How to account for Equipment’s owned by an Enterprise installed with another enterprise (AS 19)

A. Facts of the Case

• A company was a Government of India (GOI) enterprise engaged in the business of transmission of power generated by central public sector generating companies to different State Electricity Boards.
• The company stated that for effective implementation of transmission of power, it was necessary that equipment’s were installed in the facilities owned by the company as well as the facilities owned/operated by the State Electricity Boards.
• The recovery of cost/charges in respect of system supplied by the company shall also be recovered on fixed monthly basis apportioned to the cost incurred by company.
• The ownership of equipment vested with the company and “the ownership of equipment’s installed at Power Stations shall be transferred on payment of book value along with interest.
• A levelized tariff for recovery of cost incurred by the company was agreed considering life of the equipment as 15 years. The equipment’s installed were in the physical possession of the State Electricity Boards and the benefits of the system were also being drawn by them. The company has considered this as finance lease in terms of AS 19.

B. Issue

The company has sought the opinion on the following issues arising from the above:

(a) Whether the cost incurred on installation of equipment’s would be shown as the amount recoverable from the State Electricity Boards.

(b) Whether any depreciation will be charged in the books of account of the company.

C. Opinion

On the basis of the above, the opinion in respect of the issues raised by the company:

(a) Under the given facts and circumstances, it would be correct to treat the transaction as a finance lease, subject to complying with other requirements of AS 19.

(b) The cost incurred on installation of equipment’s would be shown as the amount recoverable from the State Electricity Boards provided cost of equipment represent the net investment in the lease.

(c) Since the cost incurred was accounted for as an amount recoverable, no depreciation shall be claimed in the books of accounts of company, the same shall be claimed by State Electricity Boards.

On the basis of the above, the company should account for equipment owned by an enterprise but installed with another enterprise as finance lease as per AS 19.

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

Apoorv Aggarwal, Audit Associate, SW India