Query No. 24 Subject: Capitalisation of completed parts of a project.1 A. Facts of
the Case
1. Two
companies (company ‘A’ and company ‘B’) have been jointly promoted by both the
Central Government and a State Government.
The companies are setting up an integrated iron and steel plant for
manufacture
2. Although
separate areas have been earmarked for both the companies
3. The process
of manufacturing for both the companies on composite basis includes sintering,
iron making and steel making. Various inputs required for this
manufacturing process are iron ore
fines, iron ore
lumps, coke, manganese ore,
quartzite, limestone, dolomite and coke breeze. Iron ore fines, limestone, dolomite and coke breeze are
processed through Sinter Plant
4. Company ‘A’
and company ‘B’ are interdependent on each other in
Coke The total requirement
of coke of
company ‘A’ would be
sourced from company ‘B’ which
is setting up a Coke Oven Plant with an installed capacity of 8.11 lakh tpa of BF grade coke. Power About 85% of energy requirement of company ‘A’ would be met
from the Present status of
packages:
Independent Packages
5. The salient
features of the agreement between the two companies are
(a) The transfer
price of coke will be the same as the CIF cost of imported coke of equivalent
specifications at the time of transfer. (b) Company ‘B’
shall have no right to sell electricity to a third party without the
concurrence of company ‘A’. The power tariff payable by company ‘A’ to company
‘B’ shall, in any case, and always be less than or equal to that of the State’s
power distribution corporation.
(c) Both the
companies shall have the right to sell their products (d) Both the
companies shall not resell the product and services purchased from each other
without written permission. (e) Cost of
common facilities such as infrastructure facilities shall be shared by both the
companies on pro-rata basis, taking into account the capital cost of both the
units.
(f) Both the
companies shall mutually discuss and finalise any change in tariff rates of any
of the products and services at the time of commencement of commercial
production.
(g) Both the
companies shall supply the products and services as per the quantities
stipulated and finalised between the companies.
(h) The
agreement includes obligation of both the companies in respect of completion of
work/facilities by the companies. 6. The present operational status of the project is that the Blast Furnace
7. According to
the querist, on the basis of considerations given below, company ‘A’ has
not capitalised the
expenditure incurred on any
of the packages. The expenses
incurred on operation are being treated as
‘trial and test run expenses’ which are being grouped as ‘Incidental Expenditure During
Construction’, after netting off sales revenues and other income during the
financial year 2001-2002, on the following considerations: (a) The BF is
sinter-based and sinter plant is not ready. The capacity of BF is, thus,
under-utilised. (b) Even after
successful commissioning of sinter plant, capacity of BF can not be raised to
100% owing to capacity constraint of pig casting machine which can use only 47%
of hot metal from BF and balance hot metal to be used by Steel Making Shop,
which is
(c) Ancillary
packages such as Railway Facilities, Plant Water Supply B . Query
8. The querist
has sought the opinion of the Expert Advisory Committee on the following
issues:
(a) For company
A
(i) Whether it
is necessary to capitalise commissioned packages like Blast Furnace, Raw
Material Handling System and Pig Casting Machine in isolation since the same
have been commissioned pending the capitalisation of remaining incomplete
packages like Sinter Plant, Steel Making Shop and ancillary packages.
(ii) If the
answer to (i) above is in the affirmative, then fro m which date the
capitalisation should have been done and on what basis the incidental
expenditure during construction should have been allocated. (iii) If the answer
to (i) above is in the negative, then at wh at stage the capitalisation is to
be done, i.e., whether after commissioning of Sinter Plant or after
commissioning of both Sinter Plant and Steel Making Shop or after complete integration
of all the packages of both the companies.
(iv) In case of
certain independent packages like guest house, staff quarters, inter-plant
roads and lighting and dispensary (b) For company
B (i) Whether it
is necessary to capitalise one unit (out of three units) of Power Plant and one
unit (out of two units) of (ii) If the
answer to (i) above is in the affirmative, then fro m which date the
capitalisation should have been done and on what basis the incidental
expenditure during construction should have been allocated. (iii) If the answer
to (i) above is in the negative, then at wha t stage the capitalisation is to
be done, i.e., whether after commissioning of remaining two units of Power
Plant (i.e., Power Plant as a whole) or after commissioning of bo th Power
Plant as a whole and Coke Oven Plant or after complete integration of all the
packages of both the companies.
(c) Common
(i) Whether
main packages can be capitalised pending the capitalisation of ancillary
packages or vice-versa. (ii) After part
capitalisation, how the general overheads, administrative overheads, etc.,
should be segregated for charging the same to the profit and loss account and
allocated for expenditure during construction. (iii) How the
depreciation on infrastructure facilities like roads, buildings, etc., should
be allocated to profit and loss account and expenditure during construction. C. Points considered
by the Committee
9. The
Committee notes that in both the companies, i.e., company ‘A’ and company ‘B’,
only some of the plants of the main packages and ancillary packages have been
completed and commissioned. The Committee also notes that in respect of the
Blast Furnace of company ‘A’ production has been started although the capacity
utilisation is only 30% to 40%. The Committee also notes that this production
is being achieved by purchasing alternative material from outside. In respect of company ‘B’, the Committee
notes that out of the 3 units of the power plant, only one unit is complete and
producing power. Coke oven plant of company ‘B’ is not yet complete. The
Committee also notes that some of the ancillary units and other
constructions such as guest house, staff residential quarters are also complete
fully/partly. The Committee further
notes that the companies are treating the expenses incurred on operation as
trial and test run expenses. 10. The Committee
is of the view that the purpose of the trial and test run
11. The issue as
to whether part of a plant can be separately capitalised or not has been
addressed in paragraph 21 of Accounting Standard (AS) 16,
From the above, the Committee is of the view that those
parts which are ready to commence commercial production or are ready for their
intended use and can be operated independently of the remaining parts, should
be considered to be ready for commencement of commercial production/intended
use. D. Opinion
12. On the basis
of the above, the Committee is of the following opinion in respect of the
issues raised in paragraph 8:
(a) For company
A
(i) In the given
facts of the case, it is necessary to capitalise commissioned packages like
Blast Furnace, Raw Material Handling System and Pig Casting Machine.
(ii) The date of
capitalisation should be the respective dates on which the aforesaid packages
were ready to commence commercial production.
The incidental expenses during construction incurred upto that stage
should be allocated to the commissioned packages on appropriate basis as
indicated in paragraph 15 of the ‘Guidance Note on Treatment of Expenditure During
Construction Period’, issued by the Institute of Chartered Accountants of
India.
(iii) Since the
answer to (i) above is in the affirmative, the question does not arise. (iv) The
independent packages like guest house, residential staff quarters, inter-plant
roads and lighting and dispensary, which are complete should also be
capitalised when they are ready for their intended use even though the
capitalisation of some of the main packages is pending.
(b) For company
B (i) It is
necessary to capitalise one unit of power plant and one unit of nitrogen plant
which have been made operational. (ii) The date of
capitalisation should be the respective dates on which the aforesaid packages
were ready to commence commercial production.
The incidental expenses during construction incurred upto that stage
should be allocated to the commissioned packages on appropriate basis as
indicated in paragraph 15 of the ‘Guidance Note on Treatment of Expenditure
During Construction Period’, issued by the Institute of Chartered Accountants
of India.
(iii) Since the
answer to (i) above is in the affirmative, the question does not arise.
(c) Common (i) The main
packages should be capitalised pending the capitalisation of ancillary packages
or vice-versa, when it is considered that the same are ready to commence
commercial production independent of each other or are ready for their intended
use. (ii) After part
capitalisation, general overheads, administrative overheads, etc., should be
segregated on an appropriate basis for charging the same to the profit and loss
account and to the expenditure during construction account. (iii) Similarly,
depreciation on infrastructural facilities like roads, buildings, etc., should
be allocated to profit and loss account and expenditure during construction
account on an appropriate basis.
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