1.33 Query: Write-back of maintenance cost reserve on destruction of assets.
1. A Government corporation, established under the Companies Act, 1956, is under the administrative control of the Ministry of Civil Aviation. The corporation was incorporated on 15th October, 1985 and commenced its commercial operations on 6th October, 1986. The corporation is engaged in operating a fleet of helicopters mainly to provide necessary logistic support to another public sector corporation for transporting their men and materials.
2.The corporation purchased 21 Westland helicopters from M/s. Westland Helicopters Limited, U.K., and 27 Dauphin Helicopters from M/s. Aerosopatiale, France, alongwith related inventories, ground support equipments, etc. About 45% of the fleet and related equipment was delivered to the corporation during 1986-87 and the balance fleet was received during the year 1987-88.
3. When the corporation acquired the fleet of new helicopters during 1986-87 and 1987-88, it was covered under warranty for a period of 18 months. Accordingly, all minor or major maintenance expenditure was borne by the manufacturer during the warranty period. It is a practice in the aviation industry to carry out major line maintenance related to airframe, engines and repairables and rotables which need to be undertaken after a specified number of flying hours of the helicopters. Along with this, certain unscheduled arisings also take place. Total arisings, however, are related to the actual hours of operations of the fleet. The corporation, based on certain data provided by the manufacturers, and other related estimates had arrived at standard hourly rates of maintenance of these parts for the Westland and Dauphin helicopters. Each year, based on the actual hours of operation of fleet, a maintenance reserve is created on accrual basis to the debit of profit and loss account in order to ensure that one particular year does not bear the entire burden of these maintenance costs which will fall as and when the specified number of flying hours for each item are completed. Hence, to spread equitably these maintenance costs, the reserve is created at the standard hourly rate and this provision is utilised to meet the actual maintenance expenditure in the year of replacement/overhauling of such repairables and rotables and other items.
4. During the course of last 3 years, the corporation has lost four helicopters. In respect of each of these helicopters, the maintenance reserve was created till the last date of its actual flying, based on the hours flown and the prescribed hourly rate. Since, after the crash, the maintenance reserves so created in respect of the respective helicopters are no longer required, the credit to each account is written back to the profit and loss account. In this respect, the charge created in the profit and loss account for the current year, is reversed whereas the balance relating to the previous years after adjusting approximate actual expenditure incurred is written back as a prior year adjustment during the year of the crash. The actual charge on accrual basis to the profit and loss account each year is treated as expenditure for the purposes of income-tax.
5.The querist has further clarified that the Maintenance Cost Reserve is created on accrual basis from the first date of flying of the helicopter irrespective of the warranties by the manufacturers. He has further clarified that actual payments to the manufacturers towards repairs/overhaul charges each year are adjusted against the Maintenance Cost Reserve (Balance Sheet Item) and not to the profit and loss account.
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the treatment adopted by the corporation is proper.
Opinion December 6, 1990
1. The Committee is of the opinion that it is proper to write back to the profit and loss account the balance of Maintenance Cost Reserve no longer required due to crash of a helicopter, with proper disclosure as discussed in the following paragraphs. The Committee, however, wishes to point out that it may not be necessary to create maintenance cost reserve and then reverse it in respect of the crashed helicopters in the year in which such crash took place.
2. The Committee notes that the terms ‘Prior Period Items’ and ‘Extraordinary Items’ have been defined as follows in Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India:
“Prior period items” are material charges of credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.”
“Extraordinary items” are gains or losses which arise from events or transactions that are distinct from the ordinary activities of the business and which are both material * and expected not to recur frequently or regularly. These would also include material adjustments necessitated by circumstances, which though related to previous periods are determined in the current period.”
3.On the basis of the above, the write-back of the balance of Maintenance Cost Reserve, no longer required due to crash of a helicopter, is not a prior period item. The Committee, is, therefore, of the view that the amount so written-back, if material, should be disclosed as an Extraordinary Item as per para 10 of AS 5, which is reproduced below:
“Extraordinary items of the enterprise during the period should be disclosed in the statement of profit and loss as part of net income. The nature and amount of each such item should be separately disclosed in a manner that their relative significance and effect on the current operating results of the period can be perceived.” ___________________________
*Material items have been defined in the Accounting Standard on “Disclosure of Accounting Policies” (AS-1) as items the knowledge of which might influence the decisions of the users of the financial statements. |