Query No. 30

Subject:

Accounting treatment of land/right-to-use of land not having

any future economic benefit.¹

A. Facts of the Case

1. A public sector company is engaged in the operation of mining of ore and processing of the same to produce the final product, which, in turn, is transferred to the Government of India at administered price.

2. Ore received from various mines is processed in a mill. After extracting the final product, the tailing is disposed off in a pond called “Tailing Pond (TP)”. Land used for the construction of TP includes land owned by the company, Government land and forest land obtained from the Government on right-to-use basis. The querist has separately informed that the land used for construction of TPs cannot be put to any economic use by the company or by anyone else. The querist has also informed, in respect of the government land, that the agreement for transfer thereof to the company is still to be entered into. However, the company has created a liability on account of the cost of this Government land as the actual payment is still pending.

3. The querist has informed that Tailing Ponds No. 1 and 2, which were constructed long back have been fully utilised and are not being used at present. However, TPs require continuous monitoring even if they are not in use. For protection of the environment, the company has to carry out reclamation work on a continuous basis involving afforrestation. The reclamation work, according to the querist, involves continuous monitoring of land and plantation work which helps in binding of the slime which becomes air borne during dry seasons. It helps to retain moisture and reduce dust hazards. The reclamation work is carried out to protect the environment and not for the purpose of any economic use in future. The company has constructed TP No. 3 by the side of existing TPs in the year 1999-2000. The capacity of the TP is expected to be fully utilised by 2011. The company is planning to construct TP No. 4 by the side of TP No. 3 in the coming years.

4. According to the querist, the forest land used for the construction of TPs was taken from the state government on right-to-use basis and such right-to-use of forest land is approved, subject to certain terms and conditions. The state government, while giving the right-to-use of forest land did not mention any specific period of use. The company also takes forest land from the state government for other activities like setting up of mines and mill on right-to-use basis. For land acquired on right-to-use basis, no periodical payment is to be made by the company. However, as per the querist, the Government land used by the company for tailing pond is not under ‘right-to-use’.

5. The querist has separately provided a document containing terms and conditions laid down by the state government relating to the use of forest land by the company. According to the document, the company has deposited an aggregate amount of Rs. 5,31,610 towards plantation and afforestation of forest land with the forest department.

6. The querist has further informed that the forest land used for the construction of TPs is shown under ‘Intangible Assets’ from the year 2003-04 due to introduction of Accounting Standard (AS) 26, ‘Intangible Assets’, issued by the Institute of Chartered Accountants of India. Other lands used for this purpose are shown under ‘Freehold land’. The company has treated the intangible assets (right-to-use of forest land) as non- depreciable assets considering their nature of perpetuity.

B. Query

7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether all the forest lands, including the land used for construction of TPs and for other purposes, with right-to-use, may be shown under ‘Intangible Assets’ in the fixed assets schedule.

(b) Whether the other lands like private land and Government land used for construction of TPs should also be shown under ‘Intangible Assets’.

(c) Whether the forest land used for TPs can be treated as a non- depreciable asset in view of:

(i) absence of any specific period of right-to-use in the approval of the Government.

(ii) carrying out of reclamation work on the TP on a continuous basis.

If not, what should be the period of amortisation of such assets?

(d) Whether the private land and Government land used for TPs can be treated as non-depreciable assets. If not, what

should be the period of amortisation of such assets?

 

C. Points considered by the Committee

8. The Committee, while expressing its opinion has considered only the accounting for the cost of right-to-use of forest land, and cost of Government land and private land, used for construction of TPs. The accounting treatment of land used for ‘other purposes’, such as setting up of mines and mill, etc. has not been considered in the absence of the adequate facts and information in this regard.

9. The Committee notes the definitions of the terms ‘Intangible Asset’ and ‘Asset’ as contained in paragraph 6 of AS 26 reproduced below:

“An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

An asset is a resource:

(a) controlled by an enterprise as a result of past events; and

(b) from which future economic benefits are expected to flow to the enterprise.”

10. The Committee notes that the forest land given by the state government to the company is under ‘right-to-use basis’. The Committee, on the basis of the above definition of intangible asset, is of the view that a ‘right-to-use’ is an intangible asset since the right, which is a resource controlled by the company, does not have a physical substance.

11. With respect to the amortisation of the cost of right-to-use of forest land, the Committee notes paragraph 63 of AS 26, which states as follows:

“63. The depreciable amount of an intangible asset should be allocated on a systematic basis over the best estimate of its useful life. There is a rebuttable presumption that the useful life of an intangible asset will not exceed ten years from the date when the asset is available for use. Amortisation should commence when the asset is available for use.”

On the basis of the above, the Committee is of the view that the cost of right-to-use of forest land should be amortised over the useful life thereof. In this regard, the Committee notes from the ‘Facts of the Case’ that the useful life of the right expires when the ponds are completely filled-up with the tailing. Thereafter, the company does not have any use of the land; it only has the obligation to maintain the land in a manner that the environment is not adversely affected. Thus, in the view of the Committee, the cost of right-to-use of the land should be amortised over the period the land is under the intended use, i.e., until the ponds are completely filled-up with the tailing. The Committee further notes from the ‘Facts of the Case’ that TPs No. 1 and 2 have been fully utilised and are not being used at present, whereas TP No. 3 is still being used. The Committee is of the view that since the useful lives of TPs No. 1 and 2 have already expired, the cost of the right-to-use of the forest land in respect thereof should be written-off in the profit and loss account. The cost of the right-to-use of the forest land in respect of TP No. 3 should also be written-off to the extent of the expired useful life and the balance, if any, should be amortised over the remaining useful life by way of a debit to the profit and loss account.

12. The Committee notes that insofar as the private land is concerned, the same is owned by the company. Therefore, this land can not be considered to be under ‘right-to-use’. Accordingly, this land should be considered as a tangible asset of the company and reflected as such in the balance sheet. With regard to whether this land should be considered as a depreciable asset, the Committee notes that paragraph 1 of Accounting Standard (AS) 6, ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, inter alia states that “this statement also does not apply to land unless it has a limited useful life for the enterprise” (emphasis supplied by the Committee). The Committee is of the view that though ordinarily land is considered as a non-depreciable asset, in case it has a limited useful life, it may be depreciated over its limited useful life. The Committee notes that the land which has been used for tailing ponds purposes does not have any economic use for the company or any one else as stated by the querist. Until the tailing ponds are under utilisation, i.e., the tailing is being filled in the ponds, it should be considered that the land has the economic use of disposing-off the tailing. Accordingly, such land should be depreciated over the period taken to completely fill-up the tailing ponds.

13. As far as the Government land is concerned, it appears from the ‘Facts of the Case’ that the intention is that the land will be transferred by the Government to the company. Pending the agreement of the Government with the company, it has been considered by the company as a ‘Freehold Land’. The Committee has not examined the appropriateness of this accounting treatment in the absence of the relevant information. Presuming that this accounting treatment is appropriate, the accounting for the aforesaid land should be the same as explained in paragraph 12 above.

D. Opinion

14. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 7 above, subject to the presumption stated in paragraph 13 in respect of Government land:

(a) All forest lands obtained with the right-to-use for the purpose of construction of TPs should be shown under ‘Intangible Assets’ in the fixed asset schedule, say, as ‘Land acquired on right-to-use basis’. Whether the forest land acquired on right-to-use basis for other purposes should be treated as an ‘intangible asset’ requires separate examination on the basis of relevant facts and is, therefore, not answered by the Committee as stated in paragraph 8 above.

(b) Private land and Government land used for construction for TPs should not be shown under ‘Intangible Assets’.

(c) Forest land used for tailing pond purposes cannot be treated as a non-depreciable asset. The period of amortisation of such land should be the period over which the tailing ponds are used, i.e., until these are completely filled-up with the tailing.

(d) Private land and Government land used for tailing ponds cannot be treated as non-depreciable assets. The period over which cost thereof is written-off in the profit and loss account should be the period over which the ponds are used, i.e., the period over which these are completely filled-up with the tailing.

¹ Opinion finalised by the Committee on 25.1.2006