Whether Accretion or Decretion in Stock of Scrap treated as “Other Operational Income”

Table of Contents

1. Query

2. Relevant Provisions

3. Expert Advisory Committee (EAC) Opinion

4. Conclusion

1. Query

ABC Ltd. is engaged in the manufacturing, testing, and servicing of automobile spare parts. During the manufacturing operations, scrap is predominantly generated and it does not have an active market for its sale. Thus, ABC Ltd. disposes of such items as scrap only. The income from the disposal of scrap is separately shown under “Other Operational Income” and it also includes accretion or decretion in scrap stock i.e. the difference of closing and opening scrap stock.

The auditor of the company raised an objection regarding the disclosure of changes in scrap stock under other operational income. In their opinion, the same shall be disclosed under the item ‘Changes in inventories of finished goods and work in progress’.

Whether the disclosure made by the company with respect to change in inventory of scrap to be shown as part of ‘Other operational income’ or shall be disclosed under the item ‘Changes in inventories of finished goods and work in progress’.

Check Out Illustrated Guide to Indian Accounting Standards (Ind AS) which provides a comprehensive commentary on Ind AS as amended by the Companies (Indian Accounting Standards) (Amendment) Rules 2021 & thorough analysis of amended Schedule III of the Companies Act 2013.

2. Relevant Provisions

As per Ind AS 2, Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.”

Para 10 of Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors states that in the absence of an Ind AS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:

(a) relevant to the economic decision-making needs of users; and

(b) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial performance and cash flows of the entity;

(ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form;

(iii) are neutral, ie free from bias;

(iv) are prudent; and

(v) are complete in all material respects.

Para 11 of Ind AS 8 , Accounting Policies, Changes in Accounting Estimates and Errors states that in making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order:

(a) the requirements in Ind ASs dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Conceptual Framework) issued by the Institute of Chartered Accountants of India.

3. Expert Advisory Committee (EAC) Opinion

The Committee noted that the Guidance Note requires the sale of manufacturing scrap arising from operations for a manufacturing company should be treated as other operating revenue since the same arises on account of the company’s main operating activity but it does not specifically mention about the disclosure of ‘change in the inventory of scrap’.

However, drawing the analogy from the other items under “Revenue from Operations”, Committee is of the view that only sale of scrap should be disclosed under ‘other operating revenue’ and not the changes in inventory of scrap.

Further, as per the guidance provided, internally manufactured components that are sometimes sold without further processing and sometimes after further processing may be disclosed as ‘manufactured components’ for the purpose of classification of inventories. On this basis, it is decided that the inventory of scrap can be accounted for as by-product inventory under Ind AS 2. Accordingly, the ‘change in the inventory of scrap’ should also be disclosed separately under the classification, ‘Changes in inventories of finished goods, work in progress and stock in trade’.

4. Conclusion

On the basis of relevant provisions of respective Ind AS and the opinion provided by the EAC, it can be concluded that ‘change in the inventory of scrap’ should also be disclosed separately under the classification, ‘Changes in inventories of finished goods, work in progress and stock in trade’, and not under ‘other operational revenue/income’ in the Statement of Profit and Loss

References

– EAC opinion Query 12, Volume 40- Part II
– Opinion finalized on 10.11.2020
– Ind AS 2