Query No. 48 1. A company is a listed central public sector enterprise, engaged in the construction and operation of hydro power plants. The gestation period of projects at construction stage is generally long varying from minimum 5 years to 10 years. The projects are generally situated in remote areas. During the construction phase, owing to socio-economic reasons, which are beyond the control of the enterprise, sometimes, interruptions in active construction of the projects take place. Since these projects are capital intensive and establishment is created on long term basis, the company continues to incur interest during construction (IDC) and incidental expenditure during construction (IEDC) during the period of interruption of active construction of the project. Capitalisation of such costs becomes a challenge for the management in view of the accounting as per the existing Accounting Standards.
2. The querist has stated that being a regulated entity, tariff rate of the company is fixed by the regulator, namely Central Electricity Regulatory Commission (CERC), based on the capital cost of the individual project as per the Tariff Regulations which are valid for a period of 5 years. The existing Tariff Regulations are effective for the period 01.04.2014 to 31.03.2019. The said Regulations, cover such interruptions under ‘Force Majeure’, if these are beyond the control of the developer and are allowable for the purpose of tariff. Regulation 11 of the said Regulations further goes to provide that if delay in achieving the Scheduled Commercial Operation Date (SCOD) is not attributable to the generating company and is due to uncontrollable factors as specified, these costs shall be considered as allowable costs to charge rates from customers. Thus, the regulator is permitting the company to include in the rate base, as part of the cost of self-constructed fixed assets, these amounts that would otherwise be recognised as expense in the statement of profit and loss in accordance with Accounting Standards.
3. The querist has stated that the Institute of Chartered Accountants of India (ICAI) has issued a ‘Guidance Note on Accounting for Rate Regulated Activities’. It has been clearly spelt out that a regulatory asset can be recognised when the regulatory framework provides for the recovery of the incurred costs. Thus, a regulatory asset should be recognised by the entity in respect of such costs since the same is recoverable from the customers in future through tariffs. Thus, the company intends to recognise regulatory assets and regulatory liabilities in accordance with the Guidance Note in addition to the assets and liabilities recognised in accordance with the Accounting Standards in normal course. However, the company has been made to understand that the Institute has made effective date of implementation of the said Guidance Note w.e.f. 01.04.2015.
4. The querist has further stated that pending notification regarding effective date of implementation of the Guidance Note on Accounting for Rate Regulated Activities, the company intends to apply this Guidance Note to its operating activities w.e.f. 01-04-2014 as it meets the following criteria:
Accordingly, the company would recognise regulatory assets and regulatory liabilities in accordance with the Guidance Note in addition to the assets and liabilities recognised in accordance with the Accounting Standards in the normal course.
B. Query
5. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee of the ICAI regarding early adoption of the said Guidance Note w.e.f. 01-04-2014, i.e., prior to 01.04.2015.
C. Points considered by the Committee
6. The Committee notes that the basic issue raised by the querist relates to applicability of the Guidance Note on Accounting for Rate Regulated Activities (hereinafter referred to as the ‘Guidance Note’) with effect from 01.04.2014. The Committee has, therefore, considered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, accounting for interest during construction (IDC) and incidental expenditure during construction (IEDC) during the period of interruption of active construction of the project, recognition of interest costs and other incidental expenditure incurred during interruption of active construction of the capital projects as regulatory assets as per the Guidance Note, whether delay in achieving the Scheduled Commercial Operation Date (SCOD) is attributable or not to the generating company and is due to uncontrollable factors and whether IDC or IEDC are allowable costs to charge from the customers as per the CERC Regulations, etc.
7. With regard to applicability of the Guidance Note before its effective date, the Committee notes that the Guidance Note has already been issued by the Institute although its implementation date has not yet been announced by the Council of the Institute. Accordingly, the Committee is of the view that since the treatment specified in the Guidance Note is the considered view of the Council, the company may adopt the principles of the Guidance Note as applicable to it even before its applicability date.
D. Opinion
8. On the basis of above, the Committee is of the opinion that the company can adopt the Guidance Note before its applicability date, as discussed in paragraph 7 above, in accordance with the applicable provisions of the Guidance Note.
___________________________________ [1]Opinion finalised by the Committee on 6.2.2015.
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