Facts of the case:
Mini Ratna, engaged in coal operations, operated the ‘R washery’ plant commissioned in 1986. Despite surpassing its expected lifespan, the plant continued due to regular maintenance. A tender of Rs. 42.92 crore was awarded for comprehensive enhancements to improve capacity utilization and operational efficiency. By March 2022, the company incurred Rs. 28.10 crore in costs and the same in the statement of profit and loss. The Expert committee (ECA) was tasked with determining whether the company’s accounting treatment adhered to Ind As 16 ‘Property, Plant and Equipment’.
Company’s Contention:
The company argues that replacement activities focusing on specific PPE sections present challenges. Establishing future economic benefits for the entire asset is difficult, and as the expenditure isn’t linked to PPE, estimating overall useful life enhancement is technically unattainable. The said plant, having exceeded its rated life, raises doubts about extending its lifespan through repair activities.
Key EAC Analysis Points:
1. Materiality Consideration: – The EAC underscores the importance of ‘materiality’ under Ind AS 1, assessing whether the expenditure is ‘material’ based on its impact on overall washery operations. – If not ‘material’, it might be expensed in the Statement of Profit and Loss. – If ‘material’, evaluate recognition principles under Ind AS 16.
2. Recognition Principle: – Ind AS 16’s principle applies to costs for adding, replacing, or servicing PPE. Material expenditure should be capitalized for future economic benefits.
3. Estimation of Useful Life: – The EAC emphasizes estimating useful life considering technical evaluation, past experience etc.
Conclusion and Recommendations:
SW Remarks:
The company should align its accounting practices with Ind AS 16 as it specifies the nature of the expense to be charged to Profit and loss a/c and expense that should be capitalized to asset.