(Sub : SOP for physical verification of assets /liabilities) MOD letter No. 014/Misc Topic/ Capital-outlay /P&P/ Dt.

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1 (Sub : SOP for physical verification of assets /liabilities) MOD letter No. 014/Misc Topic/ Capital-outlay /P&P/ Dt. :- 22/04/09 No.014/Misc Topic/Capital-outlay /P&P/ Govt. of India Ministry of Defence Ordnance Factory Board 10A, S K Bose Road, Kolkata Dt. :- 22/04/09 To The GM (All Fys) MSF Sub : SOP for physical verification of assets / liabilities As per standard commercial practices, the accounts stipulate that the ledger balance, always and any point of time, shall be in agreement with physical ground balance. However, during the course regular business operations, due to various reasons, aberrations i.e. fictitious / understated items assets / liabilities arise. The reasons may be: Non-linking of documents. Non-adherence to the laid down procedure in r/o Material management or Accounts. Deterioration in the physical condition of assets etc. In OFB, so far as Stores-in-hand & items of fixed assets are concerned, following procedures are in vogue:- In respect of SIH items, Stock Verification procedure as enunciated in MoD letter no. 11(9)/2005/D (prod) dt. 14/05/07 is in place. In respect of revaluation / reassessment of life of fixed assets, provisions contained in OFB circular no 78/P(C)/STR-EC/CDA/7066/D (Prod) dt.02/08/78 applies. So far as other items of assets / liabilities are concerned, viz WIP, Finished Stock, Finished Components, Stores in Transit etc, no such system of regular verification / pruning is available. In such cases where presence of such fictitious items of assets are identified, the book value of assets are liquidated by operation of Capital Outlay A/C. Following points are also relevant in this regard: a) As per provisions of GFR, OFB s accounts are being commercialized. OFB would be required to pay interest on its Capital. Holding of fictitious assets will lead to increase liability. As such, it is urgently required that book value of assets/liabilities carried by OFB should be brought to the realistic / ground levels.

2 b) One of the primary objectives for creation of OFB was to devise tight norms in the area of working capital. From the angle of cost reduction also, it is significant that tighter and realistic norms are devised for working capital holding. The assets/liabilities involved (viz. WIP, completed articles, Components, stores in transit are of a transient nature. Their physical condition vis-à-vis value changes over with time extent, it is difficult to devise a system of periodic verification. As per OFB s system, value Components, finished articles are determined once in a year, i.e. on 31 st March. So far as they are concerned, during the course of the year (from 1 st April to 31 st March) system do not any reliable figure. However, in respect of following cases, verification can be used as a method arriving at reasonably correct figures:- Completed warrants where production has been declared as complete. Old outstanding warrants where for a considerable time, there is no value addition. In respect of above categories of assets, physical verification may be considered as and arriving at correct valuation. In consideration of above points, Board in its 3 rd (2009) meeting has approved the process physical verification of assets / liabilities as per a SOP enclosed as Annexure-I. Sr. GM/GMs are requested to implement the SOP for verification of assets/liabilities within the financial year. Please acknowledge receipt Enclo: As above (D Bhattacharya) Copy to: Director/P & P OSD(Prod) Ministry of Defence Seva Bhavan For information please. NEW DELHI

3 SOP ON VERIFICATION OF ASSETS / LIABILITIES ANNEXURE-I 1. These procedures shall apply in the context of physical verification vis-à-vis valuation of following categories of assets / liabilities. A. Inventory items:- i. Work-in-Progress. ii. Finished Articles. iii. Finished Components. B. Receivables & Payables:- i. Receivables:- a. Store in transit between Factories (both from sister Fys & Trade) b. Machinery in Transit (both from sister Fys & Trade, indigenous & foreign). c. Stock pile items receivable (both indigenous & foreign). ii. Payables: a. Payables in r/o foreign, local & Central supply of Stores, Machines, Stock Pile. (*) Debtors / Creditors balances are kept out of the purview of present procedure. In this context, it has been decided that OFB shall formulate a policy in r/o Bad Debts etc in consonance with Accounting Standards. This issue will be taken-up separately after receipt of approval to the commercial formats. 2. Frequency of verification :- a. In r/o Inventory items:- All items as per Para 1.A under following categories will be physically verified at least once in a year. b. Procedure to be followed in r/o verification of inventory items:- i. Following items to be selected for the purpose of verification:- Balance pertaining to Closed Warrants. Balances pertaining to old outstanding warrants, i.e. warrants against which there is no booking for at least last two years. ii. (i) Closed warrants & (ii) Old outstanding warrants shown in LAO s database as on the date of commencement of verification should be taken up for physical verification. c. In r/o Receivables / payable balances as per para 1.B above all balances verified, at least once in a year. Procedure to be followed in r/o verification of Receivables & Payables:- Receivables & Payables balances o/s as per LAO s database should be taken up as the balance reconciled with the balances reflected Factory s database, with reference primary documents, viz. Supply Orders, Payments made / Due, Materials / machine received / due. 3. Methods of verification:- Verification team, under the control of an officer (not the rank of DGM), will be constituted by Sr. GMs / GMs. This will be a committee of Board of officers. In r/o Inventory items (para 1.A above) existing Stock Verification Group of the Factory may conduct the verification. Officer in control of stock verification will report to

4 the Sr. GM / GM of the factory. Based on past records, Sr. GMs / GM will identify high value, sensitive items of assets / liabilities and get these items verification higher frequencies, if so desired. Every year, all Sr GMs / GMs shall furnish a certificate to OFB stating the balances of assets / liabilities as per para 1.A above have been physically verified and found in agreement with balances shown in Accounts. Cases of non-verification of items during the prescribed period be referred by Sr GMs/GMs for operating division in OFB Hqrs with justified reasons for condonation. Condoning such cases of nonverification, operating division shall always negotiate with PCA (Fys), Kolkata. Based on the verification report, Sr GMs/GMs shall be reasonable for proper maintenance of concerned assets / liabilities. Short comings, if any shall reported to the concerned operating division with sufficient explanation/ justification. A copy of such report shall invariably be sent to PCA(Fys), Kolkata, & Director of Audit, Kolkata. Verification of inventory items shall be done according to following methods or method adopted shall be consistently followed during subsequent course verification:- By weight. By Counting. By assessment. By measurement. By volume. By any other method found suitable for the purpose. Verification of Receivables & Payables shall be done with reference to following document:- Supply Order (in case of ex-trade items). Payment made & Qty recd. against the SO Payment & Qty due against the SO. In case of inter-fy transactions (SIT balance): Pairing of Issue (prepared by the consignor) with consignee s Receipt Vr. 4. Discrepancies:- Discrepancies, if any, shall be brought to the notice of the controlling officer, immediately. Such items shall be rechecked in presence of A.O and controlling officer and resultant position will be brought to the notice of Sr GMs/GMs for reporting to OFB for further action. 5. Settlement of discrepancies:- Discrepancies occurring in the ground balance of assets / liabilities vis-à-vis account balance, in turn render the accounts unreliable. As it has already been accepted that the book value of assets / liabilities should always reflect the ground balance, following corrective measures should be taken:- a. On receipt of the discrepancy report from the factory, Operating Div. of OFB will carry out the due diligence. b. Once Operating Div gets satisfied about the existence of discrepancy in balance of asset / liability, a proposal for writing down/up of the value of concerned asset /

5 liability, will be put up before the concerned member, in consultation with Finance Div. c. Based on the approval received from concerned member, factory will be informed about the decision regarding rectification of the discrepancy through posting of D Vr / operation of capital outlay a/c. d. In r/o cases involving writing up of value of liability or writing down of value of asset, resulting loss to be regularized as per normal practices. Where GOI is the authority competent to sanction the loss, a Court of Enquiry must be held. In other cases, it will be discretionary for CFA to order a Court of Enquiry. In r/o following cases, formal regularization of loss would not be necessary:- Cases where it is found that the discrepancy or part thereof arose due to adoption of wrong accounting practices. Old cases pertaining to a period earlier than period stipulated for retention of concerned documents. 6. Each year, alongwith Annual Accounts of OFB, a discloser will be made by PCA (Fys), reflecting factory-wise total value of such cases involving writing down of asset values and writing up of Liability values through operation of capital outlay A/c X