Expert Advisory Committee
ICAI-Expert Advisory Committee
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1.31  Query:    

Recognition of amount received on transfer of rights not belonging to a company.

 

1.A company owns a very large plot of land in the city of Bombay. The development of land for construction in the city of Bombay is subject to Development Control Rules (DCR) framed by Brihat Mumbai Municipal Corporation (BMC). A portion of the land of the company was acquired by BMC about 30 years ago. A few years back, the company was advised that it is entitled to Transferable Development Rights (TDR) in respect of the portion of land acquired by BMC and, accordingly, it has filed an application with BMC. If BMC issues a certificate for TDR then the same can be sold in the market for development of properties within the rules framed by BMC. The person who legally owns and possesses a certificate in respect of TDR issued by BMC can transfer the same either wholly or in parts.

 

2. The company’s application for grant of such a TDR is based on its interpretation of the provisions of law that it is entitled to the TDR. There is neither any acknowledgment of this from BMC nor there is any approval from BMC as at present. However, the company’s application for grant of TDR is also not rejected. In the meanwhile, the company has entered into an agreement with a builder for sale of TDR which may be granted by BMC and has received full consideration in respect thereof.

 

3. The querist has referred the following questions for the opinion of the Expert Advisory Committee:

 

(i)         Whether the company can recognise the entire consideration as its revenue on entering into an agreement for transfer of the TDR to be received in future or whether the same should be treated as revenue in the year in which Municipal Corporation actually grants the TDR or the year in which TDR certificate is handed over to the purchasers.

 

(ii)        If the company has chosen to account the entire agreement consideration as its revenue in the year in which the agreement is entered into even before the grant of the TDR by BMC, whether the accounts give a true and fair view and whether the auditors of the company are required to qualify their report to the

 

                                                                          Opinion                                February 17, 1997

 

1. The Committee notes that as per the generally accepted accounting principles prevailing in the country, the amount received in respect of sale of an asset can be recognised if the seller of the asset has transferred significant risks and rewards of ownership in the asset to the buyer and the seller retains no effective control of the goods transferred to a degree usually associated with ownership, and no significant uncertainty exists regarding the amount of the consideration that will be received from the sale of the asset. Essential to the aforesaid is the pre-requisite that the seller himself should possess significant risks and rewards of ownership in the asset which is sought to be sold.

 

2. The Committee notes that the accounting treatment would depend upon the fact whether the seller of the TDR himself possesses at the time of the agreement to sell the TDR, significant risks and rewards of ownership in the TDR. Mere submission of an application obviously cannot be said to indicate that he has the significant risks and rewards of ownership in the TDR. On the other hand, if the rules are clear about the rights of the company and the issue of the certificate is more or less a formality, the position would be different. Therefore, the amount received from the builder should be recognised when the significant risks and rewards of ownership in the TDR vest with the company and transferred to the builder. If it is not so, the company cannot recognise the amount received in respect of the transfer of the TDR at the time of the agreement to sell the TDR, even though full payment is received from the builders. Such a receipt should in such a case be treated as an advance.

 

3. Based on the above, the Committee is of the following opinion on the issues raised by the querist in para 3 of the query:

 

                        (i)         Please see para 2 above.

 

(ii)        In case the revenue recognition is not in accordance with para 2 above, the auditors should appropriately qualify their report or give a negative opinion, depending on the facts of the case.

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