A. Facts of the Case
1. A public sector undertaking is engaged primarily in the
extraction and sale of manganese ore from its mines in two States.
It also produces and sells ferro manganese, a value added product
at one of its mines in one of the States by using a small quantity of
its manganese ore production as principal raw material.
2. The company has recently ventured into generation of
electricity by installation of wind turbine generators in one of the
States. The company has entered into an agreement with another
company (which installed and commissioned the generators) for
operating the wind turbine generators by paying operations and
maintenance charges.
3. The existing regulations framed by the State Government
permitted the company to opt for any one of the following:
(a) Direct sale of electricity to X State (Western Region)
Electricity Distribution Company Ltd., at the rates decided
by the regulatory authority.
(b) Use of the power units generated at the Wind Mills
Project (WMP) for the company’s own activities at any
other location in State X by transmitting the power
generated to grid through the X State (Western Region)
Electricity Distribution Company Ltd., and drawing 98%
of the units generated from the X State (Eastern Region)
Electricity Distribution Company Ltd., for its specified
consuming units. In this case, the company enters into
an agreement with various arms of the X State
Government, viz., (i) X State (Western Region) Electricity
Distribution Company Ltd. (where power is generated),
(ii) X State Power Transmission Company Ltd. (through
which power is transmitted) and (iii) X State (Eastern
Region) Electricity Distribution Company Ltd., (where
actual consumption is made).
4. As the company is in a position to get more benefit by way of
reduction in electricity bills of consuming units as compared with
direct sale of electricity, the company has opted for (b) above. The
company has identified one of its manganese mines and ferro
manganese plant as its specified consuming unit. By virtue of the
agreement with the above distribution/transmission arms of the
electricity companies (hereafter referred to as ‘XEDCL’), gross
consumption by manganese mine and ferro manganese plant is
reduced by actual power generated at the WMP less 2% towards
wheeling charges/transmission and distribution losses. Thus, the
company gets electricity bills of specified consuming units for net
amount payable to XEDCL.
5. Further, if the actual consumption at the consuming units is
less than the units generated at the WMP, the reduction in power
units is restricted to actual consumption at the consuming units.
The additional units generated, termed as “inadvertent flow”, are
compensated at a specified fixed rate per unit by the distribution
company.
6. The querist has stated that although the revenue generated
from the project is not substantial in relation to the total turnover of
the company, the investment in the project is more than 10% of its
gross block of assets. In view of this and the fact that the risks
and rewards of the new venture are different from that of the
existing business, the company considers the WMP as a separate
reportable segment.
7. The querist has stated that the company considers the following
accounting treatment and presentation to be appropriate and in
line with the accounting standards:
(i) Since the ultimate consumers are units of the company
itself, the transaction shall not be termed as ‘sale of
electricity’.
Consumption of products of one of the units by other
units, commonly referred to as ‘captive consumption’, is
generally charged to other units as the cost of production
of the producing unit. However, in this case, the revenue
generated from the project shall be disclosed separately
under the heading ‘other income’ in the profit and loss
account for the following reasons–
(a) The reduction allowed in electricity bills by XEDCL
towards units generated at WMP, which otherwise
would have been charged to consuming units at
normal power tariff rates, represents gain realised
‘in cash’ as distinguished from a mere book
adjustment.
(b) Power generated by the company goes into the
grid and loses its identity there itself (as distinguished
from a case where the same commodity is
transported to another location).
(c) Power generating/consuming company, power
receiving company and power distributing company
are three different legal entities involved in the
transaction and a third party (XEDCL) is quantifying
the value of electricity generation.
In view of the above, the net reduction in electricity
charges of the two divisions, i.e., ferro manganese plant
and manganese mine, equal to the value of credit given
by XEDCL in its monthly bills, shall be treated as revenue
generated from the project. Further, in the event of
generation at WMP exceeding the consumption at
consuming units, amount credited by XEDCL in electricity
bills shall also be treated as revenue generated from the
project and shall also be treated as ‘other income’.
The querist has furnished a statement containing extracts
from the electricity bill for November 2006 for the perusal
of the Committee to explain the methodology. As against
the gross bill of Rs. 39,14,579, the company is required
to pay only Rs. 26,85,455 thus resulting in reduction of
Rs. 12,29,124 towards power generation at WMP. This
sum of Rs. 12,29,124 shall be treated as revenue
generated from the project.
Separate accounting of 2% wheeling charges on
expenditure side, by grossing up revenue, is not
considered necessary because the reduction is made by
XEDCL at generation point and accounting on expenditure
side will pose difficulty in allocation of the charges to
consuming units.
(ii) Operations and maintenance charges are payable after
a specified period at agreed rate per machine on annual
basis. Besides this, administrative expenses like rates
and taxes, inspection fees, etc., are to be borne by the
company right from the first year of operation. All the
above expenses shall be disclosed separately in the profit
and loss account as expenditure of wind mills division.
(iii) Depreciation on WMP assets shall be indicated separately
below the fixed assets schedule in line with the practice
followed by the company in respect of manufacturing
units.
(iv) Ferro manganese plant and mine will not be charged
with actual cost of generation of electricity at WMP
because (a) these units continue to consume the same
quantity of power (b) the credit given by the XEDCL in
electricity bills of these units towards electricity generation
at WMP represents gain realised in cash, (c) power
generating/consuming company, power receiving
company and power distributing company are three
different legal entities involved in the transaction and a
third legal entity (XEDCL) is quantifying the value of
electricity generated and (d) profit centre concept does
not permit such an adjustment.
In view of the above, the company shall also value stock
of manganese ore and ferro manganese by considering
gross cost of power at these power consuming units
without deduction of credit given by XEDCL in electricity
bills.
(v) Net profit from operating wind mills, after deducting
operational/ administrative expenses and depreciation,
shall be disclosed in segment reporting and memorandum
profit and loss account separately.
B. Query
8. In view of the above, the querist has sought the opinion of the
Expert Advisory Committee specifically on the issue of the treatment
of reduction in electricity bills on account of credit given by XEDCL
in electricity bills towards generation of electricity at wind mills
division.
C. Points considered by the Committee
9. The Committee notes from paragraph 8 above that the querist
has raised the issue only with respect to the treatment of reduction
in electricity bills on account of credit given by XEDCL in the
electricity bill towards generation and supply of electricity by the
company through its wind mill division. The Committee has,
therefore, considered only this issue and has not considered or
touched upon any other issue arising from the Facts of the Case,
such as, segment reporting for wind mill division, treatment of
various expenses of the wind mill division, disclosure of depreciation
on the assets of the wind mill division, etc.
10. The Committee notes from the Facts of the Case that the
company is not selling the power generated at its wind mill division.
Rather, the company is using the power generated at the wind mill
division for the company’s own activities at another location. For
this purpose, the company is transmitting the power generated
through a distribution company. The extracts from the agreement
with the distribution company furnished by the querist also indicate
that the power is being transmitted by the company to the
distribution company for its self-use only. For this purpose, wheeling
charges in the form of 2% of the energy fed into the system by the
company, are paid to the distribution company. Thus, the company
is drawing only 98% of the energy fed into the system for its selfuse
at a different location. The energy drawn above this limit is
charged to the company separately. In case, a lesser quantity of
energy is drawn by the company, the company is compensated for
the excess units generated at specified rates. The Committee
notes that the distribution company in the electricity bill sent to the
company shows charges for the full energy drawn by the company
and then gives a credit for 98% of the energy that was actually fed
into the system by the company itself. The Committee is of the
view that this is only a manner of disclosure in the electricity bill. It
does not amount to sale and purchase of energy to and from the
distribution company. Thus, the Committee is of the view that the
energy drawn by the company for its self-use is only an interdivisional
transfer from the wind mill division to its consuming
divisions, though at a different location.
11. The Committee notes that the querist has argued in paragraph
7 above that the net reduction in electricity charges of the
consuming divisions equivalent to the 98% of the energy fed into
the system by the company by its wind mill division, should be
treated as revenue generated by the wind mill division. In this
context, the Committee notes the definition of the term ‘revenue’
as per Accounting Standard (AS) 9, ‘Revenue Recognition’, which
is reproduced below:
“4.1 Revenue is the gross inflow of cash, receivables or other
consideration arising in the course of the ordinary activities of
an enterprise from the sale of goods, from the rendering of
services, and from the use by others of enterprise resources
yielding interest, royalties and dividends. Revenue is measured
by the charges made to customers or clients for goods supplied
and services rendered to them and by the charges and rewards
arising from the use of resources by them. In an agency
relationship, the revenue is the amount of commission and
not the gross inflow of cash, receivables or other consideration.”
The Committee is of the view that as per the definition of the term
‘revenue’ as reproduced above, inter-division transfers do not
constitute revenue. The Committee further notes that as per an
Announcement issued by the Institute of Chartered Accountants of
India in the year 2005, titled ‘Treatment of Inter-divisional Transfers’,
transfers within an enterprise cannot be considered as fulfilling the
definition of the term ‘revenue’.
12. The Committee also notes that the reduction in the electricity
bills of the consuming units does not constitute ‘income’ for the
company. In this context, the Committee notes that the Framework
for the Preparation and Presentation of Financial Statements, issued
by the Institute of Chartered Accountants of India, defines the
term ‘income’ as “increase in economic benefits during the
accounting period in the form of inflows or enhancements of assets
or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants”. The
Committee is of the view that selling to itself does not result in
enhancement of assets and, therefore, the reduced electricity bills
do not fit into the definition of the term ‘income’ as above.
Accordingly, it is not appropriate to present the same as ‘other
income’.
13. The Committee is of the view that the expenditure incurred by
the wind mill division together with the electricity charges paid by
the consuming divisions to the distribution company for excess
electricity drawn, would represent the cost on account of electricity
charges of the consuming divisions. Thus, no separate accounting
entries need be passed for the saving in cost towards electricity
charges. However, it may be noted that to the extent of the
‘inadvertent flow’ of electricity to the XEDCL (referred in paragraph
5 above), the compsensation received towards the same would be
treated as sale of electricity and appropriately disclosed in the
profit and loss account.
D. Opinion
14. On the basis of the above, the Committee is of the opinion
that the accounting treatment suggested by the querist for the
reduction in the electricity bills on account of credit given by the
distribution company in electricity bills towards generation and
supply of electricity by the wind mill division, is incorrect. The
correct treatment would be as given in paragraph 13 above.
1Opinion finalised by the Committee on 30.1.2008. |