Query No. 27

Subject:           

Treatment and disclosure of surplus construction materials.1

A. Facts of the Case

1. A government company constructs its own large thermal power plants and operates the same.

2. In  respect  of  a  particular  plant,  the  company  procured  structural steel of different sizes and cables along with other construction materials during  the  financial  years  1988-1989  to  1995-96,  when  the  plant  was under  construction.  Units  I  and  II  of  the  project  commercially  started generating electricity w.e.f. 21.12.1994 and 20.6.1996 respectively. After completion  of  the  project,  surplus  materials  including  steel  and  cables worth Rs. 7.10 crore and Rs. 10.64 crore respectively were shown under the  main  head  of  ‘Fixed Assets’ under  the  sub-head  ‘Capital  Work-in- progress – stock of construction materials’ in the balance sheets for the financial years 1996-97, 1997-98, 1998-99 and 1999-2000. The relevant note in the notes to accounts for the financial year 1999-2000 appeared as under:

“Capital Work-in-progress includes surplus stock of steel and cables amounting to Rs. 1773.71 lakh which is kept for either utilisation in units III and IV or for disposal.”

3. The C&AG, during the course of audit for the financial years 1997-98, 1998-99 and 1999-2000, commented as under:

“Capital Work-in-progress (Stock of Construction Material):

This includes stock of construction material like steel (Rs.xxx) and cables (Rs.xxx) and stock of building materials (Rs.xxx), in respect of  project  which  was  commissioned  and  started  commercial generation in July 1996. These stocks were surplus. This item should have been shown under ‘stores’ instead of ‘Capital Work-in-progress’. This resulted in understatement of Current Assets and overstatement of Capital Work-in-progress to that extent. The management has not declared the surplus construction material.”

4. With reference to the above qualification, the management replied (1999-2000) as under:

“Stock  of  construction  materials  like  cables,  steel  and  building materials  was  acquired  by  the  corporation  for  the  purpose  of construction  work  but  not  for  the  purpose  of  consumption  in  the ordinary  manufacturing  process.  In  accordance  with  disclosure requirement of Schedule VI to the Companies Act, 1956, stock of construction  materials  acquired  for  the  purpose  of  construction  is not in the nature of current assets rather it is in the nature of a fixed asset  to  be  shown  under  Capital  Work-in-progress.  Therefore, disclosure made by the corporation is strictly in accordance with the requirements of Schedule VI to the Companies Act, 1956. We have also verified the Annual Accounts of different companies including M/s. ‘XYZ’ and observed that the same procedure is being adopted by them to reflect such materials under Capital Work-in-progress.”

5. According  to  the  querist,  the  statutory  auditors,  while  replying  to the C&AG, agreed with the views expressed by the management.

B. Queries

6. The querist has sought the opinion of the Expert Advisory Committee as  to  what  should  be  the  treatment  and  disclosure  norms  for  surplus construction materials after commissioning of the project if:

(a)        these materials can be utilised for construction of other projects undertaken in a regular manner; or

 

(b)        it is decided to dispose of these surplus materials.

C.  Points considered by the Committee

7. The Committee notes that the term ‘Fixed Asset’ has been defined in Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, as “an asset held with the intention of being used for the purpose of producing or  providing  goods  or  services  and  is  not  held  for  sale  in  the  normal course of business”.

8. The  Committee  also  notes  the  definition  of  ‘Capital  Work-in- progress’ as  given  in  the  ‘Guidance  Note  on  Terms  Used  in  Financial Statements’,  issued  by the  Institute  of  Chartered  Accountants  of  India, which states as below:

“Capital Work-in-progress

Expenditure on capital assets which are in the process of construction or completion.”

9. The  Committee  also  notes  that  in  Schedule  VI  to  the  Companies Act,  1956,  ‘Stores  and  spare  parts’  are  disclosed  under  the  sub-head ‘Current  Assets’,  under  the  main  head  ‘Current  Assets,  Loans  and Advances’.

10. On the basis of the above, the Committee is of the view that only the  expenditure  incurred  on  capital  assets  which  are  in  the  process  of construction or completion can be  termed as Capital Work-in-progress. The construction materials that are surplus cannot be termed as Capital Work-in-Progress.  The  Committee  is  further  of  the  view  that  surplus construction material cannot be termed as a fixed asset, keeping in view the definition of the said term as reproduced above. The Committee is, therefore,  of  the  view  that  the  surplus  construction  material  should  be separately disclosed under the head ‘Current Assets’. When and to the extent,  the  material  is  transferred  to  the  other  projects,  it  should  be transferred to the ‘Capital Work-in-progress’. Construction material to be disposed of should be shown under the head ‘Current Assets’.

D.  Opinion

11. On the basis of the above, the Committee is of the opinion that the surplus construction materials should be separately disclosed under the head ‘Current Assets’ irrespective of whether the same are to be used for other projects or to be disposed of. Only on transfer of the materials to another  project,  the  same  should  be  considered  as  ‘Capital  Work-in- progress’.

1Opinion finalised by the Committee on 5.7.2001.