How to Disclose ‘changes in inventory of scrap’ in the statement of profit and loss?

Facts of the Case

• A listed central public sector company (integrated power plant equipment manufacturer) is engaged in design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy.
• Scrap is predominantly generated from the Company’s manufacturing operations. Some scrap gets generated during fabrication and assembly also.
• Further, with regard to the nature of the scrap in the extant case, the company has separately clarified that the majority of the items are ferrous cut-bits emanating during the course of machining, fabrication, assembly etc. The material is not usable and there is no other use of such items except disposal as scrap. Further, the material is not being deliberately produced and the production process is not modified in order to produce such material.

Exiting practice

• The scrap income is being shown separately under ‘Other Operational Income’ and it includes scrap sale as well as accretion/decretion in scrap stock i.e. difference of closing stock and opening stock.
• Guidance Note on Division II- Ind AS Schedule III to the Companies Act, 2013, issued by ICAI requires disclosure of difference in opening and closing inventories of finished goods (FG)/work-in-progress (WIP)/stock-in-trade only in ‘changes in inventories of finished goods and work in progress’
• No guidance is available regarding disclosure of change in scrap inventory in the Guidance Note or in the Standard because of which the same is being consistently shown as part of scrap income.

Issue

The company has sought the opinion as to whether the change in inventory of scrap can be continued to be shown as part of scrap income being disclosed under ‘Other operational income’ or whether it has to be disclosed under the item ‘Changes in inventories of finished goods and work in progress’.

Opinion

• Paragraph 85 of Ind AS 1, ‘Presentation of Financial Statements’ states that additional line items, headings and subtotals in the statement of profit and loss shall be presented, when such presentation is relevant to an understanding of the entity’s financial performance.
• The disclosure requirements specified in ‘(General Instructions for Preparation of Financial statements in Division II of Schedule III to the Companies Act, 2013) are in addition to and not in substitution of the disclosure requirements specified in the Indian Accounting Standards. Additional disclosures specified in the Indian Accounting Standards shall be made in the Notes or by way of additional statement or statements unless required to be disclosed on the face of the Financial Statements.

Conclusion

‘Change in the inventory of scrap’ in the extant case 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. The above opinion was affirmed by the ICAI Expert Advisory

Manav Rajgaria, Audit Associate, SW India