A. Facts of the Case
1. A company was incorporated in 1976 as a wholly owned
Government of India enterprise under the administrative control of
Ministry of Power to plan, promote, investigate, survey, design,
construct, generate, operate and maintain hydro and thermal power
stations and to explore and utilise the power potential of northeast
in particular. The company is presently running three hydroprojects
and two thermal projects in north-eastern states and
catering to the demand of north-eastern states only.
2. The stages involved from conception to execution of power
projects are as follows:
(a) Survey and investigations for preparation of pre-feasibility
report.
(b) Survey and investigations for preparation of detailed
project report.
(c) Arrangement of various clearances and investment
approval from Public Investment Board and Cabinet
Committee on Economic Affairs.
3. At the initial stage, the company has to incur expenditure on
survey and investigation for collection of topographical, hydrological,
geological and meteorological data besides pursuing various
clearances like forest clearance, environmental clearance, etc. This
expenditure, other than those expenditures which are of capital
nature, is booked as incidental expenditure during construction
and shown under capital work-in-progress. This incidental
expenditure incurred during construction forms part of the project
cost approved by the Government of India and specifically
attributable to construction of projects which on completion of the
project is apportioned to ultimate assets on pro-rata basis in
compliance with paragraph 9.3 of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, issued by the Institute of Chartered
Accountants of India.
4. The querist has pointed out that it is the standard industry
practice to prepare shelves of project reports out of which
economically viable projects are taken for execution. The schemes
which are not found economically viable are discontinued or
abandoned. The expenditure on such schemes is written-off over
a period of time.
5. According to the querist, as per the standard industry practice
and accepted accounting principles, expenditure incurred over a
period of time and recognised as asset is written-off over a period
in the event of abandonment or unsuccessful construction.
Accordingly, the company has framed its accounting policy
approved by its Board of Directors to write off the incidental
expenditure incurred on abandoned projects and expenditure
incurred on discontinued survey and investigation schemes over a
period of five accounting years.
B. Query
6. The opinion of the Expert Advisory Committee has been sought
by the querist as to whether the accounting policy followed by the
company is in compliance with the existing Accounting Standards
and standard accounting principles.
C. Points considered by the Committee
7. The Committee notes that the query primarily involves two
issues. The first issue is whether it is appropriate to treat the
expenditure specified in paragraph 3 above as an asset by carrying
it as capital work-in-progress. The second issue is whether the
accounting policy followed by the company to write-off such capital
work-in-progress on abandoned projects, discontinued survey and
investigation schemes over a period of 5 accounting years, is
appropriate.
8. The Committee is of the view that before treating such
expenditure as capital work-in-progress, i.e., a fixed asset, in
accordance with provisions of Accounting Standard (AS) 10,
‘Accounting for Fixed Assets’, as indicated by the querist in
paragraph 3 above, such expenditure should meet the definition of
an asset as given in the Framework for the Preparation and
Presentation of Financial Statements, issued by the Institute of
Chartered Accountants of India. Accordingly, the Committee notes
the definition of an asset as per the Framework which provides as
below:
“An asset is a resource controlled by the enterprise as a
result of past events from which future economic benefits are
expected to flow to the enterprise.”
9. On the basis of the above definition, the Committee is of the
view that future economic benefits from the project could be
expected only when the company reaches a conclusion that the
project is economically viable and the company decides to continue
the project. Accordingly, the Committee is of the view that before
the project reaches the economic viability stage, no asset is created.
10. The Committee notes that since no asset can be created till
the project reaches the economic viability stage, the question of
writing-off such expenditure on abandoned projects, discontinued
surveys and investigation schemes over a period of 5 accounting
years, does not arise. Therefore, the expenditure incurred before
reaching the aforesaid stage should be written-off as and when
incurred.
D. Opinion
11. On the basis of the above, the opinion of the Expert Advisory
Committee on the issue raised in paragraph 6 above is that the
accounting policy followed by the company is not in compliance
with the existing Accounting Standards and standard accounting
principles.
1Opinion finalised by the Committee on 13.11.2007.
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