Ascertaining cost of individual fixed assets where all costs

debited to a composite account.

1.A private limited company involved in the business of growing and manufacturing tea, was also continuously involved in the construction of works, e.g., construction of offices, directors’ bungalow, godowns, guest houses, generator house, factory shed, internal approach roads, culverts, boundary wall etc. The company, as per its general practice, debits the whole of the amount spent/expenses incurred on different construction jobs to one account called ‘Construction-in-Progress Account’. The said account however does not show the name of the particular construction jobs on which the amounts of cement, labour, bricks etc. are spent excepting the few costs like the cost of Tabular Structures etc. which had been specially incurred for godowns or factory shed etc.

2.Since last five years no final capitalisation has been made by transferring the amount from Construction-in-Progress Account to particular capital (asset) accounts for charging depreciation on it, though many jobs have already been completed and the company is using the same.

3. The querist has sought the opinion of the Expert Advisory Committee that as all the construction jobs are now completed, on what basis the particular asset heads have to be debited with a corresponding credit to Construction-in-Progress Account, for the purpose of charging depreciation on the assets since the rates of depreciation vary from asset to asset.

4.The querist has informed that while having discussions on the matter, the auditors and the directors held two different views which are as follows:

(a) The company should ask a Govt. Civil Engineer to evaluate the construction works as per the present construction costs. The asset value so arrived at should be used for computing depreciation for the years it is in use of the company, provided the job had been completed before this financial year. The net value of individual asset-head so arrived at after charging depreciation (if it is to be charged only) should be finally capitalised under particular asset head, crediting the total of all the heads to Construction-in-Progress Account. The balance of Construction-in-Progress Account whether debit or credit, should be transferred to General Reserve Account. However, if this treatment is to be followed, the querist wants to know, what should be the Gross Fixed Asset value under each head to be considered for charging depreciation for Income-tax purposes.

(b) The total amount of Construction-in-Progress Account, i.e., the amount to be capitalised, is to be divided under separate heads in the proportion the value of each head bears to the total of his valuation report, as per the Civil ngineers Valuation report.

Opinion March 13, 1989

1.The Committee notes that the company in question has charged both direct and indirect costs to a ‘Construction-in-Progress Account’ and that the said account does not indicate the extent to which various items of expenditure relate to individual assets. In these circumstances, the Committee is of the opinion that the cost of individual assets should be arrived at by an independent valuer as on the date a particular asset was put to use (e.g., this can be done by adjusting the present costs by the inflation factor) and the amount so arrived at should be credit to the ‘Construction-in-Progress Account’. In the opinion of the Committee, this would be the ‘Gross Fixed Asset’ cost for accounting as well as Income-tax purposes.

2.The Committee notes that as per the normally accepted accounting principles, depreciation on a fixed asset, after the same is ready for use, should be charged to profit and loss account. The Committee further notes that in the present case it was not done and therefore there was an error of principle. The Committee is accordingly of the opinion that depreciation at the applicable rates in respect of the period subsequent to the completion of the asset up to the commencement of the current accounting period, should be charged to the profit and loss account of the current accounting period as a ‘Prior Period item’, and separately disclosed as required in 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. The Committee is further of the opinion that any balance, debit or credit, in ‘Construction-in-Progress Account’, after transfers to individual asset account would be due to approximations in estimating the cost of individual assets and therefore should be transferred to the profit and loss account of the current period as an ‘Extraordinary Item’ and disclosed separately as required in the aforesaid accounting standard.

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