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A. Facts of the Case
1. A Government of India enterprise incorporated under the Companies Act, 1956, is engaged in the business of transmission of power from the generating units to different State Electricity Boards (SEBs) through its transmission network. With the growing investment in power sector, it also undertakes construction of new transmission systems linked with the generating units as well as system strengthening schemes of the existing networks.
2. The company has borrowed foreign currency loans to partly finance its capital expenditure on construction of new projects. The principal and interest on the loans are repaid in the agreed foreign currencies as per the terms of the various loan agreements. As per the querist, the resulting foreign exchange rate variation (FERV) is being accounted for as per the requirements of Accounting Standard (AS) 11 (pre-revised as well as revised), i.e., ‘Accounting for the Effects of Changes in Foreign Exchange Rates’ (1994) and ‘The Effects of Changes in Foreign Exchange Rates’ (revised 2003), as applicable, and Accounting Standards Interpretation (ASI) 102 , ‘Interpretation of paragraph 4(e) of AS 16’ issued by the Institute of Chartered Accountants of India.
3. The querist has stated that due to fluctuations in exchange rates of various currencies, the accounting for accrued FERV, as stated above, results into vast fluctuations in the quarterly as well as the annual results of the company. As per the Central Electricity Regulatory Commission (CERC) norms, FERV is recoverable in tariff from State Electricity Boards on actual payment basis. The querist has informed that to avoid the mismatch, the matter was referred to the Expert Advisory Committee (EAC) which had given its opinion on the same (copy enclosed as Annexure. The Opinion is also published as Query No. 10 of Compendium of Opinions Volume XXVII).
4. The querist has mentioned that the accounting treatment suggested by EAC in the above mentioned opinion would resolve mismatch between the recovery in tariff and the accounting treatment as per the provisions of AS 11 and ASI 10. However, according to the querist, the opinion of EAC regarding (i) the date of implementation of the suggested accounting treatment with retrospective effect; and (ii) charging the financial impact of the suggested accounting treatment pertaining to earlier years to the profit and loss account as ‘prior period item’ may be reconsidered in view of the facts and reasons brought out in subsequent paragraphs. The opinion given in these two matters has been reproduced by the querist as below:
“15. …
(ii) The accounting treatment suggested above in respect of capitalisation of FERV as per the requirements of AS 16 read with ASI 10 should be implemented from the date AS 16 became applicable to the company from retrospective effect as discussed in paragraph 14 above.
(iii) The adjustments arising from the retrospective implementation of the above-suggested accounting treatment should be accounted for as ‘prior period items’, as per the requirements of AS 5. For disclosure purposes, the amounts may be included in the natural heads provided the nature thereof and the relevant amounts are disclosed in the notes to accounts, so that their impact on the profit or loss can be perceived, or these can be reflected as a separate item in the statement of profit and loss as discussed in paragraph 14 above.”
5. As per the querist, the opinion regarding implementation of the suggested accounting treatment with retrospective effect from the date accounting Standard (AS) 16, ‘Borrowing Costs’ became applicable may be reconsidered in view of the following facts:
(a) Reimbursement of FERV stated in paragraph 3(ii) of the earlier opinion is reckoned as per the present CERC norms in this regard. As such, the reimbursement of FERV is considered with respect to exchange rates prevailing as on 01/04/2004 or the date of commercial operation of the respective transmission projects whichever is later.
(b) Reimbursement of FERV is allowed in respect of amount of loan outstanding as on 01/04/2004 or the date of commercial operation of the respective transmission project whichever is later.
(c) FERV accrued up to 31/03/2004 was included in the capital cost for the purpose of tariff. On such capital cost (including FERV upto 31/03/2004) normal tariff is allowed as per CERC norms.
Considering the above, the querist is of the view that it will be more appropriate to implement the accounting treatment opined by the Expert Advisory Committee w.e.f. 01/04/2004 or the date of commercial operation, whichever is later. Further, as per the querist, if the accounting treatment is implemented from any other date, the amount being depicted as ‘deferred foreign currency fluctuation asset/liability account’ in accordance with the earlier opinion shall not match with the actual amount recoverable/payable as per the provisions of CERC norms.
6. The querist has further mentioned that in paragraph 15(iii) of the earlier opinion (reproduced in paragraph 4 above), EAC has suggested that adjustments arising from retrospective implementation should be accounted for as “prior period items”. Alternatively, as per the earlier opinion, the amount may be included in the ‘natural heads’ provided the nature thereof and the relevant amounts are disclosed in the Notes to Accounts. In view of the querist, this opinion may be reconsidered in view of the fact that implementation of the suggested accounting treatment with retrospective effect is not on account of any error or omissions in the earlier years. Further, the querist is of the view that alternatively, the amount to be credited/debited to the profit and loss account on account of retrospective implementation upto 31/03/2007 may be accounted for as an adjustment to “General Reserve” as has been allowed in the case of transition period applicability of Accounting Standard (AS) 15, ‘Employee Benefits’ (revised 2005) and Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’. The querist has stated that this is in view of the fact that amount being reversed now has already been adjusted in general reserve through the profit and loss account. Further, as per the querist, this accounting treatment is considered appropriate and prudent, particularly, as the shares of the company are listed.
B. Query
7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether the accounting treatment suggested in the earlier opinion of the Committee referred in paragraph 3 above, should be implemented from 01/04/2004 or the date of commercial operation of the respective transmission project, whichever is later, in respect of the amount of loan outstanding as on that date, instead of from the date of applicability of AS 16 (as suggested in the earlier opinion).
(ii) Whether adjustment on account of retrospective implementation for the period from 01/04/2004 to 31/03/2007 may be made through general reserve instead of as prior period items through profit and loss account.
C. Points considered by the Committee
8. The Committee notes the opinion issued earlier which is given in the Annexure. The Committee has considered only the issues raised by the querist in paragraph 7 above and has not examined any other issue(s) that may be contained in the Facts of the Case or the earlier opinion of the Committee referred by the querist. The views of the Committee contained herein are only with respect to the reimbursement of FERV to the company. The Committee has not examined the recovery of FERV through inclusion in capital cost for tariff purposes or in any other manner as the matter has not been raised by the querist. The Committee has also not revisited its earlier opinion except with respect to the two issues raised by the querist in paragraph 7 above.
9. The Committee notes from the Facts of the Case that it appears that the scheme of reimbursement of foreign exchange rate variation (FERV) to the company by the State Electricity Boards is effective only from April 1, 2004. The Committee also notes that it appears that the reimbursement is only with respect to the exchange differences arising on foreign currency loans from April 1, 2004, i.e., considering the foreign exchange rates prevailing on April 1, 2004 or the date of commencement of commercial operation, whichever is later. Consequently, the exchange differences on outstanding loans prior to April 1, 2004 are not reimbursable to the company.
10. From the above, in the light of the new facts now supplied by the querist, the Committee is of the view that in case of the loans pertaining to projects already in operation on April 1, 2004, since the reimbursement of FERV on actual basis as stated in paragraph 3(ii) of the earlier opinion (see Annexure) is made in the present scheme with effect from April 1, 2004, the accounting treatment suggested in paragraphs 10, 11 and 13 of the earlier opinion of the Committee relating to accounting for FERV which is recognised in the financial statements on the balance sheet date for accounting purposes in one year but is recovered in a later year, should be implemented from April 1, 2004, that is the date from which the foreign exchange differences are effectively reimbursable to the company. In case of new projects, the accounting treatment suggested in the earlier opinion should be followed from the date of expensing/capitalisation of the foreign exchange differences, as the case may be, if at that point of time itself it is known that such foreign exchange differences will be reimbursed to the company at a later date. In case the reimbursement is to be received in respect of FERV arising after the date of commencement of commercial production, the treatment suggested in the earlier opinion should be followed from that date.
11. With respect to the adjustments arising from retrospective implementation (in the present case, implementation from April 1, 2004 or the date since when reimbursement is to be received or the date of commercial operation, as the case may be, as per discussion in paragraph 10 above), the Committee notes that the same will have to be accounted for as a prior period item as per the provisions of Accounting Standard (AS) 5, ‘Net Profit or loss for the Period, Prior Period Items and Changes in Accounting Policies’. Accordingly, no adjustment on this account can be made directly to the general reserve. The Committee is of the view that adjustment directly to the general reserve under the transitional provisions of some new accounting standards are specifically allowed under those Standards only.
D. Opinion
12. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 7 above:
(i) In case the reimbursement of foreign exchange rate variation is effective from April 1, 2004, the treatment suggested in paragraphs 10, 11 and 13 of the earlier opinion of the Committee (contained in Annexure) should be applied from that date. However, in case of new projects, the said accounting treatment will have to be followed from the date of expensing/capitalisation of the foreign exchange differences if it is known at that point of time that the same would be reimbursed under the tariff plan at a later date. In case the reimbursement is to be received in respect of FERV arising after the date of commencement of commercial production, the treatment suggested in the earlier opinion should be followed from that date. Please refer to paragraph 10 above.
(ii) The adjustment of amounts on retrospective implementation for the period from April 1, 2004 to March 31, 2007 cannot be made directly through general reserve. The said adjustment will have to be made as a ‘prior period item’ through the profit and loss account of the year in which the treatment is so adopted.
Annexure
1Opinion finalised by the Committee on 8.5.2009
2The ASI 10 has been withdrawn by the Council of the Institute of Chartered Accountants of India and the Consensus portion thereof has been added as ‘Explanation’ to the paragraph 4(e) of Accounting Standard (AS) 16, ‘Borrowing Costs’.
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