Query No. 9
Subject: Treatment of expenditure incurred on catchment area of a hydroelectric power project.1
A. Facts of the Case
1. A public sector company registered under the Companies Act, 1956, is engaged in the construction and operation of hydro-electric power projects. Construction of dam, tunnels, power house building and installation of generating plant and machinery are integral parts of a hydro-electric project. The dam is constructed for the purpose of creation of a reservoir so that water is stored and used for the purpose of generation of electricity. The dam is constructed across the river. The reservoir is dependent upon catchment area as a source of water.
2. The catchment area is prone to degradation, which takes place due to various anthropogenic, and natural reasons that might be existing prior to setting up of a hydro-electric power project in the area. Degradation of catchment area causes soil erosion. Continuous soil erosion from the free draining catchment of the reservoir results in the sedimentation of the same thereby reducing the capacity of the reservoir and efficiency of the project (emphasis supplied by the querist). To check the menace of soil erosion, extensive catchment area treatment measures are adopted by the company at its various projects at construction stage, involving capital outlay. These measures are:-
3. The company had been capitalising expenditure on the above measures as a part of the cost of the dam. The statutory auditors of the company for the year 2001-02 were, however, of the opinion that catchment area treatment is a common expenditure, which will benefit the dam as well as the power house/generating plant and machinery and should, thus, form part of Incidental Expenditure During Construction (IEDC). The recommendation of the statutory auditors was agreed to by the company and classification of the expenditure was corrected accordingly.
4. During the course of the audit for the next year by C&AG under section 619(4) of the Companies Act, 1956, the above change in classification was taken up for review. The office of the C&AG was of the view that such expenditure should be capitalised as a part of the cost of the dam, as "Catchment area treatment plan …… is for treatment of the catchment area within the free draining catchment of the projects so as to maintain the life of dam which could otherwise be threatened by silting and consequent ill effects and also prove to be a catalyst for the holistic development of the area".
5. The company is of the view now that the opinion of the statutory auditors as implemented in the accounts of the company for the year 2001-02 and 2002-03, i.e., the expenditure on catchment area is a common expenditure and should form part of the Incidental Expenditure During Construction (IEDC), is in order, and this practice should continue to be followed.
B . Query
6. In view of the divergent views, the querist has sought the opinion of the Expert Advisory Committee as to whether the expenditure on catchment area treatment should be capitalised as a part of cost of dam; or it should be apportioned to the various components of the projects at the time of the capitalisation alongwith other components of IEDC.
C. Points considered by the Committee
7. The Committee notes that paragraph 9.1 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, states as below:
The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors."
8. The Committee notes that during the construction of a project, various expenditures are incurred to make the project operational. In some cases, it is feasible to identify the asset to which an expenditure is directly attributable to bring it in its working condition for its intended use. The Committee is of the view that the meaning of the phrase ‘intended use’ should not be considered from the point of view of the project as a whole but should be considered from the perspective of individual assets. For determining which expenditure is ‘directly attributable’ to bring the asset to its working condition for its intended use, factors such as whether the concerned expenditure directly benefits or is related to that asset may be considered. In establishing whether the expenditure directly benefits or is related to an asset, a nexus between the expenditure and the benefit/ relationship with the asset can be ascertained technologically.
9. From the above, the Committee is of the view that the company in question should ascertain on technological basis whether the expenditure on catchment area directly benefits or is related to dam and/or any other asset. In this context, the Committee notes that a factor in favour of capitalising the expenditure on catchment area treatment with the cost of the dam is that such expenditure may have to be incurred irrespective of whether the dam is to be used for the generation of electricity or exclusively for irrigation purposes.
D. Opinion
10. On the basis of the above, on the issue raised in paragraph 6, the Committee is of the opinion that the company should ascertain as to which asset the expenditure on catchment area treatment is primarily attributable to, on considerations stated in paragraph 9 above. |