Expert Advisory Committee

Query No. 43

Subject: Accounting treatment of funds received for land acquisition.[1]

Facts of the Case

1. A wholly owned company of the Government of India (hereinafter referred to as the ‘company’) is registered under the Companies Act, 1956. The company is engaged in construction of railway tracks for freight, popularly known as dedicated freight corridor (hereinafter referred to as the ‘project’). Presently, two corridors are under construction, viz., Eastern Dedicated Freight Corridor and Western Dedicated Freight Corridor. Construction of these corridors is being funded through equity participation from the Ministry of Railways and debt from the World Bank and Japan International Cooperating Agency (JICA).

2. Land for the project is acquired in the name of the Ministry of Railways (MOR) under the Railways Act, 1989 as modified by the Railways (Amendment) Act, 2008. Chapter IVA of the Act contains detailed provisions for land acquisition for a special railway project. Railway Board has been nominated as the ‘Central Government’ for the purpose of the above Act and ‘Competent Authority’ for acquisition of land as per the Act are State Land Acquisition Officers (SLAOs), which are the officials of the Government of the State concerned in which land is being acquired and are not the officers of the company. All the acts in terms of above-mentioned Chapter IV A are being performed by the SLAOs.

3. The owner of land being acquired is the Ministry of Railways (MOR). The company will use the land as a lessee. As per the directions of the MOR, the possession of the land will be taken by Railways officials and immediately handed over to the concerned official of the company. For this purpose, officials from the Railways and the company will sign on the land handing-over documents. Subsequently, lease agreement would be signed based on these documents. The company would pay a lease rent @ 6% per annum of land cost, which shall commence from the date of commissioning.

4. Since the land is being acquired for the project, it has been mandated by the MOR that the company will actively associate in the land acquisition process and following actions need to be taken by the company:

(a) Advise the Railway-wise and district-wise details of the land to be acquired for preparing the schedule of land to be acquired by SLAOs;

(b) To prepare and forward the draft notification, to be issued after the approval of the Central Government and vetted by the Ministry of Law & Justice, if required;

(c) To nominate coordinators to work with SLAOs;

(d) To open a Special Joint Saving Bank Account in the name of SLAO and the officials nominated by the company;

(e) Preparation of all the documents required for taking possession of land;

(f) After receiving possession of land, the company will erect boundary pillars as per railways standards, or similar to demarcate the land;

(g) To ensure sufficient watch and ward to retain encroachment free possession of land;

(h) To liaison with the railways officials and will arrange for signing of lease agreement.

As such, the company is involved in the land acquisition process as a facilitator since ultimate user of land to be acquired would be the company. Considering the position of the company as a facilitator, the MOR is reimbursing all the expenditure incurred by the company towards activities enumerated above on actual basis. Further, administrative cost towards land acquisition which includes establishment expenditure of SLAOs, expenditure incurred on facilities provided to SLAOs, such as, providing of fixed assets and providing of vehicles etc., are also reimbursed by the MOR to the company on actual basis.

5. Funds towards compensation of land are being released by the MOR to special joint saving bank account maintained in the name of SLAO and the officials nominated by the company. Disbursement of compensation is done by cheques jointly signed by the account holders. The MOR has further casted a duty on the company for submission of monthly accountal of the money released by the MOR and actually disbursed as compensation. It is pertinent to note that the money released by the MOR to SLAOs accounts cannot be used for ordinary business of the company and the company has no right to utilise such money except for land acquisition for the MOR. Without the authorisation of SLAO, no disbursement out of that money can be made. The querist has also separately clarified that interest accrued on deposit balance in the joint saving bank account will be to the MOR’s benefits and any unused funds will have to be transferred to MOR after the land acquisition process is over.

6. The querist has stated that in view of above, expenditure incurred towards facilitation/administrative cost of land acquisition is shown as amount recoverable from the MOR. The amount recoverable from the MOR and the funds released by the MOR in the special joint saving bank account are not included in the accounts of the company. This fact is disclosed in the financial statements of the company through notes to accounts. This practice is being followed consistently by the company since its inception. In the financial statements of the company for the financial year (F.Y.) 2013-14, the following note is given to disclose the above fact:

“As per the directions of the Ministry of Railways (MOR), Land for the project shall be acquired in the name of MOR under the Railways Act, 1989 as modified by the Railways (Amendment) Act, 2008 and the land so acquired shall be leased to the Company at lease rent of 6% per annum of the land cost. Lease rent shall commence from the date of commissioning. Funds for acquisition of land are being provided by MOR to separate bank accounts, being operated jointly by the State Land Acquisition Officer, being the Competent Authority under the above Act and a nominated official of the Company. Such Bank Accounts do not form part of the Company’s accounts.

In addition to the compensation payments for land acquisition, for which funds are given by MOR in separate account as explained above, Company is incurring facilitation & administrative expenditure in connection with acquisition of land, which are reimbursable by MOR on actual basis.”

7. Office of the Comptroller and Auditor General of India (C&AG), while carrying out the supplementary audit of financial statements of the company for the F.Y. 2013-14 has given following observation:

“As per the above note, the funds for land acquisition are provided for by the Ministry of Railways which are being kept in separate bank account operated jointly by SLAO and the Company.

As on 31st March, 2014, Rs. 1,67,905 lakh was lying in the above account. As the Company is authorized to use the funds along with the SLAO, hence, the same should have been included in “Cash and Bank Balance” and “Other Current Liabilities”.

The above has resulted in understatement of “Cash and Bank Balance” and “Other Current Liabilities” to the extent of Rs. 1,67,905 lakh.”

During discussion on the above observation, it was contended by the company that funds are received directly by SLAOs and being utilised by them for disbursement and the company has no role in utilisation of those funds. It was further contended by the company that funds belong to the MOR and land for which funds are released also belongs to MOR. Role of the company is merely a facilitator in the instant case, which has been amply disclosed in the financial statements. Bringing the above funds in the books of the company would tantamount to overstating the cash and bank balances of the company, which would not be a correct statement of affairs.

8. The querist has also stated that the observation was not pressed further in view of the assurance of the management that the issue shall be referred to the Expert Advisory Committee of the Institute of Chartered Accountants of India for an expert opinion. The querist is of the view that funds for land do not form part of the company’s accounts and disclosure referred to in paragraph 6 above is sufficient.

B. Query

9. Keeping in view the above, the opinion of the Expert Advisory Committee is solicited as regard to the following:

(i) Whether the accounting practice followed by the company of not accounting for the funds received for land from the MOR, as part of the company’s books with suitable disclosure in the financial statements is correct.

(ii) Would it not be an overstatement of balance sheet if the observation of the Government auditor is complied with? (iii) In case the accounting practice followed by the company is not correct, what should be the accounting treatment for such funds?

C. Points considered by the Committee

10. The Committee notes that the basic issue relates to accounting treatment of the funds received by the company as a facilitator for acquisition of land to be transferred to the Ministry of Railways (MOR). The Committee has, therefore, considered only this issue and has not considered any other issue that may arise from the Facts of the Case, such as, treatment of funds received as equity from the MOR and debt from the World Bank and Japan International Cooperating Agency (JICA), treatment of acquisition of land by the company for the MOR, treatment of lease rent paid by the company, treatment of expenditure incurred by the company as administrative cost which is reimbursed by the MOR, etc.

11. With regard to the accounting for funds received for acquisition of land from the MOR, the first issue to be examined is whether such funds held in separate joint saving account can be considered as an ‘asset’ of the company. In this regard, the Committee notes the definition of the term ‘asset’ as per paragraph 49(a) of the Framework for the Preparation and Presentation of Financial statements, issued by the ICAI as follows:

“An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.”

The Committee notes from the Facts of the Case (refer paragraph 5 above) that the funds towards compensation of land are being released by the MOR to special joint saving bank account maintained in the name of SLAO and the officials nominated by the company and that the interest accrued on deposit balance in the joint savings bank account will be to the MOR’s benefits and any unused funds will have to be transferred to MOR after the land acquisition process is over. Further, the money released by the MOR to joint savings account cannot be used for ordinary business of the company and the company has no right to utilise such money except for land acquisition for MOR. From this, the Committee notes that the company does not have any right to use the amount lying in the joint savings bank account and therefore, no control is exercised by the company on such account. Further, since the balance of funds in the joint savings account with SLAOs can be used only for the acquisition of land which will be owned and controlled by the MOR, no future economic benefits from such funds arise to the company. Accordingly, the Committee is of the view that the funds lying in the joint savings account is not an ‘asset’ of the company and therefore, should not be accounted for as ‘cash and bank balance’ in the financial statements of the company. Thus, the accounting treatment followed by the company of not recognising the funds received from the MOR as its ‘cash and bank balance’ is appropriate. However, considering the role for the company as a facilitator of the MOR for acquisition of land and since the company has also to submit monthly accountal of the money released by the MOR and actual disbursements, the Committee is of the view that the company, in the extant case, is acting in a fiduciary capacity to the MOR. Accordingly, the Committee is of the view that the funds received by the company should be duly disclosed in the notes to accounts giving details of nature of funds received, the purpose and restrictions imposed and its relationship with the MOR.

D. Opinion

12. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 9 above:

(i) and (iii) The accounting practice followed by the company of not accounting for the funds received for land from the MOR, as part of company’s books is appropriate. However, the company should give appropriate disclosures in the notes to accounts, as discussed in paragraph 11 above.

(ii) Inclusion of the funds received from the MOR in the cash and bank balances of the company as per the observation of the Government auditor would not be appropriate, as discussed in paragraph 11 above.

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[1]Opinion finalised by the Committee on 16.1.2015.