Query No. 34

Subject:

Presentation of provision for wear and tear of stores and spares in the financial statements.1

A. Facts of the Case

1. In the financial year (F/Y) 2001-02 and F/Y 2002-03, a company made, in its accounts, provisions to the extent of Rs. 163.42 million and Rs. 26.28 million respectively on account of wear and tear of stores items, specifically project surplus materials.

2. As per the querist, the company’s published annual report disclosed the following:

(a) Debit to the profit and loss account was disclosed separately in the annexure to the profit and loss account.

 

(b) In F/Y 2001-02, in the notes to accounts, it was stated that "necessary provision has been made in the books for stores and spares as per the assessment of the management". However, notes to accounts of F/Y 2002-03 were silent about the fact that the provision against reduction in value of stores had been made in accounts.

3. According to the querist, stores and spares under ‘Current Assets’ was shown at net of provision. However, the inspector of accounts has objected to netting-off of provisions from the value of stores and spares stating that this is contrary to the requirements of Part I of Schedule VI to the Companies Act, 1956, which requires all provisions to be specifically presented under the sub-heading ‘Provisions’ under the main head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side of the balance sheet.

4. As per the querist, the company is of the view that there is no specific requirement of disclosing provision against stores and spares in Schedule VI. Also, the company has made adequate disclosures in respect of the debit to the profit and loss account.

B . Query

5. On the basis of the above, the querist has sought an opinion of the Expert Advisory Committee as to whether the company is required to present the provisions in respect of wear and tear of stores and spares under the sub-head ‘Provisions’ under the main head ‘Current Liabilities’ on the ‘Liabilities’ side of the balance sheet.

C. Points considered by the Committee

6. The Committee notes from Part I of Schedule VI to the Companies Act, 1956, that it is not correct that all provisions are required to be specifically presented under the sub-head ‘Provisions’ under the main head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side of the balance sheet (emphasis supplied by the Committee). For instance, provision for doubtful or bad debts is required to be disclosed as a deduction from sundry debtors under the sub-head ‘Current Assets’ under the main head ‘Current Assets, Loans and Advances’. On a perusal of the items disclosed under the sub-head ‘Provisions’ under the main head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side, it is apparent that these provisions are in respect of liabilities rather than the provisions in respect of diminution in the value of assets such as sundry debtors. The Committee is, therefore, of the view that reduction in the value of stores and spares due to wear and tear thereof which indicates diminution in their value, is not required to be disclosed under the head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side of the balance sheet. The Committee is also of the view that such a presentation is not contrary to the requirements of Schedule VI to the Companies Act, 1956.

D. Opinion

7. On the basis of the above, the Committee is of the opinion that the company is not required to present the provisions in respect of wear and tear of stores and spares under the sub-head ‘Provisions’ under the main head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side of the balance sheet.

1 Opinion finalised by the Committee on 28.1.2005