Query No. 13
Subject: Treatment of interest earned on investments against specific funds.1 A. Facts of the Case
1. The querist is one of the major ports of India situated on the west coast and is one of the best container handling ports in India. The port is constituted under the provisions of Indian Ports Act, 1908 and governed by the provisions of the Major Ports Trusts (MPT) Act, 1963 and is under administrative control of the Ministry of Shipping. The port was formally brought into existence in May 1982 and commenced its commercial operation in May 1989. It was financed entirely out of loans taken from the Government of India (GOI) and other ports. The audit of accounts is carried out by the Comptroller and Auditor General of India (CAG) under section 102 of the MPT Act, 1963.
2. Pursuant to section 90 of the Major Ports Trusts Act, 1963, the port has created the following statutory reserves, by transferring every year, minimum of 3% of capital employed from revenue account:
3. The port trust prepares its revenue account and balance sheet at the close of every financial year. Due to its operating surpluses, the port has accumulated a sizeable chunk of investments. The interest earned on these investments is treated as a part of finance and miscellaneous income in the revenue account. The port, then makes suitable appropriation of profits below the line to the above reserves. Any interest earned, would be covered by this appropriation. The CAG has objected to this practice and stated that the interest on investments against specific reserves should be directly credited to reserve accounts instead of crediting to revenue account.
4. According to the querist, the Ministry of Shipping had appointed an independent firm of chartered accountants, to advise a uniform accounting procedure on financial reporting for all major ports in the country in order to enable the MOS t o make inter-portcomparison . In the irrecommendations, they have suggested that interest earned on investments earmarked against specific reserve funds should be credited to the respective funds account. The recommendations made in the report have been accepted by the Ministry.
5. As per the querist, the above accounting treatment is not correct;making suitable appropriation below the line is the correct practice, which is presently being followed. The reason being that, irrespective of the name by which any reserve or fund or investment is called, the fact is that it is a part of the overall pool of profits as well as a part of the overall pool of investments. Therefore, the interest on such investments also contributes to the port’s profits. If the interest is directly credited to the reserve fund, the profits will be understated.
B . Query
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the present practice of the company to credit the interest earned on investments against specific reserve funds to revenue account is correct or not.
C. Points considered by the Committee
7. The Committee restricts its opinion to the issue raised by the querist in paragraph 6 above, namely, whether the present practice of the company to credit the interest earned on investments against specific reserve funds to revenue account is correct or not. The Committee has, accordingly, not addressed any other accounting issue which may arise from the Facts of the Case, e.g., treatment of the specific reserves, upon debt servicing and incurrence of the capital expenditure by the company.
8. The Committee notes that according to paragraph 3.3 of the Preface to the Statements of Accounting Standards issued by the Institute of Chartered Accountants of India, "Accounting Standards apply in respect of any enterprise (whether organised in corporate, co-operative or other forms) engaged in commercial, industrial or business activities". Since the activities carried on by the Port Trust are of the aforesaid nature, the general accounting principles contained in the Accounting Standards issued by the Institute are applicable to it.
9. The Committee notes that Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India, requires, in paragraph 5, that "All items of income and expense which are recognised in a period should be included in the determination of net profit or loss for the period unless an Accounting Standard requires or permits otherwise".
10. On the basis of the above, the Committee is of the view that the interest earned on investments made out of the specific reserve funds should be recognised as income in the revenue account of the Trust. However, in view of the specific requirement as per paragraph 4 of the Facts of the Case that the said interest is also to be considered a part of the relevant reserve fund, the corresponding amount should be transferred to the reserve fund below the line.
D. Opinion
11. On the basis of the above, the Committee is of the opinion that the present practice of the company to credit the interest earned on investments against specific reserve funds to the revenue account and then appropriating the corresponding amount to the respective fund account is correct.
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