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A. Facts of the Case
1. A company is a public sector undertaking engaged in mining
of coal having touched a production capacity of 363 million tonnes
during the fiscal year 2006-07. The company is the holding company
of eight of its subsidiaries out of which seven are coal producing
and one is being mine planning and designing service oriented
subsidiary. As per the querist, the company is the largest coal
producing company in India and is having a share of about 84% of
total coal production in India. There are both underground mines
as well as open cast mines. The share of production from
underground mines is about 43 million tonnes whereas the
production from open cast mines is 317 million tonnes.
2. The company is an unlisted company having a share capital
of Rs. 6316.36 crore which is entirely held by the Government of
India. All the subsidiaries of the company are owned 100% by it.
3. Since long, one of the subsidiary companies is having, as one
of its assets, some railway sidings. These railway sidings run
through the coalfield areas/pit heads under its operational
jurisdiction. Through railway sidings, coal stock of the concerned
areas is despatched. In two areas under the subsidiary company,
namely, Parasia and Pandabeshwar, railway tracks in Parasia
railway sidings and Khottadh railway sidings respectively, have
outlived their commercial lives and become unusable/unsafe due
to corrosion and wearing out. Some parts of these railway tracks
were replaced by the company with new tracks. The replacement
job was done through Railways as they were experts in this area.
The expenditure incurred for the replacement job, by way of
payment to the Railway authorities, included the following:
(a) Complete renewal of track,
(b) Change of sleepers,
(c) Change of permanent way (P.way) material, etc.
4. Both the above railway sidings were originally capitalised in
the year 1981-82 and were being carried at 5% residual value in
the books from the year 1999-2000. The details of cost and
depreciation (at straight line method @ 4.75% p.a.) appearing in
the books are as follows:
| Railway Sidings |
Rate of Depreciation |
Cost |
Depreciation |
Net Cost |
| Parasia |
4.75% |
Rs. 29.50 lakh |
Rs. 28.03 lakh |
Rs. 1.47 lakh |
| Khottadih |
4.75% |
Rs. 64.00 lakh |
Rs. 60.80 lakh |
Rs. 3.20 lakh |
The part renewal of railway sidings took place in the year 2006-07
and the entire cost of such renewal (by way of payment to Railways)
amounting to Rs. 71.82 lakh, was capitalised with effect from the
year 2006-07 since the expected future benefits of the entire railway
sidings were enhanced, due to their replacement. However, the
life to be considered for fresh capitalisation of railway tracks at the
aforesaid cost will be determined by the technical persons, which
is yet pending.
B. Query
5. On the basis of the above, the querist has sought the opinion
of the Expert Advisory Committee on the following issues:
(a) Whether or not such capitalisation on account of part
renewal of railway sidings is commensurate with various
Accounting Standards in force.
(b) Whether or not cost of such renewal should have been
charged off as revenue expenditure in the year in which
the same was incurred.
C. Points considered by the Committee
6. The Committee notes paragraph 23 of Accounting Standard
(AS) 10, ‘Accounting for Fixed Assets’, which reads as follows:
“23. Subsequent expenditures related to an item of fixed
asset should be added to its book value only if they
increase the future benefits from the existing asset beyond
its previously assessed standard of performance.”
7. The Committee is of the view that expenditure on fixed assets
subsequent to their installation may be categorised into (i) repairs,
and (ii) improvements or betterments. Repairs, in the Committee’s
view, implies the restoration of a capital asset to its full productive
capacity after damage, accident, or prolonged use, without increase
in the previously estimated useful life or capacity. Expenditure on
repairs, including replacement cost necessary to maintain the
previously assessed standard of performance, is expensed in the
same period. On the other hand, in the view of the Committee,
expenditures on improvements or betterments are expenditures
that add new fixed asset unit, or that have the effect of improving
the previously assessed standard of performance, e.g., an extension
in the asset’s useful life, an increase in its capacity, or a substantial
improvement in the quality of output or a reduction in previously
assessed operating costs. Such expenditures are capitalised. The
Committee is of the view that ‘previously assessed standard of
performance’ is not the actual performance of the asset at the
time of repair, improvement, etc., but the standard performance of
the same asset expected at this stage of life, as assessed when
the asset was installed.
8. The Committee notes from the Facts of the Case that the
railway sidings have become unusable/unsafe due to corrosion
and wearing out and the same are being carried in the books at
their residual value, implying thereby that their useful life is already
over. The Committee further notes that the querist has stated that
the expenditure incurred on renewal/replacement of the railway
tracks by the company has enhanced the expected future benefits
of the entire railway sidings, however, the determination of useful
life thereof is pending. Thus, considering the facts and
circumstances of the case, the Committee is of the view that though the expenditure incurred on replacement/part renewal is
generally expensed, it can be capitalised by the company only if it
is established by technical experts that the useful life of the asset
has substantially increased.
D. Opinion
9. On the basis of the above, the Committee is of the following
opinion on the issues raised by the querist in the paragraph 5
above:
(a) Capitalisation on account of part renewal of railway
sidings would be commensurate with various Accounting
Standards in force only if such expenditure has resulted
into substantial enhancement in their useful lives.
(b) The cost of such renewal should generally be charged
off as revenue expenditure in the year in which the
same was incurred unless the said expenditure has
substantially enhanced the previously estimated useful
life as established by technical experts.
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