Treatment of financing facility made available against

purchase of raw materials.

1.The company under question is involved in manufacture of consumer electronic products. Substantial raw-materials are regularly imported by the company, worth approximately Rs. 1.5 crores per month.

2.The company has an arrangement with its foreign supplier of raw-materials for supply of goods against 180 days credit. This credit is released against usance L/Cs established by the company. The correspondent bank in the supplier’s country of the L/C opening bank discounts this bill in the international market and re-imburses the supplier thereafter. Separate bills are drawn for the value of the material and the interest amount. The interest bill takes care of the discount charges, and all other charges are to the L/C opener’s account.

3.On the due date, the importer retires the documents and the remittances are effected through the L/C opening bank to its foreign correspondent bank.

4.The querist has expressed his view that on one hand this transaction could be viewed as a separate financing transaction and the total of the credit so released at any given point of time be reflected as secured loan. Hence, the interest payable on the same be separately reflected in the profit and loss account under financial expenses. On the other hand, this credit could be termed as supplier’s credit and merely reflected as creditors for goods under the schedule ‘Current Liabilities’. Consequently, the interest paid on purchases of such material may be assumed to be cost of the goods and, therefore, reflected under the head ‘Material Consumed’, to the extent it relates thereto.

5.The querist has sought the opinion of the Expert Advisory Committee as to whether this credit falls under the definition of loan and is to be so reflected under the relevant schedule to the balance sheet along with the interest payable against the same.

Opinion March 13, 1989

The Committee is of the opinion that since the transaction in question is primarily of the nature of a credit given by the supplier, it should be disclosed as ‘creditors for goods’ under ‘Current Liabilities’. The Committee is, however, of the opinion that the interest on the said credit should be disclosed separately in the profit and loss account as required in Part II of Schedule VI to the Companies Act, 1956.

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