Treatment of Asset

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vijay g. nalawade (Querist)

19 September 2010 Company engaged in Transmission of Electricity purchases land only for errecting Sub-stations. Land is never purchased for reasale or as investment.

Untill the completion of errection of Sub-station the land is treated as part of Work-in-process and after that whole asstes i.e. Land, Building, Plant etc. are transferred to respective assets groups.

Whether accounting treatment of Land is correct in terms of Accounting Standards ?

vijay g. nalawade

vijay g. nalawade (Querist)

19 September 2010 a

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

02 August 2025 Great question about the treatment of land purchased for construction of substations in a transmission company! Here’s a detailed explanation aligned with accounting standards:

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### Scenario Recap:

* Company buys land specifically for erecting substations (part of fixed assets, not for resale or investment).
* Until substation erection completes, the land is treated as **Work-in-Process (WIP)**.
* After completion, land along with building, plant, etc., is transferred to fixed asset groups.

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### Accounting Standards Relevant:

1. **AS 2 — Valuation of Inventories:**

* Work-in-process (WIP) relates to inventories still in production.
* Land is **not inventory**; it's a fixed asset and should not be classified as inventory or WIP.

2. **AS 10 — Property, Plant and Equipment (PPE):**

* Land held for use in the production or supply of goods or services is classified as PPE.
* Costs of land include purchase price, taxes, and any directly attributable expenses to bring it to working condition.

3. **AS 16 — Borrowing Costs (if any borrowings related):**

* Borrowing costs directly attributable to acquisition/construction of qualifying assets can be capitalized.

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### Correct Treatment for Land in Your Case:

* **Land should be recorded as a Fixed Asset (Land) on purchase.**
* Costs related to erection of substations (building, plant, machinery) can be treated as WIP until completion.
* **Land should NOT be treated as WIP** since it’s not a manufactured or constructed inventory item.
* On completion, transfer WIP of buildings, plant, and machinery to fixed asset accounts, but land remains as a fixed asset throughout.

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### Summary Table:

| Item | Treatment | Reason |
| --------------- | ------------------------------- | -------------------------------------------------- |
| Land | Fixed Asset from purchase date | Land is a non-depreciable fixed asset |
| Building, Plant | WIP until construction complete | Construction-in-progress (inventory in production) |
| Upon Completion | Transfer WIP to Fixed Assets | Recognize completed asset in fixed asset |

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### Why Land as WIP is Incorrect:

* Land does **not get constructed or manufactured**; it’s an existing asset.
* Treating land as WIP misstates the balance sheet and could mislead users of financial statements.
* It violates AS 2 and AS 10 principles.

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### Practical journal entries:

**At Purchase of Land:**

```
Dr. Land (Fixed Asset) XXXX
Cr. Bank / Payable XXXX
```

**Construction Expenses (Erection of substation):**

```
Dr. WIP (Construction in Progress) XXXX
Cr. Bank / Payable XXXX
```

**On Completion:**

```
Dr. Building / Plant / Machinery XXXX
Cr. WIP XXXX
```

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If you want, I can help you draft detailed accounting policies for your company based on this treatment. Would that be helpful?

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