Background:
A Central Public Sector Enterprise (hereinafter referred to as ‘the Company’) was incorporated with an objective to plan, promote and organize an integrated and efficient development of hydroelectric power. The Company constructed hydropower projects and operated them on Build, Own, Operate & Maintain (BOOM) basis.
Electricity being a regulated product, tariff for each power station is determined by the Central Electricity Regulatory Commission (CERC) based on the CERC Tariff Regulations issued for a period of five years at a time. Tariff is fixed by the CERC based on the Capital Cost incurred for the Power Station.
Tariff Regulation provided for recovery of costs incurred on running & maintenance of the Power Station,
depreciation of Property, Plant & Equipment, interest on loans & borrowings for construction of the Plant and interest on working capital, plus a specified rate of return on equity invested in the Plant.
Issue:
The Comptroller and Auditor General (CAG) conducted the supplementary audit of the Company raised an issue regarding capitalization of borrowing cost of Rs. 16.61 crore along with corporate office/regional office expenses incurred between lockdown period from 25th March 2020 to 31st March 2020, and it should have been transferred to “rate regulated assets account” instead of being capitalized.
Management had replied in half margin stating an assurance that borrowing cost capitalized as CWIP during the period of lockdown during FY 2019-20 shall be recognized as Regulatory Deferral Accounts (Debit) balances during the FY 2020-21.
The Company further reviewed the matter during FY 2020-21 and a representation was made to the CAG to review their stand, stating that “View taken by the C&AG was based upon FAQ No. 39 of the ‘ICAI Covid-19 FAQs on Ind AS’ issued by the Accounting Standards Board of the ICAI”, and emphasized that in view of difference in the facts of the case, the opinion expressed by the ASB in FAQ 39 did not apply to the Company.
On the basis of the above, the opinion of the Expert Advisory Committee (EAC) was sought to determine whether the borrowing cost incurred at the project during the lockdown period from 25th March, 2020 to 31st March, 2020, qualified for capitalization.
EAC Opinion:
EAC referred to paragraphs 20 and 21 of Ind AS 23, ‘Borrowing Costs’, reviewed that the suspension of construction activity might be considered ‘temporary’ and the company need not suspend capitalization of interest considering some of the following stated points:
(a) The suspension was caused because of an external common event affecting the whole of India,
(b) The event and therefore the suspension was not in control of the management,
(c) The period of suspension might be considered a short duration especially when considered together with the time required to complete the project.
Based on the above facts, the EAC opined that in the extant case, the suspension of construction activity might be considered ‘temporary’ and the company need not suspend capitalization of interest.
