1.26     Query

Accounting treatment of land acquired on perpetual lease.

1.A public sector corporation, registered under the Companies Act, 1956, had purchased 18 flats in Asian Games Village Complex from Delhi Development Authority (DDA) during the year 1985-86. Initially, it was not known whether these flats were on perpetual lease and therefore a note was given in the annual accounts of that year stating that no provision for write-off of the cost of land had been made in view of the pending information to be received from DDA as to whether these flats were on perpetual lease or not. Later on, DDA, vide their latter dated 1.10.86, clarified that the flats were on perpetual lease basis. Since the above flats were on perpetual lease basis, the cost of flats was bifurcated into cost of land and building and were shown accordingly in the Fixed Assets Schedule in annual accounts and no provision for write-off of the cost of the land was made. However, the Government auditors are of the view that since the land is on perpetual lease, this should be classified as leasehold land and the whole cost of the land requires to be written-off during the period of its lease.

2. In the above context, the querist has sought the opinion of the Expert Advisory Committee as to whether the land which forms a part of a flat which is on perpetual lease, should be classified as leasehold or freehold land and whether a provision for write-off of the cost of land should be made over the period of its lease?

                                                      Opinion                                                         October 7, 1988

1.The Committee notes that Part I of Schedule VI to the Companies Act 1956, requires ‘leaseholds’ to be separately disclosed under the head ‘Fixed Assets’.

2.The Committee also notes that Accounting Standard 6 (AS-6) on ‘Depreciation Accounting’, issued by the Institute of Chartered Accountants of India, “does not apply to land unless it has a limited useful life for the enterprise.” The Committee is of the view that land acquired on perpetual lease does not have a limited useful file.

3.The Committee also notes that ‘A Guide to Company Audit’ (1980), published by the Company Law Committee of the Institute of Chartered Accountants, suggests the following in respect of audit of land:

“In case of leasehold land, have you seen that the provision for write-off is made according to the duration of the lease? If not, the fact that no provision has been made should be indicated by way of a note.” 

4. On the basis of the above, the Committee is of the opinion that the land acquired under perpetual lease should be shown as a ‘leasehold land’ under the head ‘Fixed Assets’, with an appropriate disclosure of the nature of lease. However, no provision for depreciation should be made on land acquired under perpetual lease. The fact that no provision for depreciation in respect of the said land has been made should be indicated by way of a note to the accounts along with the reason therefor.

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