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Query No. 2
Subject:
Treatment of expenditure on training as deferred
revenue expenditure – whether appropriate.1
A. Facts of the Case
1. A company was incorporated in the year 1976 as a wholly owned Government of India enterprise under the administrative control of the 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 North East in particular. The company is presently running three hydro projects and two thermal projects in north-eastern States and is catering to the demand of north-eastern States only. The company’s shares are not listed with any stock exchange. The authorised and paid up share capital of the company as on 31.03.2008 are Rs. 3500 crore and Rs. 3178.93 crore, respectively. The turnover of the company for the year ending 31.03.2008 is Rs. 860.31 crore.
2. The company, as per its accounting policy, charges the expenses on training, recruitment, etc. to revenue in the year of incurrence. Expenses on training for plant operations, prior to the commissioning of a project are treated as deferred revenue expenditure to be written off within 5 years after commissioning of the project.
B. Query
3. The querist has sought the opinion of the Expert Advisory Committee as to whether the accounting policy adopted by the company is in compliance with the existing Accounting Standards and the generally accepted accounting principles. If not, the querist has sought advice with respect to the modifications required.
C. Points considered by the Committee
4. The Committee notes the definition of the term ‘asset’ as contained in paragraph 49 of the Framework for the Preparation and Presentation of Financial Statements, issued by the Institute of Chartered Accountants of India, 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.”
The Committee is of the view that training expenditure, whether technical, i.e., for plant operations, or otherwise, does not give rise to a resource under the control of the company.
5. In this context, the Committee also notes paragraph 16 of Accounting Standard (AS) 26, ‘Intangible Assets’, which is reproduced below:
“16. An enterprise may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. The enterprise may also expect that the staff will continue to make their skills available to the enterprise. However, usually an enterprise has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training to consider that these items meet the definition of an intangible asset. For a similar reason, specific management or technical talent is unlikely to meet the definition of an intangible asset, unless it is protected by legal rights to use it and to obtain the future economic benefits expected from it, and it also meets the other parts of the definition.”
The Committee further notes that paragraph 56 of AS 26, provides as below:
“56. In some cases, expenditure is incurred to provide future economic benefits to an enterprise, but no intangible asset or other asset is acquired or created that can be recognised. In these cases, the expenditure is recognised as an expense when it is incurred. For example, expenditure on research is always recognised as an expense when it is incurred (…). Examples of other expenditure that is recognised as an expense when it is incurred include:
…
(b) expenditure on training activities;
…”
6. The Committee is of the view that the above reproduced paragraphs of AS 26 are applicable for all types of training and not restricted to general training, i.e., it does not make any distinction between the technical training for plant operations or any other type of training. The Committee notes from the Facts of the Case that the training in the instant case has been given to train/prepare the staff in advance for operating the plant in future after commissioning of the project. The Committee is of the view that though training may be necessary prior to commissioning of a project, the training expenditure is not incurred for construction of any asset(s) and/or bringing the asset to its working condition for its intended use. Accordingly, in the view of the Committee, the expenditure incurred on training for plant operations should be expensed when incurred in accordance with paragraph 56 of AS 26 as reproduced above.
D. Opinion
7. On the basis of the above, the Committee is of the opinion that the accounting policy of the company treating the expenses on training for plant operations prior to the commissioning of a project as deferred revenue expenditure to be written off within 5 years after commissioning of the project, is not in compliance with the existing Accounting Standards and the generally accepted accounting principles. Such expenditure should be expensed when incurred. The accounting policy should be modified accordingly.
1Opinion finalised by the Committee on 5.3.2009
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