1.8       Query

Disclosure of advances made on capital account

1.A Government Company is engaged in the business of exploration, production and transportation of crude oil and natural gas and production of L.P.G. The Company has made substantial advances to its suppliers /contractors for supply/erection of plant  & machinery, building etc. Such advances, to the extent the concerned assets are not supplied /commissioned, are shown in its balance sheet as part of  “Capital work-in–progress” with suitable disclosures by way of notes. This practice has been consistently followed by the   company since its inception with a disclosure in its annual accounts either by way of notes or in a statement of accounting policies.

2.The company has now been advised that the advances for capital expenditure should be shown under the head “Loans and Advances”. The company however feels that the disclosure practice followed by it is in accordance with the requirements of Schedule VI to the Companies Act, 1956, therefore, there is no need for change. The querist has drawn the attention of the Committee that both the practices are prevalent.

3.The querist has sought the opinion of the Expert Advisory Committee as to whether the manner of disclosure of advances made on capital account under the heading “Capital work-in-progress” with appropriate disclosure is correct and is in Compliance with the requirements of Schedule VI to the Companies Act or should such advances be disclosed under the head “Loans and Advances”.

                                                        Opinion                                                           April 30,1984

1.The Committee notes that regarding disclosure of advances made to construction contractors, para 9.2 (a) of “Study on Expenditure During Construction Period” (1980) published by the Research Committee of the Institute of Chartered Accountants of India, states as below:

“Sometimes, payments are made to contractors as advances from time to time or in accordance with the specific terms of the contract. This is particularly true in the case of construction contracts which are executed on the basis of a so-called “turn-key” agreement. However, in addition to “turn-key” contracts, advance payments made to contractors may be a feature of other types of contracts as well. In all such cases, until the contract is completed and the construction project handed over by the contractor, several payments are made to the contractor by way of advances to enable the contractor to meet his various financial commitments. In the books of account of the company making such payments, they should be treated as advance payments until the contract is completed, at which time the total of the advance payments made can be adjusted against the final contract price. Having regard to the nature and purpose of the advance, it would be preferable for a fair presentation to disclose it in the Balance Sheet as a separate item under the heading  “Fixed Capital Expenditure” rather than under “Loans and Advances”. Alternatively, if the Company prefers to classify the advances to contractors under the heading “Loans and Advances” this should be described clearly in such a manner so as to indicate that the advances are of a capital nature and represent advance payments to contractors for construction work. However, irrespective of the method which is adopted in classifying the advances on the Balance Sheet, they should not be segregated or classified against any specific “Fixed Assets” until the construction work is completed and the title to the property constructed or delivered by the contractor has passed to the purchaser.”

2.The Committee is of the view that the manner of disclosure suggested in the above paragraph is also applicable in respect of advances on capital account made by a company, even after commencement of commercial production, on a project(s) not yet commissioned. In this case, however, if the company decides to disclose such advances as ‘capital work-in-progress’, the relevant head under which it should be shown would be “Fixed Assets” and not “Fixed Capital Expenditure”.

3. On the basis of above, the Committee is of the opinion that the advances made on capital account should be shown under the head “Loans and Advances”, with a clear disclosure of the nature thereof. The Committee is also of the opinion that the manner of disclosure followed by the company, i.e., as a part of “capital work-in-progress”, along with appropriate disclosures, is also permissible.

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