Accounting for surcharge on delayed payment

A. Facts of the case

• A Government public sector undertaking is engaged in the business of mining of lignite and generation of power.
• Power generated by the company is being sold to the Electricity Boards (EBs) and DISCOMs as and when generated. However, billing for the said power sale takes place once in a month.
• As per the Tariff Regulation of Central Electricity Regulatory Commission (CERC), the purchaser has a right to pay the bill value within 45 days from the date of receipt of bill. In case the purchaser fails to pay the power bill within the allowed 45 days period, delayed payment surcharge is applicable at a specified rate i.e., 1.5% per month. Similarly, if the purchaser pays the bill within 45 days period, graded rebate is also allowed based on the date of payment of the bill.
• Both delayed payment surcharge as well as rebate are as per the tariff (pricing) Guidelines issued by the regulator (CERC).
• Accounting for Surcharge– As per the accounting practice, the rebate allowed to the power purchaser, is adjusted from the sales revenue. However, the surcharge billed / collected is considered as other revenue.

B. Query

The company has sought the opinion as to whether Surcharge billed/collected from the EBs should be considered under the head “Operating Revenue‟ or as “Other Income‟ as per applicable Accounting Standards (Ind AS-115), since some of the PSUs operating in the power business are considering the same as “operating income‟ whereas some other companies are considering the same as “other income‟.

C. Points consider by Committee

• Committee noted that the late payment surcharge in the extant case is directly linked to the timing of payment by the customers and is to compensate the entity for the time value of money. Therefore, the Committee is of the view that the late payment surcharge is of the nature of finance income in the extant case and should be accounted for and presented accordingly in the financial statements.
• Committee referred to the para 9.2 (related to disclosure of Other income) from the Guidance Note on Division II – Ind AS Schedule III to the Companies Act, 2013, issued by the ICAI, accordingly, “Interest Income‟ for financial assets measured at amortized cost and for financial assets measured at FVOCI, calculated using effective interest method, should be presented in separate line items under “Other Income‟.

D. Opinion

On the basis of the above, the Committee is of the view that the late payment surcharge in the extant case should be presented as “Other Income‟.

The above opinion was affirmed by the ICAI- Expert Advisory Committee

Sahil Goyal, Audit Associate, SW India