1.29 Query: Year of commencement of commercial production in case of cashew and coconut plantations.
1. The querist have been appointed by the C & A. G. to audit the accounts of a plantation where coconut, cashew, rubber, cocoa, black pepper etc., are planted in large areas. The farm was started in the year 1971 and the planting has been done over a period of last 17 years. Therefore, there are areas varying in age from 1 to 16 years especially in coconut and cashew.
2. Till the year ended 31st March, 1991, the farm had been capitalising expenditure on immature coconut and cashew upto the 7th year of their planting. However, during the year ended 31st March, 1992, the farm capitalised the expenditure on irrigated coconut upto 10th year, rainfed coconut upto 12th year and cashew upto 10th year, respectively. In view of the change in the method of accounting of capital expenditure, the querist qualified their report giving the financial implications on the profit/loss of the farm due to such change. However, the management is of the firm opinion that limiting capitalisation of expenditure upto the 7th year only, is a wrong accounting procedure which would not reflect a true and fair picture of the performance of the farm for following reasons:
(i) Though coconut starts yielding nuts from the 7th year, the production per palm on the 7th year is very negligible. The Central Plantation Crops Research Institute, Kasaragod, has worked out that the production from a well maintained plantation during the 7th year is only 1.4 nuts per palm and as per the published data (journal of Plantation Crops, Vol. IX-No. 1, June 1981), the production per palm gradually increases to 50 nuts in the 12th year in the case of rainfed coconut. In the case of irrigated coconut, the above production of 50 nuts is reached in the 10th year. As normal yield of 50 nuts per tree can be expected from the 10th year in the case of irrigated coconut and 12th year in the case of rainfed coconut, the plantation can be considered to have reached the stage of commercial production only in the 10th and 12th year respectively. This expert opinion of the Central Plantation Crops Research Institute is based on the studies done in different parts of Kerala that the break-even point in respect of irrigated and rainfed coconut plantation is achieved in the 10th and 12th year respectively under normal conditions and, therefore, it would be correct and justified to capitalise all expenditure upto that date.
(ii) In the case of cashew, as per opinions of the National Research Centre for Cashew, Puttur, without taking into account the interest on working capital, the break-even point is the 8th year and the pay-back period is the 12th year. Therefore, taking into account the interest on working capital, the farm wants to adopt the 11th year as the year of commencement of commercially feasible production of cashew and capitalise expenditure on immature areas upto 10th year.
(iii) “Contemporary Auditing”, 4th edition, by Shri Kamal Gupta, also states that “a cut-off date should be fixed to segregate expenditure during the construction period from the subsequent expenditure. It is the date on which the project is officially recognised as being ready for commercial production, i.e., trial runs are completed and the project is capable of producing commercially feasible quantities.” Although, in the case of plantations there is no trail run, but one can consider the normal production under ideal management conditions.
3. The querist has sought the opinion of the Expert Advisory Committee on the following:
(i) Whether the farm should continue to capitalise expenditure on immature coconut and cashew upto 7th year.
(ii) Whether the farm will be justified in capitalising the expenditure upto the year of commercially feasible quantities of production of the respective crops based on expert opinion of research centers for respective crops, as stated below:
a. Irrigated coconut 12 years
b. Raindfed coconut 12 years
c. Cashew 10 years
Opinion July 15, 1993
1. 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 factors, 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 para 2 of 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.
2. 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. On the same grounds, the argument regarding pay-back period is not relevant.
3. 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 commercial exploitation such as sale, manufacture etc., thereof. __________________________ |