Accounting theory and practice, Volume 2 (of 3)

by Roy B. Kester

Donated Land

The valuation of donated lands presents some interesting points. A town may offer a free site to secure the erection of a plant within its midst rather than allow it to go elsewhere. Sometimes the donation may be outright and absolute; at other times it may be conditional, depending upon the doing of certain things by the donee, such as the employment of a minimum force of men for a certain number of years, or the circulation of a certain amount of advertising, or the purchase of given amounts of raw material supplied locally. In the case of an outright gift, the cost to the company is usually nil, but for the proper statement of the concern’s financial condition the land must be shown as an asset. If the acceptance of the gift necessitates the scrapping of the old plant and removal expense to the new site, such costs would provide a minimum carrying value for the land. Where this is not the case, the land might be given a nominal value, with suitable explanation.

Usually, however, neither of these methods is so satisfactory as that of bringing the land onto the books at a fair appraised value and showing the contra side of the transaction as surplus, or donated surplus, or donated land surplus. Any gift received increases the proprietorship of a concern and should be so shown, and there need be no suspicion of inflated value in such a surplus item, if conservatively set up, and with the supporting records available. Any expense in connection with the acceptance of the gift is a proper charge against the donated surplus. Aside from this, it is free surplus available for customary uses so far as this transaction is concerned.

In the case of a conditional gift subject to reversion until the satisfactory fulfillment of the condition, no title nor asset value, other than a contingent one, inheres in the land. It is not therefore proper to show any. If a condition, extending over a period of, say, five years must be met, at the end of the first year one-fifth of the time has elapsed and the condition is nearer to fulfillment—the contingency has become more nearly a fact. But until its full satisfaction and the danger of a lapse has passed, there is no value in the gift. To show the progress and status of condition, the pro rata portion of the gift may be shown periodically by a charge to Donated Land or Equity in Land, offset by an equal credit to some suitable reserve such as Donated Land Reserve or Unrealized Profit on Land. On the balance sheet the reserve would be treated as a valuation item, no value being extended among the assets. This would seem to satisfy all demands for information and show the exact status of the transaction.

Land as Stock-in-Trade

A final consideration, not logically belonging here but treated as a matter of convenience, is that of land as stock-in-trade. In the case of a land company developing a tract of land for certain purposes, the individual plots, or the whole piece if division is not contemplated, constitute its stock-in-trade and it should be valued as such, i.e., as a current asset and not a fixed. All costs necessary to put it in condition ready for the market are capital charges and should be loaded onto the cost of the lands. These include all of the usual costs mentioned in connection with land as a fixed asset, and in addition all improvement costs such as parking, the laying out of streets, roading, etc. The loss in the use of land for these purposes should be prorated over the plots, or otherwise equitably distributed. Plots of land so developed are not usually sold all at one time. Any unsold plots should be inventoried at cost. Sometimes the first plots may be sold at a loss to make the rest of the proposition move. The practice is met of loading the loss in the early sales onto the unsold plots, and it is quite common to add any carrying charges to the cost of the unsold plots.

Both of these practices are to be deprecated and opposed. They are not right in theory and serve no necessary purpose. All costs after the stage of sale is reached are operating costs—charges against revenue which should not be capitalized. It may be desirable to know at what price the unsold plots must be disposed of to cover all expenses and losses and to make a profit, but that does not justify an inflation of the carrying values of the asset. If it is desired that the books shall show this, an amount equal to these costs and losses may be added to the carrying values if offset by a valuation reserve of equal amount, the costs and losses themselves being handled as operating expenses of the current period—or spread over several periods if applicable.

Wasting Assets—Definition and Characteristics

Wasting assets, as they are usually called, are better described as assets subject to depletion. They differ from depreciating assets in that, whereas the latter wear out through use or the effect of age, wasting assets simply “give out.” They are subject to depletion because they comprise stores of raw materials and natural resources the supply of which, through being mined and disposed of, is definitely and finally diminished. The stores will in every case finally come to an end through yielding up their product. Examples of enterprises of this kind are minerals and deposits of all sorts, such as coal, gold, silver, lead, clays, slate, gravel, stone quarries, oil, asphalt, nitrate, timber, and “all growing plants yielding recurring crops, such as tea and rubber.”

Dividends May Include Return of Capital