Power firms told to change P&L entry

MCA says borrowing cost of completed project counts as an expense, not an asset; clarification to affect profits of many

In what could dent the stated profitability of several power companies, the ministry of corporate affairs (MCA) has said borrowing costs of completed projects must be taken as an expense in the profit and loss (P&L) statement of these companies, even if there is delay in commercial production.

Several power companies currently add these as assets in their balance sheets. MCA has issued a clarification on accounting standards AS-10 and AS-16 in this regard.

Power companies have been following the practice of "capitalising their borrowing costs", which means showing these under asset in balance sheets, if there is delay in the commercial production from completed projects. Under the norms, this could be done if commercial production is delayed due to reasons beyond their control.

DAMPENING SPIRITS

• Several power companies currently add borrowing costs of completed projects as assets in their balance sheets
   
• MCA has issued a clarification on accounting standards AS-10 and AS-16 in this regard
   
• Power companies have been following the practice of "capitalising their borrowing costs", which means showing these in asset in balance sheets, if there is delay in the commercial production from completed projects
   
• AS-10 and AS-16 work with an underlying principle, that expenditure can be capitalised as a part of fixed assets only when it increases the assets' worth

Sai Venkateshwaran, partner and head of accounting advisory services, KPMG in India, said: "Costs were being capitalised, pending commencement of commercial production, for reasons like resolution of last-mile connectivity or sorting the issues on continuous coal procurement", constituting the term 'reason beyond the company's control'.

Such 'reasons beyond the company's control' started arising a little too often in recent years. With companies already facing a tough time, the accounting standard difference regarding capitalisation of borrowing costs started coming into the spotlight, causing lack of agreement between power companies' management and their auditors.

"It is basically a judgement call for the management to view a period for which you can capitalise the borrowing costs. With this, the auditor should also be comfortable,'' said Sai. As a result, auditors of various power companies, approached MCA for a clarification in this regard.

"Costs incurred during the extended delay in the commencement of commercial production, after the plant is otherwise ready, does not increase the worth of fixed assets. Such costs cannot, therefore, be capitalised," MCA said in its clarification.

AS-10 and AS-16 work with an underlying principle, that expenditure can be capitalised as a part of fixed assets only when it increases the assets' worth.

Besides, power companies were capitalising borrowing costs of the whole project till all the units had started. These were considering the whole 'project' as an asset, so even when phases or units started commercial production, they kept adding the borrowing costs as assets in the balance sheets, instead of an expense in the P&L account. They've been asked by the government to start capitalising the costs of the unit which had started commercial production. This means if one unit of a big project has started operating, the costs of that unit can no longer be added under the 'assets' of a balance sheet.

"The costs attributable to the completed phases ... would now be charged to the P&L account," said Sai.

The clarification will have "significant impact on the profitability of several power companies", said Sai, as the companies will have to add more costs as expense in their P&L statements.