1.24     Query

Disclosure of advances against purchase of fixed assets.

1. A public sector corporation, registered under the Companies Act, 1956, has been acquiring various fixed assets for last many years for its day to day running of the business. These assets are purchased generally either on cash down basis or the payment is made after the assets have been purchased. However, sometimes, the corporation has to pay advance against the acquisition of assets which are delivered later. The percentage of advance varies from case to case and normally it is from 50 per cent to 100 per cent of the value of the asset. One such item of purchase of assets is the purchase of flats which the corporation has acquired/ is acquiring in various States for smooth running of its business. Normally, the State agencies have been requesting for 100 per cent deposit in the initial stage and the possession is given to the corporation after three years of payment of advance. The corporation has been disclosing such advances paid to State housing agencies under ‘Loans and Advances’ as ‘Miscellaneous Advances’ in the balance sheet till the possession is taken of the flats, and then these are capitalised and depreciation is charged. The Govt. Auditors are of the opinion that such advances should be disclosed as advances against capital commitment.

2.On the basis of the above facts, the querist has sought the opinion of the Expert Advisory Committee as to whether the corporation should continue the above practice or this should be shown as advances against capital commitment and if so, in which schedule (i.e. Fixed Assets Schedule or Current Assets, Loans and Advances) it should be properly be disclosed in accounts. In case the advances are to be shown in the fixed assets schedule, whether a note should be given of this fact in the schedule stating that on depreciation has been charged on such advances.

                                                       Opinion                                                  September 13, 1988

1.The Committee is of the opinion that advances against purchase of fixed assets should be disclosed under the head ‘Loans and Advances’, under the sub-head ‘Advances recoverable in cash or in kind or for value to be received’ since these are of the nature of the advances the value for which is to be received in future. In case the amounts of such advances are significant, these may be disclosed separately as ‘Advances against purchase of flats’.

2.The Committee also notes that where 100% advances are not made against the purchase of assets, these transactions may also result in capital commitments. In this regard, the Committee wishes to draw the attention of the querist to the following recommendation contained in Statement of Auditing Practices published by the Research Committee of the Institute of Chartered Accountants of India:

“The amounts of capital commitments outstanding is not a contingent liability and should not appear as such, but as a separate note……”(para 3.27). “When advance payments are made to suppliers of machinery and other items of capital expenditure, such advances should be taken in to account and only the net unpaid amount shown under the heading”(para 3.28).

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