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A. Facts of the Case
1. A Government of India enterprise was incorporated in the year 1975 as a company under the Companies Act, 1956, to engage in the business of electricity generation by setting up coal based super thermal power stations across the country. Subsequently, it has set up gas and liquid fuel based power generating stations also. The company has diversified into oil and gas exploration, coal mining, hydro-power generation, consultancy and also into power trading, power distribution, etc., through its subsidiaries and joint ventures.
2. In coal based power stations of the company set up in early eighties, the disposal of ash left after burning of coal was generally addressed by construction of ash dykes. An ash dyke is constructed by enclosing a large area of land by high walls on the periphery so that a deep cavity results in which ash in the form of slurry is disposed. Over a period of time, the ash gets accumulated and fills up the dyke, and then to fill up ash, additional capacity is created by either raising the ash dyke walls or construction of a new ash dyke on an additional land. When an ash dyke is further raised, it is done gradually in a number of phases and with each phase of raising, additional capacity for disposal of ash is created which takes care of the requirement of the station for a period ranging from 1 to 5 years. The querist has informed that the expenditure incurred in the construction of the ash dyke as well as its further raising is capitalised as per paragraphs 6.1, 12.1 and 23 of Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of Chartered Accountants of India and the total cost of the ash dyke is amortised over the revised useful life of the ash dyke.
3. As per the querist, the basic principle behind capitalisation of the expenditure incurred on raising of ash dyke and treating it as an asset is that the fruits of the expenditure so incurred, i.e., capacity created for disposal of ash, are enjoyed over a number of accounting periods and the capitalised expenditure is depreciated over the revised useful life of the ash dyke.
4. The querist has informed that some of the old stations of the company have exhausted all the land earmarked for ash disposal and after a number of raisings of the ash dyke, there is no scope for further raisings of the ash dyke as it is considered to be a potential hazard for the neighbouring habitat. Further, it is now proposed that further capacity for disposal of ash at the station be created by incurring expenditure on evacuating the ash accumulated in the existing ash dyke. The ash accumulated over a number of years is proposed to be dug up and evacuated by transporting it to distant places where it can be used for filling up low lying areas or in road embankments.
5. According to the querist, the expenditure incurred on raising of ash dyke is capitalised only because it creates additional capacity for ash disposal which can be used over a number of years. Similarly, the querist has argued that capacity for disposal of ash can be created by digging a deep pit, well or a cavity on virgin land and such expenditure would also qualify for capitalisation as the facility so created would be held with the intention of being used for the purpose of providing services of safe ash disposal in the normal course of business of electricity generation. The querist has mentioned that similar capacity for ash disposal is now proposed to be created at a comparable cost by evacuating the accumulated ash from the existing ash dyke and disposing it in far away uninhabited low lying areas or in construction activities. The only difference in this case is that instead of digging earth, the ash accumulated in the ash dyke over a number of years is proposed to be dug and disposed of for creation of capacity for further ash disposal. Accordingly, the querist has informed that the expenditure so incurred in evacuation of ash from the existing ash dyke is proposed to be capitalised and depreciated over the remaining extended life of the ash dyke.
B. Query
6. The querist has sought the opinion of the Expert Advisory Committee as to whether the proposed accounting treatment of capitalisation of expenditure incurred on evacuation of ash from fully raised ash dyke resulting in further creation of capacity for future disposal of ash as suggested in paragraph 5 above would be in accordance with paragraphs 12.1 and 23 of AS 10.
C. Points considered by the Committee
7. The Committee restricts itself to the particular issue raised by the querist in paragraph 6 above and has not examined any other issue that may be contained in the Facts of the Case, such as, treatment of revenue from the disposal of ash evacuated from the ash dyke, accounting for the use to which the ash evacuated is put to, etc.
8. The Committee notes below paragraphs 12.1 and 23 of AS 10 referred by the querist in paragraph 2 above:
“12.1 Frequently, it is difficult to determine whether subsequent expenditure related to fixed asset represents improvements that ought to be added to the gross book value or repairs that ought to be charged to the profit and loss statement. Only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g., an increase in capacity.”
“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.”
9. The Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and maintenance, and (ii) improvements or betterments. Repairs and maintenance, 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 and maintenance, 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.
10. From the above, the Committee is of the view that in the case of the company, it needs to be examined whether the capacity of the ash dyke was initially decided after taking into account the capacity that would be created by the evacuation of ash from the ash dyke and whether useful life of the dyke was decided on that basis. In other words, it needs to be examined whether the ash dyke constructed and subsequently raised by the company was intended to be emptied for further use of disposal of ash in the ash dyke. In case it was so intended, evacuation of ash from the ash dyke does not result in creation of additional capacity or in the extension of the useful life of the ash dyke. In such a case, the cost of evacuation of ash from the ash dyke is of the nature of repairs and maintenance and, therefore, should be expensed when incurred. However, in case the ash dyke was not intended to be emptied, i.e., the dyke was meant to be for single-use only and useful life thereof was decided on that basis, the expenditure incurred on evacuation of ash from the ash dyke results into creation of additional capacity for disposal of ash in the ash dyke. In such a case, the Committee is of the view that the expenditure incurred on evacuation of ash from the ash dyke is of the nature of improvement of fixed assets and, therefore, should be capitalised.
D. Opinion
11. On the basis of the above, the Committee is of the opinion that the proposed accounting treatment of capitalisation of expenditure incurred on evacuation of ash from fully raised ash dyke resulting in further creation of capacity for future disposal of ash as suggested in paragraph 5 above would be in accordance with paragraphs 12.1 and 23 of AS 10 provided the ash dyke when constructed and when further raised was not intended to be emptied for creation of further capacity for disposal of ash in the ash dyke and its useful life was determined on that basis. Please refer paragraph 10 above.
1Opinion finalised by the Committee on 8.5.2009
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