Capitalisation of expense

AS 826 views 2 replies

CA Tushar Singhania

Asst. Manager Accts & Fin.

402 Points Joined June 2011

Respected Sir/Madam

The compny has recently just finished construction of a new unit and all expenses incured during construction has been debited to Pre-operative account and not P\L

While conductin audit of the company i came across an expense incurred for laying of electricity lines. The amount was paid to West Bengal State Electricity Board. I remember reading about a case law (Income Tax) where the court had ruled that since the ownership was not of the assessee (w.r.t. a transformer, the cost of which recovered from the assessee but ownership was of the electricity board) hence it would be construed as revenue expenditure.

My question is wether as per the Accounting Standards should we concider such expense to be capital or revenue in nature, the company does not have onwership of the said lines, but the economic benefits would be for the company itself, and it would be enjoyed over a period of years.

Thanking you

Tushar Singhania

Replies (2)

Parihar Gopal

Corporate Taxation

392 Points Joined November 2009

its revenue expenditure

last year same case has been faced by me , we have shifted 33 KV power line from our township , & we have booked all the expenditure of 78 lakh as revenue expenditure ,

CA Sachin Rastogi

Audit/IFRS Manager

338 Points Joined September 2009

The below answer is from International accounting standard perspective as normally i follow them:

IFRIC 18- Transfer of assets from customers-specifies the accounting treatment for the receiving entity about the assets from the customer. In your case, the IFRIC explains the accounting treatment in the books of West Bengal Electricity Board and say that Board will account these line at their fair value and record it as fixed assets debit and credit revenue.

IFRIC 18 doesnt explains the accounting treatment in the books of contributing party i.e your client and the management can apply its own accounting policy.

From the busines perspective i feel that in lieu of laying down these electricity lines the entity will get the electricity at a concessional rate (lower than the market rate). If that is the case, then it is advisable to hold this expenditure as an intangible assets which should be amortised over the period when the company will enjoy the concessional rate of electricity. This process will smoothen the profits of the company over the long period and will not impact the income statement in the very first year.

Hope you will agree on the above accounting treatment.