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Based on data released by Directorate General of Commercial Intelligence and Statistics (DGCI&S), export sales by Indian exporters amounted to US$ 214.1 billion for the nine months ended December, 2012.

Scaling down of economic and manufacturing activities in Asian economies of China, Japan, Singapore, Malaysia and the African and Latin American countries (which account for nearly 40% of our export destinations) has affected the demand for our products.  In spite of the global economic downturn, export sales of manufactured goods still account for majority (63% approx.) of our foreign trade.

This article deals with the audit of export sales of manufactured goods and the disclosures required to be made in the Financial Statements.

Revenue Recognition:

Accounting Standard 9, issued by the Institute of Chartered Accountants of India (ICAI) and notified by National Advisory Committee of Accounting Standards (NACAS), clearly states that,

“A key criterion for determining when to recognise revenue from a transaction involving the sale of goods is that the seller has transferred the property in the goods to the buyer for a consideration.” 

Sales should be recognized on transfer of significant risks and rewards of ownership to the buyer, unless the parties have mutually consented to transfer the risk at any other point. In case of export sales, generally, risks and rewards are deemed to be transferred when the goods under question have been laden on the transporting vessel (referred to as the lading date), as explained further under INCOTERMS. 

INCOTERMS:

For business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created "INCOTERMS" in 1936. INCOTERMS are designed to create a bridge between different members of the industry by acting as a uniform language they can use.

INCOTERMS are a set of three-letter standard trade terms globally used in international contracts for the sale and purchase of goods. The following are the terms used often in the course of export of goods: FOB (Free On Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).

Invoice Value includes :

Cost + Mark-Up

Freight

Insurance

FOB

Yes

No

No

CFR

Yes

Yes

No

CIF

Yes

Yes

Yes

These are the value terms on the basis of which the transactions are evaluated and invoices raised. These terms also define when the risks and rewards are to be transferred to the buyer. For the three terms mentioned above, the risks and rewards are transferred to the buyer when the goods pass the ship’s rail and are laden on board.

Excise Duty on Export Sales:

The taxable event for Central Excise duty to be attracted is manufacture or production in India of excisable goods. However, the Central Excise Act, 1944 lays down procedures relating to export without payment of duty.

There are two categories of export without payment of duty:

— Export of finished goods without, payment of duty, under bond or undertaking.

— Export of manufactured/processed goods after procuring raw material, without payment of duty, under bond.

The goods will have to be exported within six months (or period of extension allowed) from the date on which these were cleared for export from the factory of production or warehouse or other approved premises.

Export Incentives:

The Government has issued various export incentive schemes in India, to attract Companies to indulge in exports. Companies often apply for incentive schemes they fall under.  Few of them have been explained below:

Focus Product/Market Incentive:

Government of India gives the duty credit scrip equivalent to a 2% of FOB value of exports of certain products/exports to some countries. The duty credit scrip is freely transferable/sellable.

Duty Drawback Scheme:

Duty Drawback, as the name suggests, refers to the refund in respect of Excise & Custom duties paid by manufacturer and/or exporter in relation to the inputs used for manufacturing of the products. Duty drawback is not applicable if no excise or customs had been paid by the manufacturer/exporter or if the manufacturer or exporter is a 100% EOU/EPZ/SEZ Unit.  Duty drawback is also allowed at a fixed % of FOB as per shipping bill. Duty drawback allowed is mentioned in the shipping bill itself.

Export Promotion Capital Goods Scheme (EPCG):

According to this scheme, a domestic manufacturer can import plant and machinery without paying customs duty or settling at a concessional rate of customs duty. 

Zero Duty EPCG Scheme had come to an end on 31st of March 2012. For continued technological up-gradation of export sectors, this Scheme has now been extended up to 31st March 2013.

Other Incentive Schemes available are SHIS Licences, Duty Exemption Entitlement Certificate (DEEC) License, etc.

Accounting Of Export Sales:

Companies generally resort to record export sales in two ways.

1. They may record sales on the day when the goods have been laden on board, at the applicable foreign exchange rate on that day, or a predetermined rate as per agreement.

2. They may record sales at a notional exchange rate when the goods are dispatched from the factory or warehouse for export and later record the differential sales based on rate prevailing on the lading date.

It is of utmost importance to ensure that only those despatches which have been laden on board in the reporting period be considered as export sales, following accrual basis of accounting. Despatches which have been laden after the cut-off date should be considered as sales for the next reporting period, and Stock of Goods in Transit for the current period.

However, when the Company records sales in the first manner, their internal control for the same should be checked, so that the auditor can determine the extent of test checking to be done.

Documentation:

Every export sale transaction should be accompanied by a set of export related documents, to justify its trueness. The auditor should verify that the required documents are in place. Mentioned hereunder are the documents:

1. Contract of sale - It is a formal contract by which a seller agrees to sell and a buyer agrees to buy, under certain terms and conditions spelled out in writing in the document signed by both parties.

2.Commercial Invoice - Receipt for goods purchased indicating the sender or seller and the receiver or purchaser, a commercial invoice contains an itemized list of the merchandise with the complete description of goods with their unit value and total value. 

3. Certificate of Origin - A document containing an affidavit to prove the origin of the goods being exported. They are commonly certified a consular office or a chamber of commerce.

4. Quality Inspection Certificate - A document certifying that merchandise was in good condition, or in accordance with certain specifications immediately prior to shipment.

5. Bill of Lading - A bill of lading acknowledges that the relative goods have been received on board the specified vessel.

6. Shipping Bill - It’s an electronic declaration, stating the details of the goods being exported, accepted and assigned a unique number by the Indian Customs Electronic Data Interchange System.

7. Settlement Advice of the Bank in respect of funds received from the Buyer.

8. Documents of the following export related expenses (As applicable) :

a. Ocean Freight

b. Insurance

c. Analysis Charges

d. Terminal Handling Charges

e. Clearing Charges

Verification:

For auditing export sales, it is preferable if a detail of all exports made during the year is available. The detail should consist of basic information like commercial invoice number, buyer's name, product name, quantity sold, price per unit. value term/INCOTERM applied, date of lading, value of sales on date of lading, settlement advice number of payment received, shipping bill number, FOB value as per shipping bill, export incentive(s), export related expenses. Export incentives received should be incorporated in the detail, so that an invoice-wise detail of incentives received and pending as at year end is available. This detail after being vouched and verified will help to cross-check the quantum of export sales, export incentives and export related expenses in the books of accounts.

Another aspect which can be correlated with exports is Foreign Exchange Fluctuation (FEF) on Trade Receivables. Accounting Standard 11 calls for reporting of foreign currency monetary items using the closing rate. All those debts relating to export sales, lying receivable on reporting date, will have to be revalued at the closing foreign exchange rate.  With the invoice wise detail available, it is easily identifiable which invoices have not been settled yet, and form part of the closing balance of export related debts. The foreign exchange rates of the date of lading, at which debtors have been recorded, are also available. The closing balance of trade receivables related to export sales will have to be simply revalued at the differential exchange rate, invoice wise.

Disclosures:

FOB value of exports - The shipping bill issued against each export invoice does contain the FOB value, but it is generally not considered to be the actual FOB, reason being that the authorities issuing the shipping bill roughly estimate the freight and insurance charged.

Thus, for disclosing the FOB value of exports under the note of Foreign Exchange Earnings and Outgo, the actual FOB value of exports should be calculated. With freight and insurance expenses related to every export bill available, converting a CIF or CFR sale to FOB, is a cakewalk. Eliminating the ocean freight and insurance from the CIF and CFR (only freight, in this case) sale will give us the FOB value of the sale.

Related Party transactions - Export sales made to related parties have to be identified separately for proper disclosure of related party transactions during the year as per Accounting Standard 18.

Product-wise break up of Revenue from Operations - As per the Guidance Note on Revised Schedule VI, product wise detail of sales made is required to be disclosed. In case the Company deals in multiple products, product-wise detail of export sales of manufactured goods will have to be disclosed.

By: Aditi Chandak.

Article Assistant,

S. Jaykishan.

(The author is a student of CA Final, due to appear in May, 2014. She is currently an article trainee at S. Jaykishan, Calcutta.)


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Category Audit, Other Articles by - Aditi Chandak 



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