1.23   Query:  

Accounting for share issue expenses and interest earned on surplus

funds,pending commencement of commercial production.

1. A company was incorporated in April, 1984. It became a public limited company under section 44 of the Companies Act, 1956 in May, 1990. The company has got facilities to manufacture gypsum based building material like partition panels, ceiling tiles, gypsum marble tiles and plaster of paris etc. It has not yet started manufacturing.

2. The company has availed term-loans from various financial institutions, amounting to Rs. 850 lakhs. On these term-loans the company has been paying interest. The company made a public issue of 51,12,200 equity shares of Rs.10 each for cash at par in April, 1992. The application money received in the public issue was around Rs. 120 crores. The share issue expenses came to Rs. 100 lakhs.  The money thus collected was deposited with the collecting banks as short term deposits for 46 days. Besides, the company also invested surplus money out of term loans availed, in short term deposits and certificate of deposits.

3. During the year 1991-92 and 1992-93 the company earned Rs. 150 lakhs by way of interest on these deposits. The break-up of which is as follows:

(a)        Interest on margin money kept with bank                       Rs. 5.00 lakhs

(b)        Interest on excess share application money                    Rs.130.00 lakhs

(c)        Interest on surplus term loan kept in

bank deposits                                                              Rs. 15.00 lakhs

4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a)       Whether the company can set-off the share issue expenses against the interest earned on deposits out of share application money? If yes, how the excess interest income (over and above share issue expenses) should be disclosed in the accounts? In such a case the company shall not be disclosing any share issue expenses under the heading Miscellaneous Expenditure or disclosing such amount as NIL.

(b)       Whether the company can set-off other interest against interest payment on term-loans and show net payment in the pre-operative expenses for capitalisation purpose?

                                                                            Opinion                                        May 3, 1993

1. The Committee presumes that the interest incomes mentioned in para 3 of the query relate to the pre-operative period, i.e., the period before the plant is ready to commence commercial production.

2. The Committee notes paragraphs 15.2, 17.2, and 17.11 of ‘Guidance Note on Treatment of Expenditure During Construction Period’ (1993), issued by the Research Committee of the Institute of Chartered Accountants of India, which read as follows:

“15.2    From the total of the aforesaid items of indirect expenditure would be deducted the income, if any, earned during the period of construction, provided it can be identified with the project.

17.2     As regards the preliminary corporate expenses incurred by a new project- such as company formation expenses, expenses in connection with the issue of shares and debentures, etc.- it is suggested that the present practice may continue. Consequently, such expenses should be carried forward on the balance sheet and shown under the group heading of “Miscellaneous Expenditure”, but they should be written off within a period of three to five years after commencement of commercial production (paragraph 2).

17.11   During the construction period, a project may earn income from miscellaneous sources- for example, interest income, income from hire of equipment or assets and income from sale of products manufactured during the period of test runs and experimental production. It is recommended that where such income can be identified with the project, it should be deducted from the total of the indirect expenditure so that only the net amount of the expenditure is capitalised or treated as deferred revenue expenditure, as the case may be (paragraph 15.2). In either case, consideration may have to be given to the question of providing for the income tax liability on such income (paragraph 8.2).”

3. On the basis of the above, the Committee is of the following opinion in respect of the issues raised by the querist in paragraph 4 of the query:

(a)     The company cannot set-off the share issue expenses against the interest earned on deposits out of share application money. The other question raised in the query do not arise as the answer to the first part is in the negative. Share issue expenses should be treated as recommended in para 17.2 of the Guidance Note reproduced above.

(b)        The interest earned on deposits out of surplus funds should be deducted from the total of the indirect expenditure (including the interest expense) provided the same can be identified with the project, for the purpose of capitalisation of relevant pre-operative expenditure.

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