1.29     Query

Accounting treatment of expenditure incurred in plantation activities.

1. A group has incorporated a few private limited companies with the objective of undertaking plantation activities. The main objective of these companies is to raise teak and other forestry plantations. It takes about 10 to 12 years for a teak tree to grow which means the plantation started in the year 1987, will be ready for felling in the year 1999. Till that time, all the plantations will have to be maintained and practically there will be no revenue therefrom during the period of 12 years. There will be some miscellaneous receipts out of the value of unwanted trees to be felled in the year 1992-93, 1995-96, but the major revenue will come only in 1999.

2. In order to carry on their plantation activities, till the trees are finally ready for sale, these companies will be incurring expenditure on maintaining them, and will also be paying lease rent to the owners of the land etc.

3. In the above context, the querist has sought the opinion of the Expert Advisory Committee on the following:

(i) whether the cost of planting, and its subsequent maintenance in the future years is to be treated as capital expenditure and finally at the end of the 12 years when the trees are felled and sold, the amount realised out of the sale proceeds should be taken as long term capital receipts. The total amount spent till that time for raising the plantations should be treated as capital expenditure and the difference between the expenditure and the receipts can be taken as long term capital gains. If not,

(ii) whether the plantations should be valued at the end of each accounting year and profit and loss be determined on the basis of the difference between the value of the standing trees and the expenses incurred during that year. The valuation so made will be treated as value of work in progress and will be shown as closing stock in accounts.

(iii) If neither of the above two accounting treatments is acceptable, then what should be the accounting treatment in this case.

                                                         Opinion                                            October 7, 1988

1. The Committee notes that a timber plantation can be disclosed as ‘work-in-progress’ under ‘current assets’ till it attains maturity because the process of development of plantation – from the seedling stage to the maturity stage – is like any other production process albeit taking 10-12 years. In this particular case there is all the more reason to treat it as work-in-progress since the operations of the company are such that the entire plantation of trees is sold off in the year in which it reaches the maturity stage, i.e., when trees are ready for felling. Thus, the expenditure incurred in planting and maintaining the trees cannot be treated as capital expenditure, and the timber cannot be classified as a ‘fixed as set’. The plantation work-in-progress may be valued at the lower of cost and net realisable value. The latter can be determined on the basis of estimated selling price in the ordinary course of business less estimated cost to be incurred in future for bringing the plantation to maturity, and the cost necessarily to be incurred in order to make the sale. The cost of work-in-progress would include all expenses for raising timber incurred till the valuation date.

2. The Committee notes that the manner of treatment suggested by the querist in para 3 (ii) would involve recognition of profit as the plantation develops. In the view of the Committee, this method is not acceptable in view of the ‘prudence’ concept of accounting.

3. On the basis of the above, opinion of the Committee on the alternatives suggested by the querist in para 3 of the query, is as below:

(i) In the circumstances of the query, the method suggested by the querist at para 3 (i) is not appropriate.

(ii) The second method suggested by the querist in para 3(ii) is not acceptable in view of the prudence concept of accounting.

(iii) The developing plantation should be shown as ‘work-in-progress’ under ‘Current Assets’ and valued at lower of cost and net realisable value.

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