Disclosure of buildings purchased along

with land by a company

1.A public sector company is engaged in the manufacture and sale of earthmoving equipments, rail coaches, heavy duty trailers, heavy duty vehicles, etc. The company renders after-sales service in respect of the equipments, both during and outside warranty and also supplies spare parts.

2.During 1987-88, the company bought a residential property for Rs. 13 lakhs. The property was conveyed to the company through a sale deed which incorporated the sale consideration of Rs. 13 lakhs. Before purchase of the building, the company, for its own internal valuation, had the building valued by a registered valuer who had given certain valuation for land, building, fixtures, etc.

3.The Government Audit Representatives, while auditing the accounts of the company for the year 1987-88, suggested that the exhibition of the total value of the building, viz., Rs. 13 lakhs paid by the company as pertaining to building is not correct and a portion of the same (with reference to the valuation indicated by the registered valuer) should be taken and exhibited as pertaining to land cost and only the balance should be shown under building.

4.Since the company has not so far exhibited any transaction of that type as partly relating to building and partly relating to land and also in view of the following factors, the suggestion of Government Audit Representatives was not implemented:

(a) There is no separate sale deed for the land;

(b) Title to the company for the said property is by way of single sale deed for a sum of Rs. 13 lakhs representing the property comprising land, building, fixtures;

(c) Bifurcation of the consideration paid by the company into land and building based on the valuation for land/building etc. adopted by the registered valuer is not correct.

5.The querist has sought the opinion of the Expert Advisory Committee regarding the mode of exhibition to be adopted in such cases.

Opinion January 23, 1990

1. The Committee notes that para 3.13 of the ‘Statement on Auditing Practices’, issued by the Institute of Chartered Accountants of India, states that “where several assets are purchased for a consolidated price, the consideration should be apportioned to the various assets in the ratios of their respective market values at the date of purchase, as assessed by expert valuers.”

2.The Committee further notes that para 35 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, also recommends that “Where several fixed assets are purchased for a consolidated price, the consideration should be apportioned to the various assets on fair basis as determined by competent valuers.”

3.The Committee also notes that the ‘Guidance Note on Treatment of Expenditure During Construction Period’, issued by the Research Committee of the Institute of Chartered Accountants of India, makes the following recommendation in para 9.6, which is applicable in this case also:

“If any of the structures standing on the land have been, or can be, utilised for the purpose of the project, the estimated apportioned value of that structure should be capitalised separately from the value of the land, otherwise the total value paid for the land including that structure may be regarded as part of the cost of land. For example, if the total amount paid for a piece of land is, say, Rs. 10 lakh, and the land so purchased has a warehouse standing on it, it would be necessary to determine whether or not the project intends to utilize that warehouse or whether it intends to demolish it before constructing on the land. In the latter case the total consideration of Rs. 10 lakhs would have to be treated as the cost of land. On the other hand, in the former case, a suitable estimate would have to be made of the value of the warehouse. Assuming such value to be Rs. 1 lakh, it would be appropriate to capitalize Rs. 9 lakhs as the cost of land and separately capitalize Rs. 1 lakh as the value of the warehouse to be included under the caption of “Factory Building”.

4.The Committee further notes that “A Guide to Company Audit”, issued by the Company Law Committee of the Institute of Chartered Accountants of India, recommends the auditors to examine the following:

“If there is a consolidated purchase of land and buildings, have you ascertained whether it is reasonably allocated in the accounts and separated for balance sheet purposes under proper heads? Have you seen the Board’s resolution for the same?”

5.On the basis of the above, the Committee is of the opinion that, the cost of land and buildings should be segregated on the basis of the assessment made by expert valuers and disclosed under proper heads.

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