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Accounting norms applicability may

hit power companies' profits

PTI Aug 31, 2014, 12.46PM IST
NEW DELHI: In a move that could impact profitability of
power companies, the government has said that costs
incurred on account of extended delay in starting a project
should be shown in the profit and loss statement.
The clarification, pertaining to applicability of accounting
standards, comes at a time when many power projects are
grappling with multiple woes including acute coal scarcity
and delay in getting requisite clearances.
At present, many power companies capitalise direct and indirect costs attributable
borrowing costs, even in case of extended delay in capitalisa
of these companies.
Generally, capitalising cost refers to the expense being shown
The Corporate Affairs Ministry has clarified that Accounting Standards
irrespective of whether the power projects are 'cost plus' or 'competitive bid' ones.
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Page 1 of 3 Accounting norms applicability may hit power companies' profits - Economic Times
AS 10 and AS 16 prescribe principles of capitalisation of various costs. They are
only such expenditure that is part of the cost of fixed assets
be capitalised.
Referring to AS 10, the Ministry through a circular has clarified that extended delay in commencement of
commercial production, after the plant is otherwise ready for commercial production, does not increase the
worth of the fixed assets and therefore, such costs cannot be
It means that all such expenses have to be charged to the profit and loss statement.
Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said the
clarification is to address the divergence in accounting practices followed by companies
"The clarification is expected to have a significant impact on the profitability of several power companies
since costs which were being capitalised pending commencement of commercial production
beyond the companies' control like sorting out the issues on
required to be charged to the statement of profit and loss," he told PTI.
The circular, dated August 27, has been issued following rep
costs in cases of competitively bid power projects.
With regard to AS 16, pertaining to borrowing costs, the Ministry has said that in case one of the
project is ready for commercial production and is capable of being
construction, the unit ready for commercial production should be capitalised.
"The clarifications sought were with regard to capitalisation of borrowing costs incurred during extended
in commercial production for reasons beyond the developer's control, and
plant should be unit-wise or project-wise," the circular said.
Before taking a final view, the Ministry consulted the Accoun
Accountants of India (ICAI).
According to Venkateshwaran, the Ministry's clarification is only reiterating the
The clarification is expected to ensure consistency in the application of these principles and also align the
practices with those followed internationally, he said.
"Considering India's efforts towards convergence with globally accepted accounting standards,
welcome step and also quite timely," Venkateshwaran added.
The country's power sector is facing tough times mainly on account of coal
electricity generation at various plants.
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Page 2 of 3 Accounting norms applicability may hit power companies' profits - Economic Times
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Readers' opinions (1)
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01 Sep, 2014 04:49 PM
s k garg (noida)

2 questions have been attempted to be answered in this: 1) whether Unit wise
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Page 3 of 3 Accounting norms applicability may hit power companies' profits - Economic Times