1.20     Query

Valuation of fixed assets in case of incomplete records.

1.A State Textile Corporation was incorporated and registered as a private company under the Companies Act, 1956, in the year 1968. As on 1^st April, 1985, the corporation was managing three textile units as Authorised Controller/person and one unit as lessee in addition to one own unit.

2.The corporation has maintained the books of account from the date of takeover as Authorised Controller/person, instead of completing and continuing with the books of account maintained prior to takeover. There were certain difficulties in completing and continuing with the old books of account because of incomplete/missing records, non-availability of certain books etc. In respect of leased unit, the corporation has maintained the books of account for lease operations. The accounts of all these units were audited by different firms of chartered accountants. Out of the four units, two companies were in liquidation and their affairs were managed by the official liquidator. All these four units, of which three were managed as Authorised Controller/person and one as lessee, were nationalised and all the assets consisting of fixed assets and current assets were transferred to the corporation under the provisions of the relevant Sick Textile Undertakings (Nationalisation) Act, 1986, on 30^th June, 1986 with effect from 1^st January, 1986. The period of management by the corporation as Authorised Controller/person/lessee has been defined as post-takeover management period and period prior to that as pre-takeover management period under the said Act. The assets of the four undertakings were transferred to the corporation without any corresponding liability. Sections 3 & 4 of the relevant Act describe the nature of assets transferred to the corporation.

3.The assets transferred to the corporation consist of all the assets shown by the books of pre-takeover and post-takeover management period in addition to assets held by the liquidator as on the date of nationalisation. The book value of the assets, as on nationalisation date of post-takeover management period and the value of assets held by official liquidator were available and accounted for as assets vested in the corporation at the book value. Values of assets, for two units, of pre-takeover management period, as on nationalisation date, were available and were also accounted for as assets vested in the corporation. In respect of remaining two units, no details were available and hence the values of fixed assets only, based on Income-tax Returns were taken. The assets of the pre-takeover period, so accounted for, were based on unaudited statements and were subject to detailed scrutiny, confirmation etc. According to the querist, the assets were not valued arbitrarily but were accounted for as appearing in the books of account and duly approved by the Board of Directors.

4.On 8^th November, 1985, 12 closed units of Ahmedabad were nationalised under the provisions of relevant Closed Textile Undertakings (Nationalisation) Ordinance 1985 and all the assets were transferred to the corporation under sections 3 & 4 of the relevant Ordinance.

5.Out of the above 12 units (10 undertakings), 10 units (9 undertakings) were in liquidation. The books of account of erstwhile companies were incomplete. The corporation assigned the work of physical verification of all the assets to eight firms of chartered accountants. The books of account of erstwhile companies were updated in separate registers, incorporating the accounts submitted by official liquidator and the book value of those assets were accounted for as vested with the corporation. In case of some of the units, erstwhile mills/companies had not provided for normal depreciation and/or extra allowance.  The unprovided depreciation indicated in the last audited accounts of the erstwhile mills/companies was deducted. Thereafter, depreciation on the fixed assets, normal as well as extra shift, wherever applicable, was deducted upto the date of closure. From the date of closure to the date of nationalisation, normal depreciation was deducted from the value of fixed assets. Depreciation was deducted on the method as followed by the erstwhile mills/companies, i.e., on the straight line method except in the case of two units where written down value method was adopted. The current assets were valued at cost as appearing in the updated books of account of the erstwhile mills/companies. The values so determined, in respect of nationalised units under both the above referred ordinances, were approved by the Board of Directors. The compensation fixed under both the above referred ordinances was treated as contribution towards share capital of the corporation by the State Government under section 6 of the ordinance and shown as ‘Advance against Equity, pending allotment’ as directed by the Government. The difference between the book value of assets so transferred and the compensation amount is credited to Capital Reserve Account. The said amount is subject to future adjustments in respect of excess/short realisation of assets and liabilities to be assumed, if any. The basis of accounting for the assets at book value was adopted because of the fact that the valuation by an independent valuer would have consumed lot of time and involved heavy expenditure in addition to likely litigations.

6.As regards units transferred under the provisions of relevant Closed Textile Undertakings (Nationalisation) Ordinance, 1985, the dues of employees have been put under Category-I and the excess of that liability over the compensation amount is to be assumed by the State Government under section 22 of the said Ordinance and in turn State Government may direct the corporation to assume the said liability. The employees’ dues paid by the corporation, out of the separate funds provided by State Government, are shown as due from “Commissioner of Payment”. On settlement of the claim, the shortfall will be intimated by Commissioner to the Government. On directing the corporation by State Government to assume the unsatisfied liability of Category-I, the same will be adjusted against Capital Reserve. It is likely that on such adjustment, the Capital Reserve Account may show a negative balance.

7.Out of the sixteen units transferred under two ordinances, in the fixed assets register, item-wise value of assets are available with the four units of which three are composite units. Out of the twelve closed units nationalised on 8^th November, 1985, six have been restarted and remaining six units are to be scrapped in toto, as they are not considered viable units and the machineries of these closed units are not intended for use in that unit. While scrapping the units the disposal of assets will be as under:

(i) The stock of stores, spares and other current assets will be transferred to running units at the value at which they are accounted in the books.

(ii) Buildings will be demolished.

(iii) Land will be sold in open market.

(iv) Fixed assets other than plant and machinery, will be shifted to running units.

(v) In respect of plant and machinery, the transfer will take place in the following manner:

(a) Useful parts of the machines will be shifted to running units.

(b) Useful machines will be shifted to running units in exchange of same number of discarded machines from the running units.

(c) Useful machines will be shifted to running units without receiving anything in exchange.

(d) Outright sale to parties, of machines and part of machines.

(e) For inter-unit transfers, no cash transactions will be involved.

8.The corporation’s financial year ends on 31^st March every year. The accounts of the corporation are finalised upto 31^st March, 1987. The process of scrapping the closed units has commenced from April 1987, and will be spread over two or more than two accounting years. The depreciation on the assets of these closed units, which are to be or being scrapped, is not provided for in the accounts upto 31^st March, 1987, since acquisition.

9.Under the circumstances narrated above, for finalising the accounts for the year 1987-88, the corporation proposes to give the following accounting treatment:

(i)         Wherever book values are available, the assets may be transferred at the values as shown by the books of the transferor unit.

(ii)        Wherever book values are not available with the transferor unit, but if transferee unit has similar machines having same year of make, purchase and brand and had followed same method of depreciation prior to nationalisation, the values as appearing in the books of the transferee unit may be taken.

(iii)       Where the values are not available with the transferor and transferee units, but the value is available with the other constituent units, where uptodate fixed assets registers are available, considering the specifications as to the brand, year of make, purchase and method of depreciation followed prior to nationalisation, the values as appearing in the books of constituent units may be taken.

(iv)       Where parts of machineries are transferred and separate book values are not available, transfers may be accounted at Re. 1/- per item to reflect the physical transfer of parts of machines in the books. However, total value of parts transferred will constitute a negligible quantum considering the total value of fixed assets held by those units.

(v)        Where values of machines are not available with any of the units, i.e., transferor, transferee or other constituent mills, valuation may be obtained from the approved valuer in respect of only those items.

(vi)       Out of the 11 running units, uptodate fixed assets registers are not available in respect of 7 units. Uptodate fixed assets registers are also not available in respect of 6 closed units. As proposed at para (i) to (v), the values of all the machineries, in respect of these units, where uptodate fixed assets registers are not available, may be worked out and the difference, if any, may be adjusted against Capital Reserve. However, the difference will be very negligible as compared to the total book value of the block of respective unit. Based on these values, uptodate fixed assets registers can be prepared and entries for profit or loss on sale of assets can be passed in the years of sale.

(vii)      The values of machineries already sold during the accounting year 1987-88 may be worked out as proposed at para (i) to (v) and the difference between sales proceeds and the book values so arrived at may be transferred to Profit & Loss Account and surplus/deficit, if any, may be transferred to Capital Reserve Account through appropriation.

OR

In respect of six closed units which are being scrapped, sale proceeds may be credited to a separate account and on complete demolition, the book value as arrived at after passing transfer entries as proposed at para (i) to (v) may be adjusted against sales proceeds and difference, if any, may be transferred to Capital Reserve Account. 

(viii)      If the method of valuation proposed above is acceptable, what would be the appropriate note/disclosure which would be required for the purpose of the balance sheet.

As per the basis of accounting proposed at para (i) to (v), maturity or most of the values to be adopted from the books of transferor/transferee or other constituent units will show more or less correct values because of the fact that almost all units are about 50 years old and using the same type of machineries and basis being the book value.

10.The querist seeks the opinion of Expert Opinion Committee on the following issues:

1. Whether the accounting treatment proposed in para 9 (i) to 9(vii) will be in order and in conformity with accounting principles.

2. Is there any other method available to the corporation, most suitable in the circumstances, and in view of the provisions of the Nationalisation Acts?

                                                                             Opinion                                                        August 21, 1989

1.The Committee notes that para 22 of Accounting Standard 10 (AS 10) on ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India, recommends as follows:

“When a fixed assets is acquired in exchange or in part exchange for another asset, the cost of the asset acquired should be recorded either at fair market value or at the net book value of the asset given up, adjusted for any balancing payment or receipt of cash or other consideration. For these purposes, fair market value may be determined by reference either to the asset given up or to the asset acquired, whichever is more clearly evident. Fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.”

2. The Committee also notes that clause 3 (xii) (b) of Part II of Schedule VI to the Companies Act, 1956, requires disclosure of “Profit or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in nature”. In this regard, the Committee also notes that Accounting Standard 5 (AS 5) on ‘Prior Period and Extraordinary Items and Changes in Accounting Polices’, issued by the Institute of Chartered Accountants of India, also requires in para 10 that “Extraordinary items of the enterprise during the period should be disclosed in the statement of profit and loss as part of net income. The nature and amount of each item should be separately disclosed in a manner that their relative significance and effect on the current operating results of the period can be perceived”.

3.On the basis of the above, the opinion of the Committee on the method of accounting suggested by the querist in para 9 above is as below:

            In respect of fixed assets transferred not involving exchange of assets

A.   (i) It is proper to transfer the fixed assets at the values shown in the books

of the transferor units.

                   (ii) (a)Where book values are not available with the transferor units, it  would

                   & (iii) be proper to value the transferred machines at the book values of similar fixed assets in the books of the transferee unit or other constituent units of the company, provided, the fixed assets have same specifications as that of transferred machines as to brand, year of make, year of purchase, capacity, method(s) employed for use of the asset, and same method of depreciation has been used. The Committee feels that the figures so arrived at would be reasonably fair.

                   (b) Where it is not possible to arrive at the book values as suggested in (a) above, it would be proper to obtain valuation from the approved valuer.

                   (c) The parts of the machines transferred from closed units should be valued as suggested above. However, if the cost of determining fair market values or the net book values of the parts is not commensurate with the benefit expected from such determination and value of individual parts transferred constitutes a negligible amount individually, it may be proper to account for the said parts at nominal value of Re. 1/- per item.

            B. In respect of machines or parts transferred in exchange of machines of parts.

Where complete machines are transferred by the transferor units in exchange of machines discarded by the transferee unit, the transferred machines should be valued either at fair market value or at the net book value of the machines given up. For these purposes, fair market value may be determined by reference either to the machine given up or machine acquired, whichever is more clearly evident. However, where it is not possible to arrive at the net book values of the machines given up, the Committee feels that net book values as arrived at on the bases recommended in A. (ii)(a) and (iii) above may provide reasonable approximations of the net book values of the assets given up.

C.        The Committee is of the opinion that the difference between the book values as arrived at on the abovementioned bases and the total book value of the block of assets of various units already available may be adjusted against the capital reserve created by the company. The Committee is of the opinion that since the said reserve is a special purpose reserve created to adjust the differences in the values of various items of assets and liabilities involved in nationalization, it should be termed and disclosed under appropriate nomenclature instead of ‘Capital Reserve’ as is presently done by the company.

D.        Profit/loss on sale of machineries sold during the accounting year 1987-88, worked out as suggested in the above paragraphs should be disclosed in the profit and loss account as required in para 10 of AS 5 (refer para 2 above). The said profit/loss may be transferred, below the line, to the said special reserve.

E.         The company should appropriately disclose in its accounts the accounting policy followed by the company with regard to valuation of assets in the above mentioned cases.

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