Year-End Accounting for Goods-in-Transit Under Ind AS

1. Question

Electro Mech Industries Limited (hereinafter the buyer), an Ind AS-compliant manufacturer of heavy industrial equipment, issued Purchase Order No. PO/2403 dated 22 March 2025 to Vertex Alloys Private Limited (hereinafter the supplier) for the supply of alloy-based raw materials.

Against this order, the supplier raised a tax invoice dated 30 March 2025 for Rs. 60,00,000 plus applicable GST of Rs. 10,80,000. The goods were dispatched on 31 March 2025 and were physically received at the buyer’s warehouse on 3 April 2025.

Determine the appropriate accounting and tax treatment in the buyer’s books as on 31 March 2025 for the given scenarios, considering the relevant principles under Ind AS framework.

(a) Scenario A – Delivery considered complete on dispatch of goods

In this case, the goods are considered transferred to the buyer upon dispatch from the supplier’s premises. Although the goods were received on 3 April, the dispatch took place on 31stMarch. The buyer must assess whether to recognise the purchase as of 31 March and account for the goods as “goods-in-transit.”

(b) Scenario B – Delivery considered complete on receipt of goods

In this case, the supplier bears the transportation and insurance costs and retains responsibility until the goods are delivered to the buyer’s location. Since the delivery occurred on 3 April, the buyer must evaluate whether any entry is warranted as of 31stMarch or whether the transaction should be recorded in the subsequent financial year.

2. Relevant Provisions

Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets

Para 14 – A provision shall be recognised when:

(a) the entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources will be required to settle the obligation; and

(c) a reliable estimate can be made of the obligation.

Para 18 – Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity’s balance sheet are those that exist at the end of the reporting period.

Extract of Division II of Schedule III of the Companies Act, 2013

Para 6 – A company shall disclose the following in the Notes:

B. Current Assets

I. Inventories:

(i)……..

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.

It also states that for disclosure of import values during an accounting year, it is important to include goods-in-transit as on the balance sheet date, provided the significant risks and rewards of ownership have already passed to the company, as determined by the import contract and applicable legal principles.

Ind AS 2, Inventories

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 or supplies to be consumed in the production process or in the rendering of services.

Conceptual Framework for Financial Reporting under Ind AS

The framework states that an asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.

It also states that an entity is said to control a resource if it currently has the power to decide how the resource is used and can benefit from it. This also means the entity can stop others from using the resource or gaining benefits from it. If one entity controls a resource, no other entity can control that same resource.

3. Analysis

(a) Scenario A – Delivery considered complete on dispatch of goods

Under Scenario A, the terms of the contract indicate that delivery is deemed complete upon dispatch. In the given case, the supplier dispatched the goods on 31 March 2025, and the buyer received them on 3 April 2025. Since the significant risks and rewards of ownership transferred at the point of dispatch, Electro Mech Industries Limited is considered to have obtained control of the goods on 31 March 2025.

As per the Conceptual Framework for Financial Reporting under Ind AS, control over an economic resource that can generate future economic benefits qualifies as an asset. Accordingly, the buyer should recognise the goods as inventory as on 31 March 2025. Further, in accordance with Ind AS 2, such inventory, though in transit, represents raw materials held for use in the production process and should be presented as “goods-in-transit” under the relevant subhead of current assets, in line with the disclosure requirements of Division II of Schedule III.

Simultaneously, the obligation to pay the supplier is established by the dispatch of goods and issuance of the invoice. This results in a present obligation as of the reporting date. As per Para 14 of Ind AS 37, the criteria for recognising a liability are satisfied, a past event (dispatch and invoicing) has occurred, an outflow of resources is probable, and the amount is reliably measurable. Therefore, a liability should be recognised in the buyer’s books as on 31 March 2025. Also, in line with Para 18 of Ind AS 37, only liabilities that exist at the reporting date should be recognised, future obligations are not relevant here.

(b) Scenario B – Delivery considered complete on receipt of goods

Under Scenario B, the terms of delivery specify that the supplier retains responsibility, including transportation and insurance, until the goods are physically delivered to the buyer. This indicates that the significant risks and rewards of ownership remain with the supplier until the goods are received by the buyer at its premises.

In the given case, the goods were received on 3 April 2025. As on the balance sheet date, i.e., 31 March 2025, control over the goods had not yet passed to Electro Mech Industries Limited. Therefore, applying the Conceptual Framework under Ind AS, the buyer does not control the goods as of the reporting date and hence cannot recognise them as an asset.

In line with Ind AS 2, inventories are recognised only when the entity holds the goods and can derive future economic benefits. Since the buyer did not have control or possession of the goods on 31 March 2025, and the ownership had not yet transferred, no inventory or asset should be recorded in its books as at that date.

Furthermore, as per Ind AS 37, a liability arises only when a present obligation exists at the end of the reporting period. In this case, since ownership and risks had not transferred by 31 March 2025, the buyer does not have a present obligation to the supplier on that date. Therefore, no liability should be recognised in the buyer’s books as of 31 March 2025. Recognising a provision would also be inconsistent with Para 18 of Ind AS 37, which prohibits recognising future obligations.

Accordingly, the entire transaction, including the purchase, inventory recognition, and liability, should be recorded in the subsequent financial year, i.e., on or after 3 April 2025, when the goods are received and control is transferred.

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