Toolings classified as Inventories (pending receipt of opinion from EAC of ICAI)

Vesuvius India Ltd. — (31-12-2008)

From Accounting Policies :

Inventories :

Toolings are considered as inventories and are amortised on
a straight-line basis over a period of three years based on their estimated
useful lives. The Company’s statutory auditors are of the view that such
toolings are in the nature of moulds that are used in the production of
finished goods and hence should be classified as fixed assets and depreciated
over their estimated useful lives of three years. The company is in the
process of obtaining the opinion of the Expert Advisory Committee of the
Institute of Chartered Accountants of India regarding appropriate
classification and accounting of such toolings considering their nature.

 

Had the toolings been classified as fixed assets, the gross
block and net block of fixed assets would have been higher by Rs.140,560
thousand (Previous year Rs.106,881 thousand) and Rs.47,917 thousand (Previous
year Rs.42,564 thousand) respectively, while inventories would have been lower
by Rs.47,917 thousand (Previous year Rs.42,564 thousand).

 

Consequently, the depreciation charge for the year would
have been higher by Rs.26,893 thousand (Previous year Rs.24,961 thousand) and
the tolling charges would have been lower by Rs.26,893 thousand (Previous year
Rs.24,961 thousand).

 

The provisions for current tax and deferred tax release for
the year would have been higher by Rs.2,435 thousand (Previous year Rs.2,451
thousand) and Rs.2,435 thousand respectively. Deferred tax charge for the
previous year would have been lower by Rs.2,451 thousand. Considering the
amount of income taxes deposited by the Company, there will be no dues towards
interest under the provisions of the Income-tax Act, 1961 had these
adjustments been recognised.

 

From Auditors’ Report :

We draw attention to Note 1(iv) on Schedule 14 to the
financial statements. As explained in the note, the Company has classified
toolings as inventory which is being amortised over their estimated useful
lives of 3 years. In our opinion such toolings are fixed assets and should be
depreciated over their useful lives as explained in the aforesaid Note. Had
the toolings been classified as fixed assets, gross block and net block of
fixed assets would have been higher by Rs.140,560 thousand (Previous year
Rs.106,881 thousand) and Rs.47,917 thousand (Previous year Rs.42,564 thousand)
respectively, which inventories would have been lower by Rs.47,917 thousand
(Previous year Rs.42,564 thousand). Consequently, the depreciation charge for
the year would have been higher by Rs.26,893 thousand (Previous year Rs.24,961
thousand) and the tooling charges would have been lower by an equivalent
amount. However, there is no impact on the profit after tax.

 

In view of the significance of the matter, we believe that
the divergent views on the matter need to be resolved through reference to the
Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of
India. The Company is in the process of making such a reference. Accordingly,
the opinion expressed in paragraph 5 below should be considered pending
reference of the matter to the EAC and the confirmation by the EAC of the
classification and accounting followed by the Company.

 

From Directors’ Report :

Difference in opinion expressed by Auditors in para 4(f) of
their Report to Members of the Company dated February 24, 2009 relate to
classification of toolings which according to the Auditors should be
classified under fixed assets. The Company is consistently following the
normal industry practice of classifying them as inventory. In either case
there is no impact on profits after tax.