1.5       Query

Disclosure and Valuation of Empties

1.A private limited company engaged in the manufacture of PVC compound and allied plastic products is purchasing raw materials in iron drums/polythene bags. The company sells/discards these containers depending on their condition. The empty drums/bags in hand at the end of the year are not reflected in the Trading Account and the Balance Sheet of the company. This practice has been followed consistently in past.

2.In this context, the querist has raised the following issues for the opinion of the Expert Advisory Committee.

(i)         Should the amount in respect of empty drums/bags be reflected in the balance sheet? If yes, then should it be shown under the head ‘stock-in trade’ or under some other head?

(ii)        What should be the basis of valuation of empty drums /bags in hand in case they are required to be shown in the balance sheet?

3.The querist is of the view that empty drums/bags are not covered by the definition of ‘Inventories’ given in para 6.1 of Accounting Standard 2 on ‘Valuation of Inventories’ issued by the Institute of Chartered Accountants of India, because

            (i)            the company does not deal in the sale and purchase of drums/bags;

            (ii)            they are not held in the process of production; and

            (iii)            they are not consumed in the production of goods. 

4.The querist has further argued that the empty drums/bags cannot be valued due to the following reasons:

(i)         The company pays for the raw materials and not for drums/bags, therefore, their cost price is nil.

(ii)        The drums/bags are sold, both on weight basis and unit basis, at varying prices, depending upon the degree of damage and usability. In view of this their market prices are unascertainable.

                                                     Opinion                                                      December 27,1983

1.The Committee is of the view that where the amount in respect of empties at hand is not material, it need not be disclosed separately in the financial statements. Where, however, the amount involved is material, appropriate disclosure thereof should be made so that the balance sheet and profit and loss account give a true and fair view of the state of affairs and the operating results of the enterprise.

2.The Committee notes that para 6.1 of Accounting Standard 2 on ‘ Valuation of Inventories’ defines ‘ Inventories’ as “tangible property held

(i)            for sale in the ordinary course of business; or

(ii)            in the process of production for such sale; or

(iii)       for consumption in the production of goods or services for sale, including maintenance supplies and consumables other than machine spares.”

The Committee concurs with the querist that empties are not covered in any of the above categories therefore they cannot be classified under the head ‘Stock-in-trade’. The Committee is therefore of the view that where the amount involved is material, the empties should be disclosed under the head ‘Current Assets’ preferably as a separate item.

3.Where the disclosure of empties is warranted on grounds of materiality, they should be valued at their estimated net realizable values since their cost cannot be ascertained. The Committee is of the view that such estimates may be prepared on some appropriate basis, e.g., the average realizations on empties in a few past years adjusted to changes in prices. In view of this treatment, the cost of raw materials consumed during the year should be adjusted accordingly.

4.On the basis of the above, the opinion of the Committee is as below:

(i)         The amount in respect of empty drums/bags need not be reflected in the balance sheet if the amount involved is not material. However where the said amount is material, a disclosure thereof should be made under the head ‘Current Assets’ preferably as a separate item.

(ii)        In the latter case, the empties should be valued at estimated net realizable value.

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