Disclosure of the amount deposited with a bank in a Fixed Deposit

account to be utilised for research and development activities.

1. The Board of Directors of a company has decided to create a Research and Development Fund by appropriating a sum of Rs. 10 lakhs out of its profits each user for period of 10 years to be used for granting interest free loans, repayable after a specified period, to certain specific research institution. It was also decided that the amount of fund, to the extent not utilised for the aforesaid purpose, will be deposited with a bank in Fixed Deposit Account or a Saving Bank Account. The interest earned on such a deposit would also be utilised for research and development purpose in the aforesaid manner.

2. In this context, the opinion of the Expert Advisory Committee has been sought on the following issues:

(i) Whether funds set aside for the abovementioned purpose in a Fixed Deposit Account of bank for five years should be shown under the head ‘Investment’ or under the head ‘Current Assets’ as per the requirements of Schedule VI to the Companies Act, 1956.

(ii) (a) Should the amount so set aside be shown as a “provision” or as a “reserve”

in the balance sheet?

(b) If is to be shown as a reserve, whether the account head should be ‘Research and Development Fund’ or ‘Research and Development Reserve’ in view of the instructions contained in Part I Schedule VI to the Companies Act, 1956, according to which “the word ‘fund’ in relation to any ‘reserve’ should be used only where such reserve is specifically represented by earmarked investments.”

(iii)       Whether the interest accrued on such fixed deposits should be shown under the head ‘Current Assets’ as ‘interest accrued on investments’ or ‘interest accrued on Fixed Deposit Account’.

(iv)       What should be the mode of disclosure of the aforesaid transaction regarding research and development in the Statement of Accounting Policies?

(v)        Any other disclosure requirement under Schedule VI to the Companies Act, 1956.

Opinion August 29, 1983

The point-wise opinion of the Committee on the above issues is as below:

(i) Since Part I of Schedule VI to the Companies Act, 1956 specifically requires disclosure of bank balances- both current accounts and deposit accounts-under the head ‘Current Assets’, the Committee is of the opinion that the Fixed Deposit Account representing funds set aside for research and development activities should be shown under that head with an appropriate disclosure of the nature thereof.

(ii) (a) In view of the definition of the expression ‘provision’ in Part III of the Schedule VI as “any amount written off or retained by way of providing for depreciation, renewals, or diminution in value of assets, or retained by way or providing for any known liability of which the amount cannot be determined with reasonable accuracy,” the Committee is of the opinion that the amount set aside by the company for research and development purposes is not a ‘provision’ because it is not retained for meeting any known liability but is created at the discretion of the management by making an appropriation of profits. Thus, it should be considered as a reserve’.

(b) The Committee is of the opinion that despite the disclosure suggested in 3 (i) above, the account head should be ‘Research and Development Fund’ for appropriate presentation on the ‘Liabilities’ side of the balance sheet, because, the said reserve is specifically represented by earmarked funds deposited in the Fixed Deposit Account of the bank. The Committee is of the view that the expression ‘earmarked investments’ used in the relevant instruction contained in Part I of the Schedule VI (quoted in 2 (ii) (b) above) should not be interpreted to mean that the term ‘fund’ can only be used where the amount earmarked for reserve is shown under the head ‘Investments’; but it can also be used where the amount specifically set aside and placed outside the business against the reserve is shown under any other head in the balance sheet.

(iii) The interest accrued on the Fixed Deposit Account may be included in the amount of the fixed deposit with an appropriate disclosure because the interest earned on the deposit is to be used either for granting loans to the specified research institutions or deposited in the Fixed Deposit Account thereby increasing the Research and Development Fund.

(iv) With regard to the manner of disclosure, the Committee is of the opinion that the disclosure may be more appropriately made in the relevant schedule to the balance sheet or by way of a note thereto and not in the Statement of Accounting Policies since, in the view of the Committee, it does not involve a significant accounting policy.

(v) In the opinion of the Committee, there is no other disclosure requirement in Schedule VI to the Companies Act, 1956 in respect of the issue raised by the querist.

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