1.29     Query

Treatment of expenses shared with an agency for developing a captive plantation.

1. A public sector underrating has started a large scale plantation jointly with the concerned State s Forest Development Corporation Rajya Van Vikas Nigam) on 50:50 expense sharing basis. Upto April 10, 1987 an outlay of Rs. 2 crores has been incurred to which the share of the company has been paid as an advance to the said Nigam. The first crop from the plantation is expected after about 4 years.

2. According to the project report in respect of the above mentioned plantation the produce from the plantation will be used for the captive consumption by the company. The nature of expenditure to be incurred under the project relates to raising of nursery plantation, maintenance of plantation, plantatio, forest roads and cost of plant and machinery such as tractors and trollies, jeeps, pump sets and pipes and pipe fittings etc.

3. The project is completely controlled by the Nigam and the company is reimbursing its share of 50% expenses on demands based on the certification of the revenue/capital expenses made by the Nigam.

4.The querist has informed that an audit note no. 9 is appearing in the notes to the accounts of the company for the year 1985-86, which is reproduced below:

 The company has advanced, during the year 1984-85 a sum of Rs. 20.00 lakhs to Rajya Van Vikas Nigam Ltd. for raising industrial plantation for the company. The matter whether the Nigam is executing the scheme on behalf of this company or there will be joint sector company in which this company would be one of the shareholders is still under negotiations. No decision has been arrived at by the Government. The amount paid by the company pending finalisation of the details is being shown under Advance Recoverable. The Nigam have informed that the outlay on this scheme till 31st March, 1986 amounts to Rs. 115 lakhs. No provision has been made for expenditure incurred on behalf of this company up till now pending mutual determination of the extent of financial participation by the company and approval from the Central Government.

5. The querist has sought the opinion of the Expert Advisory Committee about the treatment of the expenses shared by the company with the Nigam. The querist has suggested the following alternative treatments in this regard:

(i) To treat the amount paid by the company as an advance to the Nigam and to adjust the advance against the value of yield received.

(ii) To treat the expenses paid under work-in-process account (capitalisation) and adjustment of the same against the value of yield received.

Opinion           October 13, 1987

The Committee notes from the facts of the query that the matter relating to executing the scheme was not yet settled. The government had still to take a decision whether the Nigam would execute the scheme on behalf of the company or whether there would be a separate company in which both the company and the Nigam would be shareholders. In view of this, the ownership of any assets being created through the execution of the said project can also not be considered to be finally settled. Thus, the amount paid by the company towards its share of expenses incurred by the Nigam in the development of plantation should be disclosed as  Advance to Rajya Van Vikas Nigam for joint plantation pending allocation under the head  Loans and Advances , in the balance sheet of the company. The explanatory note in this regard presently given in the notes to the accounts may continue to appear as it is.

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