The accounting for Expenditure on Shared Infrastructure Facilities and Depreciation thereon:
Facts:
A company, during the year 1984-85, was engaged in the construction and operation of the thermal power plant in the State of Odisha. The company had set up two power plants. (Units I and II e.g., Stage 1) as its maiden venture in the district of Jharsuguda known as IB Thermal Power Station and the Units were commercially operated during December, 1994 and June, 1996 respectively. The company is setting up two new power plants (Units III and IV, i.e., Stage 2) at the same location. The company has stated that the power generated from Units I and II is sold to ABC Ltd., a Government of Odisha Undertaking, at a tariff determined as per bulk Power Purchase Agreement (PPA) executed during the year 1996. The company has further stated that for setting up new power plant Units III and IV (new power plant), total estimated capital cost will be met out of 75% long term loans and 25% as equity from the investors. 50% of the power generated from the new power plant is to be sold to ABC Ltd., and balance 50% of power is to be sold to different power purchasers on long term and short term basis. The new power plant will share some of the existing infrastructure facilities originally constructed for Units I and II which are under direct control of the company. The infrastructure facilities will require substantial capital expenditure for renovation, improvement and addition to make them usable in support of construction of the new power plant. Without the above proposed expenditure, the infrastructure facilities may not support the construction of Stage 2.
Query:
In view of the above facts and accounting requirements, the company has sought the opinion of the EAC as to whether the accounting method of additional expenditure incurred for shared infrastructure facilities and calculation of depreciation separately for charging to operation for Stage 1 and expenditure during construction for capitalisation for Stage 2 as well as inclusion in the capital cost of Stage 2 is in consonance with the generally accepted accounting principles and Accounting Standards followed in India.
EAC Opinion:
After considering paragraph 23 of the Accounting Standard (AS) 10, “Accounting for fixed assets”, the Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and (ii) improvements and betterments. Normally, expenditure on repairs, including replacement cost necessary to maintain the previously estimated standard of performance, is expensed in the same period. Similarly, the cost of adopting a fixed asset to a new use or modernisation /renovation of such asset without actually improving the previously estimated standard of performance is also expensed. Expenditures that add new fixed asset units, or that have the effect of improving the previously assessed standard of performance are capitalised.
The Committee notes from the facts of the case that the capital expenditure is being incurred on existing infrastructure facilities which will support the construction as well as operation of new power plant. Further, the expenditure shall increase the future benefits from the existing asset beyond its previously assessed standard of performance and such asset will be used beyond the original useful life assessed for existing power plants. Accordingly, such additional expenditure incurred on common infrastructure facilities for new power plant can be capitalized.
Further, after considering paragraphs 12.2 of AS 10 and paragraphs 9, 23 & 24 of AS 6, the Committee is of the view that it is only an addition or extension which retains a separate identity and is capable of being used after the existing asset is dispose off, is accounted for and depreciated independently on the basis of an estimate of its useful life. However, in the company’s case, such expenditure is not creating any new asset which is separately identifiable but such asset will be used beyond useful life assessed for existing power plant. Accordingly, it should be capitalised with the cost of existing assets.
As regards the inclusion of the depreciation charged on the asset used in the construction activities of the new power plant in the cost of asset(s) capitalised, the Committee is of the view that to the extant the asset is being used for construction activity, depreciation on the asset is a directly attributable cost of bringing the asset to its working condition for its intended use and accordingly, as per paragraph 9.1 of AS 10, it should be capitalised with the cost of asset(s) as per AS 10.
Therefore, the Committee is of the opinion that the accounting treatment of the expenditure incurred on infrastructure facilities and calculation of depreciation separately for charging to the operation for the existing units and expenditure during construction for capitalisation for the new power plant as well as inclusion in the capital cost of new power plant is not inconsonance with the generally accepted accounting principals and Accounting Standards followed in India.
