1.2       Query

Disclosure of bills discounted.

A Company discounts the bill of exchange with a bank and the proceeds are credited to the account of the customer. The undischarged liability in respect of bills discounted is not disclosed in the balance sheet on the ground that either the bills are covered by letters of credit or by bank guarantees. In this context, the querists have sought the opinion of the Expert Advisory Committee whether the non-disclosure of the contingent liability is in accordance with the normal accounting standards.

                                                            Opinion                                                     February 14, 1983

 1. The Committee notes that Part I of Schedule VI to the Companies Act, 1956 requires that the obligations for which the company is contingently liable are to be disclosed by way of a footnote to the balance sheet. There is no mention of any exemption from this requirement. Therefore, bills discounted with a bank, even if covered by letters of credit or bank guarantees should be disclosed as a contingent liability, because the company would be liable to the bank in case the customers who have accepted the bills fail to make the payment to the bank. The fact that the company would be able to recover the amount from the guarantors is of secondary significance.

 2. The Committee, therefore, is of the opinion that non-disclosure of bills discounted even if covered by bank guarantees or letters of credit is not permissible. However, such bills discounted may be disclosed as “contingent liability in respect of bills discounted amounting to Rs…….. is fully covered by buyers’ letters of credit and their bank guarantees.”

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