Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.6       Query

 

Valuation of inventories in bonded warehouse

 1.A Government company is involved in import of metals and export of mineral ores and other finished products. One of the items imported is stainless steel which has become a slow-moving item due to increased indigenous production. The Government increased the Customs Duty on import of stainless steel from 120% to 220% in 1982-83. Consequently, de-bonding of the stocks and taking it to godowns for sale to local consumers became highly uneconomical. The company therefore decided to sell the stocks lying in bonded warehouses to exporters who are not required to pay the duty. Thus, no material was to be bonded and taken to free godowns.

 

2.Till the financial year 1981-82, the company was having only one ex-godown sale price since no separate price was fixed for ex-bond sales. For the purpose of valuation of closing stock in the bonded warehouse, the bond price was worked out by deducting customs duty and other charges from the ex-godown sale price. The market price thus derived was a compared with the costs and lower of the two was adopted for the purpose of valuation of closing stock. For the year ended 31st March, 1982 the stock was valued on the same basis. The price so worked out was lower than the cost as such the inventories were valued at that price.

 

3.For the year 1982-83, the company fixed the ex-bond price, therefore the above policy of derived market price adopted during 1981-82 was abandoned. The stocks were valued at the lower of cost or market price so fixed for the valuation of closing stock. This policy was accepted by the statutory auditors and the Government auditors.

 

4.The company has now been advised that the market price so arrived at is not appropriate for valuation of bonded inventories for the year 1983-84 since the rate of Customs Duty has increased substantially and that the realised market price should have been worked out after deduction of Customs Duty. And other charges from the ex-godown price as was done earlier. The company however valued the stocks at the same price at which they were valued during 1982-83 on the ground that the cost price was much lower than the ex-bond price (market price) fixed during 1982-83 which were in force during 1983-84 also. The company is of the view that the said valuation policy is realistic and is in accordance with the normal accounting principles and practices in this regard.

 

5.In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following:

 

(i)         Whether the method of valuation of closing stocks in bonded warehouse adopted by the company, i.e. consideration of ex-bond price as realisable value, is correct or not;

 

(ii)        In case the answer to the above is in the negative, what should be the correct method of valuation of such stocks keeping in view the decision of the company that these will be sold only to exporters who are not required to pay any import duty on the materials.

  

                                                            Opinion                                                     February 19, 1985

 

1.The Committee notes that para 24 of Accounting Standard-2 (AS-2) on ‘Valuation of Inventories’, issued by the Institute of Chartered Accountants of India, states that “………Inventories should be valued at lower of historical cost and net realisable value.” The Committee further notes that para 6.9 of the Standard defines ‘net realisable value’ as the “actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale” (emphasis ours).

 

2.On the basis of the above, the opinion of the Committee on the issues raised by the querist in para 5 is as below:

 

(i)         Computation of net realisable value of bonded stocks for 1983-84 on the basis of the ex-bond price fixed for 1982-83 will not be proper for the purpose of valuation of inventories unless the said ex-bond price is equal to the estimated/actual selling price of the said items in the ordinary course of business, i.e. the price which is actually or estimated to be realised by selling the items to exporters as per the decision of the company.

 

(ii)        Stocks in bond should be valued at cost or net realisable value, whichever is lower. The net realisable value, on the said stocks, should be arrived at on the basis of actual/estimated selling prices relevant to the sales to exporters as per the decision of the company.

 

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