Expenditure during construction period

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Sukanta Mall (Querist)

30 August 2011 A hydel power generation unit of a Company was found in 2006 not to be viable by the Management after construction but before commercial operation. since then the project is lying as it is and the Management is yet to find a prospective buyer for the project. The incidental expenditures like payment of salary, watch and ward, etc. which amounts almost rupees one crore per year is being treated as 'Expenditue during construction period' and being shown under capital works-in-progress. Is the accounting treatment is correct? If not what should be the proper accounting treatment.

U S Sharma

U S Sharma (Expert)

31 August 2011 unless the plant goes in commercial production, such expenses are righly placed under capital work in progress.

Sukanta Mall

Sukanta Mall (Querist)

31 August 2011 Mr. Sharma, tnx for ur response. Your opinion in fact holds good in the normal circumstances. But here the circumstance is not normal since the capital assets built/ acquired are not going to be used for repeaing commercial benefits in the coming years. Therefore, Paragraph-9.4 of AS-10 comes into picture, which states that in case of prolonged time gap between date of commissioning and commercial operation, the expenditures incurred during the intervening period is to be recognised in P&L account or may be treated as deferred revenue expenditure. In light of this provision and considering the fact that its not a case of mere 'prolonged time gap' rather no chance of commercial operation, the expenditure incurred post commissioning period, whether still be considered as capital in nature? Please give a second thouht and offer your valuable opinion once again. Thanks.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)

01 September 2011 In your case n doubt the provisions of As 10 are applicable but as the company is trying to dispose off the project and no commercial activities have been generated, it is better to transfer the payments to deferred revenue expenditure but how it will help you. Theses are to be reflected under the head either Miscellaneous expenditure or the current assets but once the plant is sold these are to be written off. So the best way is to keep the same under work in progress.

Sukanta Mall

Sukanta Mall (Querist)

01 September 2011 Tnx Mr. Agarwal for ur opinion. It is not the question if i will be helped in change in accounting treatment. Lets focus on the issue that as per AS-10, expenditure incurred with objective of brining that asset to generate revenue or render service should be treated as capital expediture. Going by this provision, here the expenditure incurred is not aimed at bringing the assets into a stage where it can earn revenue or capable of rendering service. So, how could u still think the expenditure can be treated as capital expenditure?

Sukanta Mall

Sukanta Mall (Querist)

19 January 2012 tnx all respondents

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