Query No. 30

Subject:     

Revaluation of assets carried out by a partnership firm which is later converted into a company - whether requirements

of Schedule VI to the Companies Act, 1956, relating to revalued fixed assets would apply to the company.^[1]

A. Facts of the Case

1. A partnership firm had two partners.  The assets of the firm were revalued in March, 1994 and the resulting gain was credited to the capital accounts of the partners.  The balance sheet of the firm as on 31^st March, 1994 reflected the effect of the above revaluation.

2. In January, 1995 the firm admitted five more partners.   In  April, 1995 the firm was converted into a closely held public company under the provisions of Part IX of the Companies Act, 1956.  Shares were issued to all the partners of the erstwhile firm in proportion to their capital in the firm.

3. Schedule VI to the Companies Act, 1956, requires, in relation to fixed assets, that  where sums have been added by writing up the assets, every balance sheet subsequent to such writing up shall show the increased figures with the date of the increase in place of the original cost.

4. The querist is of the view that the above requirement of  Schedule VI does not apply to the company. The querist has put forth the following arguments in this behalf:

(a) The revaluation was done by a partnership firm, which is not bound by the accounting standards issued by the Institute of Chartered Accountants of India, or by the Companies Act, 1956.

 

(b) A new firm came into existence when partners were admitted.  They brought in capital keeping in view the value of the revalued assets and, thus, there was an adjustment in the rights of the old partners.

 

(c) The firm was converted into a company long after the revaluation was effected and, thus, it cannot be said that the company revalued its assets.

B. Query

5. The opinion of the Expert Advisory Committee has been sought on the issue whether the fact of the assets having been revalued should be disclosed in the significant accounting policies or elsewhere in the balance sheet or by the auditor in his main report or in MAOCARO report on the accounts of the company.

C. Points Considered by the Committee

6. The Committee notes that Schedule VI to the Companies Act, 1956 requires that in the balance sheet, the original cost should be stated under each head within the broad heading of ‘Fixed Assets’.  However, where sums have been added by writing up the assets (i.e., where an upward revaluation has taken place), the Schedule requires the increased figures to be shown in place of the original cost.  The Schedule also requires certain other disclosures to be made in case of a revaluation of fixed assets.

7. The Committee notes that the fixed assets in question were acquired by the company from the erstwhile partnership firm.  The consideration for acquiring these assets (as well as any other assets taken over by the company) was discharged by the company by issuing its shares.  The Committee is of the view that the value of shares issued in consideration for the fixed assets represents their cost to the company.

8. The Committee further notes that the company has been continuing to account for the fixed assets on the basis of the value of consideration paid by it for those assets.   The Committee is of the view that as the company is continuing to account for the fixed assets on the basis of their cost (to the company), the requirements of Schedule VI relating to revaluation of fixed assets are not applicable to it.  It follows that the revaluation would also not be a subject matter of a comment by the auditor either in the main report or in the MAOCARO report.

9. The Committee notes the observation made in paragraph 4(a) above.  While this observation is not relevant in the context of the opinion of the Committee in the matter, it may nevertheless be pointed out that Accounting Standard (AS) 10 which deals with the issue of revaluation of fixed assets is mandatory in respect of general purpose financial statements of a partnership firm where such statements are statutorily required to be audited under any law,  e.g., under section 44AB of the Income-tax Act, 1961.

D. Opinion

10. Based on the above, the Committee is of the opinion that the company is not required to disclose any particulars relating to revaluation of fixed assets carried out by the erstwhile partnership firm.  Similarly, the aforesaid revaluation is not covered by the relevant clause of the Manufacturing and Other Companies (Auditor’s Report) Order, 1988, nor does it otherwise require a comment in the auditor’s report.

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^[1] Opinion finalised by the Committee on 23.10.1999.