Expert Advisory Committee

Query No. 32

Subject: Disclosure of Trade Payables.[1]

A. Facts of the Case

1. A Government of India company (hereinafter referred to as the ‘company’) is engaged in the construction and operation of thermal power plants in the country. The company has also diversified into hydro power generation, coal mining and oil & gas exploration etc. The company is registered under the Companies Act, 1956 and being an electricity generating company, is governed by the provisions of the Electricity Act, 2003. The company prepares its annual financial statements as per the provisions of the Companies Act, 1956. The company is also listed with the Bombay Stock Exchange and the National Stock Exchange.

2. The querist has stated that as per paragraph 8.4.1 of the Guidance Note on Revised Schedule VI to the Companies Act, 1956, issued by the Institute of Chartered Accountants of India (ICAI), “A payable shall be classified as a ‘trade payable’ if it is in respect of amount due on account of goods purchased or services received in the normal course of business. As per the old Schedule VI, the term ‘sundry creditors’ included amounts due in respect of goods purchased or services received or in respect of other contractual obligations as well. Hence, amounts due under contractual obligations can no longer be included within trade payables. Such items may include dues payables in respect of statutory obligations like contribution to provident fund, purchase of fixed assets, contractually reimbursable expenses, interest accrued on trade payables, etc. Such payables should be classified as “others” and each such item should be disclosed nature-wise. ...” Considering the above, the company, inter-alia, disclosed the amounts payable towards following services received from vendors/agencies as ‘trade payables’ in its financial statements:

(a) Security expenses payable.

(b) Electricity/power charges payable.

(d) Communication expenses payable.

(e) Medical expenses payable to empanelled hospitals.

(f) Legal expenses payable.

(g) Amounts payable to travel agents.

(h) Other accrued expenses for services received in the ordinary course of business.

The querist has separately explained the nature of above expenses and the purpose for which these expenses are incurred in the following table:

Sl. No.	Nature of expense	Purpose of expense
1.	Security expenses payable to Central Industrial Security Force (CISF) and private agencies.	The company is in the business of generating electricity through its power plants at various locations in the country. The security service to the plants is provided by CISF. Private security agencies provide security services for townships, office complexes, schools, hospitals, etc. owned by the company at its power plants. The amount payable to the CISF/private security agencies for the security services provided as per agreements entered with them is categorised as security expenses payable.
2.	Legal expenses payable	Litigations normally arise due to disputes in respect of execution of work/supply of materials to the company, land acquisition by the company for construction of power plants, tariff fixation etc. which are contested in various courts and tribunals. Fee payable to the advocates engaged by the company in respect of legal cases is categorised as legal expenses payable.
3.	Communication expenses payable	The company obtains communication services from various telecom operators for its day to day operations. This includes telephone/mobile, internet services etc. Expenses payable to the telecom operators are categorised as communication expenses payable.
4.	Operating expenses of schools, hospitals, transit hostels etc. at the project township	The company provides infrastructure facilities, viz., schools, hospitals, etc. to its employees at projects of the company which are at remote locations. Similarly, transit hostels are also provided for the temporary stay of employees on official work. Day to day operations and repair & maintenance of these facilities are carried out by vendors/agencies. Amounts payable for these expenses are categorised as operating expenses of schools, hospitals and transit hostels.
5.	Electricity/power charges payable	The company purchases electricity/power from electricity distribution companies for the following purposes: For use in construction activities of new power plants; and For use in administrative/other offices, premises of the company not attached to power plants of the company. Expenses payable to the electricity distribution companies are categorised as electricity/power charges payable.
6.	Water charges payable	The company purchases water from the concerned state authorities for the following purposes: (i) For use in generation of electricity; and (ii) For use in administrative offices, township and other residential facilities owned by the company. Amounts payable to the state authorities are categorised as water charges payable.
7.	Medical expenses payable to empanelled hospitals	The employees of the company are entitled for medical treatment in the empanelled hospitals and the company pays directly to the empanelled hospitals towards the medical services received by its employees. Such expenses payable are categorised as medical expenses payable to empanelled hospitals.
8.	Amounts payable to travel agents	The air/railway tickets for the official travel of employees of the company are arranged through empanelled travel agents. The charges for tickets arranged payable to the travel agencies are categorised as amounts payable to travel agents.

Depending upon the date on which such amounts are due, the trade payables were classified under non-current liabilities or under current liabilities, as per the requirement of the revised Schedule VI to the Companies Act, 1956.

3. During supplementary audit of accounts of the company for the year 2013-14, the office of the Comptroller and Auditor General of India (C&AG) observed that the disclosure of accrued expenses towards security services to CISF and other private security agencies, legal services, telephone services and operating expenses of schools and transit hostels at the project township as ‘trade payables’ is not correct and such payables should have been classified under ‘Other Current Liabilities’. During discussions, audit was of the view that amounts payable for administrative services received by the company such as security, communication, legal services etc. do not qualify to be classified as ‘Trade Payables’. The company invited reference of audit to paragraph 8.4.1 of the ‘Guidance Note on the Revised Schedule VI to the Companies Act, 1956’ which defines ‘trade payable’ as under:

“A payable shall be classified as ‘trade payable’ if it is in respect of amount due on account of goods purchased or services received in the normal course of business.”

Accordingly, it was explained that the accrued expenses referred by audit relate to services received by the company for its operations carried out in the ordinary course of business and meet the criteria for disclosure as trade payables in the financial statements. It was agreed with the Government audit that the existing practice of the company for classification of above-mentioned amounts as trade payables shall be referred to the Expert Advisory Committee (EAC) of the ICAI for opinion.

B. Query

4. In the above background, the querist has sought the opinion of the EAC as to whether classification of the amounts payable for various services referred in paragraph 2 above as ‘trade payable’ by the company is in order.

C. Points considered by the Committee

5. The Committee notes that the basic issue raised by the querist relates to classification and disclosure of amounts payable for various services under the head ‘trade payables’. The Committee has, therefore, considered only this issue and has not examined any other issue that may be contained in the Facts of the Case. Further, the opinion being expressed hereinafter is purely from the perspective of disclosures in the financial statements and not from any other perspective.

6. In order to determine whether amount payable for various services should be classified under the head ‘trade payable’, the Committee notes Note 5 of the ‘General Instructions for Preparation of Balance Sheet’ of Schedule III to the Companies Act, 2013, which states as below:

“A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.”

From the above, the Committee is of the view that only those amounts which are due in respect of goods purchased or services received in the normal course of business, can be classified under ‘trade payable’ in the balance sheet. In this context, the Committee also notes the definition of the term ‘sundry creditor’ as defined in the Guidance Note on Terms Used in Financial Statements as follows:

15.19 Sundry Creditor

Amount owed by an enterprise on account of goods purchased or services received or in respect of contractual obligations. Also termed as trade creditor or account payable.

The Committee notes from the above that under Revised Schedule VI to the Companies Act, 1956 and under Schedule III to the Companies Act, 2013, the amounts due under contractual obligations are not included within ‘trade payables’. In this regard, the Committee notes that as per paragraph 8.4.1 of the Guidance Note on Revised Schedule VI to the Companies Act, 1956 (hereinafter referred to as ‘the Guidance Note’), amounts due under contractual obligations may include dues payable in respect of statutory obligations like contribution to provident fund, purchase of fixed assets, contractually reimbursable expenses, interest accrued on trade payables, etc. The Committee further notes that the term ‘normal course of business’ is no where defined or explained in the Companies Act, 2013 or in the accounting pronouncements issued by the ICAI. Accordingly, the same should be construed in common parlance. The Committee is of the view that in common parlance, ‘normal course of business’ may be understood as the activities which are required for running the business. The Committee is further of the view that which payables arise in the normal course of business, would also depend on the type of business/industry and nature of expenses incurred. Hence, it is a judgemental issue to classify the amounts due in respect of various services received under ‘trade payables’.

7. On the basis of above, considering the nature of business of the company and the nature of expenses being incurred, the Committee is of the view that security expenses payable to Central Industrial Security Force (CISF) and private agencies, legal expenses payable, communication expenses payable, operating expenses of schools, hospitals and transit hostels at the project township, electricity/power charges payable, water charges payable, medical expenses payable to empanelled hospitals towards the medical services received by its employees, and amounts payable to travel agents, as explained in paragraph 2 above, appear to be the payables arising in the normal course of business of the company in the extant case, as discussed in paragraph 6 above and therefore, these should be classified and disclosed as ‘trade payables’.

D. Opinion

8. On the basis of the above, the Committee is of the opinion that the amounts payable to various parties referred to in paragraph 2 (table) above, such as, security expenses payable to Central Industrial Security Force (CISF) and private agencies, legal expenses payable, communication expenses payable, operating expenses of schools, hospitals and transit hostels at the project township, electricity/power charges payable, water charges payable, medical expenses payable to empanelled hospitals towards the medical services received by its employees, and amounts payable to travel agents, appear to be the payables arising in the normal course of business of the company in the extant case, as discussed in paragraph 6 above and therefore, their classification and disclosure as ‘trade payables’ would be in order, as discussed in paragraph 7 above.

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[1]Opinion finalised by the Committee on 7.11.2014.