The Chartered Accountant

tanks as WIP and capitalise
the nickel and nickel sulphamate
solution in the new
6 tanks during the financial
year 2007-08.
(v) In case the nickel and nickel
sulphamate solution, in respect
of 12 old tanks, is to
be capitalised, whether the
Income-tax Department will
permit depreciation thereon.
C. Points considered by the Committee
6. The Committee notes the definition
of the term ‘fixed asset’ as given
in paragraph 6.1 of Accounting
Standard (AS) 10, ‘Accounting for
Fixed Assets’, as reproduced below.
The Committee also notes the definition
of the term ‘inventories’ and
paragraph 4 of Accounting Standard
(AS) 2, ‘Valuation of Inventories’,
which state as follows:
AS 10
“6.1 Fixed asset is an asset held
with the intention of being used
for the purpose of producing or
providing goods or services and
is not held for sale in the normal
course of business.”
AS 2
“Inventories are assets:
(a) held for sale in the ordinary
course of business;
(b) in the process of production
for such sale; or
(c) in the form of materials
and supplies to be consumed
in the produc-
OPINION
tion process or in the
rendering of services.”
“4. …Inventories also encompass
finished goods produced, or
work in progress being produced,
by the enterprise…”
7. The Committee further notes the
definition of ‘Work in Process’ as
contained in the Guidance Note on
Terms Used in Financial Statements,
issued by the Institute of Chartered
Accountants of India, which provides
as follows:
“Work in Process includes all
materials which have undergone
manufacturing or processing operations,
but upon which further
operations are necessary before
the product is ready for sale.”
8. The Committee notes from the
Facts of the Case that the initial
nickel and nickel sulphamate solution
put into the tank get consumed
in the production process through
electroplating and are not held as
such for producing the goods, as in
the case of fixed assets. The quantity
of nickel and nickel sulphamate
solution in the tank have to be replenished
by way of fresh additions
in order to continue the production
process and thus, it is only the
quantity of initial nickel and nickel
sulphamate solution that stays in the
tank for its entire life and not the one
originally put into the tank. Accordingly,
the contention of the querist
in paragraph 4 above to capitalise
the cost of initial nickel and nickel
sulphamate solution on this ground
is not valid. Thus, the Committee
is of the view that the initial nickel
and nickel sulphamate solution that
are contained in the tank are of the
nature of work-in-progress to be
disclosed as inventory.
D. Opinion
9. On the basis of the above, the
Committee is of the following opinion
on the issues raised in paragraph
5 above:
(i) No, the accounting treatment
given by the company to treat
the cost of initial nickel and
nickel sulphamate solution in
the six new tanks, acquired in
the financial year 2007-08, as
capital expenditure is not correct.
(ii) Since the answer to the above
question is not in the affirmative,
the answer to this question
does not arise.
(iii) Since the answer to (i) above
is not in the affirmative, the
answer to this question does
not arise.
(iv) No, the company cannot
adopt dual accounting policy
for similar items purchased at
different points of time.
(v) Answer to this question does
not arise as the cost of nickel
and nickel sulphamate solution
is not to be capitalised.
In any case, as per Rule 2 of
the Advisory Service Rules,
in accordance with which the
Committee replies to the queries
received, the Committee
does not answer the issues involving
legal interpretation of
various enactments, such as,
the Income-tax Act, 1961.q
1. The Opinion is only that of the Expert Advisory Committee and does not necessarily represent the Opinion of the
Council of the Institute.
2. The Compendium of Opinions containing the Opinions of Expert Advisory Committee has been published in twenty
five volumes which are available for sale at the Institute's office at New Delhi and its regional council offices at Mumbai,
Chennai, Kolkata and Kanpur.
3. Recent opinions of the Committee are available on the website of the Institute at URL: http://www.icai.org/category.
html?c_id=146
THE CHARTERED ACCOUNTANT 977 DECEMBER 2008