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A. Facts of the Case
1. A public sector company is carrying on a business, which,
inter alia, includes cultivation and manufacturing of black tea. The
querist has informed that as per the Plantations Labour Act, 1951,
the company is required to distribute food stuff to the workers at a
subsidised rate as welfare expenditure. Accordingly, the company
purchases such food stuff in bulk and maintains the stock, so that the same is available for distribution at the appropriate time. The
said food stuff is purchased at the ‘pool rate’ as fixed from time to
time by the appropriate authority and issued to the workers at a
subsidised rate. The loss, i.e., difference between the pool rate
(bulk quantity rate) and the subsidised rate is booked in the
accounts as ‘loss on food stuff’ when such food stuff is issued to
the workers. As per the querist, this practice is followed by the tea
industry.
2. During the closing of accounts for the year 2005-06, the
company made a provision of Rs.16.54 lakh for the first time
(emphasis supplied by the querist), being the difference of pool
rate and subsidised rate applied over the total quantity of stock of
food stuff lying on 31.03.06 at various gardens of the company. As
per the querist, this provision was made on the consideration of
prudence, since, the loss is ascertained in the following months as
and when such stock is issued.
3. In the next year, i.e., 2006-07, as per the querist, the company
realised that as the loss is booked on actual basis every year once
the food stuff is issued, and, since this practice is followed
consistently over the years (emphasis supplied by the querist) by
the company and also by tea industry, creation of provision in one
year and write back of such provision in subsequent year to book
actual loss on food stuff is not practicable. Moreover, as per the
querist, food stuff is not covered under the definition of ‘inventories’
as per Accounting Standard (AS) 2, ‘Valuation of Inventories’,
being neither an item of material /supplies to be consumed in
production process nor to be held for sale in the ordinary course of
business / in the process of production for such sale. Accordingly,
as per the querist, the principle of inventory valuation as per AS 2,
which requires valuation of inventories at ‘lower of cost and net
realisable value’ is not applicable in case of food stuff. In addition,
such food stuff is distributed to tea workers at a subsidised rate as
welfare expenditure and the differential amount between pool rate
and subsidised rate is concurrently charged off in the accounts in
the year of consumption/ distribution. In effect, the differential
amount is recognised as expense when services are rendered by
the employees. Any balance left out is valued and accounted for
at the pool rate, which, in general, remains lower than the market rate. Considering the facts stated above, the company, in the year
2006-07, wrote back the provision of Rs.16.54 lakh (created in the
year 2005-06) and did not create any provision against closing
stock of food stuff in the year 2006-07.
4. As per the querist, the auditors insisted that once the provision
has been made in the year 2005-06, though for the first time, the
same principle has to be continued in the year 2006-07 and nonprovisioning
of the same has understated the loss for the year as
well as the amount of the provision, which, according to their
calculation, is to the extent of Rs.21.72 lakh.
B. Query
5. The querist has sought the opinion of the Expert Advisory
Committee as regards correctness of the treatment given by the
company in the year 2006-07 by not making provision against
closing stock of food stuff to the tune of Rs. 21.72 lakh in
compliance with the generally accepted accounting principles and
treatment adopted in tea industry together with adherence to AS 2.
C. Points considered by the Committee
6. The Committee notes that the basic issue raised by the querist
relates to the appropriateness of non-provision of difference
between pool rate and subsidised rate in respect of quantity of
food stuff in stock as on 31.03.2007 and relevance of AS 2 to the
valuation of such stock. Therefore, the Committee has examined
only these issues and has not examined any other issue that may
be contained in the Facts of the Case.
7. The Committee notes the following paragraphs from
Accounting Standard (AS) 15, ‘Employee Benefits’:
“5. Employee benefits include benefits provided to either
employees or their spouses, children or other dependants
and may be settled by payments (or the provision of goods or
services) made either:
(a) directly to the employees, to their spouses, children or
other dependants, or to their legal heirs or nominees; or
(b) to others, such as trusts, insurance companies.”
“Employee benefits are all forms of consideration given
by an enterprise in exchange for service rendered by
employees.”
“Short-term employee benefits are employee benefits
(other than termination benefits) which fall due wholly
within twelve months after the end of the period in which
the employees render the related service.”
“8. Short-term employee benefits include items such as:
(a) wages, salaries and social security contributions;
…
(d) non-monetary benefits (such as medical care,
housing, cars and free or subsidised goods or
services) for current employees.”
8. From the above, the Committee notes that distribution of food
stuff to workers at subsidised rate is a short-term employee benefit
as defined in AS 15 and the accounting treatment of the said
benefit should be in accordance with AS 15 irrespective of whether
any stock of food stuff is maintained.
9. The Committee notes the following definition given in AS 2:
“Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed
in the production process or in the rendering of
services.”
The Committee agrees with the querist that food stuff meant for
distribution to workers at subsidised rate is not inventory as per
the definition quoted above, and hence, the valuation principles
stipulated in AS 2 are not applicable for the food stuff held in
stock. The Committee is of the view that the food stuff should be
valued at cost only. However, where the stock of food stuff
represents entitlement of the workers to buy food stuff for the services already rendered, the value of such food stuff should be
reduced by the amount recognised as employee cost under AS
15, and accordingly, such food stuff should be disclosed at the
value to be recovered from the workers, i.e., the concessional
price. The Committee is of the view that for determining the cost
of food stuff and cost formula to be used for determining cost of
food stuff in stock, the principles enunciated in AS 2 should be
followed. Further, if there is any shortage, to that extent stock
value of food stuff should be written down. If there is any damaged
stock which can be disposed of, it should be valued at the lower of
cost and expected net disposal proceeds. However, in the view of
the Committee, the aforesaid is subject to the considerations of
materiality as explained in paragraph 17(c) of Accounting Standard
(AS) 1, ‘Disclosure of Accounting Policies’, and various provisions
of Standard on Auditing (SA) 320 (AAS 13), ‘Audit Materiality’,
issued by the Institute of Chartered Accountants of India.
D. Opinion
10. On the basis of the above, the Committee is of the opinion
that the non-making of provision against closing stock of food
stuff in the year 2006-07 is correct having regard to the applicable
accounting principles and inapplicability of AS 2 to valuation of
closing stock of food stuff in the facts and circumstances of the
case. However, the stock of food stuff should be valued keeping
in view the considerations stated in paragraphs 8 and 9 above.
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