Query No. 11

 

Subject:           

  Recognition of loss arising from surcharge waived.1

A.   Facts  of  the  Case

 

1. A government company, under the administrative control of the Ministry of Power, generates and supplies electricity to a State Electricity Board (SEB) and the Power Departments of other states of the North-East region.  In the power purchase agreement signed with the SEB and the Power Departments,a specific clause has been incorporated for charging of interest in case of default in payment of the bills raised by the company for the power supplied.In the annual accounts of the company from the year 1996-97 to the year 2000-01, taking into consideration the above mentioned clause of the power purchase agreement, the interest accrued due to the delay in payments by the customers has been duly accounted for.

 

2. As per the querist, recently the Government of India has taken a decision to  implement  the  recommendations  of  the  Expert  Group  Report  on  the Settlement of the SEBs Dues.  One of the recommendations of the Expert Group is that the surcharge  (interest) billed to the customers will be waived off to the extent of 60%.  Since the company has progressively accounted for the surcharge from the year 1996-97 to 2000-01, in order to comply with the above recommendation, a very substantial amount has to be written off in the current year.  Such accounting treatment will have a substantial adverse impact on the current year’s profit and loss account.

 

3.  As per the querist, in view of the huge impact that will result from the above accounting treatment which will affect the current year’s profit and loss account, the company desires to explore a suitable accounting treatment to minimise the effect on the current year’s profit and loss account.

 

B . Query

 

4.  The querist has sought the opinion of the Expert Advisory Committee as to whether the surcharge waived can be written-off in suitable instalments over future accounting periods.

 

C.  Points  considered  by  the  Committee

 

5. The Committee has examined only the issue raised in the query, i.e., whether the surcharge waived can be written off in suitable instalments over future accounting  periods.   The  Committee  has  not  examined any other accounting issue that may arise from the facts of the case, e.g., the issue as to whether recognition of revenue arising from surcharge (interest) accrued in  the  earlier  years  is  as  per  Accounting  Standard  (AS)  9,  ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, or not.   In the absence of the relevant information, the Committee presumes that the treatment accorded in earlier years was appropriate as per AS 9.

 

6.    The Committee is of the view that the surcharge (interest) would have been recognised by the company by a corresponding debit to the concerned SEB/Power  Department.   Therefore,  as  of  now,  the  surcharge  (interest) charged is a part of the carrying amount of the debts concerned.

 

7. The Committee notes that as per the generally accepted accounting principles, current assets are valued at the lower of the cost/carrying amount and net realisable value.  Thus, debts should be written-off to the extent that these have become irrecoverable due to surcharge waived.  The Committee is, therefore, of the view that since no future benefits are expected from the surcharge waived,  no  part  of the  same should  be carried  forward in  the balance sheet for being written-off in instalments over future accounting periods. The surcharge should be written-off in the year the same is waived.

 

8. The Committee notes that Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, defines the terms ‘ordinary activities’ and ‘extraordinary items’ as follows:

 

“Ordinary  activities  are  any  activities  which  are  undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to, or  arising  from, these  activities.”

 

“Extraordinary  items  are  income  or  expenses  that  arise  from events or transactions that are clearly distinct from the ordinary activities  of  the  enterprise  and,  therefore,  are  not  expected  to recur frequently or regularly.”

 

The Committee is of the view that waiver of surcharge is arising as a part ofthe ordinary activities of the company and, therefore, does not constitute an extraordinary item.

 

9.  The Committee also notes that paragraph 12 of AS 5 requires that “When items of income and expense within profit or loss from ordinary activities  are of  such  size,  nature or  incidence that  their disclosure  is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately”.   The Committee is, therefore, of the view that keeping in view the facts of the case, the loss arising from waiver of surcharge should be separately disclosed in the profit and loss account within profit or loss from ordinary activities.

 

D.  Opinion

 

10. On the basis of the above, the Committee is of the opinion that the surcharge waived cannot be carried forward in the balance sheet for being written-off in instalments over future accounting periods.