Facts
The entire equity capital of a public limited company registered under the Companies Act is held by the Government of India. The company was set up as a special purpose vehicle to provide long-term infrastructure finance as per scheme for Financing Viable Infrastructure Projects (‘the financing scheme’).
The company provides infrastructure finance through direct lending, refinancing and take-out finance as per the financing scheme. The company has raised long-term debt by way of loans from Life Insurance Corporation of India, National Small Saving Fund (NSSF), bonds listed in India and foreign currency loans from bilateral and multilateral institutions. Borrowings of the company are backed by sovereign guarantee.
The resources raised by the company are utilised for providing infrastructure finance through direct lending, refinancing and take-out finance as per the financing scheme. Pending disbursement, the resources of the company are held in the form of bank deposits and investments, such as Central/ State Government (PSUs), Certificate of Deposits with scheduled banks, etc. as per investment policy approved by the board of directors of the company.
The company has stated that as the nature of its business is that of an NBFC, the company has been treating interest on bank deposits as income from operations in its books of account and, accordingly, discloses interest on bank deposits as income from operations in the financial statements as well as in the cash flow statements. The Comptroller and Auditor General of India (CAG), while conducting audit of accounts of the company for the year ended 31st March, 2010 and subsequently for the year ended 31st March, 2011 inter alia, however, commented that interest on fixed deposits with banks has been included under income from operational activities instead of disclosing the same as other income. This has resulted in the overstatement of income from operations and understatement of other income by Rs.56,516.94 lakh.
Query:
In view of the above, the company sought the opinion of the Expert Advisory Committee (EAC) as to whether it is appropriate for the company to treat interest on bank deposits as income from operations in its books of account and accordingly, to consider the disclosure interest on bank deposits as income from operations in the preparation of financial statements, including cash flow statement.
Opinion:
As far as the disclosure of such interest income in the financial statements including cash flow statement is concerned, the Committee after considering the definition of the term ‘operating activities’ as provided in paragraphs 5, 12 and 30 of AS-3, is of the view that operating activities are the principal revenue producing activities of the enterprise. The main business of the company is to provide longterm infrastructure loans and financial assistance while optimally managing and utilising its funds. Thus, the company is in the business of earning income by managing its funds which also includes the management of surplus funds between the date of receipt of funds to the date when the funds are finally disbursed. Accordingly, the Committee is of the view that interest earned on investment of surplus funds of the enterprise arises from its principal revenue producing activities and therefore, it should be treated and classified as income from operating activities. Further, in the context of cash flow statement, the Committee notes that paragraph 30 of AS-3 specifically states that cash flows arising from interest and dividends received in case of financial enterprise should be classified as ‘cash flow from operating activity’. Therefore, according to EAC, the treatment given by the company in the books of account is appropriate.
