1.18     Query

Valuation of Inventories.

 1.A newly formed textile company, wholly owned by a State Government, adopted the following accounting policy in respect of valuation of closing stock of inventories (finished goods) as on 31.3.1988.

(a) Sold goods- Export- At realizable value inclusive of export cash incentive.

(b) Sold goods- Domestic- At realizable value.

(c) Unsold Goods- Domestic- Cost or realizable value whichever is lower.

The term ‘sold goods’ means goods for which firm contracts have been executed, but the ownership of these goods has not passed on to the buyer.

2. Originally, this textile unit was a public limited company. It was taken over by the State Government by an ordinance. The erstwhile management was also following the above referred policy for valuation of inventories.

3.The querist is of the view that the closing stock of finished goods should be valued at cost or market value whichever is lower; also, export cash incentive should not be included for valuation purposes.

4.The querist has also stated that the Institute has given an opinion in the case of a company that such goods, including work-in-progress, should be valued at cost or market value, whichever is lower. But, according to the querist, at large number of private textile companies are adopting the above stated policy for valuation of closing stock of finished goods. The reason normally given by such companies is that it is an accepted accounting policy in the textile industry and that the general rule of cost or market value does not apply. Further, the Comptroller & Auditor General has given ‘NIL’ comments.

5.The querist has referred to the Expert Advisory Committee the following issues for its opinion:

                        (a) Whether the policy adopted by the company is correct.

(b) If it is correct, does it require to be disclosed or qualified, and if so, how, with special reference to reporting requirements u/s 227 (4A) of the Companies Act, 1956?

                                                                         Opinion                                                         September 13,1989

1.The Committee notes that para 24 of Accounting Standard 2 (AS-2) recommends that “Subject to the exceptions stated in para 29.1 to 29.4 inventories should be valued at lower of historical cost and net realizable value”. The Committee further notes that exceptions stated in para 29.1, do not cover the situation described in the query.

2.The Committee also notes that para 5.12 of the Statement on Auditing Practices, which is as under:

“The basis on which inventories are valued is determined by the management. The normal basis is cost or net realizable value whichever is lower….. In appropriate circumstances, having regard to the industry, e.g., plantations, inventories may be valued at market value or at prices subsequently realised”.

3.The Committee also notes that para 6.2 of accounting Standard 9 (AS-9)) recommends as below:

“At certain stages in specific industries, such as when agricultural crops have been harvested or mineral ores have been extracted, performance may be substantially complete prior to the execution of the transaction generating revenue. In such cases, when sale is assumed or where market exists and there is a negligible risk of failure to sell, the goods invoiced are often valued at net realizable value. Such amounts, while not revenue as defined in this statement, are sometimes recognized in the statement of profit and loss and appropriately described.”

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

(a) The policy adopted by the company is not correct and the stocks should be valued at cost or net realizable value, whichever is lower.

(b) The second query needs no answer in view of (a) above.

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