(This article identifies the non-current assets to be separated from current assets while appraising the working capital limits to borrower).
The figures of ‘Current Assets’ appearing on the balance sheet is normally a consolidated figure of ‘Current Assets’ and ‘Other non-current Assets’. Hence, the Non-Current Asset items are to be separated from current assets and that only the figures of actual current assets shall be taken into account for the calculation of working capital bank finance. For this purpose, it is important to know what are current assets and what are the likely non-current asset items clubbed with the current assets in the balance sheet.
Current Asset is defined as ‘Any assets of a business organisation that is expected to realise within 12 months from the reporting date or normal operating cycle which includes cash in hand and bank balance. The inventories viz. raw materials, work- in- progress, finished goods, including those in transit, stores (coal, fuel, oil, lubricants, packing materials, labels etc., coming under stores.), are classified as current assets. Trade receivables realisable within a year including receivables from subsidiaries, associates, sister concerns, (if they represent genuine sales made in the ordinary course of business) are also classified as current assets. In addition to the above, all those investments such as investment made in Government, other trustee securities and fixed deposits in banks may also be classified as Current Assets.
Other non-current assets
The assets which are not Current Assets or Fixed Assets or Investment Asset shall be classified under the head ‘Other Non-Current Assets’. The ‘Dead Inventories’ which are separated from items of current assets, ‘Receivables’ outstanding beyond one year(which is also called deferred receivables), Advances made to staff, partners, directors, Advances made for acquisition of fixed assets, Margin for non-fund based facilities’ intercorporate investments, security deposits, and any other miscellaneous assets shall be classified as other non-current assets.
The securities maintained for long term purpose viz. Sinking Fund, gratuity etc. are not the current assets. Also, the items like marketable securities, shares of other companies are not reckoned for assessment of current assets. (This the RBI guidelines with an intent to dissuade the borrowers from utilising their working capital finance for the purpose of Intercorporate investments). If bills discounted/purchased by banks are shown in the balance sheet as Trade Receivables, such items shall also be reclassified and taken to liability side while computing working capital limits.
Netting of Current Liabilities with current assets
Banks are permitted by RBI in netting the following current liabilities and current assets for the purpose of working capital assessment.
- Tax provisions and advance payment of Income tax.
- Excise duty provision and investment in Government and Trustee Securities or Fixed deposits with bank.
- Advance payment received (ex: vehicles booking with automobiles companies) and when same is invested in approved securities.
- Advance payments or progress payments received by capital goods manufacturing companies and work-in-process.