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advance against depreciation
That it is not treated as income and it is a reserve...
Advance against depreciation (AAD) was a concept which was earlier notified for the Power generating companies by the Central Electricity Regulatory Commission (CERC). It was a part of the Tariff structure and its main objective was to mobilise additional cashflows for the electricity companies. This concept is no more applicable as the recent CERC norms have removed this element.
Electricity Companies (generally assuming 30 years of life) charge 3.33% depreciation every year due to usage of SLM method. In the initial years, the depreciation amount is generally less than the loan's repayment installment amount, so AAD would be collected by the companies to meet this shortfall as an advance against depreciation which would be adjusted in the future years. So once the loan was completely repaid, AAD collected in earlier years would be reduced from the depreciation of the later years and this inturn would lead to lowering of tariffs.
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