A government company generated and supplied electricity to a State Electricity Board (SEB) and the Power Departments of other states with a power purchase agreement clause signed for chargingof interest in case of default in payment of the bills raised by the company for the power supplied.
In the company’s annual accounts from the year 1996-97 to the year 2000-01, taking into consideration the above clause, the interest accrued due to the delay in payments by the customers had been duly accounted for.
As per recommendations of the Expert Group on the Settlement of the SEBs Dues, the surcharge (interest) billed to the customers would be waived off to the extent of 60%. Since the company had progressively accounted for the surcharge from the year 1996-97 to 2000-01, to comply with the above recommendation, a very substantial amount had to be written off in the current year. Such accounting treatment would substantially adversely impact the current year’s profit and loss account.
The company approached the Expert Advisory Committee (EAC) to determine whether the surcharge waived could be written off in suitable installments over future accounting periods treatment to minimize the effect on the current year’s profit and loss account.
EAC Opinion-
The EAC was of the view that the surcharge (interest) would have been recognized by the company by a corresponding debit to the concerned SEB/Power Department. Therefore, the surcharge charged was a part of the carrying amount of the debts concerned.
As per the generally accepted accounting principles, current assets are valued at the lower of the cost/carrying amount and net realizable value. Thus, debts should be written off to the extent that they had become irrecoverable due to the surcharge waived. Since no future benefits were expected from the surcharge waived, no part of the same should be carried forward in the balance sheet for being written off in installments over future accounting periods.
The EAC was of the view that waiver of surcharge was arising as part of the company’s ordinary activities and, therefore, did not constitute an extraordinary item.
Also AS 5 requires that “When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately”. Thus the loss arising from the waiver of the surcharge should be separately disclosed in the profit and loss account within profit or loss from ordinary activities.
Conclusion-
Based on the above, the EAC opined that the surcharge waived could not be carried forward in the balance sheet for being written off in installments over future accounting periods.
