The Chartered Accountant

A. Facts of the Case
1. A private limited company manufactures
nickel sheets using the electroforming
process. The key plant
and machinery for the manufacturing
process is an electroplating tank
consisting of:
(i) Pure nickel in pellet form,
and
(ii) Nickel Sulphamate Solution.
2. The principle of operation is that
of electroplating. In electroplating,
there are two electrodes dipped in
an electrolyte solution (Nickel Sulphamate
solution). They are given
opposite electric charges; the electrode
having positive charge is called
Anode and the one having negative
charge is called Cathode. When the
electric charge is applied, Anode
dissolves in the electrolyte and the
metal that has dissolved gets deposited
on the Cathode. The Anode
consists of a perforated titanium
basket filled with the nickel pellets.
The nickel in the basket dissolves in
the nickel sulphamate solution. The
Cathode consists of a metal sheet.
The nickel that dissolves from the
Anode gets deposited on the Cathode,
thus the product is ready. In the
normal course of operation, whatever
nickel is taken away from the
Anode is replenished by way of addition
of fresh nickel pellets.
3. To get the production started and
then to maintain the desired quality
of product, it is absolutely essential
that the quantity of nickel in the
Anodes as well as the quantity and
concentration of nickel sulphamate
DECEMBER 2008 976 THE CHARTERED ACCOUNTANT
OPINION
Treatment of initial quantity of
in-process material.
The following is the opinion given by the Expert Advisory Committee of the Institute in response
to a query sent by a member. This is being published for the information of readers.
solution be maintained as per the
standards. Unless nickel and nickel
sulphamate solution is added to the
tank the same cannot be put to use.
4. In short, according to the querist,
the quantity of initial nickel and
nickel sulphamate solution that is
put inside a tank stays for the entire
operational life of the tank. Hence,
the cost of initial nickel and nickel
sulphamate solution is treated as
capital cost for the purpose of obtaining
term loan for buying six new
tanks in the financial year 2007-08.
Besides the six new tanks added in
the financial year 2007-08, the company
has twelve old tanks where
the cost of initial nickel and nickel
sulphamate solution has not been
considered as capital cost and the
balance stock in the tanks as on the
balance sheet date is shown as workin-progress.
As per the querist, this
being major addition, management
of the company felt it necessary to
ascertain as to whether capitalisation
of cost of initial nickel and nickel
sulphamate solution is proper.
B. Query
5. The querist has sought the opinion
of the Expert Advisory Committee
on the following issues:
(i) Whether the accounting treatment
given by the company
to treat the cost of nickel and
nickel sulphamate solution in
the six new tanks, acquired in
the financial year 2007-08, as
capital expenditure is correct.
(ii) In case the answer to the
above question is in the af-
firmative, then whether it is
necessary to declare the same
as a change in the accounting
policy for fixed assets, since
nickel and nickel sulphamate
solution in earlier tanks has
not been capitalised.
(iii) In case the answer to (i) above
is in the affirmative whether
it is possible to transfer the
work-in-progress (WIP) to
capital asset in respect of earlier
12 tanks in the financial
year 2007-08. This, according
to the querist, will be done by
transferring WIP to fixed assets.
If it is possible, the following
questions arise:
(a) At which price transfer
from WIP to Fixed assets
should be made, whether
at today’s price (carrying
cost) or the price at which
it was originally purchased,
i.e., 1998 price.
(b) Whether depreciation
from the date of capitalisation
(1998) to date
should be considered.
(c) If WIP is transferred at
1998 price, what treatment
should be given
for the balancing amount
(difference between the
present WIP value and
1998 price).
(iv) Whether the company can
adopt dual accounting policy,
i.e., continue to show the
nickel and nickel sulphamate
solution in the earlier 12