Closing stock

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10 September 2012 Should we keep any Provision for excise duty for closing stock as on 31 march?

CA Ilayaraja

CA Ilayaraja (Expert)
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10 September 2012 S we should provide ED on closing stock of manufactured goods as the liability arises on production. This is according to the guidelines by ICAI on this topic.

(The AS-2 (Revised) on, "Valuation of Inventories" states that finished goods are to be valued by taking into account the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of conversion to be included would be all direct factory overheads related to the said finished goods. Excise duty is a duty which is payable on the manufacture of the finished goods inside a factory. Though the collection of the same is deferred till the goods leave the factory, the liability for the same arises when the manufacture takes place.

The Institute, before the enactment of the revised AS-2, in its Guidance Note on Accounting Treatment for Excise Duty gave an option to entities to provide the excise duty payable on finished goods and add the same to the valuation of finished goods or not to make any provision but only make a disclosure of the said liability. After the revised AS-2 was issued, the ICAI revised its earlier guidance note and removed the alternative of not providing for the excise duty. Thus it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the to the value of closing stock. According to Guidance Note on "Accounting Treatment of Excise Duty", excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an element of cost for inventory valuation. Where excise duty is paid on excisable goods and such goods are subsequently utilised in the manufacturing process, the duty paid on such goods, if the same is not recoverable from taxing authorities, becomes a manufacturing cost and must be included in the valuation of work-in-progress or finished goods arising from the subsequent processing of such goods. Further, where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made.

Excise duty cannot be treated as a period cost. Accordingly excise duty now cannot be shown as a contingent liability. Thus, it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the value of closing stock. If the said provision is not made, the revised Guidance Note on Accounting Treatment for Excise duty says that the auditor should qualify his report and, if possible, also mention the quantum of the duty not so provided).