Accounting for the share of expenditure incurred by the company on development of power sub-station and for obtaining power connection

A. Facts of the case

• A company is engaged in the manufacture of automobile parts for supplying the same to various automobile manufacturers. An industrial plot for establishing its new unit was acquired by the company in an industrial estate, which was developed by M/s A Ltd.
• Since the unit is a manufacturing unit, it requires power to carry out its production and other operations. A State Power Corporation Limited (SPCL) is the nodal agency to provide power connection to consumers. When the unit approached them for power connection, it was informed that it will take about 3 years to provide the power connection as they are not having any sub-station in the area.
• Presently, all the units in the industrial estate are operating through their self-operated Diesel Generating (DG) sets. The cost of operating through DG sets is very high as compared to cost of power supplied by SPCL.
• M/s A Ltd., with mutual consent of all units in industrial estate, has decided that the said power sub-station will be developed by M/s A Ltd. on behalf of all units and will be handed over to SPCL in industrial estate without any payment so that all the units in industrial estate may get power supply. This power sub-station will be operated and maintained by SPCL and it will also have the right to provide power connections to new units.
• M/s A Ltd. estimated the cost of developing the sub-station and allocated the proportionate cost among all units in the industrial estate on the basis of load requirements by the respective units. The share of the company comes to Rs. 62.70 lakh (to be paid to M/s A Ltd).
• Besides the above, the company will have to pay to SPCL for other expenses, like connection charges, line charges, pole and cable charges.

B. Query

The company has sought the opinion as to:

• Whether the expenditure of Rs. 62.70 lakh to be paid to M/s A Ltd. and subsequent payments to SPCL for getting the power connection is capital or revenue in nature? If it is classified as capital expenditure, then the class of asset in which the expenditure should be booked may be clarified.
• Whether such expenditure creates an intangible asset as defined and governed by Accounting Standard (AS) 26, ‘Intangible Assets’?

C. Points considered by Committee

• Committee referred to the para 49 and 88 (related to definition & recognition criteria of an Asset) of the ‘Framework for the Preparation and Presentation of Financial Statements’ and accordingly noted that an expenditure incurred by an enterprise can be recognised as an asset only if it is a ‘resource controlled by the enterprise’. But in the instant case, the company does not possess either the ownership or the control on the power sub-station.
• As regards the accounting for other types of expenditure incurred by the company, Committee is of the view that the expression ‘charges’, in relation to power connection may be taken to mean the charges being paid for using the asset of SPCL and not that such charges would give rise to any asset (tangible or intangible) which would be controlled by the company.

D. Opinion

On the basis of the above, the Committee is of the opinion that the expenditure of Rs. 62.70 lakh paid to the M/s A Ltd. and subsequent payments to SPCL for getting the power connection are revenue in nature.

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

Sahil Goyal, Audit Associate, SW India