Query No. 7
Subject:           Accounting for moulds manufactured in-house which were charged to revenue in earlier years.[1]

A. Facts of the Case

1.     A company (hereinafter referred to as ‘the company’) engaged in manufacturing activity, in order to achieve the object of exhibiting true and fair value of its assets, has revalued and capitalised in the financial year 2011-12, moulds manufactured in-house till the year 2011. The out flow on such moulds was treated as a part of normal revenue expense and charged to the profit and loss account in each year during the financial years 2007-2011. This change as per the management is necessary, because cumulatively, the value of the moulds used as a part of the plant and machinery is on the rise and in fact qualifies to be separately reflected in the list of Fixed Assets Schedule. The corresponding amount in the financial year 2011-12 has been credited to revaluation reserve and the capitalised amount has been reflected in the Schedule of Fixed Assets under the head plant and machinery.

(i)         Fixed asset is an asset held for producing or providing goods and/or services and is not held for sale in the normal course of the business. Moulds capitalised are used for manufacture.

(ii)        Self-constructed assets, viz., moulds have been capitalised at cost that is specifically related to these assets and which is allocable to the specific assets, viz., moulds.

(iii)       Basis of revaluation is the estimated cost upto 1.4.2012 as per management analysis.

“Fixed assets are stated at cost except item of moulds under plant and machinery which have been revalued as at 31.03.2012.”

            “Moulds at Rs. 89,50,000/- has been revalued as on 31.03.2011.”

5.         Revaluation has been made by debiting the value of moulds capitalised under plant and machinery and crediting to revaluation reserve in the balance sheet.

B.        Query

6.         On the facts and circumstances stated above, opinion of the Expert Advisory Committee has been sought by the querist on the following issues:

(i) whether the procedure adopted by the company is in order.

(ii) accounting policy to be stated on revaluation/capitalisation as also policy to be followed henceforth. Further, the disclosure of the amount incurred in manufacturing the moulds because the management does not have the year-wise in-house cost incurred in its manufacture

 

                 or

Any modification is required.

C. Points considered by the Committee

7.          The Committee notes that the basic issue raised in the query relates to recognition of moulds manufactured in-house which were charged to revenue in earlier years. The Committee has, therefore, considered only this issue and has not considered any other issue that may arise from the Facts of the Case, such as, valuation of moulds, accounting treatment followed for expenditure incurred on moulds in earlier years, prior period item, if any, arising in the Facts of the Case, etc.  The Committee wishes to point out that at some places in the Facts of the Case, it has been stated that capitalisation of moulds was done in the financial year 2011-12 and at other places, capitalisation has been stated to be done in the financial year 2012-13. However, the Committee has not considered this aspect as this does not affect the issue raised. Further, the Committee has expressed its opinion purely from accounting perspective and not from the perspective of interpretation of any legal enactment, such as, Income-tax Act, 1961, etc.

8.          The Committee notes paragraph 8.1 of AS 10, notified under the Companies (Accounting Standards) Rules, 2006, (hereinafter referred to as the ‘Rules’) which provide as follows:

“8.1 The definition in paragraph 6.1 gives criteria for determining whether items are to be classified as fixed assets. Judgement is required in applying the criteria to specific circumstances or specific types of enterprises. It may be appropriate to aggregate individually insignificant items, and to apply the criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have been included as fixed asset, because the amount of the expenditure is not material.”

From the above, the Committee is of the view that an enterprise may decide to expense an item which could otherwise have been included as fixed asset, because the amount of the expenditure is not material. Judgement is required in applying the criteria to specific circumstances. The Committee notes from the Facts of the Case that as per the querist, moulds meet the definition of ‘fixed asset’ as per AS 10 and the company treats the moulds as fixed assets. The querist has also stated that there is also no change in classification of moulds from one category to another, for example, from ‘inventory’ to ‘fixed assets’. From this, it appears that the company had also treated the moulds as fixed assets in earlier years, but on the consideration of materiality, the costs incurred for manufacturing the moulds were charged to the profit and loss account.
9.        The Committee notes from the Facts of the Case that the company considers the aggregate value of moulds as held by it at the current reporting date as material and, therefore, it wishes to recognise them in its books of account as fixed asset. In this regard, the Committee notes the following paragraphs of Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, notified under the ‘Rules’:

“4.4        Accounting policies are the specific accounting principles and the methods of applying those principles adopted by an enterprise in the preparation and presentation of financial statements.”

“30. A more appropriate presentation of events or transactions in the financial statements occurs when the new accounting policy results in more relevant or reliable information about the financial position, performance or cash flows of the enterprise.
31. The following are not changes in accounting policies:

(a) the adoption of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions, e.g., introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia payments to employees on retirement; and

(b) the adoption of a new accounting policy for events or transactions which did not occur previously or that were immaterial.”

From the above, the Committee notes that in the extant case, on consideration of materiality, expenditure on moulds was considered immaterial depending on the circumstances prevailing at that point of time and accordingly, these were expensed off immediately. Subsequently, on account of change in circumstances, it is felt that the moulds have cumulatively become material, keeping in view the circumstances at the current reporting date. The Committee is of the view that consideration of materiality is to be applied at a particular point of time depending on the circumstances prevailing at that point of time. Any change in circumstances subsequently, does not warrant reversing an expense already charged off since those circumstances did not exist at the time of original accounting treatment. Accordingly, in the extant case, the moulds written off in the earlier years on account of immateriality cannot be brought back in the books of account even if these become material at a later date. Thus, the accounting policy to capitalise the moulds as fixed assets should be considered a new accounting policy, to be followed from the current reporting period when the moulds acquired are considered as ‘material’.  In view of the above aforesaid discussion, the question of revaluation does not arise. Thus, the procedure adopted by the company is not in order.

10.       On the basis of the above, the Committee is of the following opinion on the issues raised in
paragraph 6 above:

(i) No, the accounting followed by the company is not in order, as discussed in paragraph 9 above

(ii) The question of revaluation does not arise, as discussed in paragraph 9 above.

 

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