Valuation of machinery and ship equipment held for installation on ships to be construed under constructions contract – ICAI

Facts of the Case

A public sector company was engaged in the business of construction of ships and ship repair activities on contractual basis. As per Company’s policy, machinery and other ship borne equipments were charged to consumption when they are installed on the ship and uninstalled items are taken in Inventory and are valued at actual cost.
However, government auditors suggested them to record uninstalled machinery/ equipment at net realizable value based on the percentage of realization received from customer.
On the contrary, company is of the contention that valuation of machinery and equipments which are in inventory and not yet installed should not be based on the estimated realisable value of the ship as company has already created “Provision for Future losses” for contract on the basis of total estimated loss.

Issue

The Company has sought the opinion of ICAI in respect of the issues arising from the above-mentioned
facts:

Whether treatment adopted by the company in respect of valuation of machineries and ship equipments
and calculation of future losses is correct or not.

Opinion

On the basis of the above-mentioned facts, the opinion is respect of the issue raised by the Company:

• The Cost of machinery and ship equipments that can be used only in connection with a specific ship under construction contracts and is intended to be used in that specific ship should be added to the cost of work-in-progress of the ship under construction contract and accordingly provisions of AS 7 is applied instead of AS 2.
• The valuation of work-in-progress of the contract in which loss is expected on overall basis should be made by derating the cost incurred on the contract to date, to its estimated realisable value.

The above opinion was affirmed by the ICAI- Expert Advisory Committee.

Swati Bansal, Audit Associate, SW India