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Query No. 3
Subject: Accounting treatment of interest on enhanced land compensation.
A. Facts of the Case
1. A Government of India company (hereinafter referred to as the ‘company’) is engaged in the construction and operation of thermal power plants in the country. The company has also diversified into hydro power generation, solar power generation, coal mining and oil & gas exploration, etc. The company is registered under the Companies Act, 1956. The company is also governed by the provisions of the Electricity Act, 2003 in respect of generation of electricity business. The company prepares its annual financial statements as per the provisions of the Companies Act, 1956. The company is also listed with the Bombay Stock Exchange and National Stock Exchange.
2. The company is functioning in a regulated environment. The tariff for sale of energy from its stations is determined by the Central Electricity Regulatory Commission (CERC). Tariff for sale of energy comprises of two components, namely, annual capacity (fixed) charges and energy (variable) charges. The capacity charges mainly consist of interest on loan capital, depreciation, return on equity, operation and maintenance expenses, interest on working capital etc. and to a large extent depend on the admitted capital cost of a generating station. The energy charges consist of primary fuel cost as stipulated in the tariff regulations.
3. The querist has provided the background of the issue raised as below:
(a) Land Acquisition Act, 1894 (hereinafter referred to as ‘the Act’) is applicable for acquisition of private land through the State Government for the projects of the company. As per the said Act, the compensation payable to the person whose land has been acquired (land loser) is determined by the Land Acquisition Officer (LAO) in the first instance. The compensation for the land acquired under the Act shall comprise in addition to the market value of land, an amount calculated at the rate of 12% per annum on the market value for the period commencing on and from the date of notification to the date of award or date of taking possession, whichever is earlier and further amount of 30% of the market value as solatium. The amount determined by the LAO is paid by the company to the land losers through the State Government. In case the land loser is aggrieved as regards the amount of the compensation or other matters, the Collector may, on ( an application by the land loser, refer the matter to the Court for determination of the compensation.
(b) Where the Court enhances the compensation, interest on the enhanced amount of compensation at the rate of 9% from the date of possession to the date of payment into Court for the first year and at the rate of 15% for the period beyond one year is payable as per section 28 of the Act.
(c) On an earlier reference to the Expert Advisory Committee (EAC) by an oil company for which opinion was finalised on February 25, 2006 (hereinafter referred to as ‘oil company case’) regarding accounting for interest paid on enhanced land compensation awarded by the courts under the Act, the EAC opined that interest payments (9% and 15%) referred in paragraph (b) above are “in the nature of cost for delay in the payment of enhanced compensation and are not directly attributable to bringing the asset to its working condition for its intended use. These costs also do not generate any future economic benefit. Accordingly, in the view of the Committee, these interest payments should not be capitalised but recognised in the profit and loss account for the year in which these are incurred”.
4. Present accounting practice followed by the company:
(a) The basic price (market value), 12% p.a. on market value from the date of publication of notification under section 4 of the Act upto the date of award or possession whichever is earlier and solatium, as determined by the LAO in terms of section 23 of the Act are treated as land cost.
(b) Where the land losers approach the Court demanding compensation higher than that awarded by the LAO and if the Court awards higher compensation, keeping in view the principles of conservatism and prudence, liability is provided for the enhanced compensation awarded by the court, including interest if any thereon, irrespective of fact whether the decisions are contested by the company or by the land losers before higher courts.
(c) Interest on the compensation awarded by the Court is recognised in the statement of profit and loss. Interest upto the date of commercial declaration of the first unit of the stage for which land has been acquired is capitalised as ‘Expenditure during Construction (EDC)’, since during that period the entire project was under construction. Though this interest is not in the nature of borrowing costs, the accounting treatment followed by the company similar to the provisions of paragraph 16 of Accounting Standard (AS) 16, ‘Borrowing Costs’, which states that “... borrowing costs incurred while land is under development are capitalised during the period in which activities related to the development are being undertaken. ...” (Emphasis supplied by the querist.)
(d) In respect of cases pending before the District Court (appeals against the amounts awarded by the LAO), the financial effect is disclosed as contingent liability after considering the following:
(i) In case the claims of some of the land losers are disposed off by a Court, the contingent liability in respect of the pending claims is disclosed considering the rate awarded by the Court in respect of cases in the same/adjacent locality.
(ii) If none of the cases have been decided by the Courts, opinion of the legal counsel dealing with the case is obtained with regard to tenability of the claims made and the amounts likely to be admitted by the Court taking into consideration the rate awarded by the land acquisition officer, decisions of the courts for land acquisition cases in the project vicinity and other relevant factors.
(e) Where interim payments are made as per directions of the Court, interest liability ceases on such payments from the date of payment into the Court, unless otherwise provided in the orders of the Court.
(f) In case a superior Court modifies the award of the lower Court, suitable updation of liability is carried out in the accounts in line with the decision of the superior Court, even though any appeals filed against such decision are pending.
5. The accounting treatment of land followed by the company is explained by way of an example as under:
Land acquired by the company (10 land losers 10 acres each) = 100 acres
Market value of land awarded by the LAO = Rs. 100 per acre
Date of publication of Notice u/s 4 of the Act = 1st January, 2010
Date of possession of land by the company = 31st March, 2010
Date of award by the LAO = 31st March, 2010
Date of commercial declaration of first unit of the station = 31st January, 2012
Amount deposited with LAO for land (calculated as under): = Rs. 13,300/-
Market value of land = Rs. 10,000/-
12% on market value upto the date of
possession (10,000 X 0.12 X 3/12) =Rs. 300/-
30% Solatium =Rs. 3,000/-
________________
=Rs. 13,300/-
________________
The amount of Rs. 13,300/- is capitalised as cost of land in the books of account.
After accepting the compensation awarded by the LAO, 5 land losers approach the District Court for enhancing the market value of land from Rs. 100 per acre to Rs. 200 per acre on 30th September, 2010 with consequential benefits. Further, the balance 5 land losers also approach Court for enhancing the market value of land from Rs. 100 per acre to Rs. 200 per acre on 31st December, 2010 with consequential benefits. The District Court after hearing the prayer of first 5 land losers enhances the market value of land from Rs. 100 per acre to Rs. 150 per acre on 30th November, 2012 along-with other entitlements as per the Act. The Court directs the collector to recalculate balance amount payable to the land losers. Such orders along-with the calculations for payments are received by the company from the office of the collector on 31st December, 2012. On 1st January, 2013, the company deposits the balance amount of Rs. 4,497/- with the LAO for payments to the land losers. The calculation of Rs. 4,497 is as under:
Differential market value of land = Rs. 2,500/-
12% on market value upto the date of
possession (2,500 X 0.12 X 3/12) =Rs. 75/-
30% solatium =Rs. 750/-
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=Rs. 3,325/-
Interest @ 9 % from 1st April, 2010 to 31st March, 2011 =Rs. 299/-
(3,325 X 0.09)
Interest @15% from 1st April, 2011 to 1st January, 2013) =Rs. 873/-
(3,325 X 0.15 X 21/12)
Total amount deposited with the LAO for 5 land losers =Rs. 4,497/-
The enhanced compensation of Rs. 3,325/- is capitalised as cost of land. Interest of Rs. 299/- and Rs. 873/- is debited to the statement of profit and loss. Out of this, interest of Rs. 299/- (9% for one year) and Rs. 374/- (15% from 1st April, 2011 to 1st January, 2012 i.e., the date of commercial declaration of the station) is capitalised as EDC since the entire project during this period was under construction.
6. The querist has stated that considering the guidelines given in paragraph 4 (d) above, claims of the land losers have been disclosed as under:
Financial Year 2010-11
Contingent liability of Rs. 14,497/- (differential market value of land with 12% on market value, 30% solatium and 9% interest from 1st April, 2010 to 31st March, 2011, i.e., Rs. 10,000/- (+) Rs. 300/- (+) Rs. 3,000/- (+) Rs. 1,197/-) is disclosed.
Financial Year 2011-12
Contingent liability of Rs. 14,497/- appearing in the accounts as at 31st March, 2011 is updated with 15% interest for the year 2011-12 and the amount of Rs. 16,492/- (i.e., differential market value of land with 12% on market value, 30% solatium, 9% interest for one year and 15% interest from 1st April, 2011 to 31st March, 2012, i.e., Rs. 10,000/- (+) Rs. 300/- (+) Rs. 3,000/- (+) Rs. 1,197/- (+) Rs. 1,995/-) is disclosed.
Financial Year 2012-13
On receipt of the judgment of the District Court on 31st December, 2012, an amount of Rs. 4,497/- is paid to the LAO based on the order of District Court. Contingent liability towards the claims of balance 5 land losers is updated based on the judgment of the Court in similar cases and disclosed at Rs. 4,622, (i.e., differential market value of land awarded by the district court along-with 12% on market value, 30% solatium, 9% interest for one year and 15% interest from 1st April, 2011 to 31st March, 2013, i.e., Rs. 2,500/- (+) Rs. 75/- (+) Rs. 750/- (+) Rs. 299/- (+) Rs. 998/-).
7. New developments:
In April 2012, the EAC of the Institute of Chartered Accountants of India (ICAI) pronounced another opinion which was finalised on 10th October, 2011 (hereinafter referred to as ‘port trust case’) relating to accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof. The opinion related to the State Port Trust (SPT), entrusted with the construction of a new port by the Government of India (GOI) and subsequently handover it to a company as per the directions of the GOI. In the opinion, the Committee referred to paragraphs 49 (a), 58 and 88 of the Framework for the Preparation and Presentation of Financial Statements, issued by the ICAI and opined that the company should capitalise the total amount (including the interest) as cost of land as the interest in substance is part of the consideration of land.
8.Points for Consideration
The company is of the view that keeping in view the opinion of the EAC in the port trust case, there is a need to review the existing practice of accounting for interest on enhanced land compensation and the entire amount of enhanced compensation together with interest awarded by the Court should be treated as cost of land for the following reasons:
(a) As per paragraph 9.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, “The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:
(i) site preparation;
(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations for plant; and
(iv) professional fees, for example fees of architects and engineers.
The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors”. (Emphasis supplied by the querist.)
In the context of the land acquired under the Act, the price is initially determined by the LAO. The Act also has provisions for the land losers to make an application to the collector to refer the matter to the Court for determination of the compensation if they are not satisfied with the award of the LAO. The collector is obligated to make such reference and the Court thereupon determines the compensation taking into account various factors as provided in the Act. The decision of the Court can be challenged before the High Court and thereafter, in the Supreme Court as per the Code of Civil Procedure. Further, the Act also provides that if even in a single case the Court determines enhanced compensation compared to that awarded by the LAO, the other land losers can make an application for re-determination even though they have not previously made an application to the collector for reference to the Court. It is observed that invariably the award of the LAO is challenged and the land losers approach for enhanced compensation on various grounds. While there is a prescribed time for the collector to make an award, there is no such time limit for the Court to determine the compensation. Due to these reasons, the cost of the land acquired does not get finality for a considerable period of time.
It is observed that in many instances, with a view to expedite the project development, possession of the land is handed over to the company pending issuance of award by the LAO on deposit of 80% of the estimated compensation decided by the LAO. The awards are issued by the LAO subsequently following the procedure under the Act. Under the circumstances, the company provisionally capitalises the land in its books as per the best estimate of the cost incurred which is updated from time to time depending upon the developments in each case. Where the awards are challenged before courts, the cost of land is adjusted in the books as and when decisions of the courts are received. The above accounting treatment is similar to adjustment in the cost of assets provisionally capitalised pending final receipt of bills from the suppliers/contractors where upon receipt of final bills, adjustments are made in the asset cost as per the admitted bill amounts. This is also disclosed through accounting policy of the company which states that “In the case of assets put to use, where final settlement of bills with contractors is yet to be effected, capitalisation is done on provisional basis subject to necessary adjustment in the year of final settlement” (emphasis supplied by the querist). AS 10 also recognises that the cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors. The enhanced compensation awarded by the courts in the case of land acquisition together with interest thereon are in the nature of price adjustments subsequent to initial recognition as provided in AS 10 and should be recognised as cost of land.
(b) The compensation for land is determined by the collector or the Court considering various aspects including market value, standing crop, buildings, trees, wells, etc. on the land and any damages to the other property of the land loser. The market value of land is to be increased by 12% per annum for the period commencing on and from the date of publication of the notification under section 4 of the Act to the date of award of the collector or the date of taking possession of the land whichever is earlier. Solatium @ 30% of the market value is also to be paid due to the compulsory acquisition of the land. In cases where the Court enhances the compensation, it may order payment of interest on such excess @ 9% p.a. for the first year and 15% p.a. for the subsequent period till the payment of such excess into Court. It is submitted that all the above elements differ from one another only in the method by which they are computed and are in reality consideration paid for the acquisition of land. Accordingly, they should be treated as cost of land in terms of AS 10 since these payments are directly attributable to the acquisition of land. While AS 10 does not define ‘directly attributable’, drawing reference to the ‘avoidability test’ given in AS 16, it can be said that since all the above elements of cost, including interest, could have been avoided only if the company had not made the land acquisition, these are directly attributable costs. It may be appreciated that the competent authority to determine the compensation for the land acquired is the LAO or the Court (including the High Court or Supreme Court, where appeals are made) and until such determination is made by them, the cost is not finally known to the company. The company cannot avoid any such amount as finally determined by the courts and therefore, the same is a directly attributable cost for the land.
(c) As to the element of interest included in the compensation awarded by the Court, it may not be correct to term the same to be ‘in the nature of cost for delay in the payment of enhanced compensation’ since such interest arises due to the very process of determining the compensation specified in the Act which is inherently a time consuming affair. The amount of interest awarded by the courts does not constitute a penalty. Even assuming these are arising due to delays, such delays cannot be attributed to the company as primarily interest arises due to the time taken by various authorities for determination of the compensation and not due to any delay in payment of the compensation amount by the company. Even in those instances where the company appeals against the enhanced compensation awarded by a Court, the time taken by the higher Court for disposal of the appeal cannot be said to be a delay on the part of the company since the company, as a commercial organisation, is required to take all necessary actions to protect its interests. The company has also a moral obligation to ensure that the electricity tariffs for its customers do not go up on account of enhanced compensation awarded by the courts considered as unreasonable or excessive by it. In many instances the company has also seen that the enhanced compensation awarded by a lower Court has been rejected or significantly reduced by the higher courts.
(d) The views expressed by the EAC in the oil company opinion that the interest costs do not generate any future economic benefit are not substantiated. Land acquired under the Act is freehold land which is a non-depreciable asset with indefinite life. One of the reasons for not depreciating land is that usually land prices appreciate and therefore, there is no diminution in its value to be recognised in the financial statements. Drawing from the principles of Accounting Standard (AS) 28, ‘Impairment of Assets’, the economic benefit could be in the form of ‘value in use’ or ‘net realisable value’. In any case, the cost of land would form part of the related cash generating unit and would be subjected to impairment testing as per AS 28. Therefore, it may not be fair to automatically conclude that the amounts paid as interest do not yield any future economic benefit.
The argument that there is no future economic benefit is particularly not relevant in the case of the company since tariffs for sale of energy are regulated by the Central Electricity Regulatory Commission (CERC). As per the Tariff Regulations issued by the CERC, the company is allowed to recover the capital cost incurred for generation of power by way of depreciation, interest on borrowed funds and a specified return on equity over the useful life of the asset. Where courts order payment of enhanced compensation for the land acquired, the company is entitled to approach the CERC for revision of the project cost for tariff purposes and the same would be considered by the CERC as per the Tariff Regulations providing ‘future economic benefits’.
(e) For the sake of argument, let us assume that the LAO or Court determines the compensation as a lump sum amount without providing break-up for various elements considered. In such case, the entire amount would be treated as cost of land without the need to charge any portion thereof as ‘interest’ to the statement of profit and loss. The methodology followed by the LAO or Court in determining the amounts payable for the land acquired should not guide the accounting in the books of the company. Applying the principle of substance over form, from the company’s perspective the entire amount is a cost for the land acquired.
(f) In the port trust case also, the EAC has been guided by the substance over form principle and has stated that the entire amount paid should be treated as cost of land even though in arriving at the amount payable, an interest element was identified by the Government. While the facts of the port trust case are different from that of the oil company case (which squarely deals with land acquisition under the Act), certain important similarities are relevant. Firstly, the port company, from the beginning, obtained possession of the land though the price thereof was not fixed. Secondly, the SPT and the port company, undertook to be bound by the decision of the GOI on the cost of the land. In the case of land acquired by the company under the Land Acquisition Act, also (i) the possession of land is available pending final determination of compensation amount and (ii) the compensation amount is determined by an independent agency which is the LAO or the Court. The EAC in its opinion in the port trust case has been guided by the ‘substance over form’ principle and observed that “for accounting purposes, the transactions and events should be recorded in accordance with their substance and economic reality rather than legal form”. Referring to paragraph 88 of the Framework for the Preparation and Presentation of Financial Statements, issued by the ICAI which states that “An asset is recognised in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured reliably” , the EAC noted that “until and unless the Government issued a final order that the title to the land can be obtained by the company alongwith determining the final payments that the company would make to SPT, the cost of land cannot be measured reliably”. Accordingly, in accordance with paragraph 88 of the Framework, as reproduced above, the Committee was of the view that “although in the extant case, the land may meet the criteria of an asset for the company, but before the financial year 2007-08 when the said order was issued by the Government of India, it cannot be recognised in the books of the company”. The EAC also opined that even though the compensation required to be paid by the port company included interest element, the same is not a borrowing cost nor it is payment for any delays on the part of the company. The EAC was of the view that “… rate of interest is only as a reference point for determination of final sale consideration of the land and does not automatically lead to an inference that the amount so computed is of the nature of interest. In substance, the company is paying the total amount as a consideration to obtain the title to land”. It may be seen that the EAC opinion stresses on the fact that pending the Government order the cost of land could not be measured reliably. Drawing the same analogy, in the case of land acquired by the company, the acquisition is done as per the provisions of the Act where the LAO or the courts are the competent authorities to determine the compensation. The modus operandi for such determination is not relevant as in substance, all amounts paid by the company are consideration to obtain the title to land. As opposed to the port trust case, where perhaps the compensation amount was not disputed, in the case of land acquired by the company, the awards of the LAO are more often than not disputed before courts. Pending final determination of the compensation amount by the appropriate Court, the company provisionally recognises the payments made in respect of land in possession as land cost which is subsequently adjusted for increases/decreases ordered by the courts.
(Emphasis supplied by the querist.)
According to the querist, considering the above, it is submitted that the company is paying the total amount including interest to the land losers as consideration to obtain the title to land. Accordingly, the total amount should be recognised as cost of land in the books of account.
B. Query
9. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a)Whether interest on enhanced land compensation awarded by the courts should be included in the capital cost of land.
(b) If answer to question (a) is negative, whether the current accounting practice of the company is in order.
(c) If answer to question (b) is also negative, what shall be the correct accounting treatment of such interest?
C. Points considered by the Committee
10. The Committee notes that the basic issue raised by the querist relates to accounting treatment of interest on enhanced land compensation. The Committee has, therefore, considered only this issue and has not examined any other issue that may be contained in the Facts of the Case, such as, accounting treatment of enhanced compensation and additional payments as mentioned in paragraph 3(a) above, accounting policy of the company for providing liability or disclosing contingent liability for the probable/possible enhancement in land compensation and interest thereon, propriety of capitalisation of land on provisional basis and updation of the same from time to time depending on the developments, etc. Further, the Committee’s opinion expressed hereinafter is purely from accounting point of view and not from the angle of interpretation of various legal enactments, such as, Land Acquisition Act, etc. The Committee has also not examined the issue from the angle of tariff regulations issued by the CERC as the considerations for tariff determination may be different from accounting considerations. The Committee also wishes to point out that though the expression ‘enhanced compensation’ normally means original compensation plus increase in compensation, for sake of convenience, the Committee uses the expression ‘enhanced compensation’ as the difference between final compensation awarded by the Court (excluding 9% interest/15% interest) and the original compensation awarded by the Land Acquisition Officer (LAO).
11. At the outset, the Committee notes the earlier opinions of the Committee referred to by the querist in paragraph 3(c) above (viz., oil company case) and paragraph 7 above (viz., port trust case). The Committee also notes the arguments of the querist with respect to the earlier opinions of the Committee and is of the view that these deal with two different situations (as also admitted by the querist) as explained below:
(i) In the oil company case, initially the award for acquisition of land was given by the Land Acquisition Officer which was enhanced by the Court. Further, the Court also directed to pay interest @ 9%/15% on enhanced compensation for the period from the date of award/dispossession till the date of payment, though determined at a later date. Thus, the facts of that case were similar to the facts given in the present case.
(ii) In the port trust case, although the company in question had been handed over the possession of land by the transferor entity who had originally incurred certain costs for acquisition of land but at that time it was not clear that which party will own that land, viz., the transferor entity or the company to whom the possession of the land was handed over (viz., the company in question). After few years, the Government decided that the land would be owned by the company in question and also determined the sale consideration by adding an amount equivalent to the interest at the rate of SBI PLR to the cost incurred by the transferor entity. Thus, the Committee had opined that SBI PLR was used as a benchmark to arrive at consideration for the transfer of land.
Since the facts are different in the two cases as discussed above, the opinion expressed on the oil company case differs from the opinion on the port trust case. However, though the facts of the case in oil company case are similar to facts of the extant case, the Committee notes that the earlier opinion in oil company case had apparently focused on the delay in payment of compensation by the company rather than on delay in the process of arriving at the final decision.
12. The Committee notes that section 18 of the ‘Act’ provides for reference to the Court by the Collector, at the instance of any interested person who has not accepted the award, for the determination by the Court of certain matters, which include the amount of the compensation. Sections 23 and 24 of the ‘Act’ specify the matters to be considered and maters to be neglected respectively by the Court in determining the amount of compensation to be awarded. As per section 25 of the ‘Act’, the amount of compensation awarded by the Court shall not be less than the amount awarded by the Collector under section 11. Section 28 of the ‘Act’ reads as below:
“28. Collector may be directed to pay interest on excess compensation: If the sum which, in the opinion of the Court, the Collector ought to have awarded as compensation is in excess of the sum which the Collector did award as compensation, the award of the Court may direct that the Collector shall pay interest on such excess at the rate of nine per centum per annum from the date on which he took possession of the land to the date of payment of such excess into Court:
Provided that the award of the Court may also direct that where such excess or any part thereof is paid into Court after the date of expiry of a period of one year from the date on which possession is taken, interest at the rate of fifteen per centum per annum shall be payable from the date of expiry of the said period of one year on the amount of such excess or part thereof which has not been paid into Court before the date of such expiry.”
13. From the above, the Committee notes that since the award notified by the Land Acquisition Officer (LAO) may be enhanced by the Court in case reference is made to the Court, the compensation towards the acquisition of the land becomes final only on the date of the final award by the Court. The Committee further notes that the Land Acquisition Act itself recognises that the amount awarded by the LAO may not be final or acceptable to the land owners and accordingly, considering the long process of determination of final value of land, it envisages for the payment of various elements apart from the enhanced compensation such as interest @ 9% and 15% from the date of possession till the payment into the Court. The Committee also notes that till the final award of the Court, the quantum of interest to be paid cannot be determined as even the principal amount on which such interest payments are to be made is not determined and therefore, such interest is the result of the process of acquisition of land as per the Act. Accordingly, the Committee is of the view that ‘interest’ in the extant case is a part of the process for determination of purchase price of land and, therefore, in substance, should be considered as a component of purchase/ acquisition price only, to the extent the interest payments relate to the period of final determination of the price by the Court. Any interest beyond such period, viz., after the date of final award till the date of payment should not be capitalised and charged to the statement of profit and loss, since, interest after the date of Court’s award is to compensate for delay in the payment of the enhanced compensation as finally awarded by the Court.
14. As regards the policy of the company to capitalise the interest on enhanced compensation incurred for the period before commercial declaration of the first unit of the stage for which land is acquired on the basis of the principles enunciated in AS 16, the Committee is of the view that any expenditure incurred during construction cannot be capitalised or expensed on the basis of the principles of AS 16. AS 16 prescribes principles for accounting treatment of borrowing costs. In the extant case, the interest payments cannot be considered as a ‘borrowing cost’ as there is no borrowing of funds by the company.
D. Opinion
15. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 9 above:
(a) The interest payments on enhanced land compensation awarded by the Court should be included as cost of the land to the extent they relate to the period upto the date of Court’s award. Any interest beyond that period should be treated as revenue expenditure and charged to the statement of profit and loss for the year of incurrence, as discussed in paragraph 13 above.
(b) No, the current accounting practice of the company is not in order, as discussed in paragraphs 13 and 14 above.
(c) See (a) above.
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[1]Opinion finalised by the Committee on 11.4.2014.
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