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A. Facts of the Case
1. A company is a Government of India undertaking incorporated
in the year 1975 under the Companies Act, 1956. One of the
objectives of the company is to set up power plants at various
geographical locations in the country and to supply bulk power to
various State Electricity Boards.
2. The company is registered under the Companies Act, 1956
and being an electricity generating company, is governed by the
provisions of the Electricity Act, 2003. As per the querist, since the
Government has not prescribed any format for the statement of
accounts for the central undertakings engaged in generation of
electricity, the company is preparing its accounts in the format
prescribed as per Schedule VI to the Companies Act, 1956. The
company is also listed with the Bombay Stock Exchange and
National Stock Exchange.
3. The company has ambitious expansion and diversification plans
for the future and aims to be a 75,000 MW company by the year
2017. Further, it intends to diversify by way of providing backward
and forward integration. As a part of its diversification plans, it has
entered the hydro sector, coal mining, and oil and gas exploration
sectors. For this purpose, large tracts of land are required. The
land is acquired from the State Governments and/or the private land owners through the concerned State Government. The land
acquired from the State Governments is normally on long term
lease basis while the land acquired from the private land owners is
on freehold basis. The estimated amounts payable towards
acquisition of land including the estimated amount payable to the
project affected persons (PAPs) under resettlement and
rehabilitation (R&R) schemes are indicated in the Feasibility Report
(FR) or Detailed Project Report and approved by the company
before taking up the project work.
4. Land Acquisition for the Power Projects
A. Land acquired from the State Government:
The amount paid to the State Government towards transfer of
land or diversion of forest land, e.g. land premium,
compensatory afforestation, cost of trees, catchment area
treatment and rim plantation, etc. is treated as cost of land /
‘capital work-in-progress – expenditure pending allocation –
diversion of forest land’, as the case may be.
B. Land acquired from private parties:
In case of private land, a survey is conducted for obtaining
the details of the extent of land, persons affected and the
number of land owners. Based on the survey, a requisition is
made to the District Collector (authority nominated by the
Government under the Land Acquisition Act, 1894) for
acquisition of the identified land. The District Collector
designates a Tehsildar to take appropriate steps for acquisition
of the required land. The Tehsildar on behalf of the
Government publishes a notice under the Survey and
Boundaries Act, 1961. A gazette notification is also issued
identifying the land for public purpose. Thereafter, notices are
issued to the land owners and a hearing is conducted. In the
meantime, the Tehsildar fixes the value of the land after
assessing the local prevailing market rate. Buildings are valued
based on the schedule of rates of the Public Works Department
and the trees are valued based on the norms fixed by the
State Forest Department. The District Collector or the State
Government, as the case may be, approves the value fixed by the Tehsildar. Thereafter, a Gazette declaration regarding
the acquisition of land for public purpose is issued. The
Tehsildar issues a notice intimating the company to remit the
money in respect of land to be acquired by the company to
the Government Treasury for distribution to the land owners.
On receipt of the money, the possession of the land is handed
over to the company by the Tehsildar. The amount paid to the
Tehsildar by the company is accounted for as cost of land on
physical possession of land.
5. In addition to the above, the company also takes measures
for resettlement and rehabilitation (R&R) of the project affected
persons (PAPs) with the objective that the PAPs will improve or at
least regain their previous standard of living. As per the
Rehabilitation Action Plan (RAP), the PAPs are entitled for the
following rehabilitation packages apart from the land compensation
amount already received from the Tehsildar:
I. Land for Land Option
Under ‘Land for Land’ option, the following sums will be
payable:
(a) Rehabilitation amounts calculated @ Rs…..per acre of
land actually acquired; from this, the basic land
compensation amount (excluding solatium and interest)
paid under the Land Acquisition Act, 1894 shall be
deducted.
(b) Additional rehabilitation grant as ex-gratia, calculated
per acre of land actually acquired on purchase of land.
(c) Land development charges calculated @ Rs… per acre
of land actually acquired; and
(d) Land registration amount towards purchase of land shall
be paid by the company. However, the registration
charges shall be restricted on the rehabilitation amount
agreed to be paid in (a) above.
For payment under the ‘Land for Land’ option, the following
mechanism shall be adopted:
(i) The project affected person (PAP) shall open a joint
account in the bank. This account shall be in the name
of husband and wife. In case the PAP is unmarried or
widow/widower then he or she shall open the account in
his/her own name. In case the land ownership is in the
joint name of more than one person, and the same has
been acquired from them, the bank account shall have
to be opened in the name of all the joint land owners.
(ii) After opening the bank account, the PAP shall enter
into an agreement with the company giving his/her
acceptance to the rehabilitation option.
(iii) On finalisation of the agreement, the company shall
deposit the entitled amount due on purchase of land
alongwith the ex-gratia amount in the bank account of
PAP.
(iv) For making the option effective, the company shall
constitute a Task Force. This shall comprise two persons
nominated by the Village Development Area Committee
(VDAC), one person each nominated by the company
and District Administration. The representative of District
Administration shall not be below the rank of Deputy
Collector. Apart from this, the company shall endeavor
to seek the assistance of any retired Deputy Collector.
(v) Further, the PAP shall submit to the Task Force, the
consent letter from the seller from whom he intends to
purchase the land.
(vi) After scrutiny of the consent letter by the Task Force,
the PAP shall be eligible to draw from his bank account
towards purchase of land and the ex-gratia amount.
(vii) The option shall be time bound and purchase of land
within one year from the commencement of
implementation shall be compulsory.
(viii) In case land is not acquired within one year period, the
Task Force shall review the implementation status of
the option.
II. Rehabilitation/resettlement grants
In case the land oustees do not opt for ‘land for land’ option,
they can opt for ‘One Time Rehabilitation Grant’. The one
time rehabilitation grant will be paid on signing an agreement
with the company giving his acceptance and thereafter, the
company will deposit the amount in the joint names of the
land oustees which can be withdrawn on fulfilling the relevant
conditions mentioned at (i) to (viii) above. The rehabilitation
grant will be calculated based on the minimum agricultural
wage multiplied by the applicable number of days in the
concerned State prevailing at the time of notification under
section 4 of the Land Acquisition Act, 1894.
III. Subsistence/self-resettlement grant
Keeping in view the time required for stabilising the
resettlement process, each PAP shall normally get a monthly
subsistence allowance equivalent to 20 days minimum
agricultural wages per month for a period of one year and
financial assistance will be given generally @ five times of the
basic compensation payable for house excluding solatium and
interest under the Land Acquisition Act. These grants will be
payable on opening of the bank account in joint names of his/
her spouse etc.
IV. Infrastructural facilities
In addition to the payments towards cost of land and other
benefits indicated above, certain infrastructural facilities are
also provided to the group of PAPs to improve their standard
of living or to put them close to their previous standard of
living. The amounts towards such facilities are provided in the
feasibility report. These infrastructural facilities will vary
depending upon the local requirements and may include the
following:
• Construction of the resettlement colonies
• Internal and approach roads with proper drainage
• Safe drinking water through hand pumps
• Community halls/Panchayat Ghar
• Primary educational facilities
• Primary health facilities
• Street lighting in resettlement colonies
• Public cremation ground/burial ground, etc.
In respect of the above-mentioned infrastructural facilities, the
company awards various contracts for execution in the
resettlement colonies of the PAPs.
6. During review of accounts for the financial year 2006-07, the
Government auditor observed that “provisions do not include an
obligatory expenditure towards rehabilitation and resettlement to
be discharged by the company in respect of its projects under
construction/expansion. By not making the above provision, the
company has violated the provisions of Accounting Standard (AS)
29, ‘Provisions, Contingent Liabilities and Contingent Assets’.”
7. According to the querist, the related provisions with regard to
recognition of provision or disclosure of contingent liability in
Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities
and Contingent Assets’, issued by the Institute of Chartered
Accountant of India, are as under:
Recognition of Provision:
“14. A provision should be recognised when:
(a) an enterprise has a present obligation as a result
of a past event;
(b) it is probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation; and
(c) a reliable estimate can be made of the amount
of the obligation.
If these conditions are not met, no provision should be
recognised.”
Contingent Liability:
“26. An enterprise should not recognise a contingent
liability.
27. A contingent liability is disclosed, as required by
paragraph 68, unless the possibility of an outflow of resources
embodying economic benefits is remote.
28. Where an enterprise is jointly and severally liable for an
obligation, the part of the obligation that is expected to be met
by other parties is treated as a contingent liability. The
enterprise recognises a provision for the part of the obligation
for which an outflow of resources embodying economic benefits
is probable, except in the extremely rare circumstances where
no reliable estimate can be made (see paragraph 14).”
8. The querist has explained the accounting treatment being
followed by the company as follows:
(i) Amounts payable to the PAPs in respect of R&R benefits
indicated at paragraph 5 I to 5 III above:
(a) The amount payable to the PAPs is neither provided
as liability nor disclosed as contingent liability since
in many cases, the PAPs do not fulfill the abovementioned
conditions making them eligible to receive
such payments and do not meet the abovementioned
conditions of paragraphs 14, 27 and 28
of AS 29 for recognition of provisions/disclosure of
contingent liability.
(b) On fulfillment of the conditions mentioned in the
respective rehabilitation package, the amount
payable is ascertained and accounted for as liability.
(ii) In respect of infrastructural facilities indicated at
paragraph 5 IV above to be executed by the company:
(a) The amount paid to the contractors on execution of
such works is debited to the cost of land. At the
balance sheet date, liabilities are provided in case
such works have been executed and not paid.
(b) Balance amount of such contracts remaining to be
executed are disclosed as ‘Estimated amount of
contracts remaining to be executed on capital
account’ in the ‘Notes to Accounts’ forming part of
annual accounts.
(c) Pending award of contracts/execution of such works,
the company is neither providing liability nor
disclosing contingent liability even though these
works are included in the Feasibility Report (FR) or
Detailed Project Report (DPR) of the company, since
inclusion of the above works in the FR or DPR does
not create present obligation on the company as a
result of a past event or meets the requirement for
disclosure of contingent liability in terms of AS 29
mentioned above.
B. Query
9. Considering the applicable provisions of AS 29 and the present
practice being followed by the company, the querist has sought
the opinion of the Expert Advisory Committee on the following
issues:
(i) Whether the existing practice being followed by the
company indicated at paragraphs 8 (i) and 8 (ii) above
is in order.
(ii) In case answer to (i) is in the negative, whether the
company should provide for liability
(a) in respect of the estimated amount payable to the
land oustees in respect of ‘Land for Land’,
rehabilitation/resettlement grants, subsistence grant/
self-resettlement grant indicated at paragraphs 5 I
(a) to (d), 5 II and 5 III above, even though the land
oustees have not complied with mechanism for
implementation of these schemes indicated at
paragraph 5 I (i) to (viii) above or the attached
conditions making them eligible to receive such
amounts/grants as per the resettlement and
rehabilitation scheme of the company.
(b) in respect of infrastructural measures, mentioned at
paragraph 5 IV above, agreed to be executed by
the company for which award letters will be issued
in future and also the works will be executed only
after the award in respect thereof.
(iii) In case no liability in respect of rehabilitation and
resettlement schemes indicated at paragraphs 5 I (a) to
(d), 5 II, 5 III and 5 IV above is to be provided because
the land oustees have not complied with implementation
mechanism or the attached conditions making them
eligible to receive such amounts/grants as per the
resettlement and rehabilitation scheme of the company,
whether the same is to be disclosed as contingent
liability.
(iv) In case no liability in respect of works mentioned at
paragraph 5 I to IV above is to be provided, whether
any disclosure of this fact is to be made in the ‘Notes to
Accounts’ forming part of annual accounts.
C. Points considered by the Committee
10. The Committee notes that the basic issue raised by the querist
primarily relates to need for creating provision or contingent liability
towards various rehabilitation/resettlement measures discussed in
paragraph 5 above. Therefore, the Committee has examined only
this issue and has not examined any other issue that may be
contained in the Facts of the Case, such as, appropriateness of
capitalisation of some expenses, e.g., those related to afforestation,
as part of cost of land/capital work-in-progress, etc.
11. The Committee notes paragraph 14 and paragraphs 26 to 28
of AS 29 as reproduced by the querist in paragraph 7 above. In
addition, the Committee notes the following paragraphs from AS
29:
“A provision is a liability which can be measured only by
using a substantial degree of estimation.
A liability is a present obligation of the enterprise arising
from past events, the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
An obligating event is an event that creates an obligation
that results in an enterprise having no realistic alternative
to settling that obligation.
A contingent liability is:
(a) a possible obligation that arises from past events
and the existence of which will be confirmed only
by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control
of the enterprise; or
(b) a present obligation that arises from past events
but is not recognised because:
(i) it is not probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation; or
(ii) a reliable estimate of the amount of the
obligation cannot be made.”
“Present obligation - an obligation is a present obligation
if, based on the evidence available, its existence at the
balance sheet date is considered probable, i.e., more likely
than not.
Possible obligation – an obligation is a possible obligation
if, based on the evidence available, its existence at the
balance sheet date is considered not probable.”
“11. An obligation is a duty or responsibility to act or perform
in a certain way. Obligations may be legally enforceable as a
consequence of a binding contract or statutory requirement.
Obligations also arise from normal business practice, custom
and a desire to maintain good business relations or act in an
equitable manner.”
“15. In almost all cases it will be clear whether a past event
has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain
events have occurred or whether those events result in a
present obligation. In such a case, an enterprise determines
whether a present obligation exists at the balance sheet date
by taking account of all available evidence, including, for
example, the opinion of experts. The evidence considered
includes any additional evidence provided by events after the
balance sheet date. On the basis of such evidence:
(a) where it is more likely than not that a present obligation
exists at the balance sheet date, the enterprise
recognises a provision (if the recognition criteria are met);
and
(b) where it is more likely that no present obligation exists at
the balance sheet date, the enterprise discloses a
contingent liability, unless the possibility of an outflow of
resources embodying economic benefits is remote (see
paragraph 68).
16. A past event that leads to a present obligation is called an
obligating event. For an event to be an obligating event, it is
necessary that the enterprise has no realistic alternative to
settling the obligation created by the event.
17. Financial statements deal with the financial position of an
enterprise at the end of its reporting period and not its possible
position in the future. Therefore, no provision is recognised
for costs that need to be incurred to operate in the future. The
only liabilities recognised in an enterprise’s balance sheet are
those that exist at the balance sheet date.
18. It is only those obligations arising from past events existing
independently of an enterprise’s future actions (i.e. the future
conduct of its business) that are recognised as provisions.
Examples of such obligations are penalties or clean-up costs
for unlawful environmental damage, both of which would lead
to an outflow of resources embodying economic benefits in
settlement regardless of the future actions of the enterprise.
Similarly, an enterprise recognises a provision for the
decommissioning costs of an oil installation to the extent that
the enterprise is obliged to rectify damage already caused. In contrast, because of commercial pressures or legal
requirements, an enterprise may intend or need to carry out
expenditure to operate in a particular way in the future (for
example, by fitting smoke filters in a certain type of factory).
Because the enterprise can avoid the future expenditure by
its future actions, for example by changing its method of
operation, it has no present obligation for that future
expenditure and no provision is recognised.
19. An obligation always involves another party to whom the
obligation is owed. It is not necessary, however, to know the
identity of the party to whom the obligation is owed – indeed
the obligation may be to the public at large.”
12. The Committee notes from the above that a provision cannot
be recognised simply because there is a published environmental
policy of the company or the cost has been included in the FR/
DPR or there is a legal or contractual obligation, until an event
takes place which triggers creation of an obligation for an entity
that leaves no realistic alternative to an enterprise apart from settling
that obligation, and other conditions as mentioned in the abovereproduced
paragraph 14 of AS 29 are also met. Thus, a provision
should not be recognised before the obligating event arises under
the provisions of law or the terms of the contract. A contingent
liability should be disclosed when either there is a possible obligation
arising from the past events, the existence of which will be
confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise
or there is a present obligation but is not recognised because the
outflow of resources embodying economic benefits required to
settle the obligation is not probable or a reliable estimate cannot
be made of the amount of the obligation.
13. In the present case, as far as the obligating event for the
rehabilitation/resettlement measures, such as those mentioned in
paragraph 5I, 5II, and 5III are concerned, it appears to the
Committee that the obligating event for the same arises as soon
as the land is acquired from the project affected persons. This is
so, even if the PAPs may not have fulfilled the necessary conditions
for becoming individually entitled to receive the money, because,
as far as the company is concerned, upon acquisition of land from the PAPs it becomes liable to pay to the PAPs collectively.
Accordingly, a provision in respect thereof, on the basis of best
estimate of the expenditure required to settle the obligation, should
be made on the acquisition of land from the project affected persons
irrespective of fulfillment of various conditions by PAPs. With respect
to the infrastructural facilities mentioned in paragraph 5 IV also,
the point of time at which the provision should be made in the
books of account would depend on the obligating event, which in
the view of the Committee, is the acquisition of land by the
company. The event of acquisition of land from the PAPs makes
the company liable to provide the infrastructural facilities even
though the contracts may not have been awarded for execution of
those works. Accordingly, the accounting treatment being followed
by the company in the present case as enumerated in paragraph
8 above is not correct and the same should be modified on the
lines as discussed above.
D. Opinion
14. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 9 above:
(i) The existing accounting practice being followed by the
company is not in order. Please refer to paragraph 13
above.
(ii) (a) In respect of the estimated amount payable to the
land oustees in respect of ‘Land for Land’, rehabilitation/
resettlement grants, subsistence grant/self-resettlement
grant, a provision, on the basis of best estimate of the
expenditure required to settle the obligation, should be
made on the acquisition of land from the project affected
persons as discussed in paragraph 13 above.
(b) In respect of infrastructural measures, a provision
on the basis of best estimate of the expenditure required
to settle the obligation, should be made on the acquisition
of land from the project affected persons.
(iii) & (iv) Please refer to (ii) above.
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