Query No. 16 Subject: Accounting for the cost incurred on acquisition of land including the buildings situated thereon and demolished immediately thereafter for the purposes of mining and payment of compensation claim for rehabilitation to the owners of land as per the approved scheme.[1]
2. The querist has stated that the company has incurred heavy cost in the acquisition of land including building situated thereon through negotiated settlement process from a large number of parties for the purposes of extraction of heavy minerals as a part of its regular mining activities for manufacture and production of titanium dioxide in its plant. The minerals so extracted constitute one of the principal raw materials for the production of titanium dioxide and for comfortable survival and existence of the company, it is essential to acquire and own sufficient and adequate mineral deposits. Hence, the acquisition of land is wholly and exclusively intended to provide uninterrupted supply of scarce minerals for manufacturing operations. The purchase price of land is based on the current market value of land only and price paid has no relationship with the mineral deposits embedded or available on such land. The mineral deposits are being collected by the company through sea harvesting by removing sand deposited by the waves and to a limited extent, land mining has also been started in the recent past as the concentration in sand collected through sea harvesting has been depleted. After the extraction of the minerals as above, the land is filled with the tailing sand and restored to the original position and hence, according to the querist, there is no depletion in the value of land acquired except on account of sea erosion and in fact after filling and restoration to its original position, the market value of the land only increases over a period of time on account of the inflationary trend in the real estate market. Further, the sea harvesting can be continued for long after completing the land mining. 3. The querist has further stated that in respect of the cost incurred for acquisition of land as also the cost paid for the building situated on the land acquired from various parties (and demolished before commencement of mining activities), consideration is stated separately in the document of purchase (title deeds of land). The cost of building as per the document is substantially higher as compared to the cost of land. The total cost incurred for land and building upto 31-03-12 is Rs. 116.65 crore and more than 60 % of the same is the cost of building. The company accounts for the cost paid for acquisition of land under ‘Land Account’ under fixed assets as a tangible asset having an enduring value is acquired. The company has to pay royalty to the State Government for extraction of minerals through mining activities as per the Mines and Minerals Development and Regulation Act, 1957 as the title of ownership of the minerals embedded in the land vests in the Central Government and extraction and use of such minerals is regulated by the above statute. As regards the cost incurred for acquisition of building, the company has no intention of utilising the building for its business activities and the building is demolished immediately or at the time of the commencement of mining. The vendors / occupants are allowed to demolish the building by payment of 5% of the value of the building as stated in the document to the company. Therefore, the objective / intention of the company is to acquire land for undertaking mining activities only and the break-up details of price of land and building are separately stated in the purchase documents as per the insistence of the sellers of such land. Accounting treatment presently followed: 4. In view of the fact that the land is used essentially for sea-harvesting as above, the company follows the accounting policy of booking the cost incurred on acquisition of the land under ‘Land Account’ under fixed assets and it is the stand of the company that a considerable portion of land is acquired as a reserve for facilitating the sea harvesting which is a continuous process and the land adjacent to sea shore is required. In view of this, the company is of the opinion that the land is held as a fixed asset and cannot be treated as a current asset. Since the ownership of minerals embedded on such land, under law, vests with the Government, the company can sell / transfer the mineral deposits only after paying the royalty to the State Government, as stated above. For these reasons, it was considered not appropriate to account for the land as a current asset purely based on the mineral deposits available in such land. Being predominantly a unit of chemical industry, the company wants to convert these lands after mining as a buffer zone as a part of the initiative towards environment and social responsibilities. 5. The querist has also stated that the company does not account for the cost of the building acquired and demolished separately under ‘Buildings’ under ‘Fixed Assets’ and the entire cost of the land and building is accounted for under ‘Land Account’. 5% of the value recovered from the vendors / occupants on demolishing the building is credited to the cost of land as the salvage value recovered as a part of the acquisition process considering that the predominant objective was only to acquire such land for mining activities. 6. The company has received audit query from the statutory auditors and the Comptroller and Auditor General (C&AG) stating that the cost of land, which has to be taken to represent the mineral deposits included / embedded in the land has to be accounted for as a current asset and not under ‘Fixed Assets’. Moreover, the cost of building has to be shown separately under fixed assets and as and when the same is demolished, the cost of building has to be written off to the statement of profit and loss. In this regard, the querist has stated that in case the entire cost of building is to be written off to the statement of profit and loss in the financial year 2012-13, this will seriously erode the financial position of the company since the aggregate cost incurred upto 31.03.2012 is quite high. B. Query 8. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:
C. Points considered by the Committee 9. The Committee notes that the basic issue raised in the query relates to accounting for the land and buildings acquired for the purposes of sea harvesting and land mining and accounting for rehabilitation expenditure incurred on acquisition of land. The Committee has, therefore, considered only these issues and has not examined any other issue that may arise from the Facts of the Case, such as, accounting for the royalty paid to the Government on sale or transfer of minerals, accounting for the costs incurred, if any, for acquiring mining rights, accounting for sea harvesting and land mining activities and the minerals developed out of these activities, accounting for site restoration costs, etc. The Committee notes from the Facts of the Case that in case where land owners have opted for the offer of equivalent extent of land along with reduced rehabilitation compensation, it is stated that the company is not able to ascertain which land would be given in exchange to the parties involving equivalent area and hence, the cost thereof is not ascertainable. Accordingly, the Committee has presumed that the land is not to be given to the parties by the company out of its owned lands. Further, the opinion of the Committee is purely from the accounting point of view and not from the angle of interpretation of any legal enactments, such as, Income-tax Act, 1961, etc. as in view of Rule 2 of the Advisory Service Rules of the Committee, it is prohibited from doing so. 10. As regards accounting for the land and buildings acquired, the Committee notes the definition of the term, ‘fixed asset’ as per paragraph 6.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, notified under the Companies (Accounting Standards) Rules, 2006 (hereinafter referred to as the ‘Rules’) which provides as follows:
The Committee also notes the definition of the term ‘Current Assets’ as per paragraph 3.34 of the Guidance Note on Terms Used in Financial Statements as follows:
From the above, the Committee is of the view that in the extant case, although the land has been acquired for extracting mineral deposits, it is the minerals extracted which will be sold in the normal course of business. Land will be held by the company till all the mineral deposits are exhausted and will also continued to be held thereafter. In other words, land is not being consumed in the normal course of business rather it is held for the purpose of extraction of mineral deposits through sea harvesting or land mining. Accordingly, the Committee is of the view that it is not appropriate to consider land as a current asset just because it will be used to extract mineral deposits available under such land, rather the land should be treated as fixed asset. In this regard, the Committee also wishes to point out that mineral deposits is a separate asset which should be recognised separately. 11. As regards accounting for buildings situated on the land acquired for sea harvesting and land mining, the Committee notes that although a separate price is stated in the purchase documents in respect of buildings, the company has no intention of utilising the buildings for its business activities. In other words, these buildings are unusable for the purpose of the business and are demolished either immediately on acquisition or at the time of commencement of mining. Even the vendors are allowed to demolish the building by payment of 5% of the building value to the company. Thus, although the company may have acquired both land as well as buildings, the sole purpose of acquiring them is mining and sea harvesting on the acquired land and accordingly, the Committee is of the view that the amount paid for buildings should be included in the cost of acquisition of land. The value received from the vendors on account of demolition of buildings should be deducted from the cost of acquisition as it is incidental to the acquisition only. 12. As far as accounting for rehabilitation compensation paid to sellers of land who have not exercised the option for alternative land is concerned, the Committee is of the view that this expenditure is directly attributable to the acquisition of land and accordingly, following the principles of AS 10, it should be included as a part of cost of land. In this regard, the relevant paragraph of AS 10, notified under the ‘Rules’ is reproduced below:
With regard to accounting for rehabilitation compensation paid in the form of alternative land plus reduced compensation, the Committee notes that at the point of acquisition, the company is not able to ascertain the land that would be given in exchange to the parties and accordingly, its cost is not correctly ascertainable. The Committee notes the following paragraphs of Accounting Standard (AS) 29, ‘Provisions, Contingent Liabilities and Contingent Assets’, notified under the ‘Rules’ as follows:
From the above, the Committee is of the view that acquisition of land in the extant case creates an obligation on the enterprise to pay the rehabilitation expenditure either through outright compensation of Rs. 3 lakh or through exchange of another piece of land plus reduced compensation. Thus, even though the alternative land may not have been identified, the company has an obligation to settle it which cannot be avoided. Thus, the company has incurred a liability. However, since the value of alternative land can be measured using a substantial degree of estimation, the Committee is of the view that the company should recognise a provision in respect of its liability at the best estimate of the expenditure required to settle the obligation at the reporting date as per paragraph 35 of AS 29, reproduced above, which should be included as part of the cost of the land. In this regard, the Committee is also of the view that Rs. 3 lakh can be taken as a basis for reasonable estimation of the liability. D. Opinion 13. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 8 above:
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[1] Opinion finalised by the Committee on 16.7.2013. |