EAC Opinion – Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof

The Government of India directed a State Port Trust (SPT) to construct a new Port. Accordingly SPT acted as the executing agency and completed a Port. For this, the Government of India provided a sum of Rs.426.11 crore to SPT towards implementation of the Port. The Government of India vide their letter dated 14-2-2002 directed SPT to handover the completed Port to ABC Limited, (‘the company’) which is owned by the Government of India and was incorporated with the specific purpose of corporatising the Port.

The company has stated that the Port has been developed and constructed on land acquired from Government agencies. The total consideration paid for acquisition of land was Rs.24.89 crore. Of which, Rs.14.89 crore was paid by SPT and balance Rs.10 crore was paid by the company. In the financial year 2007-08, the Government of India decided that land be owned by the company and therefore directed the company to pay to SPT the amount of Rs.14.89 crore together with interest of Rs.16.51 crore i.e., totaling Rs.31.40 crore. The company had shown the entire amount of Rs.24.89 crore in its books as ‘Advance for Land’ under the head ‘Loans & Advances’, as nature of title that will accrue to the company was not known at the time of making these payments.

Based on the subsequent development in this regard between the company, the Government and Government agencies involved in this issue, the company expects to get ‘Orders of Alienation of Title’ for the land from the respective vendors of the land in due course of time. The company has informed that the formal transfer of title of the land would be through issuance of ‘Orders of Alienation of Title’ by the transferor Government.

Query

On these facts the company has sought the opinion of EAC that (i) whether the company can capitalise the value of land at Rs.24.89 crore in the financial year 2010-11 with a suitable disclosure in the Notes to Accounts as ‘Pending receipt of formal Orders of Alienation of Title’, and (ii) whether the company can charge the interest of Rs.16.51 crore paid to SPT to its profit and loss account for the financial year 2010-11, as separate line item being extraordinary and non-recurring?

Opinion

After considering paragraphs 17 & 35 of Accounting Standard (AS) 1 ‘Disclosure of Accounting Policies’ and paragraphs 35, 49, 58 & 88 of ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee is of the view that the company should capitalise the total amount of Rs.41.40 crore paid by both the company and SPT as ‘Land’ and not as ‘Advance for Land’ from the date when the company possess the beneficial interest in the land and not in the financial year 2010-11. However, the company should give suitable disclosures to convey to the users of financial statements that the execution of conveyance deeds in favour of the company is in progress. Further, the Government has made reference to a rate of interest as a means to compute final sale consideration of the land. Therefore, the amount so determined is in substance not ‘interest’. So the question of treating interest as revenue expenditure and disclosure of interest paid as an extraordinary item does not arise.