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A company is engaged in the construction of metro rail projects. Whenever the company buys material for the metro project it parks the expenditure incurred under the head of Capital Work in Progress (CWIP). On successful completion of the operation, the company will classify this expenditure as PPE. The company still holds some of the surplus ‘stock of tracks’ remaining from the completed project which is shown under the head CWIP. On completion of one project, the company has been granted further new similar projects.
As per para 6 of Ind AS 2, Inventories, Inventories are defined as assets in the form of materials or supplies to be consumed in the production process or in the rendering of services. The auditor following the above definition commented that classifying this surplus material under CWIP will result in an understatement of ‘Inventory’ as these are supplies to be consumed in the production process of metro rail. To cease the confusion, the company sought the opinion of EAC on the correct accounting treatment of surplus stock of material.
The Expert Advisory Committee (EAC) of ICAI has noted that the classification of an item as ‘inventory’ depends on its intended primary use for an entity. In the current case, the ‘stock of track’ is neither held for sale in the ordinary course of business; nor it is in the process of production for such sale, nor in the form of materials or supplies to be consumed in the production process or in the rendering of services. Therefore, the same does not meet the definition of ‘inventories’. Further, the stock of tracks is tangible items, which upon laying/installation as metro tracks will be used for providing services and will be used during more than one period. Therefore, tracks once laid/installed will meet the definition of property, plant and equipment (PPE). Accordingly, the ‘stock of track’ should be termed as CWIP but of new projects rather than completed projects.
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