Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.6       Query

 

Treatment of export incentives not received as at the balance sheet date.

 

1.‘X’ is a public limited company engaged in the construction of sea-going and inland water vessels. As the commencement and completion of the work falls into different accounting periods, the company is following the accounting policy of recognising revenue on the basis of degree of completion of work performed. Thus, where the work on a certain vessel has progressed beyond a certain stage of construction, ‘r%’ of the net estimated profit on the contract is considered for that accounting period in the ratio of the ‘total cost incurred upto that accounting period’ to the ‘estimated total cost of constructing the vessel.’ If, however, a loss is anticipated, such loss is fully provided by reducing the value of work-in-progress at the end of the accounting period.

 

2. The company received an order from another company ‘Y’ for construction of a certain number of vessels to be exported by the latter. The terms of the contract provided that the Cash Compensatory Support (hereinafter referred to as ‘cash assistance’) and the excise duty-drawback on export of these vessels by ‘Y’ will be passed, on realisation, to ‘X’. As at the year ended 31st March 1982, all the vessels being constructed by ‘X’ for ‘Y’ were nearly complete. Profit for the year has been computed after taking into account the sale value of the vessels, the estimated cash assistance and the estimated excise duty-drawback. The rates of cash assistance and duty-drawback remained unaltered from the time the order was received by ‘X’ till even after 31-3-1982.

 

3. All the vessels were exported by ‘X’ on behalf of ‘Y’ in the second week of April, 1982. ‘X’ received cash, on account of the cash assistance only, before the authorisation of its accounts by the Board. The amount so received was more than the estimated amount of cash assistance and excise duty-drawback content of the profit included in the work-in-progress.

 

4.On the basis of the above facts, the querist raised the following issues for the opinion of the Expert Advisory Committee:

 

         (i)         Can the cash assistance and the duty-drawback be considered for arriving at the profit for the year ended 31st March 1982,          in view of the following:

 

         (a) Recognition of revenue as the contract activity progresses is an accepted concept as per the International Accounting Standard          11 on ‘Accounting for Construction Contracts’.

         (b) The financial statements should give a true and fair view of the state of affairs of the company.

         (c) When the realisation of a gain is virtually certain then such gain is not a contingency and the accrual of the gain is appropriate          (Para 14 of the International Accounting Standard 10 on “Contingencies and Events Occurring After the Balance Sheet Date”).

         (d) ‘X’ actually received, even before its Board considered its accounts for the year, an amount of cash which in itself was more          than the amount of cash assistance and the excise duty-drawback content of the work-in-progress.

 

         (ii)        If the answer to query no. (i) above is in the affirmative, can the profit included in the work-in-progress for the year ended          31st March 1982 be, in any way, adjudged not appropriate, if the amount on account of cash assistance and excise duty-drawback          is not received till the date of the consideration of accounts for that year by the Board.

 

5.The querist raised the above questions in the Expert Advisory Committee’s Opinion given at page 15-19 Volume I of the ‘Compendium of Opinions’ (1982) on a similar query.

 

                                                                 Opinion                                                February 23, 1983

 

1. The Committee notes that para 6 of Accounting Standard 4 of the Institute of Charted Accountant of India on ‘Contingencies and Events Occurring After the Balance Sheet Date’ states: “Contingent gains and benefits from contracts to the extent not executed are not accounted for in financial statements since this may result in the recognition of revenue which may never be realised”. This is in accordance with the generally accepted principle of conservatism in accounting. However, the aforementioned paragraph allows and exception to this principle in view of the true and fair presentation of accounts as it further states: “However, when the realisation of a gain is virtually certain, then such a gain is not a contingency and accrual of the gain is appropriate.” Whether, a gain is ‘virtually certain’ has to be decided be the management on the basis of the criteria that the revenue is measurable and that there is a reasonable expectation of its ultimate collection. The management will have to consider the facts and circumstances of each case in order to arrive at this decision. In case the management decides to accrue a gain in the accounts, the Committee is of the view that a conservative estimate of the amount of gain should be made. The accounting policy followed should also be appropriately disclosed. The Committee is of the view that these principles are also valid for the companies engaged in the construction activity and following the percentage of completion method. These views are also in consonance with the opinion of the Committee referred to in para 5 of the query.

 

2.From the facts furnished by the querist, it is not possible to say whether the company considered the receipt of cash assistance and excise duty draw-back ‘virtually certain’ as at the balance sheet date. The fact that the actual receipt of cash, after the balance sheet date but before the approval of the accounts by the Board, was more than the estimated amount of cash assistance and excise duty-drawback content of the profit included in work-in-progress, does not indicate, in the view of the Committee, that there was a reasonable expectation of their ultimate collection at the balance sheet date. The relevant factors to be considered by the company on that date would be, e.g., its past experience in this respect, the future government policy, etc.

 

3.On the basis of the above, the Committee’s opinion on the issues raised by the querist is as below:

 

                  (i)The company can consider the cash assistance and the excise duty-drawback for arriving at the profit for the year ended                   31st March 1982, provided (a) the receipt of the aforementioned benefits as per the government policy of allowing cash                            assistance and duty draw-back is not changed and the company is virtually certain of receiving the same at the balance sheet                   date;

 

                  (b) the accounting policy followed is appropriately disclosed in the accounts; and

 

                  (c) the accounting policy is consistently followed.

 

                 (ii)        Once the conditions specified in (i) above are fulfilled, it is of little significance that the amounts on account of                            the aforementioned benefits are actually received after the balance sheet date and before the approval of the accounts                            by the Board. The actual receipt of cash during that period merely confirms the management’s appraisal of the certainty                            of the benefits. Thus, the Committee is of the opinion, that the profit included in the work-in-progress for the year                                     ended 31st March 1982 can be considered appropriate even if the amounts are not actually received after the                            balance sheet date and before the approval of the board, provided, the conditions specified in para 3 (i) above are fulfilled.