An important clarification on capitalisation of cost in cases of Competitive bid power projects has been issued by the Ministry of Corporate Affairs (MCA) vide its general circular no. 35/2014 and reference no. F. No.17/66/2013/CL-V.
In case of Power plant projects huge amount of loan is taken for the purpose of building the plant. The purpose of the loan is to build a power plant which will generate commercial value in future. However, the period between the loan taken for building the plant and operating the plant is long and it may get delayed due to reasons which are beyond developer’s control. Since there is a huge cost incurred during this extended delay, it was found fair to capitalise this cost. In view of the same, a clarification was sought from the Ministry of Corporate Affairs whether the cost incurred during the extended delay of the power plant project must be capitalised into fixed asset.
Another clarification sought was whether the capitalisation of the power plant into fixed assets must be done unit wise or project wise. In other words, when a power project commences to get built-up, it is divided into a certain number of units. One by one these units are getting built and eventually the whole project gets completed and is ready for commercial production. The clarification was sought on whether the units which are completed can be capitalised in that financial year accounting.
MCA stated that as per AS 16, once such unit is completed and capable of being used for commercial production while the other units are yet to be constructed, the cost of constructing such unit can be capitalised. Further AS 10 and AS 16 are both applicable to ‘Competitve Bid Power Projects’ or ‘Cost Plus Projects’.
CS Riddhi Patel – Practicing Company Secretary
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