From Published Accounts

Compiler’s Note
The
EAC of ICAI had in July 2011 opined that expenditure on enabling assets
not owned by the company should be charged off to revenue in the
accounting period in which such expenditure is incurred. ICAI has
subsequently issued ED of AS 10 (revised) wherein the matter was sought
to be addressed. The ICAI has also subsequently issued GN on Rate
Regulated Activities effective from 1st April 2015 with an earlier
adoption permitted.

Given below are instances of accounting
treatment on expenditure incurred by ‘rate regulated entities’ and
earlier adoption of the ICAI GN on Rate Regulated Activities in some
cases.

NTPC Ltd. (31-3-2015)
From Significant Accounting Policies
Fixed Assets

4.
Capital expenditure on assets not owned by the Company relating to
generation of electricity business is reflected as a distinct item in
capital work-inprogress till the period of completion and thereafter in
the tangible assets. However, similar expenditure for community
development is charged off to revenue.

Extract from notes below ‘Tangible Assets’ schedule
h)
The Company has received an opinion from the EAC of the ICAI on
accounting treatment of capital expenditure on assets not owned by the
Company, wherein it was opined that such expenditure are to be charged
to the Statement of Profit and Loss as and when incurred. The Company
has represented that such expenditure being essential for setting up of a
project, the same be accounted in the line with the existing accounting
practice and sought a review.

During the year, ICAI has issued
an exposure draft of AS- 10 ‘Property, Plant & Equipment’ which
would replace the existing AS-10 ‘Accounting for Fixed Assets’. Para 9
of the said exposure draft and explanation thereto provides for
capitalisation of such expenditure alongwith the project cost. The final
AS-10 ‘Property, Plant & Equipment’ is yet to be issued by the
Ministry of Corporate Affairs (MCA), GOI. Pending receipt of
communication from the ICAI regarding the review of opinion &
notification of the Revised AS-10 by the MCA, the Company continues to
account for the said expenditure as per accounting policy no.E-4.

From Comments of C&AG u/s. 143(6)(b) and management reply thereon

Capital work-in-progress – (Note No.13)

Capital Expenditure on assets not owned by the Company – Rs.76.37 crore
As
per provisions of AS-10 highlighted by the Expert Advisory Committee
(EAC) of the Institute of Chartered Accountants of India (ICAI) in their
opinion of May 2010 reiterated in July 2011, the expenditure incurred
on enabling assets not owned by the Company should be charged off to
revenue in the accounting period in which such expenditure is incurred.

The
Company, however, capitalised the expenditure incurred on assets not
owned by the Company. The Company was requested (September 2014) by
Audit, to revise its Accounting Policy in line with the opinion given by
EAC of ICAI, if the decision of EAC on the review application of NTPC
of October 2011 is not received till finalisation of annual accounts of
the Company for 2014- 15. Though the decision of EAC of ICAI in the
matter raised by the Company was not received till finalisation of the
accounts for 2014-15, the Company did not revise its Accounting Policy
on enabling assets not owned by the Company in the current year.

The Company stated that based on their follow up, ICAI issued Exposure Draft of AS-10 which would replace the existing AS-10. The issue is being addressed in the revised AS-10. The reply is to be viewed against the fact that Revised AS-10 has not yet been notified and is likely to have prospective application. Therefore, booking of expenditure on enabling assets not owned by the Company under Tangible Assets and Capital work in progress up to March 2015 has resulted in understatement of “Expenses” by Rs.130.77 crore and overstatement of “Tangible Assets” (Net block) by Rs.54.40 crore as well as “Capital work in progress” by Rs.76.37 crore. Consequently, profit for the year is also overstated by Rs.130.77 crore.

Management Reply
The Company is a Rate Regulated Entity. Accounting of capital expenditure on the assets not owned by the Company was being done by the Company considering the Guidance Note on ‘Treatment of Expenditure during Construction Period’ since long. With the withdrawal of the above guidance note, accounting of such expenditure is being done in line with the provisions of Para 9.1 and 10 of AS 10 on ‘Accounting for Fixed Assets’ which provides that expenditure on assets which is directly attributable to the construction of the power project should be capitalised.

The balances appearing under the head ‘Capital expenditure on assets not owned by the Company’ in Tangible Assets and Capital Work-in-Progress represents expenditure incurred on roads, construction power lines, etc.

Expenditure incurred on these assets is directly attributable to the construction of the power projects without which the construction of projects of the Company would not be possible. In the opinion of the Management, such expenditure is necessary for bringing the asset to the location and condition necessary for it to be capable for operating in the manner intended by the management.

Accordingly, a reference has been made to the Expert Advisory Committee of the Institute of Chartered Accountants of India for review of its opinion which is still awaited. Pending disposal of the reference, the company has continued its existing practice of capitalisation of such expenditure which has been followed consistently over the years. This has also been disclosed in Note No.12 (h) of the financial statements.

NHPC Ltd . (31-3-2015)
From Notes to Accounts

10. Construction activities at site of Subansiri Lower Project have been interrupted w.e.f. 16.12.2011 due to protest of anti-dam activists. Technical and administrative work is however continuing. Management is making all out efforts to restart the work at site. In line with the opinion of Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI), borrowing cost of Rs. 406.83 crore (up to previous year Rs. 766.90 crore) and administration and other cost of Rs. 115.12 crore (upto previous year Rs. 341.54 crore) have been charged to the Statement of Profit & Loss.

The company has, however, adopted the accounting as per Guidance Note on Rate Regulated Activities issued by the Institute of Chartered Accountants of India which allows recognition of ‘Regulatory Asset’ and corresponding ‘Regulatory Income’ of the right to recover such expense which are not allowed to be capitalised as part of cost of relevant fixed asset in accordance with the Accounting Standards, but are nevertheless permitted by Central Electricity Regulatory Commission (CERC), the regulator, to be recovered from the beneficiaries in future through tariff. (Detailed disclosure as per the ibid Guidance Note is given at para no.23 below of this Note)

23. Disclosure relating to creation of Rate Regulated Assets & recognition of Rate Regulated Income as per the ‘Guidance Note on Accounting for Rate Regulated Activities’ issued by the Institute of Chartered Accountants of India (ICAI) :
The company is engaged in construction & operation of hydroelectric power projects. The price (tariff) to be charged by the company for electricity sold to its customers, is determined by Central Electricity Regulatory Commission (CERC) under applicable CERC (terms & conditions of tariff) Regulations. The said price (tariff) is based on allowable costs like interest costs, depreciation, operation &    maintenance including a stipulated return. This form of rate regulation is known as cost-of-service regulations. The basic objective of such regulations is to give the entity the opportunity to recover its costs of providing the goods or service plus a fair return.

For the purpose, the company is required to make an application to CERC based on capital expenditure incurred duly certified by the Auditors or already admitted by CERC or projected to be incurred upto date of commercial operation and additional capital expenditure duly certified by the Auditor or projected to be incurred during tariff year. The tariff determined by CERC is recovered from the customers (beneficiaries) on whom the same is binding.

The above rate regulation does result into creation of right (asset) or an obligation (liability) as envisaged in the accounting framework which is not the case in other industries. The ICAI has issued a Guidance Note on accounting for Rate Regulated Activities, which is applicable to entities that provide goods or services whose prices are subject to cost-of-service regulations and the tariff determined by the regulator is binding on the customers (beneficiaries). As per guidance note, a regulatory asset is recognised when it is probable (a reasonable assurance) that the future economic benefits associated with it will flow to the entity as a result of the actual or expected actions of the regulator under applicable regulatory framework and the amount can be measured reliably.

As explained above, all operating activities of the Company are subject to cost-of-service regulations as it meets the criteria set out in the guidance note hence it is applicable to the Company. Though the Guidance Note is effective from 01.04.2015, the Company has opted to adopt it from the Financial Year 2014-15, since earlier adoption is permitted.

The guidance note also provides that in some cases, a regulator permits an entity to include in the rate base, as part of the cost of self-constructed (tangible) fixed assets or internally generated intangible assets, amounts that would otherwise be recognised as expense in the statement of profit and loss in accordance with Accounting Standards. After the construction is completed, the resulting cost is the basis for depreciation or amortisation and unrecovered investment for rate determination. A regulatory asset is to be recognised by the entity in respect of such costs since the same is recoverable from the customers (beneficiaries) in future through tariffs.

As stated in para 10 above, the borrowing cost of ` 406.83 crore (up to previous year Rs.766.90 crore) and administration and other cost of Rs.115.12 crore (up to previous year Rs.341.54 crore) incurred on ‘Subansiri Lower Project’, wherein the active construction is interrupted since 16.12.2011, have been charged to the Statement of Profit & Loss in compliance of provision of Accounting Standard 10, Accounting for fixed asset & Accounting Standard-16, Borrowing Cost as notified under the Companies Act, 2013. However such expenditure is permitted under CERC (Terms and Conditions of Tariff) Regulations, 2014 to be recovered through future tariffs.

In pursuance of the above, the company has created regulatory assets and has recognised corresponding regulatory income for the Financial Year 2014-15/ credit to the opening balance of surplus against the amount pertaining to the period 16.12.2011 to 31.03.2014 using transition provision as per the ibid Guidance Note as below:

*by corresponding credit to opening balance of Surplus by Rs.876.10 crore (Rs. 1108.44 crore less provision for Income Tax for Rs.232.34 crore) [refer- Note No.3-Reserves and Surplus].

**    by corresponding credit to current year’s profit through “Regulatory Income”. From Auditors’ Report Emphasis of Matters a) ..b) .. c) .. d) .. e) ..

f) Note No. 29 para 23 read with significant accounting policy no. 4 to the Financial Statements regarding earlier adoption (duly permitted) of Guidance Note on Accounting for Rate Regulated Activities issued by The Institute of Chartered Accountants of India.

Our opinion is not modified in respect of these matters.

Nuclear Power Corporation of India Ltd (31-3-2015) From Significant Accounting Policies

Capital Work-in-Progress

Capital work in progress (CWIP) includes all expenditure for acquisition and construction of assets. Such expenditure includes cost of preparing project report, conducting feasibility study, land survey and location study etc. CWIP also includes all direct incidental expenditure during construction (EDC). All common costs are allocated on a rational basis. EDC is allocated on a pro rata basis to the assets capitalised on commencement of commercial operation.

Major Renovation, Modernisation and Upgradation of Units of Stations needing long shut down resulting in increased efficiency of the unit are considered as projects.

All direct expenditure during such major renovation, modernisation & upgradation is considered as ‘CWIP’ and capitalised on its completion.

Any payment in relation to the development schemes/ creation of facilities at projects as per the approval/ directive of Department of Atomic Energy (i.e. regulator for fixation of tariff) and recoverable through tariff is considered as ‘Capital Work in Progress’ and capitalised on completion of the relevant projects.

From Notes to Financial Statements

Department of Atomic Energy (DAE) in consultation with the Tamil Nadu State Government has directed to release funds amounting to Rs.200.00 crore to Tamil Nadu State Authorities (TSAs) towards the approved development schemes for the project affected people of KKNPP. As per the directive of DAE, the said amount released to TSAs is required to be included in the overall project cost of KKNPP 3 & 4 and a sum of Rs.89.34 crore (Rs.45.00 crore in FY 2012-13 and Rs.44.34 crore in FY 2014-15) has been released to TSAs. Further, the said amount released to TSAs is recoverable through tariff on the completion of the said project. The Institute of Chartered Accounts of India in its Guidance note on ‘Accounting for rate regulated activities’ has advised to recognise such nature of payments as regulatory ‘Asset’ as they met the recognition criteria given in the framework. Accordingly, the said amounts released have been accounted under the capital work in progress (Note-12).

Keeping in view the above, a new clause in the significant accounting policies related to Capital Work in Progress (CWIP) has been introduced during the current year ended on 31.03.2015 (Refer Accounting Policy No. G – CWIP). Had this guidance note not been followed , this may result in decrease in CWIP by a sum of Rs.89.34 crore and also decrease in profit before tax by a sum of Rs.89.34 crore.