Query No. 27

Subject:

Accounting treatment of bullet proof jackets provided to an outside

agency for providing security to the enterprise.¹

A. Facts of the Case

1. A Central Government public sector undertaking (PSU) is engaged in exploration and production of hydrocarbons in the country. Presently, the company has got a production base in Assam, Arunachal Pradesh and Rajasthan. It has also got exploration blocks in other parts of the country and outside the country. However, the major production areas are in Assam and Arunachal Pradesh.

2. In Assam and Arunachal Pradesh, the security services to the company are being provided by the Central Industrial Security Force (CISF) at various locations. The total expenditure for the security services, including procurement of arms and ammunition, is borne by the company. During the year 2004-05, 228 bullet proof jackets were procured at a cost of Rs. 81.46 lakh (each costing approximately Rs. 35,700/-) for use by the security personnel. These bullet proof jackets were issued to CISF. The company capitalised the bullet proof jackets under the head ‘General Plant and Machinery’ and accordingly, provided depreciation on the same. According to the querist, the same practice is being followed by another public sector undertaking which is also engaged in the business of exploration and production of hydrocarbons and employs CISF for security. The bullet proof jackets have been capitalised by the company since, as per the querist, these cannot be classified as normal uniform and are of enduring nature.

3. As per the querist, the auditors are, however, of the view that bullet proof jackets should have been treated as uniform and charged to the profit and loss account.

B. Query

4. The querist has sought the opinion of the Expert Advisory Committee on the correct treatment of the bullet proof jackets.

C. Points considered by the Committee

5. The Committee notes the following definition of the term ‘asset’ as per paragraph 49(a) of the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India:

“(a) An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.”

6. The Committee is of the view that the bullet proof jackets acquired by the company and provided to the security personnel of the CISF would meet the definition of the term ‘asset’ in case they continue to be a resource controlled by the company, i.e., even after handing over the jackets to the security personnel, the jackets continue to be controlled by the company. However, if the jackets are given to the specific persons of the security forces and are not required to be returned to the enterprise, e.g., in the event of termination of the agreement with the security agency, just like a uniform which is also not normally returned to the enterprise, the bullet proof jackets should not be treated as an asset of the enterprise. Thus, in case the bullet proof jackets are not provided as a uniform, but can be used by different security personnel and the company can take these back as and when required to be used by someone else, these should be treated as an asset.

7. In case the bullet proof jackets meet the definition of ‘asset’ as defined above, the next question is whether these should be considered as a fixed asset of the company. In this context, the Committee notes the following definition of the term ‘fixed asset’ as provided under paragraph 6.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India:

“6.l Fixed asset is 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 is of the view that if a bullet proof jacket fulfills the definition of the term ‘asset’ as defined in paragraph 5 above, it should be considered as a fixed asset since it is not held for sale in the normal course of business but is held for being used indirectly for the purpose of producing goods in the same manner as many other assets, such as various administrative assets, are so considered and treated as fixed assets. If the bullet proof jackets are considered as fixed assets, the same should be classified as a separate fixed asset for Schedule VI purposes rather than as ‘General Plant and Machinery’, as mentioned by the querist in paragraph 2 above. However, since no specific rate of depreciation has been prescribed under Schedule XIV to the Companies Act, 1956, for bullet proof jackets, the general rate of depreciation applicable to Plant and Machinery would be applicable.

D. Opinion

9. On the basis of the above, the Committee is of the opinion that the cost of bullet proof jackets should be considered as cost of acquisition of a fixed asset only in case the jackets fulfill the definition of the term ‘asset’ as per paragraph 5 above and treated accordingly as mentioned in paragraph 8 above.

¹ Opinion finalised by the Committee on 20.10.2005