Expert Advisory Committee

Query No. 3

Subject:  

Valuation of stock of gypsum, a by-product.1

A.Facts of the Case

1. A company is a Government company in terms of section 617 of the Companies Act, 1956.  The Government of India holds 98.56% of share capital of the company. The turnover of the company for the year 2010-11 is Rs. 2512 crore.  The total paid-up share capital of the company is Rs. 647.07 crore

2.The company’s current main business is manufacture and marketing of (a) fertilisers, (b) caprolactam (petrochemical), (c) engineering consultancy and (d) fabrication of equipments. The company manufactures two types of fertilisers namely, ammonium phosphate and ammonium sulphate, which are sold in the Southern States through its established network of dealers. Both the ammonium phosphate and ammonium sulphate are covered under the ‘Nutrient Based Subsidy Scheme’ notified by the Government of India and are eligible for subsidy at the notified rates.  Caprolactam manufactured by the company is sold both in the domestic and export markets.

Raw material, intermediate and by products

3. The basic raw materials required for ammonium phosphate are as under:

(a)ammonia
(b)phosphoric acid
(c)sulphuric acid.

The basic raw materials required for ammonium sulphate are as under:

(a)ammonia

(b)sulphuric acid

 

The basic raw materials required for caprolactam are as under:

(a) ammonia

(b)benzene

 

In order to facilitate the production of final product of fertilisers, the company has also set up captive production facility for intermediates, such as, ammonia plant for manufacture of ammonia using naphtha, phosphoric acid  plant for manufacture of phosphoric acid using rock phosphate and sulphuric acid, sulphuric acid plant  for manufacture of sulphuric acid using sulphur, etc. These intermediates, viz., ammonia, phosphoric acid and sulphuric acid are also purchased from external sources as per requirement for manufacture of fertilisers depending upon various cost and operational factors.

4. The basic input required for the manufacture of phosphoric acid is rock phosphate which is sourced by way of import.  Another raw material in the manufacture of phosphoric acid is sulphuric acid which is used from both captive facility as well as from external purchase.  Considerable amount of residue is generated on conclusion of the phosphoric acid production. Such residue is called phospho gypsum and is around 4.5 times of the phosphoric acid production.  There are other by-products arising out of manufacture of various intermediates having insignificant values such as nitric acid, soda ash, carbon di-oxide, etc

Treatment of stock of gypsum in the books of account

Upto financial year 2006-07:

5.The querist has stated that comparative value of gypsum generated during the process of manufacture of phosphoric acid using rock phosphate is very insignificant with the cost of production of phosphoric acid.  Further, there was no regular market for gypsum and the sales effected by the company were in small quantities.  The production of phosphoric acid from the in-house processing plant was also not regular and external procurement was resorted to from time to time. The realisable value of gypsum ranged between Rs. 25 to Rs. 100/MT and when compared with the cost of phosphoric acid, such realisation was insignificant. There had been substantial quantity of stock of gypsum due to accumulation of stock over the years due to absence of regular market for gypsum.  According to the querist, in line with paragraph 3(a) of Accounting Standard (AS) 2, ‘Valuation of Inventories’, the company had considered the quantity of gypsum as ‘not held for sale in the ordinary course of business’ in the absence of regular market for gypsum. The amount realised on sale of such gypsum was taken as ‘miscellaneous income’ in the accounts. The company followed such treatment in the books of the account till the financial year 2006-07 on a consistent basis. 

During the financial year 2007-08

6. Based on the pick-up of sales of gypsum and a definite market availability for gypsum, the statutory auditor in his report for the financial year 2007-08 pointed out the need to consider the value of stock of gypsum in the books of account.  Statutory auditor of the company has observed in their audit report on the accounts of financial year 2007-08 as under

"1.As per excise records, the company holds stock of (accumulated over years) of 68,46,139 MT of gypsum on 31.3.2008.  The company has not included the value of stock of gypsum in the accounts on the plea that gypsum stock has not been physically verified and that the company has not valued the stock on a conservative basis consistent with the past practice. (Refer note 13 of notes on accounts).

 

However at present, gypsum has a realisable value and the company has entered into Memorandum of Understanding with India Cements Ltd., Madras Cements Ltd., Malabar Cements Ltd., and Tancems Ltd. and has got ambitious schemes for marketing of gypsum on a large scale.  Further, the company has hypothecated stock of gypsum to State Bank of Travancore indicating the value of gypsum for Rs. 391.44 crore computed @ Rs. 575/- per unit for availing cash credit facilities.  In the circumstances, non-recognition of value of stock of gypsum in the accounts as on 31.3.2008 results in understatement of profit and understatement of current assets to the extent of the value of stock of gypsum, which in our opinion, is not quantifiable in the absence of availability of realistic estimate of quantity as well as value of stock of gypsum.”

 

7. While noting the observation of the statutory auditor, the company replied as under in the Annual Report of financial year 2007-08:

“Gypsum is a by-product, produced along with phosphoric acid. During the year only, the company could realise a reasonable amount and a ready market for the same.
As stated by audit, a realistic estimate of the quantity and value cannot be derived while finalising the accounts for the year 2007-08.”

During the financial year 2008-09

8. Taking cognizance of the observation of the statutory auditor’s report for the financial year 2007-08 on the need to value stock of gypsum which could not be carried out as on 31.3.2008, the company obtained an opinion from a Chartered Accountant on the methodology to be adopted for valuation of gypsum especially in the light of substantial accumulation of old stock. As per the opinion obtained, the company physically verified the stock as on 31.03.2009. Out of 60.31 lakh MT available, 39.90 lakh MT of gypsum, being estimated quantity of sales in the next five years, was valued at net realisable value of Rs. 199.50 crore and accounted as closing stock as on 31.03.2009. The company debited the closing stock account – asset and credited closing stock account – profit and loss (P&L) account for giving effect to such valuation of closing stock of gypsum as on 31.3.2009.

9. After approval of the accounts by the Board of Directors and audit report thereon by the statutory auditor, the accounts were submitted to the office of the Principal Director of Commercial Audit for the supplementary audit.  The treatment given in the books of account towards the credit of increase/decrease in stock account (profit and loss account) on account of valuation of gypsum was not accepted by government audit pointing out that such credit should be taken as extraordinary income and distinctively shown in the books of account with appropriate notes in the accounts. Consequently, the company had to revise its accounts in order to show the impact of taking such stock in the books of account separately along with appropriate notes.  The revised accounts approved by the Board of Directors of the company along with the statutory auditor’s report thereon were again submitted to Government Audit for their supplementary audit report.  Appropriate note was included vide Note No.35 of the annual accounts for the financial year 2008-09 which is as under:

“Consequent to the provisional comments issued by the Principal
Director of Commercial Audit and Ex-officio Member Audit Board, Chennai, the company distinctly disclosed the accumulated stock of gypsum as income under extraordinary item in the profit and loss account as against the original exhibition of including the same along with the normal stock as on 31.3.2009.  This has the effect on profit before extraordinary items and adjustments in respect of prior years of Rs. 2,145.37 lakh into loss before extraordinary items and adjustments in respect of prior years of Rs. 17,804.63 lakh.”

There was, however, no change in the closing stock of gypsum accounted as an asset in the inventory.  This clearly demonstrates that the policy adopted by the company towards by-product valuation of gypsum and the treatment given in the books of account were accepted not only by the statutory auditor of the financial year 2007-08 but also by the office of  the Principal Director of Commercial Audit and Ex-officio Member Audit Board.

During the financial year 2009-10:

10. Based on the principles adopted during the financial year 2008-09 for valuation of gypsum, the company valued gypsum stock of 36.82 lakh MT being the estimated quantity of sales as on 31.3.2010 out of total stock of 57.23 lakh MT of gypsum on the net realisable value of Rs. 203.08 crore.  Another statutory auditor appointed by the Comptroller and Auditor General of India, audited the accounts of the company for the year 2009-10.  The said statutory auditor has given his audit report, the extract of which is as under:

 

“…In our opinion, the balance sheet, profit and loss account and cash flow statement dealt with by this report are in compliance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956 except for the points (i) and (iv) below:

 

(i).......

 

(ii)  Reliance on the value of stock of gypsum of Rs. 20,308 lakh (Previous year –Rs. 19,950 lakh) accounted for the first time during 2008-09, based on five years expected sales, since trend of sales till date is not matching the projection on an year to year basis. (Refer point 16(c) of Notes on Accounts of Schedule 25)

 

11. The management has replied in the Annual Report for the financial year 2009-10 as under:

“The new FRBL project for producing load bearing panels and other value added building products, using phospho gypsum is under the final stage of commissioning.  On commissioning of the project, 1.5 lakh MT of gypsum is required as raw material for production of load bearing panels and other building products. Besides, the company has recently launched new branded products namely bagged gypsum, zincated gypsum, etc.  The sale of these new products will go up in the coming years.  Since the present assessment of expected sales in the coming years is in line with our estimation, the value of stock taken is in order.”

It is to be noted that the statutory auditor’s observation has not challenged the need to value gypsum stock.  He has not qualified the accounts with regard to compliance of AS 2. The observation made can not be treated even as a disclaimer as no doubt had been expressed on the physical stock, realisable value and the sale of gypsum in the ordinary course of business which are essential requirements for considering stock valuation of gypsum.

During the financial year 2010-11

12.The company maintained its consistent policy of valuation of gypsum at net realisable value as on 31.3.2011. Out of total stock of gypsum of 49.98 lakh MT as on 31.3.2011, the company considered a quantity of 37 lakh MT of gypsum for the purpose of valuation and accordingly valued at Rs. 203.54 crore on net realisable value. The said net realisable rate adopted by the company is also lesser than the carrying cost of gypsum from previous year

13.The statutory auditor, however, qualified the accounts in their auditor’s report for the financial year 2010-11 with regard to the valuation of gypsum by Rs. 20,354 lakh as under:

“Valuation of closing stock of by-product gypsum, for Rs. 20,354 lakh as at year end based on five years expected sales, in variation to Accounting Standard 2 issued by the Institute of Chartered Accountants of India.  (Ref. Point 14(d) of Notes on Accounts – Schedule 25).”

 

14.The reply furnished by the management towards such qualification in the annual report for the financial year 2010-11 is as under:

“i)  Background

Gypsum is a by-product produced along with phosphoric acid.  Till the financial year 2007-08, the company had not considered value of gypsum in the books of account in the absence of viable market for gypsum.  However, during the financial year 2007-08, certain companies had shown interest and reached Memorandum of Understanding with the company for lifting gypsum, establishing viable market for gypsum.  This has resulted in qualification of accounts of the financial year 2007-08 for not considering the net realisable value of gypsum in the books of account.  During the subsequent years, the company started recognising the net realisable value of gypsum on a conservative basis by taking into account only five years estimated sales quantity out of total stock available on the balance sheet date.  Statutory auditor accepted the valuation of gypsum as on 31.3.2010 as is evident from their audit report of the financial year 2009-10 accounts, though the auditor expressed reservations on the quantum of gypsum stock considered for such valuation.

ii) Generally Accepted Accounting Practice:

 

As per paragraph 49 of the “Framework for the Preparation and Presentation of Financial Statements”, issued by the Institute of Chartered Accountants of India, an asset has been defined as follows:

 

“An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.”

Paragraph 3 of Accounting Standard (AS) 2, ‘Valuation of Inventories’ defines inventories as follows:

 

“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.”

 

Paragraph 5 as well as paragraph 10 of AS 2 which covers the method of valuation of such inventory are relevant for the issue under consideration.

 

As the company holds the stock of gypsum for sale in its ordinary course of business, the stock of gypsum is an asset which falls within the meaning of Inventories as per AS 2.

iii)  Treatment of stock of gypsum in the Accounts:

Based on the above, it is evident that (a) the stock of gypsum is an asset of the company, being a resource controlled by the company as a result of past events from which future economic benefits are expected to flow to it, (b) the stock of gypsum existing at the balance sheet date is the inventory of the company, (c) the stock of gypsum should, therefore, be valued at the net realisable value as provided in paragraph 10 of AS 2 and (d) any deviation of valuing the stock of gypsum in the books of account would result in contravention of the accounting standards as notified in the Companies Act, 1956 and would not give a true and fair view of the accounts of the company.  Accordingly, the company correctly valued stock of 37 lakh MT of gypsum at the net realisable value which has also been disclosed in  point 14(d) of Notes on Accounts of Schedule 25.

 

Therefore, there is no over-statement of current assets by Rs. 20,354 lakh or under-statement of loss by Rs. 20,354 lakh as qualified by the statutory auditor in their audit report.”

 

The querist wishes to bring to the notice of the Expert Advisory Committee that the same statutory auditor who audited the accounts of financial year 2009-10 did not qualify the accounts for the similar treatment effected in the accounts of financial year 2009-10.

15.The querist has provided the relevant accounting policy followed by the company as under:

“Finished / Trading products are valued at lower of cost or net realisable value in the aggregate, product-wise.  Intermediate products are valued at lower of cost or net realisable value derived from finished products and saleable by-product at realisable value. Cost of finished/semi-finished/intermediate products are determined based on annual average cost excluding interest and head office and administrative overheads.  Cost of finished goods in warehouse includes freight and handling charges (emphasis supplied by the querist).”

16. The querist has further submitted as follows:

(a). The phosphoric acid is a raw material in the manufacture of final ammonium phosphate product and the residue after the process of such phosphoric acid, gypsum is obtained as by-product.  Value of such gypsum is  immaterial in value compared to  the raw material of phosphoric acid as the realisable value of gypsum as on 31.3.2011 is at Rs. 532 per MT whereas cost of production of phosphoric acid considered for valuation of closing stock after adjustment of gypsum value is Rs. 44,611 per MT.  Moreover, the sales realisation during the financial year 2010-11 on account of gypsum is Rs. 39.17 crore whereas the sales value for the company inclusive of subsidy thereof is Rs. 2,502 crore.   The company has adopted a net realisable value method for the purpose of taking credit in the cost of production of phosphoric acid and consequent valuation of gypsum stock, in line with paragraph 10 of AS 2, being immaterial in nature in the overall cost/sales realisation.

 

(b). Stock of gypsum available as on 31.3.2011 is 49.98 lakh MT. Even if the entire stock is considered as scrap, the company is entitled to value such stock either on estimated net realisable value or at a token nominal value.  The statutory auditor has not considered the relevance of even such nominal valuation and qualified the accounts with the total valuation of stock of gypsum.

 

(c). The company has considered only 37 lakh MT of gypsum on the basis of estimated sales in the next 5 years as on 31.3.2011 on conservative basis against the total stock of 49.98 lakh MT.  This is considered to be most conservative valuation followed by the company on consistent basis since the financial year 2008-09.  The fact of such valuation was also suitably disclosed in the Notes of Accounts as under:

 

“As a conservative policy consistently followed, 37 lakh MT (Previous year 36.82 lakh MT) only of gypsum (out of 49.98 lakh MT stock on hand as on 31.3.2011) has been valued at net realisable value (inclusive of excise duty), in the accounts as on 31.3.2011 on the basis of estimated saleable quantity in the next five years.”

(d).The realisable rate of gypsum per MT of the opening stock carried over from the previous financial year is at Rs. 500/MT whereas the realisable value adopted for the valuation of the stock as on 31.3.2011 is at Rs. 478/MT.  Moreover, the quantity considered for the valuation of gypsum as on 31.3.2011 is 37 lakh MT which has been a carried over stock from the previous financial year as the produced stock during the current year is only 2.20 lakh MT and the company had sold 4.93 lakh MT of gypsum during the financial year 2010-11.

(e). Valuation of gypsum at Rs. 203.54 crore also includes excise duty element considered for the purpose of stock valuation amounting to Rs. 26 crore.  The statutory auditor did not exclude the impact of excise duty while qualifying the impact on the loss of the company due to valuation of gypsum stock.

 

(f). The production details of gypsum and the credit taken in the cost of phosphoric acid during the period 2007-08, 2008-09, 2009-10 and 2010-11, complying with the requirements of paragraph 10 of AS 2, are as follows

The statutory auditor did not exclude the impact of credit of Rs. 22.27 crore specifically taken towards the gypsum value in phosphoric acid production in respect of recent three financial years while qualifying the accounts.

 

(g). The particulars of opening and closing stock, purchases, sales and consumption being provided as part of annual accounts include details of gypsum alongwith value thereof since financial year 2008-09.  In addition to opening stock and closing stock details, 4.93 lakh MT of gypsum sales at a value of Rs. 3,917.41 lakh is disclosed as part of annual accounts of financial year 2010-11 in Schedule 26.5.   The sales of gypsum are generally effected to various cement companies and also to farmers as bagged gypsum which are used as soil conditioner etc.  The current year sale of gypsum till 30.11.2011 is around 4.73 lakh MT

 

(h). During the course of the supplementary audit for the year 2010-11 by the Principal Director of Commercial Audit and Ex-officio Member Audit Board, certain observations on the rate adopted by the company were raised and the reply furnished by the management for the said query thereof is as under:

The supplementary audit observation of the Principal Director of Commercial Audit and Ex-Officio Member Audit Board only questioned the rate adopted by the company and not the entire amount as qualified by the statutory auditor.  However, comments of the Comptroller and Auditor General of India under section 619(4) of the Companies Act, 1956  on the accounts, issued by the Principal Director of Commercial Audit and Ex-Officio Member Audit Board, concluded as under:

“On the basis of my audit nothing significant has come to my knowledge which would give rise any comment upon or supplement to statutory auditor’s report under Section 619(4) of the Companies Act, 1956.”

This was followed up by letter No. PDCA/CA-CORD/FACT/4-240/2011-12/70 dated 2.11.2011 advising the company to seek the expert opinion of the Institute of Chartered Accountants of India on the issue of gypsum valuation based on the discussion with the company and the statutory auditor with the Principal Director of Commercial Audit and Ex-officio Member, Audit Board prior to the issue of such comments.

(i) It is also pertinent to bring to the notice of the Expert Advisory Committee that the assessment of income tax for the assessment year 2009-10 is still under progress

17. The querist has also stated that the current statutory auditor’s audit report in respect of gypsum valuation on the accounts of financial year 2009-10 is without adverse qualification whereas the audit report on the accounts of financial year 2010-11 is with adverse qualification.  Moreover, the statutory auditor of financial year 2010-11 has differed with the view of the earlier statutory auditor and has not taken cognizance of re-opening of the accounts of financial year 2008-09 based on the supplementary observation of the Government Audit on gypsum valuation itself wherein the method of valuation of gypsum was not questioned.  The treatment given by the company has been consistent since the year 2008-09 in recognising the estimated sales quantity of next 5 years out of the total stock of gypsum at the net realisable value.   In view of the substantial differences arising between the statutory auditor and the management consequent to such differing reports, the Principal Director of Commercial Audit and Ex-officio Member Audit Board also advised the company to seek the expert opinion of the Institute of Chartered Accountants of India.  The company is, therefore,  approaching the Expert Advisory Committee for its opinion.

B.  Query

18.Based on the above background on valuation of closing stock of gypsum, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the stock of gypsum is an asset of the company.

 

(ii) If so, whether the stock of gypsum existing as on the date of balance sheet is to be considered as inventories of the company.

 

(iii) If so, whether the stock of gypsum existing as on the date of balance sheet is to be considered as inventories of the company.

 

(iv) If the net realisable value adopted for valuation of gypsum is not in order, appropriate method to be adopted for such valuation. 

 

(v) Whether the accounting policy adopted by the company towards such by-product valuation is in order.

 

(vi) If the accounting policy adopted by the company is not in order, appropriate accounting policy for the valuation of gypsum being a saleable by-product of immaterial nature.

 

(vii) Whether the qualification made by the statutory auditor is correct.

 

(viii) Options available to the company in the light of year to year changes in the opinion of statutory auditors in their audit reports.

C. Points considered by the Committee

19.The Committee notes that the basic issue raised in the query relates to valuation of stock of gypsum. Therefore, the Committee has examined only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, accounting treatment of other by-products apart from gypsum, accounting policy followed for inventories in general, re-opening of accounts of past years, determination of materiality of gypsum, etc. Further, the Committee wishes to point out that its opinion is expressed only on accounting/auditing principles and not from the angle of interpreting any legal enactments, such as, Income-tax Act, 1961, etc.

20. The Committee notes the definition of the term ‘asset’ as per paragraph 49 (a) of the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India, which is reproduced in paragraph 14 above. The Committee is of the view that the stock of gypsum is an asset of the company as it is a resource controlled by the enterprise and future economic benefits are expected to flow out of it, either through captive consumption or though sale.

21. As regards the nature of the asset, the Committee also notes the definition of the term ‘inventories’ as provided in paragraph 3.1 of AS 2 notified under the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as ‘the Rules’), as reproduced in paragraph 14 above.  The Committee is of the view that since the company has been holding the stock of gypsum for the purpose of sale, this in itself indicates that the company considers it to be held for sale in the ordinary course of business or to use it in the form of materials or supplies to be consumed in the production process. Accordingly, the Committee is of the view that the gypsum is an inventory of the company.

22.With regard to valuation of stock of gypsum, the Committee notes paragraphs 3.2, 10, 20 to 25 of AS 2, which provide as follows:

“3.2 Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.”

“10. Most by-products as well as scrap or waste materials, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost.”

 

“20. The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs necessary to make the sale have increased. The practice of writing down inventories below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

 

21. Inventories are usually written down to net realisable value on an item-by-item basis. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses and are produced and marketed in the same geographical area and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write down inventories based on a classification of inventory, for example, finished goods, or all the inventories in a particular business segment.

 

22. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date.

 

23. Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess inventory is based on general selling prices.

Contingent losses on firm sales contracts in excess of inventory quantities held and contingent losses on firm purchase contracts are dealt with in accordance with the principles enunciated in Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date.

 

24. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

 

25. An assessment is made of net realisable value as at each balance sheet date.”

23.  The Committee notes from the Facts of the Case (paragraph 16(a) above) that gypsum is immaterial in nature, as also being argued by the querist.  Accordingly, from the above-reproduced provisions of AS 2, the Committee is of the view that by-product (gypsum), being immaterial in nature, should be measured at net realisable value and this value could be deducted from the cost of the main product.  For determination of net realisable value, the Committee notes that as per the principles of AS 2, the estimated selling price in the ordinary course of business as well as a reasonable estimate of the quantity of gypsum expected to be sold/ used in the ordinary course of business needs to be considered. Thus, the Committee is of the view that the policy of the company of considering only 5 years expected saleable quantity does not seem to be conceptually appropriate. However, the management should consider factors, such as, uncertainty of making sale, the estimated selling price of the gypsum, shelf life of gypsum, and the possibility that all of the accumulated stock may not be saleable or saleable at a lower value due to inadequate demand, etc. The Committee is of the view that such uncertainties should be factored into while measuring the net realisable value. For making such estimates, the purpose for which the stock of gypsum is held should also be considered. The aforesaid considerations for determining net realisable value would apply to the extent, the stock of gypsum is expected to be sold. To the extent, the stock of gypsum is held for use in the production of other products like bagged gypsum, zincated gupsum, etc., such stock should not be written down below cost if the finished product in which it will be incorporated is expected to be sold at or above cost.

24. As regards the qualification made by the statutory auditor, the Committee is of the view that an auditor’s report is an expression of opinion by the auditor on the true and fair view of the financial statements for the audit period in the particular circumstances and situation prevailing during that period. It may change from one year to another depending on various factors, such as, materiality of the misstatement or non-compliances, audit evidence obtained, reliability on the management’s estimates, etc. The Committee is of the view that in the extant case, if the company has not followed the accounting as discussed above, the auditor’s qualification would be correct. As regards options available to the company in the light of year-to-year changes in statutory auditor’s opinion, the Committee is of the view that the company should comply with the provisions of AS 2, as discussed in paragraphs 20 to 23 above. However, expression of an opinion on financial statements is the prerogative of the auditor.

D. Opinion

25.On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 18 above:

(i) Yes, the stock of gypsum is an asset of the company as discussed in paragraph 20 above

 

(ii) Subject to paragraph 19 above, since the company holds the entire quantity of gypsum for the purpose of sale or use in the ordinary course of business, such stock should be considered as inventory of the company.

(iii) Subject to paragraph 19 above, if the stock of gypsum is immaterial, it would be correct to carry such stock at net realisable value and the same would be in line with the requirements of paragraph 10 of AS 2.

(iv) Answer to this question does not arise in view of (iii) above.

(v) and (vi)The accounting policy of the company would be in order only if the treatment as discussed in paragraph 23 above has been followed.

(vii) In case the company has not followed the accounting as per the principles enunciated in paragraphs 20 to 23 above, the auditor’s qualification with respect to the same would be correct.

(viii) As regards options available to the company in the light of year-to-year changes in statutory auditor’s opinion, the Committee is of the view that the company should comply with the provisions of AS 2, as discussed in paragraphs 20 to 23 above. However, expression of an opinion on financial statements is the prerogative of the auditor.

 

______________________

¹Opinion finalised by the Committee on 4.4.2012.