1.8 Query
Disclosure of deferred payment liabilities for purchase of plant and machinery and borrowings from commercial banks for working capital requirements.
1.The Querist has informed that in a company when plant and machinery is purchased, particularly, from foreign suppliers, and buyers are allowed facility of payment of purchase consideration in instalments (i.e., purchase is effected on deferred payment basis), the liability being in the nature of a loan, is being classified as secured loan or unsecured loan depending on whether collateral security was provided or not. This liability is not classified as sundry creditors and shown under “current liabilities and provisions” since, in the view of the querist, the plant and machinery does not constitute purchase of merchandise for resale or processing in the normal course of trade.
2. The Commercial Audit Wing of C & A.G.’s office have recently pointed out that the instalments of deferred credit falling due for payment within 12 months from the date of balance sheet should be classified under current liabilities or, alternatively, shown as a separate item in between the heads “unsecured loans” and “current liabilities and provisions”. It is understood by the querist that their observation is based on the opinion of the Research Committee of the Institute of Chartered Accountants of India vide para 9.15 of the Institute’s booklet “Statement on Auditing Practices” (H 3 202 6). It was conceded by the Commercial Audit that this liability is in the nature of a loan but insisted that a different treatment as suggested above should be given for that portion of liability repayable within 12 months from the date of balance sheet. In other words, emphasis was placed on that part of loan which is repayable within 12 months from the date of balance sheet to be classified under current liabilities or shown under a separate head on the liabilities side of the balance sheet. The querist has mentioned that similar opinions have also been expressed by the Expert Advisory Committee of the Institute of Chartered Accountants of India, vide, query no. 1.11 and 1.42, published in “Compendium of Opinions, Volume I (2nd Edition)” (0 10 909 11).
3. Another item of liability of similar nature, in-so-far as the due date of repayment is concerned is short-term borrowings from commercial banks for meeting working capital needs. It is well known, as per the querist, that short term borrowings from commercial banks are repayable on demand. This liability is being depicted on the liabilities side of balance sheet under “secured loan” or “unsecured loan” depending on whether collateral tangible security is offered or not. Although, the repayment liability is immediate (i.e. in less than 12 months from the date of balance sheet) this liability is not being classified under current liabilities or shown under a separate head.
4. The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above:
(a) Depiction of instalments of deferred credit falling due for payment within 12 months from the date of the balance sheet as a separate item on the liabilities side of balance sheet may not conform to the requirements of Schedule VI of Companies Act in-as-much as a new head is now sought to be created on the liabilities side of balance sheet other than the five heads prescribed in Schedule VI. Deviations from the Schedule may contravene the provisions contained in section 211 of the Companies Act. In the view of the querist, the entire liability should be shown as secured loan or unsecured loan as applicable.
(b) The querist feels that there is a contradiction in the manner of exhibition of the deferred payment liabilities on the one hand and short-term borrowings from commercial banks for meeting working capital requirements on the other.
Opinion February 12, 1988
1. The Committee is of the view that wherever Part I of Schedule VI to the Companies Act, 1956, specifically requires disclosure of certain items of assets and liabilities in a particular manner, it is mandatory to disclose the said items in that manner. However, where the said part of the said Schedule is silent in respect of certain items of assets and liabilities, the disclosure thereof will be determined on the basis of sound accounting principles and practices prevailing in the country. In this regard, the Committee notes that Section 211 (1) of the Companies Act, 1956, requires that “every balance-sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit…” (emphasis by the Committee).
2. On the basis of the above, the Committee is of the opinion that since short-term loans from commercial banks are specifically required to be disclosed under Part I of Schedule VI under the head ‘secured loans’/‘unsecured loans’, as the case may be, a company does not have any option but to disclose the same in the manner so required. However, since, there is no specific disclosure requirement, under the said schedule, of deferred payment liabilities, the disclosure should be made keeping in view the nature of the liability. The Committee is of the opinion that since deferred payment liability, as per the circumstances of the query, is a long-term liability and is not of the nature of a loan as per the common commercial parlance, it should be shown separately after the head ‘unsecured loans’ and before the head ‘current liabilities and provisions’ as recommended by the Research Committee of the Institute of Chartered Accountants of India in para 9.15 of the Statement on Auditing Practices. The instalments of deferred payment liabilities payable within 12 months of the balance sheet date may be separately disclosed along with the deferred payment liabilities. Alternatively, the said instalments payable within 12 months of the balance sheet date may also be disclosed separately under the head “Current Liabilities and Provisions”, in view of the definition of the term ‘current liability’ as a “liability…..which falls due for payment in a relatively short period, normally not more than 12 months “(Guidance Note on Terms Used in Financial Statements, issued by The Institute of Chartered Accountants of India ). The Committee is of the opinion that the aforesaid manner of disclosure is not in contravention to he requirements of Schedule VI to the Companies Act. ____________________________
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