1.74     Query

Expenditure on development of property

Schedule VI—Part I of the Companies Act, 1956, requires the Fixed Assets to be classified under 11 categories (a) to (k) and one such category is ‘Expenditure on Development of Property’.

While auditing the accounts of a Government company u/s 619 (4) of the Companies Act, 1956, the Government Auditors commented that in order to comply with the requirements of Schedule VI the expenditure incurred on land development should not be added to the cost of land but should be shown under ‘Development of Property’.  The argument given was that the expenditure relates to the development of land which is a property.  The generally accepted accounting practice is that any expenditure incurred on the development of a particular asset should be added to the cost of that asset.  The heading ‘Development of Property’ probably relates to expenditure incurred on development of mines, quarries and oil fields etc., because the expenditure of this nature cannot be classified under any of the other ten categories given under ‘Fixed Assets’.

 In case the argument given by Government Auditors is stretched   further, probably, the whole of expenditure incurred on a project during construction period which is always capitalised to the cost of plant and machinery and buildings, should also be treated as ‘development expenditure’ and not as part of the cost of plant and machinery, and buildings.

 In this connection we may add that the ‘Study on Expenditure during Construction Period’ published by the Institute of Chartered Accountants of India in para 9.6 recommends that expenses on development of land should be capitalised as part of land or if it can be related to buildings then added to the cost of such buildings.

 Guidance is therefore sought as to the most appropriate treatment for such expenditure.

                                                              Opinion                                                                August 25,1981

 The Study of the Research Committee of the Institute of Chartered Accountants of India on “Expenditure During Construction Period” incorporates a detailed discussion in Paragraph 9.6 of the various cost elements associated with land. One of the elements discussed in the publication is expenditure on grading and levelling the land in order to make it fit for construction. This item can be considered as of the nature of land development. According to the views expressed in the publication, the expenditure on levelling and grading the land can be treated as an indirect cost of construction rather than as an additional cost relating to the land itself, having regard to the primary purpose for which this expenditure is incurred.

Wherever possible, the expenditure on levelling, clearing and grading the land should be related with, and added to, the cost of the particular buildings or other structures which stand on each particular piece of land. Where this is not practicable, the total expenditure on levelling, clearing and grading the land may be apportioned among the different buildings and structures standing on the land in the ratios of the respective areas occupied by each such building or structure or in any other suitable ratio.  This does not imply that only that portion of the expenditure on levelling, clearing and grading the land can be capitalised, as an indirect cost of construction, which relates to the area of the land actually occupied by a building or other structures.  It is recognised that, in practice, it may not be possible to occupy the entire land area by constructing a building or other structures thereon. If the entire land area is reasonably occupied by building and other structures and if expenditure on levelling, clearing and grading the land is reasonably incurred for the purpose of the construction, such expenditure can be treated entirely as an indirect cost of construction and capitalised as part of the cost of the buildings or other structures.  However, any part of the expenditure on levelling, clearing and grading the land which is incurred for purpose of landscaping or for any other purposes, not connected with the construction of the project, should be treated as part of the cost of land.

In view of the above, the Committee is of the opinion that the development cost of land occupied by or related to buildings and structure should be appropriately apportioned to the buildings and structures.  If any development has been made of any land not occupied by or related to the buildings and structures, the cost thereof can be added to the cost of land.

 In the opinion of the Committee   the expression  “development of property” relates to such of the property development costs which cannot be directly clubbed with any of the property heads specified in the VIth Schedule, Part I, e.g. cost of the road constructed on municipal land to provide access to the factory.

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