BACKGROUND
A company engaged in manufacturing of super alloys generates a significant amount of scrap. It has been estimated that 95% of the generated scrap can be reused in the production process, while the remaining 5% is sold in the open market. The company recognizes the net increase or decrease in scrap stock as “Consumption of raw material-internally generated scrap” and is categorized under “Cost of Material Consumption.” Such classification of change in the inventory of scrap sometimes results in the understatement of raw material consumption. The company wants to affirm its classification and thus approached the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) for their input on the same.
Facts of the Case
Company A (the Company) is formed under Ministry of Defence. The company is in the business of production and supply of various metal products to Defence and other strategic sectors for nuclear, aeronautical and space applications. The Company’s production process starts from primary melting where the Company uses various raw materials purchased as per the required composition/specifications for an end-product in the melting process and the internally generated scrap is also used in majority volume based on requirement.
It was stated that as per the existing practice the net accretion/decretion in scrap stock, i.e., difference of closing stock and opening stock of scrap is booked as ‘Consumption of raw material-internally generated scrap’ and the same is grouped under ‘Cost of Material Consumption’ in the Statement of Profit and Loss. The closing stock of scrap is disclosed under ‘Note – Current Assets (Inventories)’ at estimated realizable value of scrap.
In the absence of any guidance for disclosing the accretion/ decretion of scrap, the same is being consistently shown as part of raw material consumption.
Query
Whether the Company can change the grouping of net scrap generated under ‘Change in Inventories of finished goods, work-in-progress and stock-in-trade’ instead of ‘Cost of Raw Material Consumption’ in the Statement of Profit and Loss.?
EAC Response
The Expert Advisory Committee has noted that the cost of intermediates or components which are internally manufactured and transferred from one department to another within the same entity should be excluded from the cost of materials consumed. Thus, only purchased and not internally manufactured and transferred intermediates can be included in the ‘cost of materials consumed’.
On the basis of the above, the EAC is of the opinion that the company shall classify internally generated scrap, used in the subsequent production process as “Work-in-Progress” and should present it under ‘Changes in inventories of finished goods, work-in-progress and stock-in-trade’ under ‘Expenses’ in the Statement of P&L.
SW Point of View: The EAC opinion on Disclosure of changes in Inventory of scrap in the Statement of P&L is align with Ind AS Guidelines. This will help assess the correct situation of company’s Cost of raw material Consumption & Changes in Inventory of Finished Goods /WIP. |
Udit Maheshwari, Audit Associate, SW