A Central PSU was engaged in manufacture and marketing of fertilizers and petrochemicals, engineering design & consultancy services and fabrication & erection of equipments. The Company had closed down one of its petrochemicals (caprolactam) plants due to uneconomic situation. The plant has been in shut down condition for the last seven years.
The Company reviewed the financial viability of caprolactam operations and it was decided to rejuvenate the caprolactam plant to generate reasonable value addition on restart of caprolactam production.
The company has provided the break-up of the expenditure incurred as follows:
i. Machinery including spares: 2.55 crore
ii. Fuel & Power : 13.73 crore
iii. Labour : 1.96 crore
The company has sought the opinion on the following issues arising from the above:
i. How the expenditure incurred for modernisation of a closed plant so as to make it productive and to increase the expected life time to 10 to 15 years, can be accounted?
ii. Whether the expenditure incurred as detailed above, can be capitalised or to be treated as revenue expenditure.
iii. Whether the total amount incurred amounting to Rs. 18.24 crores can be written off over the remaining useful life of the asset as assessed by the technical team and in line with the accounting policy of the Company.
On the basis of the above, the opinion in respect of the issues raised by the company:
(a) Subsequent expenditure should be capitalised when it is probable that the future economic benefits will flow to the Company and the cost of the asset to the Company can be measured reliably. [IND AS 16]
(b) The carrying amount of those assets that are replaced should be derecognised as per the derecognition provisions of IND AS 16.
(c) It can be capitalised only if these are directly attributable to bringing the plant to the location and condition necessary for it to be capable of operating in the manner intended by management.
(d) Any fuel and power consumed for checking the serviceability of existing plant and regular repairs and maintenance. [Will not be capitalised] Hence, the company can capitalise the expenditure incurred for rejuvenating the plant. The above opinion was affirmed by the ICAI-Expert Advisory Committee.
