1978- the date of closing of accounts- was Rs. 348-Rs. 355 per ton. The cost per ton of sugar was Rs. 186.97.

 

3. In this context, the querists sought the opinion of the Committee on the following:-

 

(i) What should have been the basis of valuation in view of the change in the government policy after the close of the accounting year but before signing of the accounts, which affected the profitability of the company materially?

 

(ii) Whether the valuation of stock of sugar at Rs. 172 per ton was justified from taxation angle, in view of the continuous fall in the prices resulting into loss of unrealised profits representing the value of closing stock.

 

                                      Opinion                                                                         September 18,1982

 

1.The Committee notes that Accounting Standard-2 of the Institute of Chartered Accountants of India on ‘Valuation of Inventories’, defines net realisable value as “the actual estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale”. According to this definition, the actual estimated selling price is to be determined with reference to sales occurring on particular future dates in the ordinary course of business and not on the basis of sale of the entire stock on some arbitrary date in future like the date of signing of the accounts which may change from year to year. In view of this, the Committee is of the opinion that valuation of stock on the basis of ‘lower of cost and approximate realisable value as on the date of signing of the accounts’ is incorrect. The Committee is also of the view that to the extent the stock in hand at 30.6.1978 had been sold by the date of signing of the accounts, the actual prices should be taken for computing the net realisable value as at 30.6.1978. For the stock not sold by the date of signing the accounts, an estimate of the net realisable value should be made.

 

2. Regarding the valuation of stock for income-tax purposes it is well established that “the basis on which stock in hand is valued is part of the method of accounting”. In other words, the valuation of stock for income-tax purposes is based upon the generally accepted accounting principles. Since the valuation of stock of sugar ‘at lower of cost and approximate realisable value as on the date of signing of the accounts’ is not in accordance with the generally accepted principles of valuation of inventories as described in para 3 above, the new valuation policy is not justifiable even for the income-tax purposes.

 

3.The opinion of the Committee on the two issues is as below:

 

(i) The stock of sugar should have been valued on the basis of ‘lower of cost and net realizable value.’ In respect of the stock sold by the date of signing of the accounts, the actual prices should be taken for computing the net realizable value. For the stock not sold by the date of signing of the accounts, the net realizable value should be estimated on the basis of selling prices which may be realized in future in the ordinary course of business.

 

(ii) Since the basis of valuation of stock for the purposes of income tax is governed by the generally accepted accounting principles, the new policy adopted by the company is also not justified from the taxation angle.

 

_________________________________