Major Accounting Policies in the Fmcg Sector

Major Accounting Policies in the FMCG Sector

The Financial statements of FMCG companies are basically prepared in accordance with the Generally Accepted Accounting Principles in India (GAAP) and to comply with the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 (as amended) and the relevant provisions of the Companies Act, 1956. We will discuss the important policies that are followed by the FMCG companies in preparation of their financial statements.

Revenue Recognition

The sale of a product is recognized only when the risk and rewards of the ownership in the product are passed on to the consumer as per the terms of the contract. The company should not retain any effective control over the product. The financial reports are generally prepared using accrual accounting method.

The sales are generally recognized net of trade discounts, rebates, sales tax, and excise duties.

Income obtained from export incentives like duty drawback, premium on sale of import licenses, and lease license fee are generally recognized on accrual basis. Time proportional basis is used to recognize the interests on investments

Depreciation / Amortisation

The depreciation is done by straight line method in accordance with the rates specified under Schedule XIV to the Companies Act, 1956. The assets purchased / sold during the year are depreciated in pro-rata basis. In some cases accelerated depreciation method is followed upon periodic review of useful life of the item.

Intangible assets are amortized using straight line method.

Inventories

Inventories include raw materials, Work in progress, packaging materials & spares, finished goods. Cost of Inventories are calculated using weighted average method. Usually inventories are valued at lower than value and net realizable value. The net realizable value is generally estimated as the estimated selling price on the course of the business less the estimated loss of completion and estimated cost necessary to make the sale.

Trade receivables, Loans and Advances

The value of Trade receivables loans and advances are accounted after making necessary adjustments with the provisions for doubtful balances.

Impairments

The Impairment has to be checked on the balance sheet for tangible and intangible assets. If a small group of asset started generating cash inflow due to continuous use and which are independent of the cash inflow from other groups of assets is considered as a cash generating unit. If any such instance occurs, an estimate of the recoverable amount of the individual asset is made.

Then for the assets whose carrying value on the books exceeds the recoverable amounts are written down by recognizing the impairment loss as an expense in the P&L Statement

Provisions

When