Disclosure of changes in inventory of scrap in the Statement of Profit and Loss Account


  • A listed central public sector company under the Ministry of Defence, was set up with a view to achieve self-reliance in production and supply of various super alloys, titanium alloys, maraging steel etc to Defence and other strategic sectors for nuclear, aeronautical and space applications. The products manufactured were sold in the form of ingots, forged billets etc.
  • Scrap was predominantly generated from the manufacturing processes, i.e., melting, forging and machining, etc. Further, 90% of the scrap generated during the manufacturing process would be re-usable in the production process of melting and only 10 %. was sold in the open market.

Current Treatment and Issues Faced

  • The difference of opening stock and closing stock of scrap was booked as ‘Consumption of raw material-internally generated scrap’ and the same was grouped under ‘Cost of Material Consumption’ in the Statement of Profit and Loss. The closing stock of scrap was disclosed under ‘Current Assets (Inventories)’ at estimated realisable value of scrap. The sale of scrap was shown separately under ‘Other Operational Income’.
  • However, with the current treatment, the company faced a serious issue i.e if scrap generation was more than the scrap consumption, the ‘consumption of raw material – scrap’ showed credit thereby reduced the amount of total raw material consumption and vice-versa, i.e., if scrap consumption was more than the scrap generation, the consumption of internally generated scrap showed debit balance, thus increasing the amount of raw material consumption.

EAC Opinion:

  • In the extant case, EAC noted that during a production process, more than one product may be produced simultaneously which may either be joint products or a main product and a by-product. Further, although the Standard does not mention about the scrap or waste products, the EAC noted that scrap or waste products are also the result of production process and if these could be sold or used/consumed internally, these can be considered as ‘inventories’.
  • In the same line, the EAC also noted that the scrap generated/produced during the manufacturing process in the given case were either used in further production process or sold in the open market. Therefore, the EAC viewed that materials generated in the manufacturing process which would be further used as input in the production process of melting could be considered to be ‘in the process of production for sale’ and accordingly, could be considered as ‘inventories’ as per Ind AS 2.
  • Based on the above, the movement in scrap which is further used in the production process should be shown under ‘Changes in inventories of finished goods, work-in-progress and stock-in-trade’.

The above opinion was affirmed by ICAI Expert Advisory committee.

Bijhon Bordoloi, Audit Associate, SW India

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