1.10 Query: Capitalisation of cost of plantation in case of cashew and coconut plantations.
1. The main objects of a wholly owned government company are to set up and to run agricultural farms primarily for the production of seeds of foodgrains, fiber crops, plantation crops, oilseeds, vegetables and fruits etc. Presently, the company is managing 12 farms situated in different states and each farm is producing different type of agricultural items. One of its farms, which is situated in Kerala, is engaged in the business of growing plantation crops, viz., coconut and cashew nut, besides other horticulture produce.
2. Accounting policy followed by the company in respect of capitalisation of expenditure on these plantation crops is as follows: -
“Plantation crop has been treated as fixed assets from the year 1988-89. The plantation crops are value at cost. The cost represents material consumed, direct labour, irrigation charges, machine hours used and the appropriate farm overhead.
However, in case of ‘X’ farm (Kerala) capitalisation is done as per CPCRI norms. Expenditure, if any, in excess of norms is charged to revenue. In case of EPO (Hort.) overheads have not been allocated.
The plantation crops which have started yielding fruits are charged depreciation in zonal instalments depending on the revenue yielding period of each crop”.
3. The above accounting policy, as per the querist, is based on the accounting principles and guidelines issued on the subject by the Institute of Chartered Accountants of India from time to time. The capitalisation of the crop is stopped from the year it starts bearing fruits. However, in the last year, the said farm had changed the accounting policy for capitalisation of expenditure, to capitalise the cost of plantation when the break-even point of production is achieved instead of earlier policy of capitalisation up to the period of fruit bearing in case of coconut and cashewnut production. For this purpose, the farm has obtained the recommendation of the head of the department, Social Sciences, Central Plantation Crops Research Institute, (CPCRI) Kasargode, Kerala. Due to this change in the accounting policy, the capitalisation period is increased from 7 years.
4. The branch auditors, while certifying the balance sheet of the farm, have qualified their report on this account. The matter was considered at head office and after discussion with the statutory auditors, the excess capitalisation was not allowed and the existing policy continued to be followed on consideration of the following points:
(a) Para 5 of the Monograph on Accounting of Rubber Plantation, issued by the Institute of Chartered Accountants of India, which can be applied mutadis-mutandis for coconut and cashewnut crops, in the absence of separate guidelines for these plantations, reads as follows:
“(5) Indirect expenditure incidental and related to planting and maintenance
This category includes items like salaries of employees who are supervising the plantations, appropriate insurance etc.
During the immature stage of plantations, such expenditure may be capitalised as part of the development cost. However, once the plantations become mature and tapping is commenced, this type of expenditure would be of a revenue nature”.
(The word ‘Tapping’ in case of coconut and cashewnut may be taken as fruit bearing).
(b) As per the general accounting principal and Guidance Note on Treatment of Expenditure During the Construction Period, issued by the Research Committee of the Institute of Chartered Accountants of India, which is applicable for the manufacturing industries, once the plant is ready for commercial production, expenditure should be charged to the profit and loss account even though the actual commercial production might have been delayed for some reason. In the view of the querist, the cost of plantation till it matures should be taken as expenditure incurred during the construction period and be treated accordingly. Once the production commences on the plantation trees, it should be charged to the revenue and the company need not wait for the break-even point. However, the said farm is not in favour of abovesaid accounting policy followed by the company and has represented as follows:
(i) The Guidance Note on Treatment of Expenditure During the Construction Period issued by the Institute of Chartered Accountants of India, relates to an establishment, like an industrial manufacturing concern and not to any agricultural farm or plantation.
(ii) The abovesaid guidance note states that cut-off date is the date on which the project is officially recognised as being ready for commercial production. It is also stated that the project should be capable of producing commercially feasible quantities. This means that only after this stage is attained, commercial production starts and till then the expenditure is to be capitalised. It is further stated that, in case the delay in commencing production is prolonged, the expenditure incurred during this period may be treated as deffered revenue expenditure, to be written off subsequently.
(iii) No coconut plantation can be considered as commercially feasible in its 8th year.
(iv) As per the Journal of Plantation Crops (9(i)/65/1981, published by Central Plantation Crops Research Institute, Kerala) the average production of nuts per tree per year from a coconut plantation (rainfed) is only 5 in the 8th year, 10 in 9th year, 25 in 10th year, and 35 in 11th year.
(v) A plantation of coconut does not break-even in case of rainfed crop till 10th year and irrigated areas till 9th year, respectively. In case of cashew also, based on the figures of National Research Center for Cashews (ICAR), the break-even point is achieved in the 9th year. Therefore, a plantation cannot be considered feasible for commercial production till then.
(vi) The data given above relates to ideal small holder’s plantation, which would normally extend over an area of less than 1 hectare only and also in ideal soil conditions in level area.
(vii) In the case of the company, (a) the terrain is highly undulating with hills and valleys with laterite soil which is very hard type of soil with very poor available nutrient content, (b) hundreds of hectare are taken under cultivation, and (c) gap filling is required because of damage due to attack of wild boars, sambers etc. Therefore, gestation period in the company’s case is prolonged at least by one year.
(viii) Due to above reasons capitalisation be allowed upto 20th year and 9th year respectively in case of coconut and cashewnut respectively for rainfed and 10th year for irrigated cashewnut and coconut.
6. The querist has sought opinion of the Expert Advisory Committee on, upto what period the expenditure incurred on plantation of coconut and cashewnut should be capitalised.
Opinion November 11, 1993
1. The Committee addresses itself only to the question of when a coconut plantation reaches its commercially exploitable fruit-bearing stage. It has, therefore, not considered the other accounting aspects such as whether it is proper to consider a plantation as a fixed asset.
2. The Committee is of the view that in case of fruit-bearing plantations, the stage of commercial production should be considered to have reached when the plantation begins to produce that much quantity of fruit which would make it possible to exploit the produce commercially, e.g., making arrangements for sale or for using them in a manufacturing process commercially. The Committee is further of the view that a uniformly applicable year in which commercial production is supposed to start can not be suggested as the output may be dependent on various factor, e.g., in case of rainfed plantation, the quantity of rain received by the plantation in different years, fertilizers and other inputs used, quality of upkeep etc. The Committee notes that this aspect appears to have been considered by various authorities on the subject mentioned in the query, while indicating the normal output in a well maintained plantation or under normal conditions. The Committee feels that the actual conditions may differ from plantation to plantation. The Committee is, therefore, of the view that the year of commercial production should be decided by the management keeping in view the actual conditions of plantations on case to case basis.
3. The Committee is further of the view that in deciding the year of commercial production, the year in which a plantation breaks-even, is not relevant since the break-even output is determined on the basis of costs and prices. A commercially exploitable quantity of fruit can be obtained, as in an industrial enterprise, much before break-even point is reached. Also, an enterprise which incurs loss from its inception may never break-even, but it cannot be said that till that time commercial production has not started.
4. On the basis of the above, the Committee is of the opinion that the year in which a plantation starts commercial production should be decided keeping in view the actual conditions under which a plantation is being developed, on case to case basis. For this purpose, that quantity of produce should be considered, which is amenable for its commercial exploitation such as sale, manufacture etc., thereof. ________________________ |