1.16     Query

Treatment of notional loss incurred on purchase of certain itemswhich can be adjusted

against the notional premium tobe earned against purchase of some other items

1.A Government of India company floated certain tenders as ‘Forward Package Deal’, one of the conditions of which was that the “Customer may indicate the itemwise quantity they are willing to accept, quoting the net notional loss against each item.” The ‘net notional loss’ being the excess of controlled price of the item over the price tendered by the customer.

2.The querist’s company—a private limited company—quoted a lower price than the controlled price since the market prices for the concerned items were lower. The proforma for the tender contained, inter alia, the following conditions:

“(a)      Notional losses would be compensated by you only by way of notional premium on supply of fast moving premium items and not in any other way. Under no circumstances, we will be entitled to claim or receive from you any cash amount against unadjusted premiums due as per your register.

(b)        There is no commitment from your side as to any particular period within which such compensatory supplies would be made.”

3.The said private limited company was awarded certain tenders. The supplier Government company raised bills against the private limited company on the basis of controlled prices which were paid by the latter as per the terms and conditions. However, the notional loss remained credited with the Government company with the difference between controlled prices and tendered prices. The querist’s company debited purchases with the tendered price although bills were received as per controlled price, which were duly paid. The difference in prices was lying as debit balance in the Government company account.

4.The querist’s company is not certain when it will be able to recover this notional loss. The Government company has started floating tenders for premium items. Only parties having notional loss to their credit are eligible to compete these tenders. Whosoever quotes the highest premium will be awarded the tender. The Government company shall raise the bill as per the controlled rates and the premium quoted by the customer will be adjusted against notional loss.

5. No time limit is fixed by the Government company for adjustment of notional loss by giving premium items to the parties who have notional loss to their credit.

6.The Querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:

(i)         Whether the querist’s company should debit the purchases at tendered prices or at controlled prices.

(ii)        Whether the accounts will reflect true and fair state of affairs if the querist’s company debits the purchases in the books of account at tendered prices inspite of the fact that bills received and paid by the querist’s company were raised by the Government company at controlled prices which were more than tendered prices and no notional losses have been recovered till the finalization of balance sheet.

                                              Opinion                                       May 9, 1985

1.The Committee notes that the querist’s company will be able to adjust the national loss against the notional premium only in the event of the acceptance of its tender/tenders in respect of premium items in future. The Committee further notes that considerable uncertainty is involved in the happening of such an event. The Committee is therefore of the view that the purchases should be debited at controlled prices which are actually paid and that the excess of controlled price over the tendered price is a contingent asset (normally shown as a footnote to the balance sheet) which has been defined in the Guidance Note of the Institute on “Terms Used in Financial Statements” as “An asset the existence, ownership or value of which may be known or determined only on the occurrence of one or more uncertain events”.

2.On the basis of the above considerations, the opinion of the Expert Advisory Committee on the issues raised by the querist is as below:

(i)         The purchases account should be debited at controlled prices i.e. the price at which the billing is made by the suppliers.

(ii)        The accounts will not reflect a true and fair view if the purchases account is debited at the tendered price.

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