A. Facts of the Case
1. A public sector company is engaged in rendering
comprehensive consultancy services in the field of hospital planning,
design, detail engineering, quality control, project management
and monitoring as well as procurement, supply, installation and
commissioning of medical equipments for the projects assigned to
it by the Ministry of Health & Family Welfare, Ministry of External
Affairs, private and public sector organisations as well as various
state governments.
2. The querist has stated that during the course of its business,
the company issues cheques to its vendors/contractors/suppliers
against the work done. As per the querist, the company has flexideposits
linked with various banks along with the current and
savings accounts for separate corpus. Cheques are being issued
from the current/savings bank account and as per the requirement
of funds, the flexi-deposits are being encashed and the proceeds
are transferred to the current/savings bank account for release of
payments by the banks.
3. The querist has further stated that sometimes the cheques
issued to vendors/contractors/suppliers are not presented for
payment on a particular date, say, on 31st March every year,
which results in credit balance in the current/savings account in
the books of the company, which is generally termed as ‘book
overdraft’. On the other hand, physical balance in the form of flexideposits
exists in the bank’s books as well as in the books of the
company on that particular date. As per the querist, the book
overdraft is prominently shown by the company under the head
‘Current Liabilities and Provisions’ whereas, flexi-deposits are shown
under the head ‘Cash & Bank Balances’. This practice is being
followed consistently by the company since a number of years.
4. According to the querist, the Comptroller and Auditor General
of India (C&AG) has raised the following issues in respect of cash
and bank balances of Rs. 202.65 crore, shown under the head
‘Current Assets, Loans and Advances’ on the ‘Assets’ side of the
balance sheet:
(a) Provisional comment
The ‘cash and bank balances’ is overstated by Rs.
4.20 crore due to inclusion of amount of cheques
issued but not presented for payment before 31st
March, 2006. As the company had issued the
cheques before 31st March, 2006, the same should
have been deducted from cash and bank balances
(flexi-accounts) instead of showing separately as
book overdraft under the head current liabilities and
provisions.
This has resulted in overstatement of cash and bank
balances by Rs. 4.20 crore with corresponding
overstatement of current liabilities by the same
amount.
(b) Final comment
Further, they have revised their comments as follows:
“The ‘cash and bank balances’ is overstated by Rs. 5.01
crore due to inclusion of cheques of Rs. 5.01 crore, issued
before 31st March, 2006. The company instead of reducing
the cash and bank balances has treated them as ‘book
overdraft’. Consequently, current liabilities are also overstated
by the same amount”.
5. The querist has informed that the company’s replies were as
follows:
(a) Against provisional comment
“The credit balance in bank account of the company as
book overdraft under the current liabilities results as
cheques are not being presented for payment and the
amount is not being utilised but physical bank balance
exists against the same. This practice is being followed
continuously for last number of years.
As per the Compendium of Opinions - Vol. I, issued by
the Expert Advisory Committee of the Institute of
Chartered Accountants of India (ICAI), the bank overdraft
can be included under the sub-head of sundry creditors.
The same interpretation has accordingly been viewed
here also and book overdraft has been shown under
the head ‘Current Liabilities and Provisions’ by
prominently disclosing under the sub-head.
Further, primarily flexi-deposits are opened for any
shortfall in the current accounts and the banks are
authorised to use amount from flexi-deposits.
As on 31st March, 2006, it is not known when the
cheques will be presented in the bank and the position
of the current account will be known only after
presentation of the cheques.
The method of recording these financial entries is well
recognised accounting method and this method has been
consistently followed in all the previous years.
In view of above, the provisional comments may be dropped.”
(b) Against final comment
“Credit balance in the bank accounts in the books of the
company include cheque issued but not presented for
payment which has been disclosed as ‘book overdraft’
under the head ‘Current Liabilities’ and bank balance in
deposit account has been disclosed under the head
‘Current Assets’ in accordance with the general
accounting principles. This disclosure has been
consistently followed by the company for last more than
two decades, in line with accounting policies followed in
other public sector undertakings and private sector
companies. The matter will be referred to ICAI for opinion
in this regard.”
B. Query
6. The querist has sought the opinion of the Expert Advisory
Committee as to whether the practice followed by the company of
showing ‘book overdraft’ under the head ‘Current Liabilities’ is
correct. Alternatively, whether amount of book overdraft can be
adjusted from the head ‘Cash & Bank Balances’, including flexideposits,
whereas the said flexi-deposits are physically not
encashed as on a particular date, i.e., on 31.3.06 and consequently,
decreasing the corresponding side of current liabilities also.
C. Points considered by the Committee
7. The Committee notes that the basic issue raised in the query
relates to disclosure of cheques issued to vendors/contractors/
suppliers but not yet presented for payment, which results in the
credit balance in the current/savings bank account in the books of
the company, i.e., book overdraft. The Committee has, therefore,
considered only this issue and has not touched upon any other
issue arising from the Facts of the Case, such as, disclosure of
flexi-deposits, etc. From the facts of the query, the Committee
presumes that the flexi-deposits are separate deposit accounts
and the amounts therefrom are transferred to the current/savings
account in case of overdraft.
8. The Committee notes that one of the basic principles of
preparation of the financial statements is to record transactions
and events that occur in or relate to the accounting period for
which the financial statements are prepared. Thus, where the
accounting period ends on 31st March, all transactions and events
that take place upto 31st March should be reflected in the financial
statements as of that date. Therefore, the Committee is of the
view that cheques issued upto 31st March but not presented for
payment upto 31st March should be accounted for in the period in
which they are issued. Thus, the vendors/contractors/suppliers
should be debited and the bank account should be credited in
respect of cheques issued upto 31st March but not presented for
payment upto 31st March, even though it results in credit balance,
i.e., ‘book overdraft’ in the cash book of the company whereas the
physical balance against those cheques is still lying in the bank
accounts as per the bank pass book. In the view of the Committee,
these cheques are only an item of reconciliation between the cash
book and the pass book of the company and do not have any
accounting effect on the financial statements prepared on the
accrual basis of accounting. This aspect is addressed by preparing
a statement normally termed as ‘Bank Reconciliation Statement’.
9. As far as the presentation of such credit/negative balance of
bank account in the books of the company is concerned, the
Committee notes that ‘Instructions in accordance with which assets
should be made out’ with respect to item 7(B), ‘Bank Balances’, of
Part I of Schedule VI to the Companies Act, 1956, inter alia, states
as follows:
“In regard to bank balances, particulars to be given separately
of –
(a) the balances lying with Scheduled Banks on current
accounts, call accounts, and deposit accounts”.
From the above, the Committee notes that Schedule VI requires
disclosure of balances of various types of bank accounts lying with
the bank as on the balance sheet date.
10. The Committee further notes from the Facts of the Case that
the negative balance in the current/savings bank account can be
set-off against the positive balances of flexi-deposits lying with the
bank. Thus, in the view of the Committee, as on the date of the
balance sheet, the present obligation of the company in respect of
bank overdraft can be set-off against the balance lying in the flexideposit
account. Thus, in substance, as far as the company is
concerned, the position is that the composite bank balance including
the balance in flexi-deposit account of the company is positive,
even though, the physical set-off has not been made on the date
of the balance sheet. With regard to disclosure of the balances,
the Committee is of the view that in the present case, in respect of
the cheques not presented for payment upto the balance sheet
date, the company should disclose the negative balance in the
current/savings bank account as per cash book and the same
should be shown as a set-off against the balance of flexi-deposit
account in the inner column, under the head ‘cash and bank
balances’ on the ‘Assets’ side of the balance sheet. However, in
the view of the Committee, it would not be incorrect to disclose the
negative balance in the bank account, i.e., bank overdraft under
the head ‘Current Liabilities and Provisions’ on the ‘Liabilities’ side
of the balance sheet.
11. The Committee also notes that in the opinion (Query no. 1.31
of Compendium of Opinions – Vol. I) referred to by the company
while supporting its accounting treatment in paragraph 5 above, it
has been opined that in case the bank does not have a right of
set-off of negative balance in one account against positive balance
in another account, it would not be appropriate to set-off the
overdrawn balance against the other positive balances lying with
the banks and showing it under ‘cash and bank balances’ on the
‘Assets’ side of the balance sheet. However, since in the present
case, the banks have the right to adjust the negative balance in
current/savings account with the positive balance in the flexi-deposit
account, it would be more informative and useful for the users of
the financial statements to disclose the negative bank balances as
a set-off from flexi-deposit account in the manner explained in
paragraph 10 above.
D. Opinion
12. On the basis of the above, the Committee is of the opinion,
subject to the presumption stated in paragraph 7 above, that in
respect of cheques issued upto 31st March but not presented for
payment upto 31st March, resulting into credit/negative balance in
the current/savings bank account in the books of the company
which can be adjusted by making a transfer from the balance lying
in the flexi-deposit accounts, it would be more informative and
useful for the users of the financial statements to disclose the said
negative balances as a set-off from flexi-deposit account in the
manner explained in paragraph 10 above. However, disclosure of
the said negative balances as ‘book overdraft’ under the head
‘Current Liabilities and Provisions’ on the ‘Liabilities’ side of the
balance sheet would not be incorrect.
1 Opinion finalised by the Committee on 14.5.2007. |