Query No. 19 Subject: Accounting treatment of income and expenditure incurred during development of ore body of the existing mine.1
A. Facts of
the Case
1. A government
company within the
meaning of section
617 of the
2. The company
has engaged an outside contractor for developing the ore body of the existing
mine so that the present level of production can be maintained. During the process of development, some ore
has come out which is around 1% to 2% of annual production of the ore. The value of the final output produced out
of such ore, i.e., development ore, has been treated 3. On
completion of the development work, the same is capitalised and depreciated at
the general rate of 4.75% under the straight line method as per point no.
11(e), i.e., Shafts and inclines, of Note 6 of Schedule XIV to the Companies
Act, 1956. 4. The
government auditors, during the audit of accounts for the financial year
2000-01, have observed that “profit of the company is overstated by Rs. 0.34
crore due to crediting of the profit and loss account by income of Rs. 0.34
crore earned on sale of ore mined during the development of mine instead of
setting off the same against the development expenditure of the mine
capitalised during the year”. 5. The querist
is of the view that as there is no market value of the ore produced by the
company, the profit calculated by the government auditors B. Query
6. The querist
has sought the opinion of the Expert Advisory Committee on the following
issues: (a) Whether the
rate of depreciation charged by the company on the value capitalised for
development work is correct; if not, what should be the treatment of such
development expenditure.
(b) Whether the
observation made by the government auditors is correct; if not, what should be
the treatment of ore produced during the development work.
C. Points considered
by the Committee
7. The Committee
is of the view that 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 should be
decided on the basis of the generally accepted accounting principles in this
regard. The Committee notes that only
that subsequent expenditure which increases the future benefits from the
existing asset beyond its previously assessed standard of performance should be
included in the gross book value, e.g., an increase in capacity.
8. The
Committee notes from the facts of the case that the company had incurred
expenditure for developing the ore body of the existing mine only to maintain
the present level of production. The Committee is, accordingly, of the view
that since the development expenditure did not result in increase in the future
benefits from the existing mine beyond its previously assessed standard of
performance, the same should not have been capitalised. The expenditure incurred
to develop the ore body of the existing mine should have been charged to the
profit and loss account when the same was incurred. 9. From
the above, the Committee is
also of the view
that charge of depreciation on the value capitalised for
the development work is not correct. 10. The Committee
is of the view that since, as per paragraph 8 above, the expenditure incurred
on development was not eligible for capitalisation, the question of adjustment
of the income earned by the company by way of sale
D. Opinion 11. On the basis
of the above, the Committee is of the following opinion on the issues raised in
paragraph 6: (a) The
depreciation provided by the company on the expenditure capitalised for
development work is not correct since the expenditure incurred by the company
on development work of mine was not of capital nature as explained in paragraph
8 above. The expenditure incurred for the development of mine to maintain its
present level of production should have been charged to the profit and
loss
(b) The
treatment of crediting the income from the sale of ore produced during the
development work to the profit and loss account is correct and, therefore, the
observation made by the government auditors is not correct. |