SOCIETY LAND TRAETMENT

[mmudassir]

SALAM TO ALL
MY NAME IS MUDASSIR,I M AUDIT SUPERVISOR IN AN AUDIT FIRM,NOW ADAYS I M HANDLING THE AUDIT OF HOUSING SOCIETY WHICH IS PROFIT ORIENTD.I HAVE A QUIERY THAT THERE IS LAND WHICH IS PROPERTY OF SOCIETY AND NOT A PROPERTY OF GOVERNMENT DUE TO GOT A INFINITE TIME LEASE FROM GOVERNMENT.
SOCIETY HAS MEMBERS IN THE FORM OF CUSTOMERS WHO GOT PLOT IN THIS SOCIETY.SOCIETY ALLOTED PLOT TO MEMBERS WITH LEASE WITH OUT POSSESION.PLEASE TEL ME THE TREATMENT OF LAND AND ADVANCE TAKEN FROM MEMBERS AFTER POSSESION OF LAND OF 99YEARS LEASE.
LAND CONSIST OF
COST OF LAND,DEVELOPMENT CHARGES
ADVENCED FROM MEMBERS CONSIST OF
COST OF LAND,INTERNAL AND OUTER DEVELOPMENT CHARGES.

[kamranACA]

Dear Muddassir,

I cannot understand the meaning of society alloted plots to members with lease without possession. If possession is not given or is not be given on any future agreed date then why members have taken the land. Anyways, I assume that you were talking about the transfer of title and not about the posession.

ACCOUNTING TREATMENT OF LEASEHOLD LAND BY SOCIETY

The society must had paid a substantial amount to government to acquire the land on 99 years lease. This, technically/practically speaking, is the entire value of the land to be paid by the lessee and in almost all cases such lands are eventually transferred to the name of the lessees after the completion of lease tenure i.e. 99 years. This has been happeing in sub-continent since British regime. Specially, in Karachi all lands are on such leases. Anyways. Now coming back to your qustion.

The land will be capitalized as "LEASEHOLD LAND" with the amount paid to the government (add related expenses) and will be shown seperately in the note of the balance sheet from the FREEHOLD LAND.

Its cost will be depreciated on straight-line method by dividing the amount capitalized with 99 years. Equal charge of depreciation will be taken to profit and loss account every year and land will be of zero value in the books of account after 99 years. These lands cannot be revalued at any balance sheet date as these are not available for sale. In current year/periods punjab Government has allowed in certain cases, different companies to sell such land provided that the 20 percent of such market price is to be paid to punjab government. Still, it is decided from case to case and as a general rule such lands cannot be sold to general public. Therefore these have to be kept on cost less depreciation, in the books of account.

Your client is a society, therefore it has acquired the land for its members, and can allot this land to members on whatever terms. To this extent, it could be alloted/sold. But eventually, there is no right with society or members to sell it non-members. That's why I concluded that where you mentioned "POSSESSION" , it should have been "TRANSFER OF TITLE". Because such lands cannot be sold.

Keep in mind that the above treatment comply's the recognition criteria of IAS 16 as given in its paragraph 7.


ACCOUNTING TREATMENT OF ADVANCES RECEIVED AGAINST LAND BY SOCIETY

I could not understand that why these plots are allotted to members and for what purpose these have been allotted. Normally such advances should be treated as liability or income dependent upon the circumstances. If these are allotted for 99 years i.e. for complete lease tenure, then the advances received should be booked as liability named "DEFERRED CREDIT" or "UNEARNED RENT" at the time of receipt. According to the recognition principles laid down by framework to IFRSs and IAS 18 for income/revenue, this unearned Rent is the income against 99 years usage of land. Therefore, it cannot be booked as income at once.

Again, there should be some basis to amortise this DEFERRED CREDIT/UNEARNED RENT INCOME. It should, in my view, be allocated on 99 years equally. Everey year, the balance outstanding in UNEARNED RENT will decrease with a decided proportion and that amount will be booked as income for the specific year in the profit and loss account.

However, there might be certain money value issues that may require some varying basis to allocate the income over 99 years. This may result in allocating lesser income in earlier years and more income in later years. This could also be done by using methamatical tools to calculate the future values of money i.e. what current amount would be equal to what future amount for any particular year. In this method the present value of income for each year should be eual to the first year's income.

However, the money values are rarely considered. Therefore, rent income could be amortized by simply dividing total advance received with 99 years.


I have not seen any such case practically, therefore, other members are also encourged to give their views.

Mr. Muddassir is also requested to elaborate his question further to help me in reaching the correct solution.

Until, then check out the above reply.

Best regards,

KAMRAN.

[kamranACA]

The amortization of Unearned Rent/deferred credit will start after the plots have been developed and handed over to the members.

Until then, these will be kept as liability.

[mmudassir]

THANKS MR KAMRAN
IN MY PRACTICAL EXPERIENCE HIS IS NEW CASE THA I SAW WITH LITLE BIT COMPLECATION.
INSHA ALLAH I WILL HANDLE IT AND ALSO KEEP IN VIEW UR ADVICE.
TAKE CARE