A. Facts of the Case
1. A company is a Government of India enterprise engaged in the business of transmission of power generated by central public sector generating companies to different State Electricity Boards.
2. The company has ventured into a state-of-art project, ‘Unified Load Despatch Centres’ (ULDC). The ULDC are highly sophisticated and are being implemented for the first time in India. The scheme is complex in nature and international consultants of repute were engaged to assist in all phases of work as per the advice of the World Bank. The benefits of the scheme are as given below:
(i) Supervision, monitoring and control of power system on real-time basis.
(ii) Optimal operation of power system (i.e., generation and associated resources).
(iii) Minimisation and faster restoration of grid disturbance.
(iv) Improvement in the quality of supply through better control of frequency, voltage and other parameters.
3. The querist has stated that for effective implementation of the scheme it was necessary that equipments are installed in the facilities owned by the company as well as the facilities owned/operated by the State Electricity Boards. There is complexity involved in the project execution due to the state-of-art technology and paucity of funds and, therefore, the State Electricity Boards entrusted the responsibility to the company to install and implement the scheme in their units.
4. In the MOU between the company and the various State Electricity Boards, it was agreed that "the recovery of cost/charges in respect ofequipment/system supplied/erected by the company in the jurisdiction of various Constituents other than Central Generating Companies shall also be recovered on fixed monthly basis apportioned to the cost incurred by company in respect of Load Despatch and Communication facilities provided for each Constituent". Presently, the ownership of equipment vests with the company and "the ownership of equipments installed at SLDC/Sub-LDCs Sub-stations and Power Stations shall be transferred to respective constituents on payment of book value to querist after full recovery of investment of the company including interest." Accordingly, levelised tariff for recovery of cost incurred by the company has been agreed to by the Regulatory Authority in principle considering life of the equipment as 15 years. For example, cost incurred by the querist in northern region is Rs. 311.93 crore and levelised tariff being allowed for 15 years is Rs. 44.37 crore per year.
5. The equipments installed are in the physical possession of the State Electricity Boards and the benefits of the system are also being drawn by them. The operational and maintenance expenditures in respect of the same are being incurred by the concerned State Electricity Boards.
6. The company has considered this as a finance lease in terms of Accounting Standard (AS) 19, ‘Leases’, issued by the Institute of Chartered Accountants of India. The following accounting treatment is proposed for this transaction:
(a) Cost incurred on installation of ULDCs would be shown as amount recoverable from the State Electricity Boards.
(b) The levelised tariff to be recovered in 15 years would be apportioned between the cost and interest income. Cost recovered would be reduced from the amount recoverable and interest income would be recognised as income
(c) Since the cost incurred is being accounted for as amount recoverable no depreciation would be charged in the books of account of the company. The same would be claimed by the concerned State Electricity Boards.
(d) Interest incurred for the borrowed loans for implementation of the above scheme would be charged to the profit and loss account.
B . Query
7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(a) Whether considering the above transaction as a finance lease in terms of AS 19 is correct.
(b) Whether the above accounting treatment is as per the requirements of AS 19.
13. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 7:
(a) Under the given facts and circumstances of the case, it would be correct to treat the transaction in question as finance lease, subject to complying with other requirements of AS 19.
(b) The accounting treatment of finance lease proposed by the company in paragraph 6 is correct if the cost of equipments represents the net investment in the lease within the meaning of AS 19 and subject to the other requirements of AS 19, such as, disclosure requirements.
Opinion finalised by the Committee on 25.3.2003.