Crystal Ltd. was making provision for non-moving stocks based on no issues for the last 12 months up to 31.3.2012. The company wants to provide during the year ending 31.3.2013 based on technical evaluation:
Total value of stock Rs. 100 lakhs
Provision required based on 12 months issue Rs. 3.5 lakhs
Provision required based on technical evaluation Rs. 2.5 lakhs
The decision of making provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made. In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from Rs. 3.5 lakhs to Rs. 2.5 lakhs is also not material.
The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of ABC Ltd. for the year 2012-13:
The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year, the profit for the year and the corresponding effect on the year end net assets would have been higher by Rs. 1 lakh.?
Kristeel Ltd. had made a rights issue of shares in 2011. In the offer document to its members, it had projected a surplus of Rs. 40 crores during the accounting year to end on 31st March, 2013. The draft results for the year, prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a deficit of Rs. 10 crores.
The board in consultation with the managing director, decided on the following:
i. Value year-end inventory at works cost (Rs. 50 crores) instead of the hitherto method of valuation of inventory at prime cost (Rs. 30 crores).
ii. Provide depreciation for the year on straight line basis on account of substantial additions in gross block during the year, instead of on the reducing balance method, which was hitherto adopted. As a consequence, the charge for depreciation at Rs. 27 crores is lower than the amount of Rs. 45 crores which would have been provided had the old method been followed, by Rs. 18 cores.
iii. Not to provide for "after sales expenses" during the warranty period. Till the last year, provision at 2% of sales used to be made under the concept of "matching of costs against revenue" and actual expenses used to be charged against the provision. The board now decided to account for expenses as and when actually incurred. Sales during the year total to Rs. 600 crores.
iv. Provide for permanent fall in the value of investments - which fall had taken place over the past five years - the provision being Rs. 10 crores. As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for inclusion in the annual report for 2012-2013.
As per AS - 1 Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. In the case of a change in accounting policies which has a material effect in the current period, the amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
Notes on Accounts:
i. During the year inventory has been valued at factory cost, against the practice of valuing it at prime cost, as was the practice till last year. This has been done to take cognizance of the more capital intensive method of production on account of heavy capital expenditure during the year. As a result of this change, the year-end inventory has been valued at Rs. 50 crores and the profit for the year is increased by Rs. 20 crores.
ii. In view of the heavy capital intensive method of production introduced during the year, the company has decided to change the method of providing depreciation from reducing balance method to straight line method. As a result of this change, depreciation has been provided at Rs. 27 crores which is lower than the charge which would have been made had the old method and the old rates been applied, by Rs. 18 crores. To that extent, the profit for the year is increased.
iii. So far, the company has been providing 2% of sales for meeting after sales expenses during the warranty period. With the improved method of production, the probability of defects occurring in the products has reduced considerably. Hence, the company has decided not to make provision for such expenses but to account for the same as and when expenses are incurred. Due to this change, the profit for the year is increased by Rs. 12 crores than would have been the case if the old policy were to continue.
iv. The company has decided to provide Rs. 10 crores for the permanent fall in the value of investments which has taken place over the period of past five yeaRs. The provision so made has reduced the profit disclosed in the accounts by Rs. 10 crores.