Accounting norms applicability may hit power cos' profits

In a move that could impact profitability of power companies, the government has said that costs incurred on account of extended delay in starting a project should be shown in the profit and loss statement.
The clarification, pertaining to applicability of accounting standards, comes at a time when many power projects are grappling with multiple woes including acute coal scarcity and delay in getting requisite clearances.
At present, many power companies capitalise direct and indirect costs attributable to the fixed assets and borrowing costs, even in case of extended delay in capitalisation of projects, for reasons beyond the control of these companies.

Generally, capitalising cost refers to the expense being shown on the company's balance sheet.
The Corporate Affairs Ministry has clarified that Accounting Standards --AS 10 16 -- are applicable irrespective of whether the power projects are 'cost plus' or 'competitive bid' ones.
AS 10 and AS 16 prescribe principles of capitalisation of various costs. They are based on the concept that only such expenditure that is part of the cost of fixed assets and which increases worth of the assets should be capitalised.

Referring to AS 10, the Ministry through a circular has clarified that extended delay in commencement of commercial production, after the plant is otherwise ready for commercial production, does not increase the worth of the fixed assets and therefore, such costs cannot be capitalised.

It means that all such expenses have to be charged to the profit and loss statement.
Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said the clarification is to address the divergence in accounting practices followed by companies implementing power projects.
"The clarification is expected to have a significant impact on the profitability of several power companies since costs which were being capitalised pending commencement of commercial production pending reasons beyond the companies' control like sorting out the issues on continuous coal procurement, would now be required to be charged to the statement of profit and loss," he told PTI.

The circular, dated August 27, has been issued following representations seeking clarity on capitalisation of costs in cases of competitively bid power projects.
With regard to AS 16, pertaining to borrowing costs, the Ministry has said that in case one of the units of the project is ready for commercial production and is capable of being used, while the other parts are still under construction, the unit ready for commercial production should be capitalised.