1.17 Query: Accounting issues related to a building whose title is sub-judice.
1. A cooperative bank is governed by the byelaws confirmed by the Registrar of Co-operative Societies, Delhi.
2. The audit of the said bank for the year 1989-90 has already been completed.
3.The bank has advanced an amount of Rs. 30 lakhs against the purchase of a building and has already taken possession of the same during the period prior to the audit year 1989-90.
4.During the period prior to the audit year 1989-90, the said bank has incurred an expenditure amounting to Rs. 7 lakhs (approximately) on renovation of the said building.
5.The title to the said building proposed to be purchased by the bank is yet to be transferred in the name of the bank till date and is pending since long. The matter relating to the transfer of the building is sub-judice.
6. While going through the balance sheet and the profit and loss account, it has been observed that:
(a) Advance against building is being shown under “Current Assets” under the head “Other Advances” as “Advance Against Building for (name of the place) Branch”;
(b) The bank has made a provision for depreciation amounting to Rs. 3,36,000/- on the said building.
(c) Renovation expenses are shown in the balance sheet under the head “Renovation Expenses for (name of the place) Branch”. The renovation expenses have been shown among the various other fixed assets.
(d) The bank has charged depreciation on renovation expenses @ 10%.
(e) The rates of depreciation on building and renovation expenses are not the same. The bank has provided a depreciation of Rs. 3,36,000/- against advanced amount of Rs.30 lakhs towards buildings shown under current assets.
7. The depreciation on renovation expenses has been deducted from the total cost of renovation expenses. The depreciation of Rs. 3,36,000/- charged against building has been shown on the liability side of the balance sheet under the head “Provision For Depreciation (on branch building)”.
8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the depreciation can be provided for on the building under the circumstances as mentioned above.
(ii) If yes, does it require a qualificatory remark from the auditor in his main audit report or it can just be mentioned in the explanatory notes.
(iii) Whether providing for depreciation under these circumstances shall exhibit a ‘true and fair’ view in the case of state of affairs of the bank and also in the profit and loss account; and
(iv) Whether renovation expenses can be capitalised and depreciation be charged as above.
Opinion September 17, 1991
1. The Committee notes that definition of ‘fixed asset’ as given in paragraph 6.1 and the treatment of expenditure on ‘improvements and repairs’ as given in paragraph 12 of Accounting Standard (AS) 10 on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, which are reproduced below:
“6.1 Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.”
“12. Improvements and Repairs
12.1 Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity.
12.2 The cost of an addition or extension to an existing asset which is of a capital nature and which becomes an integral part of the existing asset is usually added to its gross book value. Any addition or extension which has a separate identity and is capable of being used after the existing asset is disposed of, is accounted for separately.”
2.The Committee further notes that according to para 17 of Accounting Standard (AS) 1 on ‘Disclosure of Accounting Policies’, issued by the Institute of Chartered Accountants of India, one of the “major considerations governing the selection and application of accounting policies [is] ………..
(b) Substance over from
The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.”
3. The Committee also notes paragraph 57 of the ‘Framework for the Preparation and Presentation of Financial Statements’, issued by the International Accounting Standards Committee, which states as under:
“Many assets, for example, receivables and property, are associated with legal rights, including the right of ownership. In determining the existence of an asset, the right of ownership is not essential, thus, for example, property held on a lease is an asset if the enterprise controls the benefits which are expected to flow from the property. Although the capacity of an enterprise to control benefits is usually the result of legal rights, an item may nonetheless satisfy the definition of an asset even when there is no legal control. For example, know-how obtained from a development activity may meet the definition of an asset when, by keeping that know-how secret, an enterprise controls the benefits that are expected to flow from it.”
4.The Committee notes from the facts of the query that the bank has paid advance against purchase of the building. The building is in the possession of the bank and is apparently being used for the purpose of the business of the bank. The Committee is, therefore, of the view that in substance the building is the fixed asset of the bank and should be shown as such in the balance sheet with adequate disclosure that the title of the building is not held in the name of the bank as the matter is sub-judice. The depreciation on the building should be provided as is normally done in respect of the fixed assets. Thus, in the present case, to show the advance money paid towards the purchase of building as an “advance” is not proper.
5.The Committee is further of the view that the renovation expenses which increase the future benefit from the building beyond its previously assessed standard of performance should be included in the gross book value of the building. The depreciation should then be charged on the total gross book value. Thus, the same rate of depreciation would be applicable to the building and the renovation expenses so capitalised. The renovation expenses, to the extent that they do not increase the future benefit from the building beyond its previously assessed standard of performance, should be charged to the profit and loss account.
6. On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 8 of the query is as follows:
(i) Yes. Depreciation should be provided as recommended in para 4 above.
(ii) The auditor is required to qualify his report only if the bank has not made disclosures as suggested in para 4 above.
(iii) Yes.
(iv) Please see para 5 above.
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