Query No. 4 Subject: Method of accounting for MODVAT.1 A. Facts of the Case
1. A company books its purchases gross of excise duty and the credit taken on account of MODVAT is credited to ‘MODVAT Recoverable Account’. At the end of the year, ‘MODVAT Recoverable Account’ is apportioned between consumption and inventory on the basis of value. MODVAT credit in respect of inputs not consumed and lying in inventory is reduced from the value of inventory for the purpose of arriving at the profit.
2. The ‘Guidance Note on Accounting Treatment for MODVAT’, issued by the Institute of Chartered Accountants of India, earlier contained two alternatives for accounting for MODVAT on inputs. However, through a recent amendment to the Guidance Note, the second alternative of accounting for MODVAT for inputs [paragraph 6.1(b)] has been withdrawn with effect from 1.4.1999. As per this alternative (now withdrawn), the cost of inputs may be recorded at the total amount paid to the supplier inclusive of the specified duty on inputs. To the extent the MODVAT credit is utilised for payment of excise duty on final products, the amount could be credited to a separate account, e.g., MODVAT Credit Availed Account. Out of the MODVAT Credit Availed Account, the amount of MODVAT credit availed in respect of consumption of inputs would be reduced from the total cost of inputs consumed. The balance amount standing to the credit of MODVAT Credit Availed Account representing MODVAT credit in respect of input not consumed and lying in stock could be shown in the balance sheet as deduction from the value of inventory.
3. From the current year, the company proposes to switch over from valuation of inventories of raw materials, work-in-progress and finished goods based on FIFO method (after excluding MODVAT credit availed from cost of purchase) to weighted average cost method.
4. The querist has stated that many a time the excise percentage mentioned in the purchase order varies considerably from the actual excise percentage because many of the company’s suppliers are in SSI (Small Scale Industry) category operating under slab system of exemption. Thus, segregation of excise duty from the purchase cost at the stage of receipt of goods becomes quite cumbersome. Under these circumstances, the company proposes to continue its earlier practice of valuing the inventory gross of excise duty and crediting the MODVAT availed to ‘MODVAT Recoverable Account’ based on the value. In effect, the company proposes to adopt the second alternative referred to in paragraph 2 above which has recently been withdrawn.
B. Queries
5. The opinion of the Expert Advisory Committee has been sought on the following issues:
(a) Whether the accounting treatment proposed by the company is in accordance with the revised Accounting Standard (AS) 2, ‘Valuation of Inventories’, especially in view of the recent withdrawal of the second alternative for accounting for MODVAT mentioned above.
(b)Whether adoption of the above treatment will attract qualification from the auditors.
C. Points Considered by the Committee
6. The Committee notes that the revised Accounting Standard (AS) 2, ‘Valuation of Inventories’ provides (paragraph 7) that the cost of purchase of inventories should exclude the duties and taxes that are subsequently recoverable by the enterprise from the taxing authorities. The Committee also notes that the revised AS 2 is effective in respect of accounting periods commencing on or after 1.4.1999 and is mandatory in nature.
7. The Committee notes that pursuant to the issuance of revised AS 2, the second method of accounting for MODVAT as described in paragraph 2 above has been omitted from the ‘Guidance Note on Accounting Treatment for MODVAT’, as this method is not consistent with paragraph 7 of revised AS 2. Consequent to the above modification, the Guidance Note now recommends only the following method of dealing with MODVAT [paragraph 6.1(a) of the Guidance Note]:
“6.1 (a) Specified duty paid on inputs may be debited to a separate account, e.g., MODVAT Credit Receivable (Inputs) Account. As and when MODVAT credit is actually utilised against payment of excise duty on final products, appropriate accounting entries will be required to adjust the excise duty paid out of MODVAT Credit Receivable (Inputs) Account to the account maintained for payment/provision for excise duty on final product. In this case, the purchase cost of the inputs would be net of the specified duty on inputs. Therefore, the inputs consumed and the inventory of inputs would be valued on the basis of purchase cost net of the specified duty on inputs. The debit balance in MODVAT Credit Receivable (Inputs) Account should be shown on the assets side under the head ‘advances’.”
8. Based on the above, the Committee is of the view that the method of accounting for MODVAT as proposed by the company is not in consonance with revised AS 2. If this method is followed, the auditor should consider expressing a qualified opinion considering the materiality of the amounts involved.
D. Opinion
9. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5:
(a) The accounting treatment proposed by the company is not in consonance with revised AS 2.
(b) In case of adoption of the method proposed by the company, the auditor should consider issuing a qualified opinion considering the materiality of the amounts involved.
1Opinion finalised by the Committee on 22.4.2000. |