1. Background
It is well documented that the Discoms have been unable to pay their outstanding dues to the power generating companies over the last couple of years. This has led to an overall impact on the energy sector where generating companies are facing liquidity issues and are forced to incur additional finance costs.
The Central Government has been trying various measures to resolve this issue. In May 2020, the Government had announced 90,000 crore liquidity infusion for Discoms to assist them pay their outstanding dues to transmission and generating companies. In May 2022, the Ministry of Power (MoP) stated, “the inability of Discoms to pay dues impacts the entire value chain of the power sector. Considering this situation, the Ministry of Power is working on a scheme to mitigate the financial woes of the Distribution Companies that are unable to pay their dues.”
Conforming to the above statement, the MoP vide Gazette Notification dated June 3, 2022, notified “The Electricity (Late Payment Surcharge and Related Matters) Rules, 2022” (LPS rules). These rules provide a mechanism for settlement of outstanding dues of Generating Companies, Inter-State Transmission Licensees and Electricity Trading Licensees.
Electricity (Late Payment Surcharge and Related Matters) Rules, 2022
LPS rules provide for clubbing of all outstanding dues (as on June 3, 2022) including Principal, Late Payment Surcharge etc. into a consolidated amount which can be paid in interest free Equated Monthly Instalments (EMI). The maximum number of such EMIs can be forty eight (48) based on the quantum of the total outstanding dues. The rules also indicate modalities for implementation and penalties for not making payments, in line with the Re-determined Payment Schedule.
2. Accounting impact
The LPS rules will attract provisions of Ind AS 109, ‘Financial instruments’ in terms of modification of financial assets, existing impairment allowances on receivables, discount rates etc.
This article discusses the accounting impact of LPS rules under Ind AS on the power generating companies.
3. Relevant extracts of the accounting standards and LPS rules
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Paragraph 3.2.3, Ind AS 109 An entity shall derecognise a financial asset when, and only when: (a) the contractual rights to the cash flows from the financial asset expire, or (b) it transfers the financial asset as set out in paragraphs 3.2.4 and 3.2.5 and the transfer qualifies for derecognition in accordance with paragraph 3.2.6. Modification of contractual cash flows Paragraph 5.4.3, Ind AS 109 When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset in accordance with this Standard, an entity shall recalculate the gross carrying amount of the financial asset and shall recognise a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets) or, when applicable, the revised effective interest rate calculated in accordance with paragraph 6.5.10. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Modifications Paragraph B5.5.25, Ind AS 109 In some circumstances, the renegotiation or modification of the contractual cash flows of a financial asset can lead to the derecognition of the existing financial asset in accordance with this Standard. When the modification of a financial asset results in the derecognition of the existing financial asset and the subsequent recognition of the modified financial asset, the modified asset is considered a ‘new’ financial asset for the purposes of this Standard. Paragraph B5.5.26, Ind AS 109 Accordingly the date of the modification shall be treated as the date of initial recognition of that financial asset when applying the impairment requirements to the modified financial asset. This typically means measuring the loss allowance at an amount equal to 12‑month expected credit losses until the requirements for the recognition of lifetime expected credit losses in paragraph 5.5.3 are met. However, in some unusual circumstances following a modification that results in derecognition of the original financial asset, there may be evidence that the modified financial asset is credit-impaired at initial recognition, and thus, the financial asset should be recognised as an originated credit‑impaired financial asset. This might occur, for example, in a situation in which there was a substantial modification of a distressed asset that resulted in the derecognition of the original financial asset. In such a case, it may be possible for the modification to result in a new financial asset which is credit‑impaired at initial recognition. Relevant text of LPS rules Rule 2 – Definitions, LPS rules (c) “base rate of Late Payment Surcharge” means the marginal cost of funds based on lending rate for one year of the State Bank of India, as applicable on the 1st April of the financial year in which the period lies, plus five per. cent and in the absence of marginal cost of funds based lending rate, any other arrangement that substitutes it, which the Central Government may, by notification, in the Official Gazette, specify: (f) “due date” means the date by which the bill for the charges for power supplied by the generating company or electricity trading licensee or for the transmission service provided by a transmission licensee are to be paid, in accordance with the agreement , as the case may be, and if not specified in the agreement, forty-five days from the date of presentation of the bill by such generating company, electricity trading licensee or transmission licensee: (g) “Late Payment Surcharge” means the charges payable by a distribution licensee to a generating company or electricity trading licensee for power procured from it, or by a user of a transmission system to a transmission licensee on account of delay in payment of monthly charges beyond the due date. (h) “outstanding dues” means the dues of a generating company, electricity trading licensee, or a transmission licensee, not stayed by a competent court or Tribunal or dispute resolution agency as designated in the Power Purchase Agreement, which remains unpaid by the beneficiary beyond the due date and includes the amount of installment not paid after the re-determined due date under rule 5. Rule 3: Late Payment Surcharge, LPS rules (1) Late Payment Surcharge shall be payable on the payment outstanding after the due date at the base rate of Late Payment Surcharge applicable for the period for the first month of default. (2) The rate of Late Payment Surcharge for the successive months of default shall increase by 0.5 per. cent for every month of delay provided that the Late Payment Surcharge shall not be more than three per. cent higher than the base rate at anytime: Rule 5: Liquidation of arrears, LPS rules (1) The total outstanding dues including Late Payment Surcharge upto the date of the notification of these rules shall be rescheduled and the due dates re- determined for payment by a distribution licensee in the following maximum number of equated monthly installments:-
(3)Notwithstanding anything contained in rule 3, if the distribution licensee agrees to payment of the arrears dues as per the installment fixed under the rule, and makes timely payment of these installment then Late Payment Surcharge shall not be payable on the outstanding dues from the day of the notification of these rules: (4) In case of delay in payment of an installment under sub-rule (1), Late Payment Surcharge shall be payable on the entire outstanding dues as on the date of notification of these rules. |
4. Accounting analysis
As stated above, the MoP has issued LPS rules that lay down mechanism for settlement of outstanding dues of power generating companies remaining unpaid by the Discoms.
As per LPS rules, the Discoms that avail this scheme shall be required to pay the generating company all dues outstanding as at June 3, 2022 along with Late Payment Surcharge (LPS), which refers to the charges payable by Discom because of delay in payment of monthly charges beyond the due date. The Discom is required to pay the consolidated amount in interest free Equated Monthly Instalments (EMI) as determined in accordance with clause 5 of LPS rules.
The key considerations in analyzing the accounting impact of LPS rules are discussed as follows:
- Trade receivables
The Discoms availing LPS scheme shall pay the outstanding receivables due to the generating company in monthly instalments; this arrangement attracts the provisions of Ind AS 109, “Modification of contractual cash flows”. The standard provides that in case where the contractual cash flows of a financial asset are renegotiated or modified and the renegotiation or modification does not result in the derecognition of that financial asset under Ind AS 109, an entity shall recalculate the gross carrying amount of the financial asset and recognise a modification gain or loss in profit or loss.
The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows discounted at the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).
The generating company in line with above guidance shall discount the outstanding receivables and recognise the difference between (a) gross receivables recognised in books of accounts and (b) present value of EMIs agreed by the Discoms discounted at the financial asset’s effective interest rate, as finance cost in the statement of profit or loss.
Thereafter, the generating company shall recognise an unwinding income on the discounted value of receivables over the tenure of EMIs. The unwinding income shall be presented as finance income in statement of profit or loss.
- Late payment surcharge income
As explained above, the Discoms by availing LPS scheme have agreed to compensate the generating company for delay in payment of monthly charges beyond the due date and shall pay a gross amount computed in accordance with LPS rules in fixed instalments.
Accordingly, once the Discom has communicated the outstanding dues and number of instalments in which amount shall be paid, LPS income has accrued in the hands of the generating company.
Ind AS 109 provides that that at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.
Accordingly, the generating company shall recognise the present value of EMIs representing late payment surcharge discounted at the financial asset’s effective interest rate, as income in the statement of profit or loss with increase in corresponding financial asset i.e. trade receivables.
Thereafter, similar to the accounting treatment discussed above, the generating company shall recognise an unwinding income on the discounted value of LPS instalments over the agreed tenure of EMIs. The unwinding income shall be presented as finance income in statement of profit or loss.
- Offsetting of modification loss and late payment surcharge income
The general principle laid out in Ind AS 1 is that assets and liabilities, or income and expenses should not be offset, unless explicitly required or permitted by the standard.
The modification loss and late payment surcharge income are discrete transactions and should not be netted off. This is explained as follows:
- The modification loss has been recognised owing to the guidance provided by Ind AS 109 and this accounting treatment would have been conformed to irrespective of whether Discom had compensated the generating company for delay in payment of monthly charges beyond the due date or not. The difference between (a) gross receivables recognised in books of accounts and (b) present value of EMIs agreed by the Discoms, represents the guiding principle of Ind AS by considering the time value of money.
- The Conceptual Framework for Financial Reporting defines income as increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
The late payment surcharge meets the above definition and represents an additional income accrued in the hands of the generating company as the Discoms have agreed to pay the said amount. This income is independent of the modification loss recognised in accordance with Ind AS 109.
Basis the analysis discussed above, illustrative journal entries have been summarised as follows.
|
Entry |
BS / PL | Amount | Remarks | |
| Interest expense | Dr. | Profit / loss | xxxx | Being modification loss recognised due modification in contractual cash flows. |
| To Trade receivables | Cr. | Balance Sheet | xxxx | |
| Bank | Dr. | Balance Sheet | xxxx | Being EMI of receivables portion received. |
| TDS Receivable | Dr. | Balance Sheet | xxxx | |
| To Trade receivables | Cr. | Balance Sheet | xxxx | |
| Trade receivables | Dr. | Balance Sheet | xxxx | Being unwinding income recognised on discounted trade receivables. |
| To unwinding of financial assets | Cr. | Profit / loss | xxxx | |
| Interest accrued but not due | Dr. | Balance Sheet | xxxx | Being LPS income recognised at present value of EMI cash flows |
| To interest income | Cr. | Profit / loss | xxxx | |
| Trade receivables | Dr. | Balance Sheet | xxxx | Being unwinding income recognised on discounted interest accrued. |
| To unwinding of financial assets | Cr. | Profit / loss | xxxx | |
| Bank | Dr. | Balance Sheet | xxxx | Being EMI of late payment surcharge portion received. |
| TDS Receivable | Dr. | Balance Sheet | xxxx | |
| To Interest accrued but not due | Cr. | Balance Sheet | xxxx | |
| Trade receivables – non current | Dr. | Balance Sheet | xxxx | Being discounted trade receivables recognised as current and non-current. |
| Trade receivables | Cr. | Balance Sheet | xxxx | |
Thanks for reading.
Regards,
Himanshu Kalra
Sources:
- Ind AS 109, ‘Financial Instruments’
- Gazette Notification dated June 3, 2022, notified “The Electricity (Late Payment Surcharge and Related Matters) Rules, 2022
https://egazette.nic.in/WriteReadData/2022/236266.pdf
The views presented above are of the author and does not construe an accounting advice or opinion.
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