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Accounting treatment

deepa (chartered accountant) (46 Points)

25 December 2010

Hello,

I am working in a manufacturing concern. Recently my company in previous year purchased land and building from BIFR i.e a sick unit. In this current year we received a notice from PF department saying that your bank account will get seized if my company does not pay the remaining PF dues. These dues pertain to BIFR Unit. Since we purchased the land and building from this BIFR Unit this notice was sent to my Company. Now we have paid the dues amounting to500000. How should I account this liability in my books of accounts. We had made no provision for such liability in previous year since we were not aware for the same. Whether I should capitalize this expenditure or treat it as revenue expenditure.

Please reply to this query and do the needful.

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16 Replies

phanindra (IFA) (121 Points)
Replied 26 December 2010

Originally posted by : deepa
	Hello, I am working in a manufacturing concern. Recently my company in previous year purchased land and building from BIFR i.e a sick unit. In this current year we received a notice from PF department saying that your bank account will get seized if my company does not pay the remaining PF dues. These dues pertain to BIFR Unit. Since we purchased the land and building from this BIFR Unit this notice was sent to my Company. Now we have paid the dues amounting to Rs 500000. How should I account this liability in my books of accounts. We had made no provision for such liability in previous year since we were not aware for the same. Whether I should capitalize this expenditure or treat it as revenue expenditure. Please reply to this query and do the needful.

U should treat it as capital expenditure as the liability is accrued even before the acquisition of such a sick unit. Only the payment is made after the acquisition . As it was not recognized previously the same should be done and should be written off. There is no way that you can treat it as a revenue item.

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CA.Pravinchandra (Executive (F&A)) (2387 Points)
Replied 26 December 2010

I think You should treat it as Extraodinary Item as per AS 5 and treat it as revenue expenses.

phanindra (IFA) (121 Points)
Replied 26 December 2010

How can u treat it as a revenue expenditure? When the liability has accrued due to the acquisition of a fixed asset ?

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 26 December 2010

Agreed with Pravinchandra.. though i agree on AS 5 issue.. it cannot be an extraordinary item, but it is a prior period item.

As per AS 5 prior period item---> income/expenses which arise in current period as a result of error or omission in the preparation of financial statement of one or more prior periods..

Your case falls under above category..

On what basis can it be categorised under capital expenditure????

CA.Pravinchandra (Executive (F&A)) (2387 Points)
Replied 26 December 2010

There are two points needs o considered.

First , Whenever You recognising the Cost of Asset in your Books you have to follow AS 10 and AS 10 givs only the following element as Cost of Asset

1) Cost of Purchase Directly relevent

2) Borrowing Costs as per AS 16

3) Any overheads directly attributable

4) Taxes (Other than CENVAT anailble)

Secondly, the Co doesnt know the balance of Statutary dues at the time of Purchase of Asset which was in previous year. ( Or even PF liabilty is not specifically attached to Land, its on whole business assets) and Land recorded as per cost. Now you cant Capitalise PF dues for that in this financial year. It is no where permittede in AS.

and go through the AS 5 definition of Extra Odrinary Items of which best suits under present situation.

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phanindra (IFA) (121 Points)
Replied 26 December 2010

Originally posted by : sunny
	Agreed with Pravinchandra.. though i agree on AS 5 issue.. it cannot be an extraordinary item, but it is a prior period item. As per AS 5 prior period item---> income/expenses which arise in current period as a result of error or omission in the preparation of financial statement of one or more prior periods.. Your case falls under above category.. On what basis can it be categorised under capital expenditure????

The basis is simple the liability is due to the acquisition of the unit and such liability is a pre-acqusition one :)

phanindra (IFA) (121 Points)
Replied 26 December 2010

Originally posted by : Pravinchandra
	There are two points needs o considered. First , Whenever You recognising the Cost of Asset in your Books you have to follow AS 10 and AS 10 givs only the following element as Cost of Asset 1) Cost of Purchase Directly relevent 2) Borrowing Costs as per AS 16 3) Any overheads directly attributable 4) Taxes (Other than CENVAT anailble) Secondly, the Co doesnt know the balance of Statutary dues at the time of Purchase of Asset which was in previous year. ( Or even PF liabilty is not specifically attached to Land, its on whole business assets) and Land recorded as per cost. Now you cant Capitalise PF dues for that in this financial year. It is no where permittede in AS. and go through the AS 5 definition of Extra Odrinary Items of which best suits under present situation.

There u r .......it comes under the 1st point of urs...(even though it is a statutory due)

CA.Pravinchandra (Executive (F&A)) (2387 Points)
Replied 26 December 2010

Oh bhai Liabality is not recorded in books at that time in Sick Unit also.., and liabality arised only after purchase by present Co, in the current year.

phanindra (IFA) (121 Points)
Replied 26 December 2010

Originally posted by : Pravinchandra
	Oh bhai Liabality is not recorded in books at that time in Sick Unit also.., and liabality arised only after purchase by present Co, in the current year.

OMG! how can u say that the liability has arisen after the purchase? when it was clearly stated in the query that it relates to the sick unit .?

CA.Pravinchandra (Executive (F&A)) (2387 Points)
Replied 26 December 2010

Question puraa padhoo.., "We had made no provision for such liability in previous year since we were not aware for the same. "

So in general practice whenever you r going to purchase an entity you first valuate the Assets and liabilty of that entity. the above line states they were not aware means not recoreded in Books of Account.

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CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 26 December 2010

Extract of meaning of extrordinary items, please explain as to in what way above transaction is an extraordinary item, i totally agree it is AS 11 treatment, but i say it is a prior period item..

Extraordinary Items

8. Extraordinary items should be disclosed in the statement of profit
and loss as a part of net profit or loss for the period. The nature and the
amount of each extraordinary item should be separately disclosed in the
statement of profit and loss in a manner that its impact on current profit
or loss can be perceived.

9. Virtually all items of income and expense included in the determination
of net profit or loss for the period arise in the course of the ordinary activities
of the enterprise. Therefore, only on rare occasions does an event or
transaction give rise to an extraordinary item.

10. Whether an event or transaction is clearly distinct from the ordinary
activitiesof theenterpriseisdeterminedbythenatureof theeventor transaction
in relation to the business ordinarily carried on by the enterprise rather than
by the frequency with which such events are expected to occur. Therefore,
an event or transactionmay be extraordinary for one enterprise but not so for
anotherenterprisebecauseof thedifferencesbetweentheirrespectiveordinary
activities. For example, losses sustained as a result of an earthquake may
qualify as an extraordinary itemformany enterprises.However, claims from
policyholders arising from an earthquake do not qualify as an extraordinary
item for an insurance enterprise that insures against such risks.

11. Examples of events or transactions that generally give rise to
extraordinary items for most enterprises are:
– attachment of property of the enterprise; or
– an earthquake.