CA Anuj Agrawal

CA Anuj AgrawalThere are many situations where an entity needs to incur substantial amount of money to ensure proper use/ access to its existing Assets by way of constructing roads, electricity transmission lines, water well etc. which is generally being called as Enabling Assets. These are eventually not in the name of the entity who actually constructs it but per se economic benefit/ use of such assets clearly demonstrates its importance/ requirement for the entity.

As per the current scenario in India, the Companies which might need to incur amounts to construct these assets need to charge off such expenditures into profit and loss account in the year it is incurred.

Below are some of the definitions pertaining to Fixed Assets which defines its recognition criteria-

As per AS-26 “Intangible Assets” para 6.2 which defines “Asset” – An asset is a resource: (a) controlled by an enterprise as a result of past events; and (b) from which future economic benefits are expected to flow to the enterprise;

As per AS-10 “Fixed Assets” para 6.1 which defines “Fixed Assets”- is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

There was one specific Opinion given by “Expert Advisory Committee” of ICAI (reader can refer ICAI website/ publication to read this full opinion by EAC) on such issue which is being used by the Companies in current accounting practices. Some of the excerpt can be read below-

Under the Opinion by the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) clarified that costs associated with enabling assets, such as construction of connecting roads, electricity transmission lines, etc., the ownership of which does not pass to the company, do not qualify for being capitalised as Capital Work in Progress even during the construction period. Instead, the EAC opined that the amount spent on enabling assets should be expensed off in the period when these are incurred.

The EAC explained, since the control does not pass to the company such enabling assets do not meet the definition of ‘asset’ as defined in the Framework for the Preparation and Presentation of Financial Statements as issued by the ICAI. Thus these cannot be capitalised even though such enabling assets will provide future economic benefits to the company. The EAC also relied on the guidance provided in AS 26, Intangible Assets, which mentions that where an expenditure is incurred to provide future economic benefits but no asset, intangible or otherwise can be created, such expenditure needs to be expensed off when incurred.

 Now, after the applicability of Ind-As/ IFRS for such companies in India, the recognition criteria to create an Asset should be understood and accordingly these changes may follow-

As per Ind-As 16 “Property, plant & equipment” para 6 defines that – Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.

As per Ind-As 16 “Property, plant & equipment” para 7 defines that – The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.

Now, one can visualize after reading the above comparative changes while recognizing assets within these new Accounting Standards (Ind-As). As per the new requirement, any expenditure (subject to other recognition criteria) which has expected life of more than one period (means a year in normal situations) may be considered for capitalizing as asset and it will then be depreciated based on its expected useful lives. Hence, such enabling assets which have been expensed off by the Company will no longer be allowed to continue and the management needs to carefully examine about such expenditures and capitalize the same with their proper depreciation/ amortizations in “Statement of Financial Position” (we call it “Balance Sheet”).

As per the transitional provision given in Ind-As 101 – First time adoption”- if the company has opted for deemed cost (for fixed assets including capital working in progress and intangible assets) exemption then before the applicable transition date, there is no need to bring it all such enabling assets in the books which had been already been charged off into Profit & Loss account, however after the start date of Ind-As accounting all such new expenditure related to such assets will be recorded as fixed assets (subject to satisfying other criteria) and only depreciation (based on expected useful life of the asset recognized) can be routed into the profit and loss.

By referring the new definition of assets as mentioned above, it has many more areas like spare parts, standby equipments. Major repair and overhaul etc where the management needs to evaluate carefully about the implications associated and change their internal identification processes accordingly and many more reclassification from expense to asset might follow in future accounting.

Readers are requested not to refer the contents mentioned above as any kind of advice and evaluate all individual instances based on any relevant facts and circumstances to extent available.

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