Compendium - of - Opinions - Vol. - XXVI - Expert Advisory Committee - Query 25 & 32 PDF

Volume XXVI
ISBN : 978-81-8441-064-8 (Volume XXVI)

81-85868-05-0 (Set)
Volume XXVI
Expert Advisory Committee
The Institute of Chartered Accountants of India
The
Institute of
(Set up by an Act of Parliament)
Chartered
New Delhi
www.icai.org Accountants
of India
June / 2010 (Reprint)
Compendium of Opinions
(Volume XXVI)
of the
Expert Advisory Committee
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

(Set up by an Act of Parliament)
NEW DELHI
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INDIA
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(This twenty sixth volume contains opinions finalised between February

2006 and January 2007. The opinions finalised upto September 1981 are
contained in Volume I. The opinions finalised thereafter upto January
2006, are contained in Volumes II to XXV)
Published in 2009
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ISBN : 978-81-8441-064-8 (Volume XXVI)
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Foreword
Today’s ever-changing economic climate is pushing enterprises to
adopt new business models incorporating multiple business
transactions, and forcing financial executives to address complex
and intricate management issues. As the complexity in business
grows, so do generally accepted accounting principles (GAAPs)
as these principles attempt to measure the economic impacts of
intricate business transactions. These GAAPs cover in their ambit
various relevant legal requirements, accounting standards, guidance
notes, and other authoritative pronouncements of the Institute of
Chartered Accountants of India.
The complexities and intricacies involved in business transactions
also sometimes make the application and implementation of the
GAAPs difficult. To address these issues, the Expert Advisory
Committee has been constituted to provide its independent and
objective opinion on such issues. The opinions provide an insight
to various accounting and auditing related real life practical problems
faced by the industry and members in practice.
I am pleased to note that the Committee has brought out this new
volume of the Compendium of Opinions which is twenty-sixth in its
series and contains the opinions finalised by the Committee between
February 2006 and January 2007. I am sure that like other volumes,
this volume would be of great significance and use for all concerned.
New Delhi CA. T.N. Manoharan

February 4, 2007 President
Preface
This volume of the Compendium of Opinions, which is twenty-sixth
in its series, contains opinions finalised by the Expert Advisory
Committee between February 2006 and January 2007. During this
period, the Committee provided opinions on various matters
involving accounting and/or auditing principles and allied aspects
as enunciated in the applicable accounting, auditing and assurance
standards and guidance notes, relevant statutory requirements,
and also taking into account the international literature available
on the concerned issues.
The various subjects on which the Expert Advisory Committee
expressed its opinion include accounting treatment in respect of
revenue recognition, prior period items, depreciation, segment
reporting, inventory valuation, foreign exchange forward contracts,
intangible assets, deferred tax assets/liabilities, borrowing costs,
etc. As in the preceding volumes of the Compendium of Opinions,
this volume also contains a composite index, which provides ready
reference of all the opinions published in all the preceeding twenty-
five volumes and this volume. The date on which the Committee
finalises its opinion is indicated as a footnote to every opinion in
the Compendium. While making a reference to an opinion, any
subsequent changes in the relevant law(s)/pronouncements, etc.,
must be kept in mind.
The Advisory Service Rules, in accordance with which the
Committee expresses its opinion, is included in the Compendium.
The Rules also make it clear that although the Committee has
been appointed by the Council, an opinion given or a view
expressed by the Committee would represent nothing more than
the opinion or the view of the members of the Committee and not
the official opinion of the Council of the Institute.
I would like to thank my learned colleagues on the Expert Advisory
Committee, namely, CA. S. Gopalakrishnan (Vice-Chairman), CA.
T.N. Manoharan (President), CA. Sunil Talati (Vice-President), CA.
Anuj Goyal, CA. Charanjot Singh Nanda, CA. J.P. Gokhale, CA.
Manoj Fadnis, CA. Sunil Goyal, Shri Jitesh Khosla, CA. S.C.
Vasudeva, CA. H.N. Motiwalla, CA. Prem Prakash Pareek, CA.
Gautam M. Mehra, CA. P.G. Sadguru Das, CA. R. Sivakumar, CA.
V. Krishnan, CA. Seshagiri Rao, CA. Anil Mathur, CA. Aseem
Chawla and Ms. Gurveen S. Chophy. I would also like to thank Dr.
Avinash Chander, Technical Director, Ms. Anuradha Jain, Secretary,
Expert Advisory Committee and CA. Parul Gupta, Executive Officer
of the Technical Directorate for their untiring efforts and support in
the process of finalisation of the opinions.
I firmly believe that this volume will be of much significance and
value to not only the members of the institute but also to the
industry as a whole.
CA. K.P. Khandelwal

New Delhi Chairman
February 4, 2007 Expert Advisory Committee
Contents
Foreword
Preface
1. Treatment of engineering fee paid to a lumpsum turn

key contractor. 1
2. Accounting treatment of expenditure incurred on
licence fee (including user licences) for SAP software. 6
3. Accounting treatment of lease premium received
on lease of industrial plots as industrial estates. 12
4. Depreciation of Water Treatment Plant (WTP) and
Effluent Treatment Plant (ETP). 22
5. Determination of net selling price of a cash generating
unit incurring losses. 28
6. Treatment of deferred tax asset in respect of excess
provision for doubtful advances and doubtful claims. 37
7. Rates of depreciation on various assets involved in
mass rapid transport system. 42
8. Segment reporting for sale of power to the State grid. 49
9. Disclosure of partly secured Bonds. 55
10. Applicability of AS 3 and AS 18. 58
11. Accounting for Minimum Alternative Tax (MAT) under
section 115JB and credit available in respect thereof. 64
12. Recognition of revenue in respect of long production
cycle items. 72
13. Segment reporting by a finance company. 79
14. Booking of export sales/purchases of wheat and rice
under subsidised quota of the Government of India,
purchased from another government undertaking. 88
15. Overhead allocation for the purpose of inventory
valuation at quarter/year end. 96
16. Accounting treatment in respect of side-tracking
costs of wells. 109
17. Creation of provision for contingencies. 119
18. Creation of deferred tax liability on special reserve
created u/s 36(1)(viii) of the Income-tax Act, 1961. 124
19. Capitalisation of certain expenses related to
acquisition of an investment. 140
20. Accounting treatment on cancellation of foreign
exchange forward contract. 142
21. Accounting treatment of Duty Credit Entitlement
under the Target Plus Scheme. 148
22. Treatment of spares. 161
23. Disclosure of interest on shortfall in payment of
advance income-tax in the financial statements. 166
24. Accounting for conversion of membership rights of
erstwhile BSE (AOP) into trading rights of BSEL
and shares. 172
25. Recognition of duty credit entitlement under ‘Served
from India Scheme’. 181
26. Accounting for expenditure on distribution of
mementos to employees during construction period. 187
27. Books of account of franchise business and
accounting implications thereof. 190
28. Capitalisation of establishment expenses of
Rehabilitation & Resettlement office after commissi-
oning of the project. 198
29. Accounting and reporting of interest in jointly
controlled entity. 209
30. Accounting for fixed assets held for sale. 217
31. Treatment of conversion rights for calculation of
diluted EPS. 220
32. Recognition of Duty Credit Entitlement Certificates
issued under the ‘Served from India Scheme’. 225
Advisory Service Rules 234
Index 237
Compendium of Opinions — Vol. XXVI
Query No. 1
Subject: Treatment of engineering fee paid to a lumpsum
turn key contractor.1
A. Facts of the Case
1. A public sector undertaking is engaged in refining and

marketing of petroleum products. The company has entered into a
lumpsum turn key (LSTK) agreement with a contractor for
procurement, supply, commissioning, test run, etc., of a
petrochemical plant at one of its refineries.
2. The querist has stated that the LSTK agreement with the
contractor provides for residual process design, detailed
engineering, procurement, supply, transportation, storage,
fabrication, construction, installation, testing, pre-commissioning,
commissioning and performance guarantee test run, and handing
over of the plant to the company in lieu of one lumpsum amount
agreed to by both the parties.
3. According to the querist, in order to facilitate payments, the
LSTK agreement segregates the lumpsum price in the following
categories:
(a) Price for residual process design and detailed

engineering,
(b) Price for supply portion, and

(c) Price for construction/installation portion.
4. The querist has stated that the contractor carries out all the
jobs necessary to complete the project as per the agreement. As
soon as all the works have been completed in all respects to the
satisfaction of the engineer-in-charge of the company, final tests
and commissioning of the complete system plant(s), equipment(s),
vessels and machinery, and associated system, etc., as required
in the specifications, are undertaken by the contractor at the risk
and cost of the contractor under the overall supervision of the
1
Opinion finalised by the Committee on 27.3.2006
1
engineer-in-charge of the company. Upon satisfactory conclusion

of the final tests and commissioning of the system, the engineer-
in-charge issues a final tests and commissioning certificate, which
certifies the date on which the final tests and commissioning of the
system have been completed. As and from the date of the issue of
final tests and commissioning certificate, the company is deemed
to have taken over the work(s).
5. As per the querist, advance payments are being made to the
contractor based on different stages of performance as agreed in
the LSTK contract on account of all the three categories (residual
process design and detailed engineering, supply, and construction/
installation). After completion of the contract, the contractor raises
the final invoice and the company makes the final payment. Till
the date of completion of the project, as mentioned in the above
paragraph, all the advance payments made to the contractor are
accounted for as capital advance and, accordingly, disclosed as
capital work-in-progress in the financial statements. The querist
has further clarified that the payment terms, as mentioned at
paragraph 3 above are only in the nature of milestones for making
payment under the LSTK contract and the ownership of the full
project under such LSTK contract passes to the company only
after satisfactory completion of the complete project.
6. On final completion of the project, capitalisation of assets
under various heads, i.e., plant and machinery, equipments and
appliances, buildings, furniture and fixtures, etc., is carried out in
the books of the company based on the information provided by
the contractor.
7. In this connection, the querist has mentioned that one of the
elements of cost indicated in paragraph 3 above claimed by the
contractor relates to detailed engineering and design of the plant.
The examples of such process design and detailed engineering
are designing layout of the equipments, ensuring that the length,
size, thickness of equipments, pipes, etc., adheres to the safety
norms, etc.
8. The querist has also drawn the attention of the Committee to
paragraphs 9.1 and 10.1 of Accounting Standard (AS) 10,
2
‘Accounting for Fixed Assets’, issued by the Institute of Chartered

Accountants of India, which state as under:
“9.1 The cost of an item of fixed asset comprises its purchase
price, including import duties and other non-refundable taxes
or levies and any directly attributable cost of bringing the
asset to its working condition for its intended use; any trade
discounts and rebates are deducted in arriving at the purchase
price. Examples of directly attributable costs are:
(i) site preparation;

(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations for
plant; and
(iv) professional fees, for example fees of architects
and engineers.
The cost of a fixed asset may undergo changes subsequent
to its acquisition or construction on account of exchange
fluctuations, price adjustments, changes in duties or similar
factors.” (Emphasis supplied by the querist.)
“10.1 In arriving at the gross book value of self-constructed

fixed assets, the same principles apply as those described in
paragraphs 9.1 to 9.5. Included in the gross book value are
costs of construction that relate directly to the specific asset
and costs that are attributable to the construction activity in
general and can be allocated to the specific asset. Any internal
profits are eliminated in arriving at such costs.”
According to the querist, considering the above provisions of AS
10, the expenses incurred towards process design and engineering
fees under the LSTK agreement are accounted for as a component
of the cost of the fixed assets and, accordingly, apportioned among
the various categories of the fixed assets.
3
B. Query
9. The querist has sought the opinion of the Expert Advisory
Committee on the following issues in respect of accounting for
expenses incurred towards engineering and design of the plant
under the LSTK agreement:
(a) Whether the accounting treatment of capitalising the

expenditure incurred on process design and engineering
cost as a component of the total asset is in order.
(b) If the answer to (a) above is in the negative, whether the
cost is to be separately accounted for as an intangible
asset.
(c) If the answer to (b) above is also in the negative, the

suggested accounting treatment to be followed in this
regard may be given.
C. Points Considered by the Committee
10. The Committee notes that the basic issue raised in the query
relates to the treatment of expenditure incurred on process design
and engineering cost in respect of various assets under the LSTK
agreement. The Committee has, therefore, answered only this
issue and has not touched upon any other issue arising from the
Facts of the Case, such as, accounting treatment of payments
made to contractor based on stages of completion.
11. As far as the expenditure relating to detailed engineering and
design of the plant is concerned, the Committee notes paragraph
20 of AS 10 and paragraph 10 of AS 26, which state, respectively,
as follows:
AS 10
“20. The cost of a fixed asset should comprise its

purchase price and any attributable cost of bringing the
asset to its working condition for its intended use.”
4
AS 26
“10. In some cases, an asset may incorporate both intangible
and tangible elements that are, in practice, inseparable. In
determining whether such an asset should be treated under
AS 10, Accounting for Fixed Assets, or as an intangible asset
under this Statement, judgement is required to assess as to
which element is predominant. For example, computer software
for a computer controlled machine tool that cannot operate
without that specific software is an integral part of the related
hardware and it is treated as a fixed asset. The same applies
to the operating system of a computer. Where the software is
not an integral part of the related hardware, computer software
is treated as an intangible asset.”
12. From the above, the Committee is of the view that the
expenditure on detailed engineering and process design consisting
of layout of the equipments is an integral part of the related fixed
asset and is also attributable to the cost of bringing the related
asset to its working condition for its intended use. Hence, the
expenditure on detailed engineering and process design should
be allocated to various related fixed assets on the basis of benefit
derived by these assets in this regard.
D. Opinion
13. On the basis of the above, the Committee is of the following
opinion on the issues raised in paragraph 9 above:
(a) Yes, the accounting treatment of capitalising the
cost as a component of the total asset is correct.
(b) Since the answer to (a) above is not in the negative, this
question does not arise.
(c) The accounting treatment should be as stated at (a)
above.
5
Query No. 2
Subject: Accounting treatment of expenditure incurred on
licence fee (including user licences) for SAP
software.1
1. A public sector undertaking is engaged in refining and
marketing of petroleum products having its marketing network
spread throughout the country. During the year 1999-2000, the
company decided to implement SAP ERP system in a phased
manner so as to cover all its units spread throughout the country
over an expected period of 5 to 6 years.
2. Accordingly, the company budgeted for the estimated total
expenditure likely to be incurred for implementation of SAP system
throughout the company and actions were initiated in this regard.
3. Prior to Accounting Standard (AS) 26, ‘Intangible Assets’,

issued by the Institute of Chartered Accountants of India, becoming
mandatory w.e.f. 1.4.2003, the expenditure incurred by the company
on implementation of SAP software including user licences
separately procured under agreement with SAP India (other than
the hardware portion) has been charged off as expenditure in the
year of incurrence. The querist has also informed that the payment
made to SAP India is only towards the user licence fees for the
right to use the SAP software and nothing has been paid on
account of the cost of the SAP software.
4. The company continued to incur expenditure after 1.4.2003
on consultancy charges and user licences in line with its plan for
implementation of SAP system throughout the company in a phased
manner as was envisaged at the time of deciding and initialising
the implementation of SAP system in the company. The querist
has also informed that the payment of consultancy charges is over
and above the payment made on account of user licence fees of
SAP software to the supplier company. The Annual Maintenance
Charges (AMC) being paid to the supplier company is towards
1
6
maintenance of the software, right to use the latest version of the

software and minor upgradation in the software from time to time.
Such expenditure incurred after 1.4.2003 was continued to be
charged to revenue since the original cost incurred on SAP user
licences for the software were already charged to revenue prior to
1.4.2003 as explained in paragraph 3 above. According to the
querist, this is in line with the understanding conveyed by
paragraphs 58 and 59 of AS 26, which envisage that subsequent
expenditure on an intangible asset can be recognised as intangible
asset only if the original expenditure has been treated as an
intangible asset subject to satisfying the conditions laid down for
determining the test of admissibility as an intangible asset.
Paragraphs 58 and 59 are reproduced by the querist as below:
“Past Expenses not to be Recognised as an Asset
58. Expenditure on an intangible item that was initially

recognised as an expense by a reporting enterprise in
previous annual financial statements or interim financial
reports should not be recognised as part of the cost of
an intangible asset at a later date.
Subsequent Expenditure
59. Subsequent expenditure on an intangible asset after
its purchase or its completion should be recognised as
an expense when it is incurred unless:
(a) it is probable that the expenditure will enable

the asset to generate future economic benefits
in excess of its originally assessed standard of
performance; and
(b) the expenditure can be measured and attributed
to the asset reliably.
If these conditions are met, the subsequent expenditure
should be added to the cost of the intangible asset.”
5. The querist has stated that in addition to the expenditure
stated in paragraph 4 above, the expenditure incurred on or after
7
1.4.2003 and also further expected to be incurred for total

stabilisation of SAP system in the company is mainly for procuring
additional user licences for operating the software as was originally
envisaged by the company and the same is required to achieve
the originally assessed optimal utilisation envisaged while deciding
to implement the SAP system.
B. Query
Committee with respect to the expenditure incurred for acquiring
the user licences for right to use of the SAP software, on the
following issues:
(a) Whether the accounting treatment of charging subsequent
expenditure on SAP licence fee (including user licences)
incurred on or after 1.4.2003 to the profit and loss account
is correct in view of the fact that the initial expenditure
incurred on SAP software including licence fee prior to
1.4.2003 (i.e., before AS 26 became mandatory) has
already been charged to revenue in the year of incurrence.
(b) In case the answer to (a) above is in the negative, what

is the suggested accounting treatment for the following:
(i) Expenditure incurred on licence fee for SAP software

prior to 1.4.2003 (i.e., before AS 26 became
mandatory).
(ii) Subsequent expenditure on user licence fee for the
SAP software incurred on or after 1.4.2003, which
has already been charged to revenue.
(iii) Whether the adjustments, if any, required to be
carried out for the accounting periods prior to 31st
March, 2005 are to be reflected as prior year
adjustment as per Accounting Standard (AS) 5, ‘Net
Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’.
8
C. Points considered by the Committee

7. The Committee notes that the issue raised in the query relates
to accounting for the expenditure incurred on purchase of user
licences for SAP software. The Committee has, therefore, restricted
the opinion only to this issue and has not considered any other
issue arising from the Facts of the Case, for example, accounting
treatment for Annual Maintenance Contract of the software.
8. The Committee is of the view that prior to Accounting Standard
(AS) 26, ‘Intangible Assets’, becoming mandatory, i.e., before
01.04.2003, all fixed assets, whether tangible or intangible, were
covered by Accounting Standard (AS) 10, ‘Accounting for Fixed
Assets’. AS 10 dealt with assets such as know how, patents, etc.,
the relevant paragraphs in respect of which were withdrawn when
AS 26 became mandatory. In this context, the definition of the
term ‘fixed asset’ as per AS 10, contained in paragraph 6.1, is
reproduced below:
“6.1 Fixed asset 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.”
9. The Committee notes from the Facts of the Case that the
company has purchased the user licences for SAP software for
the purpose of use in the business and not for sale. Therefore, in
the view of the Committee, since the user licences have a life
longer than one year, the expenditure on purchase of user licences,
before AS 26 becoming mandatory, i.e., before 01.04.2003, should
have been capitalised as per AS 10 and should have been
depreciated/amortised as per the requirements of Accounting
Standard (AS) 6, ‘Depreciation Accounting’, over the estimated
useful life of the user licences. Since this was not done, this
amounts to an error and, accordingly, it comes within the purview
of the definition of ‘prior period items’ under Accounting Standard
(AS) 5, ‘Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies’. The definition of the term ‘prior
period items’ as contained in paragraph 4 of AS 5, is reproduced
below:
9
“Prior period items are income or expenses which arise

in the current period as a result of errors or omissions in
the preparation of the financial statements of one or more
prior periods.”
10. In view of the above, if the assets (user licences) are existing
on the date of the balance sheet, the company needs to capitalise
the above-said asset at a value arrived at by capitalising the
expenditure incurred with retrospective effect and amortising the
same for the past accounting years. The value of the asset so
arrived at should be brought into books in the current year by a
corresponding credit to the profit and loss account as a prior
period item.
11. The Committee further notes the definition of the term
‘intangible asset’, provided in paragraph 6 of Accounting Standard
(AS) 26, ‘Intangible Assets’, which is reproduced below:
“An intangible asset is an indentifiable non-monetary
asset, without physical substance, held for use in the
production or supply of goods or services, for rental to
others, or for administrative purposes.”
The Committee is of the view, on the basis of the above definition,
that the user licences purchased are intangible assets. Therefore,
the expenditure incurred on the purchase of user licences for SAP
software on or after 01.04.2003, should have been capitalised and
amortised over their estimated useful life as per AS 26. Since this
was not done as above, the company is required to make
adjustments as suggested in paragraph 10 above.
12. The Committee does not agree with the contention of the
querist that previous expenditure which should have been
capitalised but which was expensed can not be capitalised in view
of the requirements of paragraph 58 of AS 26 reproduced in
paragraph 4 of the Facts of the Case. In the view of the Committee,
paragraph 58 of AS 26 is related only to that expenditure which
could not qualify to be recognised as an intangible asset as per
the requirements of the said Standard, at the time of incurrence
and, therefore, was charged as an expense, but later it qualified to
10
be recognised as an intangible asset. Paragraph 58 of AS 26

provides that the expenditure so expensed can not be capitalised
as an intangible asset in a later year. Thus, this paragraph does
not relate to an expenditure which fulfilled all the conditions for
recognition as an intangible asset but was erroneously expensed.
Therefore, in the view of the Committee, paragraph 58 is not
relevant in the present case.
13. The Committee also does not agree with the contention of the
querist that as per paragraph 59 of AS 26, reproduced in paragraph
4 of the Facts of the Case, the subsequent expenditure can not be
capitalised as the original expenditure on acquisition was not
capitalised. In the view of the Committee, the subsequent
expenditure dealt with in paragraph 59 is that expenditure which is
incurred on those items which were recognised as assets as per
AS 10 or AS 26 in earlier years. Thus, simply because the
expenditure incurred initially on acquisition of user licences for
SAP software was not capitalised, cannot be an argument for not
capitalising user licences acquired subsequently as they meet the
recognition criteria for capitalising the user licences as an intangible
asset. Accordingly, the Committee is of the view that the further
purchase of user licences does not amount to be a subsequent
expenditure as contemplated in paragraph 59, as this expenditure
amounts to creation of an intangible asset.
14. The Committee notes paragraph 4.3 of the ‘Preface to the

Statements of Accounting Standards’ which states that “The
Accounting Standards are intended to apply only to items which
are material….”. Therefore, the above suggestions are only
applicable if the amounts involved are material.
D. Opinion
opinion on the issues raised in paragraph 6 above, subject to the
consideration of materiality stated in paragraph 14 above:
(a) The accounting treatment of charging expenditure, on

purchase of user licences on or after 1.4.2003, to the
profit and loss account is not correct.
11
(b) Subject to the condition that the user licences exist on

the date of the balance sheet, i.e., the user licences
have a useful life on the balance sheet date,
(i) expenditure incurred on purchase of SAP software

user licences prior to 1.4.2003 should be capitalised
as suggested in paragraph 10 above;
(ii) expenditure incurred on SAP user licences, on or
after 1.4.2003, should be recognised as an intangible
asset as suggested in paragraph 11 above; and
(iii) adjustments required to be carried out for the
accounting periods prior to 31st March, 2005, should
be reflected as prior period item as suggested in
paragraph 10 above.
Query No. 3
Subject: Accounting treatment of lease premium received
on lease of industrial plots as industrial estates.1
1. A government company, registered under the Companies Act,

1956, is engaged in the business of developing industrial plots,
leasing them to industrial units and meeting their financial needs.
2. The company has developed various industrial plots, which
were acquired through the Government. The company provides
adequate infrastructure facilities like construction of roads, drainage
system, sewerage system, water distribution network, maintenance
of the plots, etc. The said plots are then leased out to various
industrial units who construct buildings/sheds etc. The lease is
given for a period of 99 years and a non-refundable lease premium
1
12
amount is collected towards 100% of the estimated development

expenditure besides a yearly rental of Re 1/-.
3. The querist has stated that till 1988-89, the following accounting
practice was followed:
(i) the acquisition cost of land as well as the development
expenditure of the industrial estates were shown as
‘Current Assets’ and the lease premium received on
allotment of the corresponding developed plots was shown
as “Current Liabilities” in the balance sheet.
(ii) The resultant profit or loss on such activity was
ascertained on completion of the development of the
industrial complex.
4. According to the querist, the above accounting treatment was

changed in the financial year 1988-89, as per the advice of the
Accountant General (Commercial), to the understated method,
which has been followed upto and including the year 2005-06:
(a) accounting for the cost of land as well as the development
expenditure of the industrial estates as ‘Fixed Assets’,
(b) proportionate amount of the lease premium is accounted
for as income of the concerned financial year,
(c) the balance of the lease premium is presented under
‘current liabilities’, and
(d) depreciation is charged to the profit and loss account at
the relevant rates on the concerned assets.
5. During the supplementary audit for the financial year 2002-
03, the Accountant General (Commercial) commented that the
company was not following the accounting practice as per an
Opinion given by the Expert Advisory Committee of the Institute of
Chartered Accountants of India (Query No. 22 of Compendium of
Opinions – Volume No. XX), wherein it was opined that in such
cases, the cost of acquisition of land and the relevant development
expenditure should be treated as current assets till the plots are
leased and after leasing of the plots, the lease premium received
13
should be recognised as income in the profit and loss account in

the year in which the recognition conditions as laid down in
Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the
Institute of Chartered Accountants of India are fulfilled and the
costs of acquisition of land and the development expenditure
thereon should also be expensed in the same year.
6. The Accountant General (Commercial) had commented on

the same issue for the accounting year 2003-04 and had stated
that the current liabilities and fixed assets were being overstated.
7. The Board of Directors of the company has discussed the
issue and decided as below:
(i) That the matter regarding accounting treatment to be
given in the books of account in respect of the plots/land
allotted by the corporation under the lease premium
scheme for the period of 99 years be referred to the
Expert Advisory Committee of the Institute of Chartered
Accountants of India for expert opinion.
(ii) That the matter be brought to the Board after receipt of
the expert opinion.
(iii) That till such time, the present accounting treatment be
continued in order to have consistency.
8. The querist has reproduced below the gist of the Opinion of
the Expert Advisory Committee referred to in paragraph 5 above,
for immediate reference:
(a) The query was regarding a government company, which

was in the business of developing industrial estates and
housing plots, including provision of amenities and
infrastructure just like the company under consideration.
The developed industrial estates were given out on lease
for 60 years for which the company was receiving a
lease premium at the beginning of the lease period. The
lease premium was not refundable during the period of
lease. However, the lease was transferable to any other
entrepreneur with the consent of the company. A nominal
14
lease rent of Re. 1/- per annum was charged from the
lessees besides recovery of service and maintenance
charges towards maintenance of the industrial estate.
(b) The lease premium was accounted as income at 1/60th
each year and the balance lease premium was shown as
‘lease premium received in advance’ under the head
‘current liabilities’. The leasehold land, and the land
development expenditure were shown as ‘Fixed Assets’.
On objections raised by statutory auditors, the company
started amortising the proportionate land development
expenditure during the operative period of lease and
included the same under the head ‘Depreciation’.
(c) Considering the above basic facts, the Expert Advisory
Committee was of the view that in respect of the lease
agreements for long periods, e.g., 60 years and 99 years,
it is generally expected that on the expiry of the lease
term, either the lease period would be extended or the
title will pass to the lessee at some agreed amount. This
amounts to passing of the significant rights of ownership
in the land to the lessee. Thus, it would be in the nature
of sale of plots and should be accounted for, accordingly.
This requirement, according to the Committee, is
recognition of the principle of ‘substance over form’.
(d) The cost of land along with development expenditure
should be reflected as a current asset and should be
expensed in the same year in which the revenue from
the lease of plots is recognised as income keeping in
view the matching principle.
(e) Also, as per Accounting Standard (AS) 9, ‘Revenue
Recognition’, issued by the Institute of Chartered
Accountants of India (ICAI), the following three conditions
are laid down for recognition of revenue:
(i) Performance of the act giving rise to revenue
(ii) Measurability of the revenue
(iii) Collectability of the revenue
15
(f) In the light of the above considerations, the Expert

Advisory Committee opined that the lease of land should
be treated as sale. Thus, whole of the lease premium
should be recognised as revenue in the year in which
the three conditions as laid down in AS 9 are fulfilled and
the related costs of acquisition of land and development
expenditure thereon should be expensed in the same
period.
9. The querist has further stated that perusal of the lease deed
of the company reveals certain important provisions which are
enumerated below (a copy of the deed has been separately
provided by the querist for the perusal of the Committee):
(i) In fulfillment of one of its principal objects, the company
has laid out the land into various plots, drains and for
other commercial betterment schemes for the benefit of
the occupants of the plots so laid out. The company
proposes to have control over the amenities so created,
such as roads, water supply, drainage, etc., so that these
are distributed to the industrialists in a reasonable and
equitable manner. The company also proposes to allot
the land on long lease for 99 years inasmuch as it is felt
that the characteristic and homogeneity of the industrial
estate should not be destroyed. Also, the intention of the
company is that the leased land should be put to the
exclusive use for industrial purposes and thereby
facilitating the implementation of the pattern of
industrialisation that was envisaged. (Emphasis supplied
by the querist.)
(ii) The lessee shall pay 100% of the estimated development

expenditure as non-refundable premium in addition to
paying rent of Rs. 100/- for 99 years (Re. 1 p.a. for 98
years and Rs. 2 for 99 th year) and service and
maintenance charges as may be intimated on a monthly
basis.
(iii) In case the lessee violates any conditions of the lease
deed, the company may determine the lease during the
16
period of lease and take possession of the said allotted

plot together with the factory buildings and other buildings
located on the same and the lessee shall not be entitled
to any compensation for any of the construction on the
allotted plot or any refund of any amount paid by the
lessee by virtue of this deed. (Emphasis supplied by the
querist.)
(iv) If the lessee, by any of his action, causes the land to be
sold or attached, then the company may determine the
lease and take possession of the said property along
with the buildings thereon as mentioned in the above
paragraph. (Emphasis supplied by the querist.)
(v) If any portion of land allotted to the lessee is found
unutilised or in excess of the lessee’s requirements, then
the company may take over the unutilised or excess
land and the proportionate non-refundable premium paid
by the lessee for such land shall be refunded to the
lessee. (Emphasis supplied by the querist.)
(vi) On expiry of the lease term laid down in the lease deed,
the new lease of the said plot for a similar period of 99
years shall be entered into on such covenants and
provisions, as contained in the original lease deed.
10. The querist has stated that the above clauses reveal the
intention of the company to hold the said plots as its own fixed
assets and the agreement reveals that no significant rights of
ownership pass on to the lessee, inasmuch as that the company
retains the right to take over the land with its buildings thereon,
upon certain events taking place, even without compensation being
payable to the lessee.
11. According to the querist, the condition, “performance of the

act giving rise to revenue” is not absolutely fulfilled in this instance,
as the company retains the right of ownership and even eviction
and repossession, and also the company retains the power to
extend the lease for another 99 years. Hence, in substance, it
cannot be said that the significant rights of ownership have passed
on to the lessee.
17
12. Besides, as per the querist, if the cost of acquisition of land

and development cost thereon, are treated as current assets and
expensed in the same year in which the revenue from sale of plots
is recognised, it leads to the anomaly that the fixed assets of the
company are written off, while the company retains the ownership
rights on such assets which are only leased. According to the
querist, this is not in accordance with Accounting Standard (AS)
10, ‘Accounting for Fixed Assets’, issued by the Institute of
Chartered Accountants of India, or generally accepted accounting
principles. This accounting treatment will not reflect a true and fair
view of the financial statements and would invite a qualification
thereon by the auditors.
13. The querist has further stated that accounting of the lease
income fully in the year of receipt will also not be in accordance
with the principles of recognition of revenue laid down in AS 9,
viz., measurability of revenue, as the lease income is paid in
advance for 99 years and if accounted in one year, will lead to
lopsided presentation of income and non-matching of income with
relevant expenditure like depreciation on amenities and other
infrastructure. In the view of the querist, this accounting treatment
will not reflect a true and fair view of the financial statements and
would invite a qualification thereon by the auditors.
14. The querist has reproduced the professional opinion of the
statutory auditors on this issue which is as follows:
“(i) … we are of the professional opinion that the accounting
system followed by the company, i.e., accounting for the cost
of acquisition of land and development costs thereon and
other infrastructure costs as fixed assets and accounting for
the lease premium received in advance as current liabilities
and proportionate lease premium (1/99th) as income for the
financial year and charging off depreciation for the relevant
assets to profit and loss account, is as per the generally
accepted accounting principles and relevant accounting
standards.
(ii) Besides, we are of the professional opinion, that the
opinion of the Expert Advisory Committee of the ICAI should
18
be taken into consideration with all other relevant factors and

that it is specifically mentioned that the opinion of the Expert
Advisory Committee is only that of the Expert Advisory
Committee and does not necessarily represent the opinion of
the Council of the Institute of Chartered Accountants of India,
which is binding on all institutions and members of the ICAI.”
B. Query
15. Considering the above factors, the querist has sought the
opinion of the Expert Advisory Committee as to whether, on
consideration of the facts and circumstances of the case concerned,
it is right for the company to continue its accounting practice of:
(a) recognising the cost of land as well as the development
(b) recognising the lease premium under ‘Current Liabilities’,
(c) recognising the proportionate amount of lease premium

as income of the concerned financial year, and
(d) charging the depreciation to the profit and loss account

at the relevant rates on the concerned assets.

16. The Committee notes paragraph 17(b) of Accounting Standard
(AS) 1, ‘Disclosure of Accounting Policies’, issued by the ICAI,
which states as follows:
“17(b) Substance over Form

The accounting treatment and presentation in financial
statements of transactions and events should be governed by
their substance and not merely by the legal form.”
17. The Committee notes from the above that the transactions
and events are accounted for and presented in accordance with
their substance, i.e., the economic reality of events and transactions
and not merely with their legal form. The Committee notes from
the ‘Facts of the Case’ that the plots of land are given by the
company on lease for a period of 99 years, which is renewable for
19
a similar period. The Committee is of the view that taking into

account the long period of lease with renewability clause, and the
prevalent commercial practices in India in this regard, in substance,
the lease of land in this case amounts to passing of significant
rights of ownership to the parties concerned. Thus, such a lease
would be in the nature of sale of plots and should be accounted
for accordingly. In this regard, the Committee notes that the principle
of substance over form is also recognised in Schedule VI to the
Companies Act, 1956, which requires leaseholds to be shown as
fixed assets of the lessee and not of the lessor. The Committee
further notes from the ‘Facts of the Case’ that the leasing of
industrial plots constitutes an ordinary activity of the company;
hence, land along with the development expenditure incurred
thereon should be accounted for as ‘Current Assets’ rather than
‘Fixed Assets’. Accordingly, no depreciation should be charged on
such assets. These current assets should be expensed in the year
in which revenue from the leasehold premium is recognised, as
discussed in the following paragraphs.
18. The Committee also notes that the querist has argued in
paragraph 9(iii) above that the company can take back the
possession of the leased land, in case the lessee violates the
conditions of the lease deed, or causes the land to be sold or
attached, or keeps the land unutilised, etc. The Committee is of
the view that such terms and conditions under the lease deed are
generally inserted so as to regulate the use of industrial plots for
specified purposes only and for their optimum utilisation. The
Committee also notes that the company also reserves the right of
taking the possession of factory buildings and other construction
on land, which are not even owned by the lessors. In the view of
the Committee, this does not represent the intention of the company
to hold them as its fixed assets. Similarly, the Committee is of the
view that the above-mentioned conditions in case of lease of land,
in no way, represent the intention of the company to hold the plots
as its own fixed assets as defined in Accounting Standard (AS)
10, Accounting for Fixed Assets, issued by the Institute of Chartered
Accountants of India. Accordingly, the contentions of the querist,
as stated in paragraphs 11 and 12 above are also not tenable as
20
the significant rights of economic ownership of the land leased for

a long period of 99 years, do not vest with the company.
19. Regarding the recognition of revenue, the Committee notes
from the lease deed supplied by the querist, separately that the
upfront lease premium comprises upfront leasehold premium on
account of the acquisition of land and on account of development
expenditure, which is collectively referred to as ‘estimated
development expenditure’. As far as premium in respect of land is
concerned, it should be recognised as revenue in the profit and
loss account in the year in which the recognition conditions laid
down in paragraph 11 of AS 9 are met. The revenue from
development expenditure such as expenditure on construction of
roads, drainage system, sewerage system, etc., should be
recognised proportionately over the term during which the
development activity is carried on, on the basis of stage of
completion, every year. The Committee is of the view that this
manner of recognition of revenue on account of upfront lease
premiums related to estimated development expenditure would
lead to matching of revenue with the cost. As far as the expenditure
incurred in future on services and maintenance of land is concerned,
the same will be matched with the services and maintenance
charges obtained by the company.
D. Opinion
20. On the basis of the above, the Committee is of the opinion
that it is not right for the company to continue its accounting
practice of:
(a) recognising the cost of land as well as the development
(b) recognising the lease premium under ‘Current Liabilities’,
(c) recognising the proportionate amount of lease premium
as income of the concerned financial year, and
(d) charging the depreciation to the profit and loss account
at the relevant rates on the concerned assets.
The company should follow the accounting policy as suggested by
the Committee in paragraphs 17 and 19 above.
21
Query No.4
Subject: Depreciation of Water Treatment Plant (WTP) and

Effluent Treatment Plant (ETP).1
1. A public sector company with majority shareholding by a state

government, manufactures paper for newsprint, printing and writing.
The company has a water treatment plant and an effluent treatment
plant.
Water Treatment Plant (WTP)
2. The company constructed a WTP in 1985 to treat raw water

drawn from a river to carry out various production activities. The
capacity of WTP was augmented in 1995. WTP consists of the
following:
(i) Clarifiers
(ii) De-mineralisation plants (DM plants)
(iii) Neutralisation pit and drain
(iv) Pipelines
3. The querist has stated that the machineries installed in the

WTP, including civil foundation works to install the machinery,
were capitalised as ‘plant and machinery’. The other civil works
were capitalised as ‘Factory Buildings’. The assets are still in use.
4. The querist has further stated that the company has

constructed three water storage reservoirs during the years 2000,
2003 and 2005 to store water pumped from a river and use the
same for the requirements of the factory. The life of these storage
reservoirs is expected to be very long. These water storage
reservoirs and connected pipelines have been capitalised as
‘Factory Buildings’ by considering the nature of works.
1
22
Effluent Treatment Plant (ETP)
5. The company constructed ETP to treat the effluent in 1985

and augmented the capacity in 1995. ETP consists of the following:
(i) Effluent clarifiers (primary and secondary clarifiers)
(ii) Effluent filter house and clarifiers
(iii) Drains
(iv) Effluent/anaerobic lagoon
6. According to the querist, the machineries installed in the

effluent clarifiers, effluent filter house and clarifiers, and lagoon
including civil foundation works to install the machineries were
capitalised as ‘Plant and Machinery’. The other civil works were
capitalised as ‘Factory Buildings’. These assets are still under use.
7. The querist has provided the following tables containing the

processes/activities carried on by using various civil works involved
in WTP and ETP, respectively, along with the remarks of the
company:
CIVIL WORKS IN WATER TREATMENT PLANT (WTP)
S. Description Nature of civil Process Remarks

No. work involved activity
1 Intake well Reinforced ce- Water is being Not directly in-
sumps ment concrete pumped from the volved in treat-
(RCC) structure sump for entire ment.
at ground level. plant.
2 Clariflocula- RCC circular To treat water Directly involved
tor 1 and 2 tank at ground with chemicals in pre-treatment
(Clarifiers) level. for clarifying the of water.
water.
23
3 Reservoirs RCC circular tank For storing clari- Directly involved

at WTP at ground level. fied water being in treatment.
(Reservoir 1 pumped for plant
and 2) use.
4 De-minerali- RCC framed To house equip- Not directly in-
sation plant structure building. ments involved in volved in treat-
de-mineralisation ment of water
activity.
5 Neutralisa- RCC rectangular Water is being Directly involved
tion Pit and ground level tank. neutralised by in treatment.
drains adding chemi-
cals.
6 Softening RCC framed To house equip- Not directly in-
plant structure building. ments involved in volved in treat-
softening activity. ment of water
CIVIL WORKS IN EFFLUENT TREATMENT PLANT (ETP)

S. Description Nature of civil Process Remarks
No. work involved activity
1 Primary RCC circular tank To clarify the Directly involved
clarifiers at ground level. effluent with in treatment.
chemicals.
2 Anaerobic R e c t a n g u l a r For anaerobic Directly involved
lagoon earth-en lagoon treatment for in treatment.
with stone pitch- reducing COD.
ing.
3 Aeration Rectangular pond For treatment of Directly involved
pond with RCC lining effluent with in treatment.
and walkways at aerobic action.
ground level.
4 Secondary RCC circular tank For settlement of Directly involved
clarifier and at ground level. sludge. in treatment.
drains
5 Sludge RCC circular tank For removal of Directly involved
thickener at ground level. sludge. in treatment.
6 Filter House RCC framed To house ETP Not directly
building structure building. filters for sludge involved in
removal. treatment.
24
B. Query
Committee on the following issues:
(i) Whether the capitalisation of civil works in Water
Treatment Plant (WTP) and Effluent Treatment Plant
(ETP) as ‘Factory Buildings’ is correct? If not, what should
be the treatment for the above civil works?
(ii) Whether the capitalisation of raw water storage reservoir

as ‘Factory Buildings’ is correct? If not, what should be
the treatment?
(iii) If the above items are to be capitalised as ‘Plant and
Machinery’, whether the revised depreciation rates are
applicable prospectively or retrospectively.
(iv) If the revised depreciation rates are to be applied
retrospectively, whether the depreciation pertaining to prior
periods should be presented under ‘prior period items’.

9. The Committee is of the view that in the absence of the
definitions of the terms ‘Factory Buildings’ and ‘Plant and
Machinery’, under the Companies Act, 1956, a functional test has
to be applied to determine whether a structure is ‘plant’ or not. The
functional test requires to examine various aspects of the structure
to determine whether it is an apparatus with which the activity or
activities is/are carried on or it is a mere setting of or part of the
premises in which the activity is/activities are carried on.
10. The Committee notes from the Facts of the Case that the civil
works of WTP and ETP consisting of reservoirs, drains, lagoons,
various clarifiers, neutralisation pit, aeration pond, and sludge
thickener are directly involved in the process of treatment of water
and effluent. On this basis, the Committee is of the view that the
civil works involved in the Water Treatment Plant and Effluent
Treatment Plant, excluding intake well sumps, de-mineralisation
plant, softening plant and filter house building, are not merely the
25
premises in which the work is carried on; these are rather the
means with which and through which the activities of treatment of
water and effluent are carried on. Hence, in the view of the
Committee, the civil works directly involved in the treatment of
water and effluent should be capitalised as ‘Plant and Machinery’
instead of ‘Factory Buildings’ and accordingly, depreciation as per
the rates applicable to ‘Plant and Machinery’ should be provided
on these items, taking into account the rates given in Schedule
XIV to the Companies Act, 1956.
11. As far as depreciation on other civil works, i.e., which are not
directly involved in the process of treatment of water and effluent,
such as, intake well sumps, de-mineralisation plant, softening plant
and filter house building is concerned, the Committee notes from
the Facts of the Case that these civil works only act as the setting
or structure containing various equipments and are not directly
involved in the process of water treatment and effluent treatment.
Hence, the Committee is of the view that these civil works should
be classified as ‘Factory Buildings’ and accordingly, depreciation
on these items should be provided as per the rates applicable to
‘Factory Buildings’ under Schedule XIV.
12. The Committee notes that the information provided by the

querist in tables (paragraph 7 above), explaining the nature of civil
works involved and the process activities carried on by them, does
not specifically mention raw water storage reservoir. Hence, if the
nature of the reservoir is such that it is not directly involved in the
treatment of water and effluent, it should be treated as ‘Factory
Building’.
13. Regarding the revision of the rates of depreciation to be applied
on civil works directly involved in WTP and ETP, the Committee is
of the view that the practice followed by the company of providing
depreciation on these civil works, at the rates applicable to ‘Factory
Buildings’, is an error as depreciation on these items should have
been provided as per the rates applicable to ‘Plant and Machinery’,
from the very beginning. In view of this, depreciation on the said
items should now be provided with retrospective effect. The
deficiency or surplus arising from retrospective recomputation of
26
depreciation in accordance with the changed rates due to change

in classification of assets should be adjusted in the accounts in the
year in which change is given effect to as a prior period item as
discussed in the following paragraphs.
14. The Committee notes the definition of the term ‘prior period
items’ and paragraphs 15 and 19 of Accounting Standard (AS) 5,
‘Net Profit or Loss for the Period, Prior Period Items and Changes
in Accounting Policies’, issued by the Institute of Chartered
Accountants of India, which state as follows:
prior periods.”
“15. The nature and amount of prior period items should

be separately disclosed in the statement of profit and
loss in a manner that their impact on the current profit or
loss can be perceived.”
“19. Prior period items are normally included in the
determination of net profit or loss for the current period. An
alternative approach is to show such items in the statement of
profit and loss after determination of current net profit or loss.
In either case, the objective is to indicate the effect of such
items on the current profit or loss.”
15. From the above, the Committee is of the view that the change
in the depreciation rates due to change in the classification of
assets arising from an error, as discussed in paragraph 13 above,
is a prior period item and, therefore, excess/short depreciation
charge pertaining to prior periods should be disclosed separately
in the current year’s profit and loss account in a manner that its
impact on the current year’s profit or loss can be perceived.
D. Opinion
27
(i) No, capitalisation of civil works directly involved in water

treatment and effluent treatment, as ‘Factory Buildings’
is not correct. These civil works should be treated as
‘Plant and Machinery’.
(ii) Capitalisation of raw water storage reservoir as ‘Factory
Buildings’ would be correct only if it is not directly involved
in the process of treatment of water and effluent as
discussed in paragraph 12 above.
(iii) The revised depreciation rates are applicable

retrospectively.
(iv) Depreciation pertaining to prior period due to retrospective

application of depreciation rates is a prior period item,
which should be separately disclosed.
Query No. 5
Subject: Determination of net selling price of a cash
generating unit incurring losses.1
1. The accounts of a public sector company are audited by the

Office of the Principal Director of Commercial Audit & Ex- Officio
Member, Audit Board. During the audit of the accounts of the
company for the financial year 2004-05, certain differences of
opinion had arisen in respect of Accounting Standard (AS) 28,
‘Impairment of Assets’, issued by the Institute of Chartered
Accountants of India. The auditors, however, had cleared the
accounts for the year 2004-05, on the commitment made by the
company to take opinion from the Expert Advisory Committee of
the Institute of Chartered Accountants of India.
1
28
2. The querist has stated that the company has mainly three
different businesses controlled by three separate business groups
as under:
(i) Business Group (Petroleum) – It is engaged in storage

and distribution of high speed diesel, motor spirit (petrol),
kerosene oil, naphtha, aviation turbine fuel, etc., and
manufacture and marketing of automotive lubes and
grease, etc. Turnover of this business group (B.G.) in
the financial year 2004-05 was Rs. 13,364 crore. Under
the B.G. (Petroleum), there are 3,272 petrol pumps as
on 31.03.2005, 17 depot terminals (for storing and
distribution of petroleum products), 27 divisional offices,
4 regional offices, one marketing head office at Mumbai
and one corporate head office at Kolkata. For budget
and MIS reporting purpose, B.G. (Petroleum) as a whole
has been considered as a separate unit and budgeted
profitability is being prepared for the B.G. (Petroleum)
separately.
For the purpose of accounting, all transactions (cash/
bank/journal) at the divisional office level and depot level
are consolidated at the concerned region. Except some
major adjustments pertaining to margin updation,
Government subsidy is being controlled and accounted
for at marketing head office for petroleum at Mumbai.
Considering 4 regional final accounts and separate final
accounts for LPG business, marketing head office for
petroleum prepares consolidated final accounts for the
petroleum business which is ultimately consolidated at
corporate head office at Kolkata along with the final
accounts of B.G. (Explosives) and B.G. (Cryogenics).
Considering various provisions of AS 28 and the industry
practice on the issue, the company has considered
business group (petroleum) as ‘cash generating unit
(CGU)’ instead of considering each regional offices and
LPG business as separate CGUs. Reason being that
individual regions and LPG business are not independent
29
of cash inflows from the other assets or group of assets

of the B.G. (Petroleum). The statutory auditors of the
company and C&AG have agreed to consider the B.G.
(Petroleum) as a separate CGU.
(ii) Business Group (Explosives) – It is engaged in
manufacture and marketing of site mixed explosives, re-
pumpable bulk emulsion explosives, cartridged explosives,
detonating fuses, cast boosters, etc. Turnover of this
group in the financial year 2004-05 was Rs. 92 crore.
Under B.G. (Explosives), there are 14 manufacturing
plants, two marketing offices at Delhi and Nagpur and
one divisional head office at Kolkata. Individual plants
are maintaining accounts and making all payments except
for majority of the raw material payment which is procured
centrally from the divisional head office (DHO) at Kolkata.
Sundry creditors for raw material and debtors are also
being maintained centrally at divisional head office.
For the purpose of Budget and MIS, overall profitability

of the B.G. (Explosives) is being prepared. However,
plant-wise profitability is also prepared as per the
requirement of the management from time to time. Trial
balances of each plant, after getting audited, are sent to
DHO for consolidation and preparation of final accounts
of B.G (Explosives) which subsequently get consolidated
at corporate head office, Kolkata along with B.G.
(Cryogenics) and B.G. (Petroleum) accounts. The final
accounts get audited at regional level, Mumbai Head
office level for B.G. (Petroleum) and at DHO level for
B.G. (Cryogenics) and B.G. (Explosives).
Considering various provisions of AS 28, the company
has considered the Business Group (Explosives) as a
separate ‘cash generating unit’ (CGU). Reasons being:
(a) The sales allocation of principal customer of B.G.
(Explosives) is being made from DHO, Kolkata. (b) All
the major raw materials are being procured centrally at
DHO and then placed with the plants as per the
requirements. (c) The overall control of the plants with
30
respect to finance, human resource, marketing issues

are being centrally controlled at DHO. The statutory
auditors of the company and C&AG have agreed to
consider the B.G. (Explosives) as a separate CGU.
(iii) Business Group (Cryogenics) - It is engaged in
manufacture and marketing of aluminium cryogenic
containers, stainless steel industrial cryovessels, etc.
Turnover of this group in the financial year 2004-05 was
Rs. 23 crore. Under B.G. (Cryogenics), there is one plant
at Nasik and one cryogenics head office at Mumbai.
Final accounts of B.G. (Cryogenics) are prepared at
Mumbai and finally consolidated at Kolkata corporate
office along with B.G. (Petroleum) and B.G. (Explosives)
accounts. For the purpose of budget and MIS, overall
profitability of the B.G. (Cryogenics) is being prepared.
Considering various provisions of AS 28, the company
has considered Business Group (Cryogenics) as a
separate ‘Cash Generating Unit’.
3. According to the querist, as stated above, in line with the
various paragraphs of AS 28, the company has identified three
cash generating units (CGUs), i.e., B.G. (Petroleum), B.G.
(Explosives) and B.G. (Cryogenics). For the purpose of testing the
impairment of the three CGUs of the company, while calculating
the recoverable amount, value in use has been considered for B.
G. (Petroleum) as it was possible to forecast the future cash flows
for the next 10 years (emphasis supplied by the querist). However,
according to the querist, to calculate the recoverable amount of
B.G. (Explosives) and B.G. (Cryogenics), assets’ net selling price
has been considered in line with paragraph 15 of AS 28 as it was
not possible to forecast the future cash flows nearest to actual due
to volatile conditions in the market. The querist has also mentioned
that these two business groups have been suffering losses for the
last five years. While calculating the net selling price of the above
two business groups, since the company was unable to make
reliable estimate of the amount obtainable from the sale of the
assets in an arm’s length transaction between knowledgeable and
willing parties, the company had appointed chartered valuers to
31
arrive at the net realisable value of the assets. On the basis of the
valuers’ reports, the company had tested the impairment of assets
of the B.G. (Explosives) and B.G. (Cryogenics) and found that the
carrying amounts of the assets are less than the recoverable
amount (net realisable value) of the assets. Hence, as per the
querist, no impairment of assets was warranted.
4. The querist has further stated that while considering the net
selling price as recoverable amount of the above two business
groups, the company has placed reliance on the following: (a)
definition of recoverable amount as per paragraph 4 of AS 28 –
since these two business groups are making losses, net selling
price of the assets will always be higher than the value in use. (b)
paragraph 15 of AS 28, which, inter alia, states that it is not
always necessary to determine both assets’ net selling price and
value in use.
B. Query

(a) In the absence of a binding sale agreement in an arm’s

length transaction, or if the assets are not traded in the
active market, or in the absence of the current bid prices
of the assets, or if the prices of the most recent
transaction are not available,
(i) Whether the assets can be valued by a chartered

valuer for accounting at net selling price/ net
realisable value, and
(ii) If yes, whether such value can be considered for
the purpose of testing impairment.
(b) If a CGU is incurring losses, whether the carrying amount
should not be more than its value in use.
relates to the calculation of impairment loss in case of B.G.
32
(Explosives) and B.G. (Cryogenics). The Committee has, therefore,

considered only this issue and has not touched upon any other
issue arising from the Facts of the Case, such as, identification of
CGUs, testing of impairment in case of B.G. (Petroleum), etc.
7. The Committee notes that the basic objective of providing
impairment loss is to ensure that the assets of an enterprise are
carried at no more than their recoverable amount. Recoverable
amount, according to AS 28, “is the higher of an asset’s net selling
price and its value in use.” Hence, the company has to compare
the net selling price and value in use of an asset and the higher of
these two, which is the recoverable amount, is then compared with
the carrying amount of the asset, and if an asset is carried at more
than its recoverable amount, i.e., the asset is impaired, then the
impairment loss is recognised.
8. Insofar as the calculation of value in use is concerned, the

Committee notes the definition of the term ‘value in use’, as
contained in paragraph 4 of AS 28 and paragraphs 26 to 30 of AS
28, which state as follows:
“Value in use is the present value of estimated future
cash flows expected to arise from the continuing use of
an asset and from its disposal at the end of its useful
life.”
“26. In measuring value in use:
(a) cash flow projections should be based on

reasonable and supportable assumptions that
represent management’s best estimate of the
set of economic con ditions that will exist over
the remaining useful life of the asset. Greater
weight should be given to external evidence;
(b) cash flow projections should be based on the
most recent financial budgets/forecasts that have
been approved by management. Projections
based on these budgets/forecasts should cover
a maximum period of five years, unless a longer
period can be justified; and
33
(c) cash flow projections beyond the period covered

by the most recent budgets/forecasts should be
estimated by extrapolating the projections based
on the budgets/forecasts using a steady or
declining growth rate for subsequent years,
unless an increasing rate can be justified. This
growth rate should not exceed the long-term
average growth rate for the products, industries,
or country or countries in which the enterprise
operates, or for the market in which the asset is
used, unless a higher rate can be justified.
27. Detailed, explicit and reliable financial budgets/forecasts
of future cash flows for periods longer than five years are
generally not available. For this reason, management’s
estimates of future cash flows are based on the most recent
budgets/forecasts for a maximum of five years. Management
may use cash flow projections based on financial budgets/
forecasts over a period longer than five years if management
is confident that these projections are reliable and it can
demonstrate its ability, based on past experience, to forecast
cash flows accurately over that longer period.
28. Cash flow projections until the end of an asset’s useful
life are estimated by extrapolating the cash flow projections
based on the financial budgets/ forecasts using a growth rate
for subsequent years. This rate is steady or declining, unless
an increase in the rate matches objective information about
patterns over a product or industry lifecycle. If appropriate,
the growth rate is zero or negative.
29. Where conditions are very favourable, competitors are

likely to enter the market and restrict growth. Therefore,
enterprises will have difficulty in exceeding the average
historical growth rate over the long term (say, twenty years)
for the products, industries, or country or countries in which
the enterprise operates, or for the market in which the asset
is used.
34
30. In using information from financial budgets/forecasts, an

enterprise considers whether the information reflects
reasonable and supportable assumptions and represents
management’s best estimate of the set of economic conditions
that will exist over the remaining useful life of the asset.”
9. Regarding the determination of net selling price of the two
business groups, the Committee notes the definition of the term
‘net selling price’ as contained in paragraph 4 of AS 28, and
paragraphs 16 and 20 to 22 of AS 28, which, state as follows:
“Net selling price is the amount obtainable from the sale
of an asset in an arm’s length transaction between
knowledgeable, willing parties, less the costs of disposal.”
“16. It may be possible to determine net selling price, even if
an asset is not traded in an active market. However, sometimes
it will not be possible to determine net selling price because
there is no basis for making a reliable estimate of the amount
obtainable from the sale of the asset in an arm’s length
transaction between knowledgeable and willing parties. In this
case, the recoverable amount of the asset may be taken to
be its value in use.”
“20. The best evidence of an asset’s net selling price is a
price in a binding sale agreement in an arm’s length
transaction, adjusted for incremental costs that would be
directly attributable to the disposal of the asset.
21. If there is no binding sale agreement but an asset is
traded in an active market, net selling price is the asset’s
market price less the costs of disposal. The appropriate market
price is usually the current bid price. When current bid prices
are unavailable, the price of the most recent transaction may
provide a basis from which to estimate net selling price,
provided that there has not been a significant change in
economic circumstances between the transaction date and
the date at which the estimate is made.
22. If there is no binding sale agreement or active market
for an asset, net selling price is based on the best information
35
available to reflect the amount that an enterprise could obtain,

at the balance sheet date, for the disposal of the asset in an
arm’s length transaction between knowledgeable, willing
parties, after deducting the costs of disposal. In determining
this amount, an enterprise considers the outcome of recent
transactions for similar assets within the same industry. Net
selling price does not reflect a forced sale, unless management
is compelled to sell immediately.”
10. The Committee notes from the above that while AS 28 does
not exempt any enterprise from calculating value in use under any
condition, it exempts calculation of net selling price under paragraph
16 reproduced above, where net selling price cannot be arrived at
in accordance with the requirements of the Standard. The Standard
does not contemplate that in case the net selling price cannot be
arrived at as per its requirements, such a price can be arrived at
on the basis of the valuation made by a chartered valuer. The said
paragraph provides that in such a case the enterprise should,
instead, use the value in use. Thus, in the view of the Committee,
the company should compute its value in use even though there
are volatile conditions in the market, on the basis of the reasonable
projections supported by the existing conditions and assumptions
over the remaining useful life of the asset as stated in paragraphs
26 to 30 of AS 28. The Committee does not agree with the
conclusion given by the querist that in case a CGU is incurring
losses, its value in use will always be lower than that of its net
selling price. In any case, as stated in paragraph 16 of AS 28, in
case the net selling price cannot be computed, the value in use is
to be considered by the company. The underlying reason for this
requirement is that the fixed assets are held by the company for
use in the business rather than for the purpose of their sale. Thus,
computation of value in use is paramount.
D. Opinion
11. The Committee is of the following opinion on the issues raised
in paragraph 5 above:
(a) In the absence of a binding sale agreement in an arm’s
length transaction, or if the assets are not traded in the
36
active market, or in the absence of the current bid prices

of the assets, or if the prices of the most recent
transaction are not available,
(i) the values provided by a chartered valuer can not

form basis for determining the net selling price/net
realisable value of the assets.
(ii) No, such value can also not be considered for the
purpose of testing impairment.
(b) For the purpose of testing impairment, the carrying
amount has to be compared with the recoverable amount
(higher of an asset’s net selling price and its value in
use). In case net selling price cannot be determined in
accordance with principles of AS 28, value in use may
be taken as recoverable amount, which then should be
compared with the carrying amount of the asset. In such
a case, carrying amount of the asset should not be more
than its value in use, irrespective of the fact that CGU is
incurring losses.
Query No. 6
Subject: Treatment of deferred tax asset in respect of excess

provision for doubtful advances and doubtful
claims.1
1. The accounts of a public sector company are audited by the

office of the Principal Director of Commercial Audit and Ex-officio
Member, Audit Board. During the audit of the accounts of the
company for the financial year 2004-05, certain differences of
opinion had arisen between the company and the auditors in respect
1
37
of Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’,

issued by the Institute of Chartered Accountants of India. The
auditors, however, cleared the accounts for the year 2004-05,
giving the benefit of doubt and on the commitment made by the
company to take opinion of the Expert Advisory Committee of the
Institute of Chartered Accountants of India.
2. The company has mainly three different businesses controlled

by three separate business groups, namely, Petroleum, Explosives
and Cryogenics.
3. The querist has separately provided detailed calculation of
deferred tax assets/liabilities of the company for the last two years
and a copy of the balance sheet as on 31.03.2005 for the perusal
of the Committee. According to the querist, the computations show
that the company has considered only the provision for doubtful
debts against sundry debtors for the purpose of creating deferred
tax assets and has not considered provision for doubtful advances,
provision for doubtful claims and provision for doubtful deposits for
this purpose. The reason given by the querist for the aforesaid
treatment is that, from its past experience, the company is
reasonably certain in respect of provisions for doubtful advances
and doubtful claims that there are remote chances of these resulting
into bad debts. The querist has also emphasised that there were
no bad debts against these two provisions for the years 2001-02
to 2003-04. As per the querist, the company is consistently following
the same method while calculating the deferred tax assets/liability.
B. Query
Committee as to whether while calculating deferred tax assets/
liability for the company as a whole, provision for doubtful advances
and provision for doubtful claims need to be considered for
calculation of deferred tax assets.
5. The Committee notes that the basic issue raised by the querist
relates to creation of deferred tax asset/liability in respect of
provision for doubtful advances and doubtful claims. Hence, the
38
Committee has considered only this issue and has not examined
any other issue arising from the Facts of the Case, for example,
creation of provision in respect of doubtful debts against sundry
debtors and treatment of deferred tax assets/liabilities in respect
thereof, etc.
6. The Committee notes that Part III of Schedule VI to the
Companies Act, 1956 states in paragraph 7(2) as below:
“(2) Where –
(a) any amount written off or retained by way of
providing for depreciation, renewals or diminution in
value of assets, not being an amount written off in
relation to fixed assets before the commencement
of this Act; or
(b) any amount retained by way of providing for any
known liability;
is in excess of the amount which in the opinion of the directors
is reasonably necessary for the purpose, the excess shall be
treated for the purposes of this Schedule as a reserve and
not as a provision.”
7. The Committee also notes that Schedule VI to the Companies

Act, 1956, under ‘Instructions in accordance with which assets
should be made out’ in respect of ‘sundry debtors’ provides that
“The provisions to be shown under this head should not exceed
the amount of debts stated to be considered doubtful or bad and
any surplus of such provision, if already created, should be shown
at every closing under “Reserves and Surplus” (in the Liabilities
side) under a separate sub-head “Reserve for Doubtful or Bad
Debts”.”
8. The Committee further notes that the provision for bad and
doubtful claims and advances represents impairment of receivables
which is covered by Accounting Standard (AS) 4, ‘Contingencies
and Events Occurring After the Balance Sheet Date’, issued by
the Institute of Chartered Accountants of India. In this context, the
Committee notes paragraph 10 of AS 4, which states as follows:
39
“10. The amount of a contingent loss should be provided

for by a charge in the statement of profit and loss if:
(a) it is probable that future events will confirm that,
after taking into account any related probable
recovery, an asset has been impaired or a
liability has been incurred as at the balance sheet
date, and
(b) a reasonable estimate of the amount of the
resulting loss can be made.”
The Committee notes that an event is regarded as ‘probable’ if the
event is more likely than not to occur, i.e., the probability that the
event will occur is greater than the probability that it will not.
9. The Committee notes that the querist has stated in paragraph

3 of the Facts of the Case that the chances of advances/claims
(against which provisions have been created) becoming bad are
very remote and from its past experience, the company is
reasonably certain that these debts will be recovered in the future.
The Committee also notes from the said paragraph that there
were no bad debts against these two provisions during the last two
years.
10. From the above paragraphs, the Committee is of the view

that creation of provision by the company against advances/claims
that are considered to be recoverable is an error in view of the
requirements of the Companies Act, 1956, and AS 4. Hence, the
excess amount of provision should be written-back in the financial
statements as a ‘prior period item’. In this regard, the Committee
notes the definition of the term ‘prior period items’ and paragraphs
15 and 19 of Accounting Standard (AS) 5, ‘Net Profit or Loss for
the Period, Prior Period Items and Changes in Accounting Policies’,
issued by the Institute of Chartered Accountants of India, which
state as follows:

prior periods.”
40

“19. Prior period items are normally included in the
determination of net profit or loss for the current period. An
alternative approach is to show such items in the statement of
profit and loss after determination of current net profit or loss.
In either case, the objective is to indicate the effect of such
items on the current profit or loss.”
11. On the basis of the above, the Committee is of the view that
since the creation of provision for doubtful claims and advances
was on account of an error in the past years, as discussed in
paragraphs 9 and 10 above, it should be written-back in the financial
statements of the year in which such a correction is made and
should be shown separately in a manner that its impact on the
current profit or loss can be perceived. Accordingly, the question
of creation of deferred tax assets/liability in respect of provision for
doubtful claims and advances would not arise. The Committee is,
however, of the view that if the company so desires, the company
may create reserve for doubtful claims and doubtful advances as
an appropriation of profits.
D. Opinion
12. On the basis of the above, the Committee is of the opinion,
on the issue raised in paragraph 4, that in the present case, the
provision for doubtful advances and provision for doubtful claims
should be written back in the financial statements as a ‘prior period
item’ as explained in paragraph 11 above and hence, the question
of treatment of deferred tax asset/liability against such provisions
does not arise.
41
Query No. 7
Subject: Rates of depreciation on various assets involved in
mass rapid transport system.1
A Facts of the Case
1. A government company has been incorporated to construct

and operate a mass rapid transport system (i.e., metro trains) in
the National Capital Region. While some phases of the system
have already become operational, others are at various stages of
construction or conceptualisation. The construction of a mass rapid
transport system involves incurrence of huge capital expenditure.
Consequently, depreciation constitutes a significant element of cost
of operations.
2. According to the querist, three major types of fixed assets,

each of which accounts for a substantial capital expenditure and
are quite unique to the company in the Indian context are as
follows:
(a) Rolling stock
(b) Escalators and elevators
(c) Track work

3. The querist has stated that Schedule XIV to the Companies
Act, 1956, does not specifically lay down any rates of depreciation
in respect of the above categories of fixed assets. In the absence
of a specific rate, if the company applies the general rate applicable
to plant and machinery, it would be totally un-representative of the
useful lives of these assets. According to the querist, this general
rate applicable to plant and machinery (i.e., 4.75 percent on
straightline basis) assumes that the useful life of general items of
plant and machinery is 20 years whereas, the estimated lives of
Rolling Stock, Escalators and Elevators, and Trackwork are much
longer than 20 years. The special features of these items are as
below:
1
42
(i) Rolling Stock – The trains are of modern design and are
light weight made of stainless steel with three phase AC
drive having VVVF control regenerative braking and
suitable for automatic train protection and operation
system. The coaches are provided with automatic door
closing mechanism to ensure passenger safety. The
coaches have been built, meeting international standards
of safety, reliability and maintainability. They are designed
and constructed for a service life of at least 30 years of
normal usage, without major repair.
(ii) Escalators and elevators – They are provided at elevated
and underground stations for passenger transportation.
These heavy duty public escalators comply with
international and national standards. The design,
manufacture, supply, installation, testing and
commissioning of the escalators meet the state of the
technology in the area. The life of these escalators and
elevators is estimated at a minimum of 30 years.
(iii) Trackwork – With a view to obtain optimum life for various
components, a sturdy track structure has been selected,
such as 60 kg. head hardened rails, ballast less track on
viaduct/tunnel and structurally strong turnouts. A life of
58 years is estimated for the same.
4. As per the querist, the estimates made by the company are
based on technical evaluation and suppliers’ assertions. These
estimates are prudent and would represent true and fair commercial
depreciation. The querist has separately provided technical
evaluation reports of suppliers in this regard for the perusal of the
Committee. Comparative depreciation rates/lives of assets adopted
by the companies carrying similar operations, along with the
corresponding lives under the Companies Act, 1956 and that as
estimated by the company, are also provided separately by the
querist for the perusal of the Committee. According to the querist,
a perusal of the comparative analysis of depreciation rates/useful
lives highlights the following in respect of the said assets:
43
(a) Rolling stock: All the companies carrying similar

operations have estimated life of Rolling Stock much
higher (at 35-40 years) than 20 years which is the life
worked out on the basis of the general rate applicable to
plant and machinery as per the Companies Act, 1956.
According to the data given by the management, the
suppliers of the company have estimated the life at 30
years. The life of 30 years, according to the querist,
therefore, seems a prudent estimate.
(b) Escalators and elevators: The useful life has been

estimated around 30 years by various other companies
(except one company). However, the general rate as
prescribed in Schedule XIV to the Companies Act, 1956
envisages a life of 20 years. The life of 30 years as
estimated by the management may, therefore, be
adopted.
(c) Trackwork: The management’s estimate of 58 years is
supported by the estimates of other railway companies.
5. The querist has stated that the company applied for
concurrence to the aforesaid special rates of depreciation to the
Ministry of Urban Development (Administrative Ministry) and the
Ministry of Company Affairs. In response, the Ministry of Urban
Development, vide its Office Memorandum No. 14011/73/2003/
MRTS dated 22.3.2004, communicated its concurrence. The
Ministry of Company Affairs vide its letter dated 22.8.2005 asked
the company to seek the expert opinion from the Institute of
6. The querist has stated that as per Accounting Standard (AS)

6, ‘Depreciation Accounting’ issued by the Institute of Chartered
Accountants of India, useful life is “…the period over which a
depreciable asset is expected to be used by the enterprise…”
(emphasis supplied by the querist). Further, paragraph 8 of AS 6,
inter alia, states that “determination of the useful life of a depreciable
asset is a matter of estimation and is normally based on various
factors including experience with similar types of assets” (emphasis
44
supplied by the querist). The querist has also drawn the attention
of the Committee to paragraph 22 of AS 6, which states as follows:
“22. The useful life of a depreciable asset should be
estimated after considering the following factors:
(i) expected physical wear and tear;
(ii) obsolescence;
(iii) legal or other limits on the use of the asset.”

7. The querist has further stated that AS 6 also recognises in
paragraph 13 that “the statute governing an enterprise may provide
the basis for computation of the depreciation. For example, the
Companies Act, 1956 lays down the rates of depreciation in respect
of various assets. Where the management’s estimate of the useful
life of an asset of the enterprise is shorter than that envisaged
under the provisions of the relevant statute, the depreciation
provision is appropriately computed by applying a higher rate. If
the management’s estimate of the useful life of the asset is longer
than that envisaged under the statute, depreciation rate lower than
that envisaged by the statute can be applied only in accordance
with requirements of the statute.” (Emphasis supplied by the
querist.) According to the querist, it is clear from the aforementioned
provisions that one has to:
(a) estimate the useful life of the specified categories of
fixed assets, and
(b) consider the position under the Companies Act, 1956.
8. According to the querist, as far as the estimate of the useful
life is concerned, technical estimates and past experience are
important indicators. The practice followed by the companies using
similar assets is another useful indicator (provided those companies
are not covered by any specific legal stipulations). As per the
querist, in the present case,
(a) the technical specifications agreed to between the
company and the suppliers of rolling stock, escalators
45
and elevators clearly stipulate a life of a minimum of 30

years;
(b) other entities using similar assets are also charging
depreciation at rates based on estimates of useful lives
which are generally higher than those estimated by the
company; and
(c) the Ministry of Urban Development has independently
concurred with the useful life as envisaged above.
9. On the basis of the above, the querist has argued that there
is a strong logic for the Ministry of Company Affairs to specifically
allow ‘rolling stock’ and ‘escalators and elevators’ of the company
being depreciated at 3.17% (SLM) and trackwork being depreciated
at 1.63% (SLM) based on technical life of the relevant assets.
Also, since the above estimates already take into account the
extent of likely usage of the assets (which will be almost on a
continuous basis round the clock except for a few hours around
mid-night), it may also be specifically provided that there would be
no extra shift depreciation on those assets.
B. Query
(a) Assuming that (i) it can be demonstrated that the useful
life of rolling stock and escalators and elevators is 30
years and that of track work is 58 years and (ii) there are
no legal stipulations as to rate of depreciation, whether
charging depreciation at 3.17% and 1.63% (respectively)
per annum as per straight line method (SLM) would result
in a true and fair view.
(b) Since the company, as per the querist, has been able to
adduce sufficient evidence regarding the above estimates
of useful life, whether depreciation at 3.17% and 1.63%
(SLM) per annum would be a proper charge, if this rate
is allowed by the Ministry of Company Affairs under
section 205(2) of the Companies Act, 1956.
46

11. The Committee notes that the basic objective of providing
depreciation is to allocate the depreciable amount of an asset over
its useful life so as to exhibit a true and fair view of the financial
statements of an enterprise. In this regard, the Committee notes
the definition of the term ‘useful life’ as contained in paragraph 3.3
of AS 6 and paragraph 20 of AS 6, which state as follows:
“Useful life is either (i) the period over which a depreciable
asset is expected to be used by the enterprise; or (ii) the
number of production or similar units expected to be
obtained from the use of the asset by the enterprise.”
“20. The depreciable amount of a depreciable asset
should be allocated on a systematic basis to each
accounting period during the useful life of the asset.”
12. The Committee further notes paragraphs 7 and 8 of AS 6,
explaining the term ‘useful life’, as follows:
“7. The useful life of a depreciable asset is shorter than its
physical life and is:
(i) pre-determined by legal or contractual limits, such
as the expiry dates of related leases;
(ii) directly governed by extraction or consumption;
(iii) dependent on the extent of use and physical
deterioration on account of wear and tear which
again depends on operational factors, such as, the
number of shifts for which the asset is to be used,
repair and maintenance policy of the enterprise etc.;
and
(iv) reduced by obsolescence arising from such factors
as:
(a) technological changes;
(b) improvement in production methods;
47
(c) change in market demand for the product or

service output of the asset; or
(d) legal or other restrictions.
8. Determination of the useful life of a depreciable asset is
a matter of estimation and is normally based on various factors
including experience with similar types of assets. Such
estimation is more difficult for an asset using new technology
or used in the production of a new product or in the provision
of a new service but is nevertheless required on some
reasonable basis.”
13. The Committee also notes paragraph 13 of AS 6, which

recognises the linkage between charge of depreciation under a
statute and that as per the generally accepted accounting principles,
as reproduced in paragraph 7 above.
in arriving at the rates at which depreciation should be provided,
the company should consider the true commercial depreciation,
i.e., the rate which is adequate to write off the asset over its useful
life based on the technological estimates of the management. In
case the useful life so worked out is less than the life arrived at as
per the rates prescribed in Schedule XIV to the Companies Act,
1956 (in case of companies), the higher rate of depreciation, so
arrived at is applied. However, in case the useful life works out to
be longer, i.e., the rate so arrived at is lower than the rate prescribed
by the statute, the rates prescribed in the relevant statute (Schedule
XIV in case of companies) should be applied. In the concerned
case, since Schedule XIV prescribes no specific rates of
depreciation in respect of rolling stock, escalators and elevators,
and track work involved in mass rapid transport system, the general
rates applicable to ‘plant and machinery’ would be relevant.
Accordingly, the useful life of 20 years (as arrived at from the
general rate of depreciation as per Schedule XIV to the Companies
Act, 1956), which is much shorter than the lives of the assets, as
estimated by the management, should be considered for the
purpose of calculating depreciation in the present case.
48
D. Opinion
(a) Assuming that (i) the useful life of rolling stock and
escalators and elevators is 30 years and that of track
work is 58 years determined in accordance with the
provisions of AS 6 and (ii) there are no legal stipulations
as to the rate of depreciation, charging depreciation as
per SLM at the rates determined on the basis of the
afore-mentioned lives of the respective assets would result
in a true and fair view, provided provisions of section
205(2) of the Companies Act, 1956 are complied with.
(b) Charging of depreciation as per the SLM rates, based on
estimated useful lives of the assets as per the provisions
of AS 6 would be a proper charge, provided such rates
are allowed by the Ministry of Company Affairs under
section 205(2).
Query No. 8
Subject: Segment reporting for sale of power to the State
grid.1
1. A listed company is engaged in the business of manufacturing
paper for newsprint, printing and writing. The turnover from the
sale of newsprint, printing and writing paper during 2004-05 was
Rs. 671.29 crore.
2. The querist has stated that the company has installed four
turbo generators. The entire power requirement is met through
captive generation. Surplus power is sold to the State grid. In
1
49
addition, the company is having a wind farm. The wind power is

also sold to the State grid. The proceeds from sale of power
during the financial year 2004-05 were Rs. 29.27 crore.
3. The querist has reproduced paragraph 27 of Accounting

Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of
Chartered Accountants of India, which states as follows:
“27. A business segment or geographical segment should
be identified as a reportable segment if:
(a) its revenue from sales to external customers
and from transactions with other segments is
10 per cent or more of the total revenue, external
and internal, of all segments; or
(b) its segment result, whether profit or loss, is 10

per cent or more of-
(i) the combined result of all segments in

profit, or
(ii) the combined result of all segments in loss,

whichever is greater in absolute amount; or
(c) its segment assets are 10 per cent or more of
the total assets of all segments.”
4. According to the querist, sale from power works out to 4.36 %
of the total turnover. The profit from sale of power is less than
10% of the combined result of the manufacturing activities and
sale of power. The segment assets are also less than10% of the
total assets of the company.
5. The querist has stated that in the above circumstances, the
company has considered that sale of power is not a reportable
segment. However, during the audit, the statutory auditors have
opined as below:
“Segment Reporting vis-à-vis, the company, after applying

the above norms, we are of the opinion that the company has
two business segments viz. 1) paper and Paper products and
50
2) wind farm or power sector. Both are subject to different

risks and returns and further have different organisational
structure and internal reporting.
As far as reportable segment is concerned, paper and paper

products individually meet the criteria laid down in AS 17
(paragraph 27) (i.e., more than 10%) and hence to be reported
as a separate business segment.
As wind farm or power sector is regarded as a different
undertaking for the purpose of claiming deduction u/s 80-IA of
the Income-tax Act, for reckoning the threshold limits ‘internal
transfer/utilisation’ (i.e., the transaction with other segments)
shall also be taken into account as AS 17 (paragraph 27) is
very clear in this regard.
Therefore, disclosing of the power sector as a reportable

segment has to be arrived at by taking into consideration the
transactions with other segments. In case the threshold limits
are lower than the percentage stipulated, it is the discretion of
the management to consider it as a separate ‘reportable
segment’ or as a ‘residual segment’ (as ‘others’).”
B. Query

Committee as to whether the sale of power to the State grid
should be considered as a separate reportable segment even
though the activity does not fall within the threshold limits stipulated
under paragraph 27 of AS 17.

7. The Committee notes from paragraph 6 above that the querist
has raised the query only in the context of ‘power’ segment. In the
absence of the relevant information, the Committee presumes that
there is only one segment other than ‘power’, viz., ‘paper’.
8. The Committee notes that as per the provisions of Accounting
Standard (AS) 17, ‘Segment Reporting’, issued by the Institute of
Chartered Accountants of India, the components of an enterprise
51
have to first fall within the definitions of the term ‘business segment’
or ‘geographical segment’ before being considered as ‘reportable
segment’. In this context, the Committee notes the definitions of
the terms ‘business segment’ and ‘geographical segment’ as per
paragraph 5 of AS 17, which are reproduced below:
“A business segment is a distinguishable component of
an enterprise that is engaged in providing an individual
product or service or a group of related products or
services and that is subject to risks and returns that are
different from those of other business segments. Factors
that should be considered in determining whether
products or services are related include:
(a) the nature of the products or services;
(b) the nature of the production processes;

(c) the type or class of customers for the products
or services;
(d) the methods used to distribute the products or
provide the services; and
(e) if applicable, the nature of the regulatory
environment, for example, banking, insurance,
or public utilities.
A geographical segment is a distinguishable component

of an enterprise that is engaged in providing products or
services within a particular economic environment and
that is subject to risks and returns that are different from
those of components operating in other economic
environments. Factors that should be considered in
identifying geographical segments include:
(a) similarity of economic and political conditions;
(b) relationships between operations in different
geographical areas;
(c) proximity of operations;
52
(d) special risks associated with operations in a

particular area;
(e) exchange control regulations; and
(f) the underlying current risks.”
9. The Committee further notes paragraphs 7 and 12 of AS 17

which provide as below:
“7. A single business segment does not include products

and services with significantly differing risks and returns. While
there may be dissimilarities with respect to one or several of
the factors listed in the definition of business segment, the
products and services included in a single business segment
are expected to be similar with respect to a majority of the
factors.”
“12. The predominant sources of risks affect how most
enterprises are organised and managed. Therefore, the
organisational structure of an enterprise and its internal
financial reporting system are normally the basis for identifying
its segments.”
10. The Committee notes from the above that to identify business
and geographical segments, the undertaking needs to evaluate
whether the risks and returns of various components of an
enterprise are different as per the factors stated in the definitions
of the terms ‘business segment’ and ‘geographical segment’. Where
the organisational structure and internal financial reporting system
of various components are different, it suggests that the risks and
returns are different. The Committee presumes from the Facts of
the Case that the company has two business segments, viz., paper
and power, as the two have different risks and returns particularly,
in view of the fact that they have different organisational structure
and internal financial reporting systems.
11. The Committee also notes the requirements of paragraph 27

of AS 17 reproduced in paragraph 3 above with respect to
identification of a reportable segment that for the purpose of
determination of the threshold limit of 10% with regard to revenue,
53
the revenue from sales to external customers and from transactions

with other segments is to be taken into account. Accordingly, the
Committee is of the view that for the purpose of determining whether
paper and power qualify as reportable segments, the revenue
from external sales as well as internal sales should be taken into
account. In case the segment revenue so determined, is equal to
or exceeds 10% of the total revenue of the company, external and
internal, that segment would qualify as a separate reportable
segment. The Committee further notes that for the purpose of
identification of reportable segments, not only the threshold limit
with respect to segment revenue, but also with respect to segment
result and segment assets should be considered as stipulated in
paragraph 27 of AS 17.
12. In the above context, the Committee notes paragraph 28 of
AS 17, reproduced as below:
“28. A business segment or a geographical segment
which is not a reportable segment as per paragraph 27,
may be designated as a reportable segment despite its
size at the discretion of the management of the enterprise.
If that segment is not designated as a reportable segment,
it should be included as an unallocated reconciling item.”
Therefore, if the segment is not designated as a reportable segment
either on the basis of the consideration of paragraph 27 of AS 17,
or the management’s discretion as per paragraph 28 of AS 17, it
should be included as an unallocated reconciling item. In other
words, in the context of the company under consideration even if
one of the segments does not qualify as a reportable segment as
per the threshold requirements of paragraph 27 of AS 17, the
same would have to be reported separately as a residual segment.
D. Opinion
that the company needs to recalculate the threshold limits in
accordance with paragraph 27 of AS 17 as stated in paragraph 11
above. In case the threshold limit is not met, it is the discretion of
the management to consider power as a separate ‘reportable
54
segment’. However, in case the management does not do so, it

has to be reported as a ‘residual segment’.
Query No. 9
Subject: Disclosure of partly secured Bonds.1
1. A company is a wholly-owned, Government of India enterprise

under the Ministry of Power. The company is a public financial
institution and is also registered as a non-banking financial company
(NBFC) with the Reserve Bank of India (RBI). The main activity of
the company is to fund the various power sector projects in the
country.
2. The querist has stated that the company, for meeting its
financial needs, has been raising money through various sources.
One of them is bonds. Some of the bonds raised by the company
are guaranteed by the Government of India, some bonds are
secured by mortgage of immovable property and hypothecation of
book debts, and some are unsecured against which no security
has been provided.
3. The company, for meeting its financial requirements, has also

been permitted to raise Capital Gains Tax Exemption Bonds and
Infrastructure Bonds under section 54EC and section 88 of the
Income-tax Act, 1961. These bonds have a lock-in period as per
the requirements of the Income-tax Act, 1961 and have been
secured by providing mortgage of immovable properties, the value
of which is less than the funds borrowed. As per the practice
adopted by various companies, the company has been disclosing
these bonds as ‘secured borrowings’ with a disclosure of the extent
of the security provided. A point has arisen that since the value of
the security provided is not commensurate to quantum raised,
1
55
whether these borrowings should be disclosed as ‘unsecured loan’

or ‘secured loans’. Prima facie, the borrowings are neither fully
secured nor unsecured. A copy of the annual report of the company
for the financial year 2004-05 has also been provided by the querist
for the perusal of the Committee. The querist has stated that
Schedule ‘C’ on page 52 of the annual report indicates disclosure
being made by the company in the balance sheet about factual
position. The querist has provided the following extracts from the
said Schedule:
“Capital Gains Tax Exemption Bonds are issued for a tenure

of 5/7 years at different interest rates varying from 5.15% to
8.70% payable with 3 options, viz., semi-annual, annual and
cumulative. These bonds have put option at par at any time
and in case of Capital Gains Tax Exemption Bonds – Series-
IV at the end of 3/5 years. Infrastructure Bonds are issued for
a tenure of 3/5 years at different interest rates varying between
5.60% to 9.00% payable annually. These Bonds have put
option at par at the end of 36 months from the date of allotment
and in case of Infrastructure Bonds – Series-IV at par at the
end of 3/5 years. The Capital Gains Tax Exemption Bonds
and Infrastructure Bonds are secured by a legal mortgage
respectively over the company’s immovable properties and
receivable to the satisfaction of the trustees. The book value
of these immovable properties and receivables is Rs.38.50
lakh. However, charge to the extent of amount borrowed has
been created with the Registrar of Companies (ROC ) in
favour of trustees.”
4. According to the querist, the company has raised Capital Gains
Tax Exemption Bonds to the extent of Rs. 7,750 crore as on
31.03.2005.
B. Query
Committee as to whether such borrowings should be disclosed as
‘secured’ or ‘unsecured’ in the balance sheet of the company.
56

relates to the disclosure of partly secured Capital Gains Tax
Exemption Bonds as ‘secured’ or ‘unsecured’ loans as per the
requirements of Schedule VI to the Companies Act, 1956, in the
financial statements of the company. The Committee has, therefore,
considered only this issue and has not examined any other issue
that may arise from the ‘Facts of the Case’, for example, disclosure
required by NBFC Prudential Norms (Reserve Bank) Directions,
1998.
7. The Committee notes the definition of the term ‘secured loan’,
as provided by paragraph 15.02 of the Guidance Note on Terms
Used in Financial Statements, issued by the Institute of Chartered
Accountants of India, which states as follows:
“15.02 Secured Loan
Loan secured wholly or partly against an asset.”

8. The Committee further notes from paragraph 3 of the Facts
of the Case that the Capital Gains Tax Exemption Bonds have
been partly secured by mortgage of immovable properties. Hence,
the Committee is of the view that these bonds should be classified
under ‘secured loans’, for the purpose of disclosure in the balance
sheet as per the requirements of Schedule VI to the Companies
Act, 1956. However, the nature of security should be clearly
specified, as required by ‘Instructions in accordance with which
liabilities should be made out’ of the said Schedule.
D. Opinion
9. On the basis of the above, the Committee is of the opinion,
read with paragraph 6 above, that partly secured Capital Gains
Tax Exemption Bonds should be disclosed under ‘secured loans’
along with a proper disclosure of the nature of security, as stated
in paragraph 8 above.
57
Query No. 10
Subject: Applicability of AS 3 and AS 18.1

1. A not-for-profit company was incorporated on 13th January,
1992 under section 25 of the Companies Act, 1956. Its authorised
capital is Rs.700 crore and paid up capital is Rs. 425.35 crore as
on 31st March, 2005. It is a Government company within the
meaning of section 617 of the Companies Act, 1956. Its shares
are not listed and its turnover (interest income) during the year
2004-05 was Rs. 20.39 crore. The company is exempted from
payment of income-tax under section 10(26 B) of the Income-tax
Act, 1961.
2. The main objects to be pursued by the company, as per its

memorandum and articles of association, are reproduced
hereunder:
(i) To promote economic and developmental activities for
the benefit of backward classes;
(ii) To assist, subject to such income and/or economic criteria
as may be prescribed by the Government from time to
time, individuals or groups of individuals belonging to
backward classes by way of loans and advances for
economically and financially viable schemes and projects.
Under micro-financing schemes, self help groups having
members of target groups to the extent of at least 75%
could be considered for financial support. The groups of
the individuals belonging to the backward classes will
include such groups in which predominantly (75% and
above) members belong to backward classes provided
other members belong to weaker sections (as per income
and/or economic criteria prescribed by the Government)
including scheduled castes/scheduled tribes, minorities
and disabled persons;
1
58
(iii) To promote self-employment and other ventures for the

benefit of backward classes;
(iv) To grant concessional financial assistance in selected
cases for persons belonging to backward classes below
the poverty line in the country in collaboration with
Government Ministries/Departments at the national and
state level to the extent of the budgetary assistance
granted by the Government of India to the company;
(v) To extend loans to the backward classes for pursuing

general /professional/technical education or training at
graduate and higher levels;
(vi) To assist in the upgradation of technical and
entrepreneurial skills of backward classes for proper and
efficient management of production units;
(vii) To assist the state level organisations dealing with the
development of the backward classes by way of providing
financial assistance and in obtaining commercial funding
or by way of refinancing;
(viii) To work as an apex institution for coordinating and
monitoring the work of all corporations/Boards set up by
the State Government/Union Territory Administrations for
schedule castes, schedule tribes, backward classes and
minorities insofar as it relates to the economic
development of the backward classes;
(ix) To help in furthering the Government policies and
programmes for the development of backward classes.
3. In order to achieve its objects as outlined above, the company
is providing finances at concessional rate of interest (4% p.a. to
6% p.a.) to persons belonging to backward classes (OBCs - notified
by the State Government/Central Government) living below the
poverty line/double the poverty line in the country. The loans are
provided to the eligible target groups through state level companies/
corporations/cooperatives (wholly owned/controlled by the State
Governments). These are referred to as state channelising agencies
59
(SCAs). The loans are provided to the SCAs after obtaining

guarantee from the State Government. The individual borrowers
obtain financial assistance from SCAs. The loans are provided for
setting-up small business, agricultural activities, viz. STD, PCO
shop, electric repair shop, barber shop, minor irrigation, tailoring
shop, carpentry, blacksmithy shop, pottery, general store, vegetable
vendors or other self employment ventures etc. The loan limit per
beneficiary is Rs. 5 lakh, out of which generally 85% to 95% is
financed by the company and the balance by the SCAs/individual
borrowers. The company also provides educational loans at
concessional rates, to the target group for pursuing higher studies.
As part of its developmental activities, the company is also providing
grants-in-aid to the target group for the upgradation of their technical
and entrepreneurial skills.
4. The querist has informed that the company was initially
classified as an investment company (Industrial Classification Code
No. 803.1) by the Registrar of Companies. Therefore, the Reserve
Bank of India had initially directed the company to file ‘First
Schedule’ returns, which are applicable to non-banking financial
companies. Consequent to the company’s representation dated
8th January 1996, on the basis of its objects and nature of activities,
the Department of Company Affairs, vide its letter dated 1st
February, 1996, decided to change the Industrial Activity Code
number of the company from 803.1 to 94 (Community Services).
Thereafter, on submission of the revised industrial classification
code on 20th August, 1998, the Reserve Bank of India, vide its
letter dated 2nd September, 1998, informed that it has deleted the
name of the company from the mailing list w.e.f. 15th February,
1996. Further, vide the company’s representation to the Reserve
Bank of India on 7th April, 1999, the company sought a clarification
from the RBI, as to whether RBI directives and prudential norms
etc., applicable to NBFCs, are applicable to the company. On July
23, 1999, the RBI informed and “certified that the company is not
an NBFC and as such no RBI directives and prudential norms etc.
are applicable to the company”. Copies of the relevant
correspondence have been provided by the querist separately for
the perusal of the Committee. The querist has also drawn the
60
attention of the Committee to the fact that the company is also not
covered under the definition of ‘Public Financial Institution’ as per
the Companies Act, 1956.
5. The querist has reiterated that the main objects of the

company, as mentioned in paragraph 2 above, are to promote
economic and developmental activities to help the poor persons
belonging to other backward classes. The query pertains to the
applicability of Accounting Standard (AS) 3, ‘Cash Flow Statements’
and Accounting Standard (AS) 18, ‘Related Party Disclosures’,
issued by the Institute of Chartered Accountants of India. AS 3
and AS 18 are applicable to ‘financial institutions’ and certain other
institutions/organisations. The querist has stated that in view of
the objects of the company and the background note given above,
in the opinion of the company, it is neither a financial institution
nor falls under any category of the other institutions/organisations
within the scope of AS 3 and AS 18. Therefore, the company did
not make disclosures required as per AS 3 and AS 18 in the
annual accounts for the year ending 31st March, 2005. However,
the government auditors representing the Office of the C&AG,
during the course of the supplementary audit u/s 619(4) of the
Companies Act, 1956, for the said year had issued two half margins
(copies supplied separately for the perusal of the Committee) to
the company stating that though being a financial institution, it has
not complied with the aforesaid accounting standards. The company
in its reply (copy supplied separately for the perusal of the
Committee) had submitted the aforesaid facts and had also given
an assurance to the government auditors that it shall seek
clarification/ opinion from the Institute of Chartered Accountants of
India on this subject. Consequently, the Office of the C&AG agreed
to drop the half margins issued to the company and therefore, no
audit qualification was issued by them on this account.
B. Query
(a) Whether AS 3 and AS 18 are applicable to the company.
61
(b) If yes, whether the company can claim exemption from

the applicability of AS 3 and AS 18 and how.
7. The Committee notes that the term ‘financial institution’ is not
defined in the applicability paragraphs of Accounting Standard
(AS) 3, ‘Cash Flow Statements’, and Accounting Standard (AS)
18, ‘Related Party Disclosures’, issued by the Institute of Chartered
Accountants of India (ICAI). The Committee is, therefore, of the
view that the term ‘financial institutions’ for the purpose of
applicability of Accounting Standards, in the absence of a specific
definition thereof in the Accounting Standards, should be construed
to have its meaning in the general commercial parlance, which
may be different from that given in various legislations. In the view
of the Committee, any enterprise engaged in the activities of
providing loans and advances and/or providing financial services
and/or engaged in financial transactions involving financial products,
etc., is considered to be a financial institution in terms of the
general commercial parlance. Keeping in view the aforesaid, the
company in question should be considered as a financial institution.
Accordingly, AS 3 and AS 18 apply to the company.
8. The Committee notes the contention of the querist stated in
paragraph 5 of the ‘Facts of the Case’ that in view of the objects of
the company being primarily for the development of backward
classes, AS 3 and AS 18 should not be applied to it. In this
context, the Committee notes paragraph 3.3 of the ‘Preface to the
Statements of Accounting Standards’, issued by the ICAI,
reproduced below:
“3.3 Accounting Standards are designed to apply to the

general purpose financial statements and other financial
reporting, which are subject to the attest function of the
members of the ICAI. Accounting Standards apply in respect
of any enterprise (whether organised in corporate, co-operative
or other forms) engaged in commercial, industrial or business
activities, irrespective of whether it is profit oriented or it is
established for charitable or religious purposes. Accounting
62
Standards will not, however, apply to enterprises only carrying

on the activities which are not of commercial, industrial or
business nature, (e.g., an activity of collecting donations and
giving them to flood affected people). Exclusion of an enterprise
from the applicability of the Accounting Standards would be
permissible only if no part of the activity of such enterprise is
commercial, industrial or business in nature. Even if a very
small proportion of the activities of an enterprise is considered
to be commercial, industrial or business in nature, the
Accounting Standards would apply to all its activities including
those which are not commercial, industrial or business in
nature”.

for the purpose of applicability of the Accounting Standards to an
enterprise, the objective of setting up the enterprise is not relevant;
what is of relevance is the nature of the activities carried on by it.
Since the company in question is carrying on the activities of
providing loans and advances on which it earns income by way of
interest, in the view of the Committee, the activities carried on by
the company are of commercial nature. Accordingly, Accounting
Standards issued by the Institute of Chartered Accountants of
India are applicable to the company, subject to specific exemptions/
relaxations available in the Standards.
10. With regard to disclosure of related party information by the

company, the Committee notes paragraph 9 of AS 18, reproduced
below:
“9. No disclosure is required in the financial statements
of state-controlled enterprises as regards related party
relationships with other state-controlled enterprises and
transactions with such enterprises.”
company in question is a state controlled enterprise. In view of
this, no disclosure is required in its financial statements in respect
of related party relationships and related party transactions with
other state controlled enterprises.
63
D. Opinion
(a) AS 3 and AS 18 are applicable to the company.
(b) The company is exempted from disclosures under AS 18

only to the extent stated in paragraph 11 above. There
are no exemptions from AS 3.
Query No. 11
Subject: Accounting for Minimum Alternative Tax (MAT)
under section 115JB and credit available in respect
thereof.1
1. A company is a public sector undertaking engaged in refining
of crude oil. The company was earning profits till the financial year
1998-99. Due to withdrawal of Administrative Pricing Mechanism
(APM), additional interest, and depreciation burden on account of
substantial capacity expansion of the refinery from 3 million metric
ton per annum (MMTPA) to 9 MMTPA in April 2001, coupled with
drop in refinery margins, the company incurred losses till the
financial year ending 31st March, 2003. This has resulted into
substantial carried forward losses and unabsorbed depreciation
under the Income-tax Act, 1961.
2. The querist has stated that another public sector undertaking

acquired 52% stake in the company through acquisition of 37.50%
stake of one of the private promoter group company and infusion
of additional equity capital. Further, it acquired equity shares allotted
to banks and financial institutions on debt restructuring, thereby
increasing its stake to 72%. The company’s debts were restructured,
1
64
which has resulted into substantial reduction in the interest cost of

the company.
3. According to the querist, the company made a turn-around in
the year 2003-04, earned substantial profit in the year 2004-05
and declared maiden dividend. This has resulted in wiping-off of
the entire carried forward business loss and substantial reduction
in unabsorbed depreciation.
4. The company had paid Minimum Alternative Tax (MAT) for
the year 2004-05 and as the company is earning profit for the year
2005-06 also, the company is liable to pay MAT under section
115JB of the Income-tax Act, 1961.
5. The querist has mentioned that with effect from assessment
year commencing on 1st April, 2006, by virtue of insertion of sub-
section (1A) in section 115JAA of the Income-tax Act, tax credit in
respect of tax paid under provisions of section 115JB of the Act is
allowable. The sub-section (1A) of section 115JAA of the Income-
tax Act provides that “where any amount of tax is paid under sub-
section (1) of section 115JB by an assessee, being a company for
the assessment year commencing on the 1st day of April, 2006
and any subsequent assessment year, then, credit in respect of
tax so paid shall be allowed to him in accordance with the provisions
of this section”. Further, sub-section (4) of section 115JAA provides
as under:
“The tax credit shall be allowed set-off in a year when tax
becomes payable on the total income computed in accordance
with the provisions of this Act other than section 115JA or
section 115JB, as the case may be.”
6. This position, according to the querist, implies that the MAT
paid in the financial year 2005-06 is eligible for set-off by reduction
in the tax liability of subsequent year(s) where the company
becomes liable to pay tax under regular computation provisions. In
other words, the company needs to pay lower tax in a subsequent
year, in which the credit is available for MAT paid in the current
year. As per the querist, in view of the company’s present/projected
levels of profits, the company is virtually certain that taxes paid
65
under MAT will be available for set-off against tax liability in

subsequent year(s).
7. The querist has given the following options in respect of
accounting for MAT paid in the year 2005-06:
(a) Tax paid under MAT to be accounted for as advance tax
instead of tax expense of the year; or
(b) Treat MAT paid as a timing difference resulting in deferred
tax asset and reduce the same from the deferred tax
liability, to the extent of credit available; or
(c) Treat MAT paid as current tax and also provide deferred
tax without considering such MAT paid as timing
difference, for the purpose of deferred tax calculation, in
the year.
8. The querist has further stated that Accounting Standard (AS)
22, ‘Accounting for Taxes on Income’, issued by the Institute of
Chartered Accountants of India, does not specifically provide for
timing differences arising out of tax credits. However, this standard
envisages recognition of tax on the book profit. The current tax
provision and deferred tax provision shall be equal to tax computed
on book profit (excluding permanent difference) at the enacted tax
rates. Hence, according to the querist, in case of virtual certainty
of absorption of tax credit, if either of the accounting treatments
(a) or (b) stated in paragraph 7 above, is not followed, it may
result in excess provision to the extent of MAT paid in the current
year and also under provision to the extent of set-off/absorption of
tax credit in the subsequent year(s). The querist has also stated
that Accounting Standards Interpretation (ASI) 6, ‘Accounting for
Taxes on Income in the context of Section 115JB of the Income-
tax Act, 1961’ was issued by the Institute before the introduction of
sub-section (1A) of section 115JAA with effect from 1st April, 2005,
i.e., when credit in respect of MAT paid was not available, meaning
thereby that tax paid under MAT was not allowed to be set-off
against regular tax payable in later years.
66
B. Query
9. Considering the Facts of the Case as explained above, the
querist has sought the opinion of the Expert Advisory Committee
on the following issues:
(i) Whether MAT paid under section 115JB of the Act for
the year ending 31st March, 2006, is to be considered as
current tax to be absorbed as tax expense in the profit
and loss account for the year or treat the same as
advance tax under current assets.
(ii) Whether MAT paid under section 115JB of the Act is to
be considered as timing difference resulting in deferred
tax asset for deferred tax computation purposes under
AS 22 and reduce the same from the deferred tax liability
in the current year, to the extent of tax credit available.
(iii) Whether MAT payable under section 115JB of the Act
needs to be considered as current tax but should not be
considered for the purpose of deferred tax calculation
inspite of it being eligible for carry forward and set-off in
the subsequent year.
relates to the accounting treatment of MAT paid under section
115JB of the Income-tax Act, 1961 and credit available in respect
thereof. The Committee has, therefore, considered only this issue
and has not touched upon any other issue arising from the Facts
of the Case.
11. The Committee notes that the issue raised by the querist has
been dealt with in the Guidance Note on Accounting for Credit
Available in respect of Minimum Alternative Tax under the Income-
tax Act, 1961, issued recently by the Institute of Chartered
Accountants of India. Paragraphs 4 to 15 of the said Guidance
Note suggest the accounting treatment in respect of MAT and
credit available in respect of MAT, as follows:
67
“Whether MAT credit is a deferred tax asset

4. An issue has been raised whether the MAT credit can
be considered as a deferred tax asset within the meaning of
Accounting Standard (AS) 22, Accounting for Taxes on Income,
issued by the Institute of Chartered Accountants of India. In
this context, the following definitions given in AS 22 are noted:
“Timing differences are the differences between taxable
income and accounting income for a period that originate
in one period and are capable of reversal in one or more
subsequent periods.”
“Accounting income (loss) is the net profit or loss for a
period, as reported in the statement of profit and loss,
before deducting income tax expense or adding income
tax saving.”
“Taxable income (tax loss) is the amount of the income
(loss) for a period, determined in accordance with the tax
laws, based upon which income tax payable (recoverable)
is determined.”
5. From the above, it is noted that payment of MAT, does
not by itself, result in any timing difference since it does not
give rise to any difference between the accounting income
and the taxable income which are arrived at before adjusting
the tax expense, namely, MAT. In other words, under AS 22,
deferred tax asset and deferred tax liability arise on account
of differences in the items of income and expenses credited
or charged in the profit and loss account as compared to the
items of income that are taxed or items of expense that are
allowed as deduction, for the purposes of the Act. Thus,
deferred tax assets and deferred tax liabilities do not arise on
account of the amount of the tax expense itself. In view of
this, it is not appropriate to consider MAT credit as a deferred
tax asset for the purposes of AS 22.
Whether MAT credit can be considered as an ‘asset’
6. Although MAT credit is not a deferred tax asset under
AS 22 as discussed above, yet it gives rise to expected future
economic benefit in the form of adjustment of future income
68
tax liability arising within the specified period. A question,

therefore, arises whether the MAT credit can be considered
as an ‘asset’ and in case it can be considered as an asset
whether it should be so recognised in the financial statements.
7. The Framework for the Preparation and Presentation of
Financial Statements, issued by the Institute of Chartered
Accountants of India, defines the term ‘asset’ as follows:
“An asset is a resource controlled by the enterprise as a
result of past events from which future economic benefits
are expected to flow to the enterprise.”
8. MAT paid in a year in respect of which the credit is
allowed during the specified period under the Act is a resource
controlled by the company as a result of past event, namely,
the payment of MAT. MAT credit has expected future economic
benefits in the form of its adjustment against the discharge of
the normal tax liability if the same arises during the specified
period. Accordingly, MAT credit is an ‘asset’.
9. According to the Framework, once an item meets the
definition of the term ‘asset’, it has to meet the criteria for
recognition of an asset so that it may be recognised as such
in the financial statements. Paragraph 88 of the Framework
provides the following criteria for recognition of an asset:
“88. An asset is recognised in the balance sheet when
it is probable that the future economic benefits associated
with it will flow to the enterprise and the asset has a cost
or value that can be measured reliably.”
10. In order to decide when it is ‘probable’ that the future
economic benefits associated with the asset will flow to the
enterprise, paragraph 84 of the Framework, inter alia, provides
as below:
“84. The concept of probability is used in the recognition
criteria to refer to the degree of uncertainty that the
future economic benefits associated with the item will
flow to or from the enterprise. The concept is in keeping
with the uncertainty that characterises the environment
69
in which an enterprise operates. Assessments of the

degree of uncertainty attaching to the flow of future
economic benefits are made on the basis of the evidence
available when the financial statements are prepared.”
11. The concept of probability as contemplated in paragraph
84 of the Framework relates to both items of assets and
liabilities and, therefore, the degree of uncertainty for
recognition of assets and liabilities may vary keeping in view
the consideration of ‘prudence’. Accordingly, while for
recognition of a liability the degree of uncertainty to be
considered ‘probable’ can be ‘more likely than not’ (as in
paragraph 22 of Accounting Standard (AS) 29, ‘Provisions,
Contingent Liabilities and Contingent Assets’) for recognition
of an asset, in appropriate conditions, the degree may have
to be higher than that. Thus, for the purpose of consideration
of the probability of expected future economic benefits in
respect of MAT credit, the fact that a company is paying MAT
and not the normal income tax, provides a prima facie evidence
that normal income tax liability may not arise within the
specified period to avail MAT credit. In view of this, MAT
credit should be recognised as an asset only when and to the
extent there is convincing evidence that the company will pay
normal income tax during the specified period. Such evidence
may exist, for example, where a company has, in the current
year, a deferred tax liability because its depreciation for the
income-tax purposes is higher than the depreciation for
accounting purposes, but from the next year onwards, the
depreciation for accounting purposes would be higher than
the depreciation for income-tax purposes, thereby resulting in
the reversal of the deferred tax liability to an extent that the
company becomes liable to pay normal income tax.
12. Where MAT credit is recognised as an asset in
accordance with paragraph 11 above, the same should be
reviewed at each balance sheet date. A company should write
down the carrying amount of the MAT credit asset to the
extent there is no longer a convincing evidence to the effect
that the company will pay normal income tax during the
70
specified period.
Presentation of MAT credit in the financial statements
Balance Sheet
13. Where a company recognises MAT credit as an asset
on the basis of the considerations specified in paragraph 11
above, the same should be presented under the head ‘Loans
and Advances’ since, there being a convincing evidence of
realisation of the asset, it is of the nature of a pre-paid tax
which would be adjusted against the normal income tax during
the specified period. The asset may be reflected as ‘MAT
credit entitlement’.
14. In the year of set-off of credit, the amount of credit
availed should be shown as a deduction from the ‘Provision
for Taxation’ on the liabilities side of the balance sheet. The
unavailed amount of MAT credit entitlement , if any, should
continue to be presented under the head ‘Loans and Advances’
if it continues to meet the considerations stated in paragraph
11 above.
Profit and Loss Account
15. According to paragraph 6 of Accounting Standards
Interpretation (ASI) 6, ‘Accounting for Taxes on Income in the
context of Section 115JB of the Income-tax Act, 1961’, issued
by the Institute of Chartered Accountants of India, MAT is the
current tax. Accordingly, the tax expense arising on account
of payment of MAT should be charged at the gross amount,
in the normal way, to the profit and loss account in the year of
payment of MAT. In the year in which the MAT credit becomes
eligible to be recognised as an asset in accordance with the
recommendations contained in this Guidance Note, the said
asset should be created by way of a credit to the profit and
loss account and presented as a separate line item therein.”
D. Opinion
71
(i) MAT paid under section 115JB of the Income-tax Act,

1961 should be considered as current tax for the year in
which it arises. MAT Credit should, however, be treated
as an asset to be shown under the head ‘Loans and
Advances’ in the year in which it becomes eligible to be
recognised as an asset as discussed in paragraph 11 of
the Guidance Note.
(ii) No, MAT should not be considered as ‘timing difference’,
as stated in paragraph 5 of the Guidance Note.
(iii) MAT should be considered as current tax but should not
be considered for the purpose of deferred tax calculation.
Instead, MAT credit can be recognised as an asset, in
case it meets the requirements of paragraph 11 of the
Guidance Note.
Query No. 12
Subject: Recognition of revenue in respect of long production
cycle items.1
1. A company is a leading engineering product company catering

to the vital sectors of the economy such as infrastructure, surface
transportation, mining and defence. The company is a public sector
enterprise under the administrative control of the Ministry of
Defence. With a turnover of Rs.1857 crore for the financial year
2004-05, the company is the market leader in earthmoving and
mining products. The company is making profits consistently right
from its inception. For the year 2004-05, the profit before tax of
Rs. 272.80 crore registered a growth of 444% compared to the
previous year. The shares of the company are listed on Mumbai
and Bangalore Stock Exchanges and are actively traded scrips
with a market price of Rs. 1473 per share (as on date) with face
1
72
value of Rs. 10. The company is a fast growing engineering product

company with export presence in as many as ten countries spanning
over Asia, Africa and South American continents. For the year
2004-05, the export turnover of the company was Rs. 59 crore
and according to the querist, it is expected to increase manifold in
the future.
2. The company has three manufacturing units located at Kolar

Gold Fields (KGF), Bangalore and Mysore. It has marketing and
service centres spread all over India. The KGF unit manufactures
dozers, excavators, loaders, walking draglines, rope shovels and
sophisticated aggregates catering to the needs of the mining and
defence sectors. The Bangalore unit manufactures rail coaches,
EMU’s, wagons, overhead inspection vehicles for Indian Railways
and also logistics vehicles (Tatra variants) for usage by the Ministry
of Defence. In addition, Bangalore unit is manufacturing, for the
first time in India, metro rail coaches under license from M/s Rotem
of Korea. The Mysore unit manufactures highly sophisticated
dumpers, graders, aircraft towing tractors, weapon loading systems
and high powered internal combustion engines. All these products
are highly technology intensive and call for an array of
manufacturing technologies. Some of these products have a long
production cycle time extending beyond one accounting year.
3. The querist has stated that the accounting policy of the
company, as far as revenue recognition is concerned, is as under:
“(i) Sales set up for products, viz., equipments, aggregates,
attachments and ancillary products is made when these
are unconditionally appropriated to the valid sales contract
after pre-despatch inspection by the specified authority.
(ii) Sales setup for long production cycle items, is reckoned
based on technical estimates when the percentage of
completion of each identifiable unit of contract including
despatches with customers is 30% or more of the total
realisable value of such contract or estimate. Such
revenue recognition is restricted to 97.5% of the reckoned
realisable value and the balance 2.5% is accounted on
completion of the contract.”
73
According to the querist, these policies are being consistently

followed by the company. Further, these policies have been
validated by both the statutory auditors and the Comptroller and
Auditor General of India (C&AG) (government auditors). However,
during the meeting of the Audit Committee held on 06.01.06, the
statutory auditors were of the opinion that the accounting policy
propounded in paragraph 3 (ii) is not in line with Accounting
Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of
Chartered Accountants of India (ICAI). As per the querist, as the
views of the statutory auditors are at variance with the stated
policy of the company regarding revenue recognition, a need is felt
to seek the opinion of the Expert Advisory Committee of the ICAI.
4. The querist has further stated that the marketing policy of the
company is in line with the accounting policies being pursued. For
instance, the revenue from sale of equipments, aggregates,
components and attachments are recognised based on valid sales
contracts. Further, the revenue is recognised in respect of these
products only on the basis of pre-despatch inspection. This is
applicable in the case of products and aggregates having a
production cycle time of less than one year. Some of the products,
like Walking Draglines are highly import intensive coupled with
multiple manufacturing technologies. Further, the manufacturing
of these equipments warrant fabrication and manufacture of heavy
duty steel structures, integrating the multiple electrical and electronic
assemblies, sub-assemblies and transporting them in dis-
aggregated structures to customer site for erection and
commissioning. All these activities, right from commencement of
production to final erection take more than one year. Recognising
the long production cycle time as well as assembling the structures
at site, the company has evolved a specific marketing policy in
respect of such products. The policy calls for production of these
goods only on firm sale orders. Further, in case of these products,
invariably advances are received from the customers before the
commencement of production. In addition, the customer order
provides for billing details, with respect to pre-identified and mutually
agreed modules, assemblies and structures. Based on the billing
details, invoices are raised as and when the modules, assemblies,
74
structures, as the case may be, are despatched as per the terms
of the sale order and payments are also received as agreed.
5. According to the querist, it may be seen from paragraph 4
above, that revenue is recognised based on reliable data regarding
physical completion. Both the parties to the contract agree to the
terms of sale and also payment in respect of modules despatched.
Further, both the parties are clear in understanding the rights,
obligations, risks and rewards as well as the terms of payment. In
fact, in many of the transactions of this kind, the buyer pays not
only advance but also to the extent of agreed percentage of value
of invoices raised at the point of delivery at site or ex-works, as
the case may be.
6. The querist has stated that considering the nature of business,
the type of product and the long production cycle time involved,
the method adopted by the company is in order. This also
synchronizes the revenue recognition with occurrence of
performance or event and is well within the realm of the principle
of matching concept (emphasis supplied by the querist). According
to the querist, US GAAPs also recognise revenue on the basis of
percentage of completion method in respect of long production
cycle items/products (the querist has referred to US GAAP 2002
by Siegel, Levine, Qureshi and Shim published by Prentice Hall).
On the other hand, if revenue is recognised only after the final
delivery of such equipment, it will lead to distortion of the financial
performance and position of the company for earlier years.
7. The querist has further stated that AS 9 recognises revenue

both from the sale of products and rendering of services. However,
in the case of services, it reckons the applicability of percentage of
completion method but not so in the case of sale of goods. The
querist has further stated that in this regard, it may be worthwhile
to note that revenue recognition irrespective of the fact whether it
is revenue generation from rendering of service or from sale of
goods, is well within the purview of the framework of matching
concept of revenue with expenditure. Therefore, what is explicitly
stated as applicable to rendering of services will be equally
applicable for sale of goods. Further, as per the querist, in the
75
case of goods having long production cycle time, as long as there

is a valid contract and the parties to the contract agree regarding
billing details, contractual obligations and payment terms, there is
no need to apply the rule of explicit statement in the Standard. On
the other hand, the strict interpretation of the Standard based on
the literal meaning instead of the spirit behind it would adversely
affect the financial performance of the companies having such
products (emphasis supplied by the querist). This, in turn, according
to the querist, would have significant impact on the perception of
economic agencies, like stock exchanges, creditors, bankers,
investors and other stakeholders.
8. The querist has also mentioned that an attempt was made by
the company to find out the accounting policies pursued by other
companies manufacturing engineering products having long
production cycle time. The querist has observed that another
company, having similar product profile as that of the company
under construction in respect of products having long production
cycle time, has similar accounting policy in respect of these items.
It is requested by the querist that the Committee may also take
cognizance of the other company’s accounting policy while
expressing its considered opinion.
B. Query
9. The querist has sought the opinion of the Committee as to

whether the accounting policy of the company, particularly, with
regard to sale of products having long production cycle time is in
line with AS 9. If not, what modifications, in the opinion of the
Committee are desirable to conform to AS 9?

relates to whether as per the provisions of AS 9, the revenue from
sale of products having long production cycle time, produced under
a contract with the customer, can be recognised following the
principles of percentage of completion method. The Committee
has, therefore, considered only this issue and has not touched
upon any other issue arising from the Facts of the Case, such as
76
accounting treatment of products having production cycle time

less than a year, etc.
11. With regard to long production cycle items taking more than a
year to complete, the Committee notes the ‘Objective’ paragraph,
definition of the term ‘construction contract’, and paragraph 3 of
Accounting Standard (AS) 7 (revised 2002), ‘Construction
Contracts’, issued by the Institute of Chartered Accountants of
India, which inter alia, state as follows:
“Objective
The objective of this Statement is to prescribe the accounting
treatment of revenue and costs associated with construction
contracts. Because of the nature of the activity undertaken in
construction contracts, the date at which the contract activity
is entered into and the date when the activity is completed
usually fall into different accounting periods.”
“A construction contract is a contract specifically

negotiated for the construction of an asset or a
combination of assets that are closely interrelated or
interdependent in terms of their design, technology and
function or their ultimate purpose or use.”
“3. A construction contract may be negotiated for the

construction of a single asset such as a bridge, building, dam,
pipeline, road, ship or tunnel. A construction contract may
also deal with the construction of a number of assets which are
closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use;
examples of such contracts include those for the construction
of refineries and other complex pieces of plant or equipment.”
in case of contracts of manufacture and supply of long production
cycle items which are complex pieces of equipment and which are
manufactured under a contract with the customer, AS 7 (revised
2002) is applicable because the date on which the contract is
secured and the date when the contract activity is completed fall
into different accounting periods. In view of this, the principles of
77
recognition of revenue in respect of sale of goods, as enunciated

in AS 9, as being argued by the statutory auditor, are not applicable
in this case. In this regard, the Committee also notes paragraph 2
of AS 9, which, inter alia, states as follows:
“2. This Statement does not deal with the following aspects
of revenue recognition to which special considerations apply:
(i) Revenue arising from construction contracts”.
13. With regard to method of recognition of revenue prescribed in

AS 7, the Committee notes paragraph 21 of the Standard as
reproduced below:
“21. When the outcome of a construction contract can be
estimated reliably, contract revenue and contract costs
associated with the construction contract should be
recognised as revenue and expenses respectively by
reference to the stage of completion of the contract activity
at the reporting date. An expected loss on the construction
contract should be recognised as an expense immediately
in accordance with paragraph 35.”
that in the present case, the company should recognise revenue
from sale of long production cycle items manufactured under a
contract with the customer, on the basis of stage of completion of
the product, i.e., percentage of completion method, provided other
conditions and provisions of AS 7 (revised 2002) are also complied
with.
D. Opinion
15. The Committee is of the opinion on the issues raised in
paragraph 9 above that in the present case, AS 7 (revised 2002)
is applicable rather than AS 9. Accordingly, the revenue of the
company from sale of products having long production cycle time,
i.e., more than a year, that are manufactured under a contract with
the customer, should be recognised following the percentage of
completion method as per the provisions of AS 7 (revised 2002).
78
Query No. 13
Subject: Segment reporting by a finance company.1

1. A public sector undertaking is registered under the Companies
Act, 1956. The Government has also recognised it as a public
financial institution under section 4A of the Companies Act, 1956.
2. The main operational activity of the company is financing of

housing and infrastructure projects. The other activities include
construction, consultancy, conducting management development
programmes, etc., which revolve around the main activity of
financing. A break-up of the activity-wise revenue is as under:
S. Particulars % of (Rs. in
No. total crore)
revenue
1 Income from financing activities 94.15 2,661.38*
(interest on housing, infrastructure
loans and investment in bonds/
fixed deposits)
2 Other income on loans (i.e., 2.40 67.75
advisory income and other fees)
3 Closing-work-in-progress (constru- 2.94 83.20
ction activity)
4 Other income (balance) 0.51 14.38
Grand Total 100.00 2826.71
* Includes income of Rs. 374.74 crore from loan under retail finance
scheme, i.e., Rs. 328.75 crore on account of bulk loans and Rs. 45.99 crore
on account of direct loan to individuals.
3. The querist has informed that the financing activity, i.e., housing
and infrastructure financing business, is shown as a single segment
since the rates of interest at which loans are advanced, the
1
79
securities taken against the loans and the recovery mechanism

are absolutely the same for both the businesses. Also, the rate of
interest as well as the security aspect of both types of projects are
regulated through ‘Financing Pattern’ (a copy of which has been
provided by the querist for the perusal of the Committee) which is
approved by the company’s board of directors. Further, the loan
agreement with the borrowing agencies is common for housing as
well as infrastructure projects. The securities demanded for various
projects are taken based on the common circular, according to
which, there is a basket of securities from which available security
is picked up. Thus, the types of security accepted are also same
for both the types of projects. Moreover, in most of the cases, as
per the querist, the loans are advanced to a single agency both for
housing and infrastructure purposes. In this context, the querist
has informed that the total loan outstanding in respect of loans
advanced by the company as on 31.3.2005 was Rs. 21,583.90
crore (provisional). The loan outstanding in respect of the same
agencies in housing as well as infrastructure loans is Rs. 7,263.11
crore.
4. The querist has stated that as per Accounting Standard (AS)
17, ‘Segment Reporting’, issued by the Institute of Chartered
Accountants of India, “a business segment is a distinguishable
component of an enterprise that is engaged in providing an
individual product or service or a group of related products
or services and that is subject to risks and returns that are
different from those of other business segments. Factors that
should be considered in determining whether products or
services are related include:
(a) the nature of the products or services;
(b) the nature of the production processes;
(c) the type and class of customers for the products or

services;
(d) the methods used to distribute the products or

provide the services; and
80
(e) if applicable, the nature of the regulatory environment,

for example, banking, insurance, or public utilities.”
According to the querist, since the risks and returns in housing
and infrastructure businesses are considered the same, no separate
segments are required to be recognised for the purposes of AS 17.
5. In view of the above, a disclosure in the notes forming part of

accounts is given by the company which is as under:
“The main business of the company is to provide finance for

housing/infrastructure projects. All other activities of the
company revolve around the main business and, therefore,
there are no separate reportable segments as per AS 17”.
6. The querist has further mentioned that during the course of
audit of accounts for the year 2003-2004 by the Comptroller and
Auditor General of India (C&AG), a query was raised that since
the company has classified its business into ‘housing’ and ‘non-
housing business’ as required under NHB directions, the housing
loans and infrastructure project loans should be reported as
separate segments as per the requirements of AS 17, since the
revenue generation from these activities are 41.21% and 46.40%,
respectively of the total revenue of the company.
7. In this connection, the querist has further clarified that the

company’s main business is long term financing for housing and
urban infrastructure projects and is not undertaking housing and
infrastructure activities as such. Therefore, the company’s main
product/activity is long term financing – housing and infrastructure
are the areas for which finances are provided.
8. The querist has also furnished the following information relating
to the risk profile of financing of housing and infrastructure activities:
(i) (a) The profile of borrowers for housing loans includes
various State Government agencies, e.g. Housing
Boards, Rural Housing Boards, Development
Authorities, City Improvement Trusts, Municipal
Corporations, Public Sector Undertakings, State
Government Undertakings, NGOs, Co-operative
81
Societies, viz., Primary Level Cooperative Housing

Societies and State Level Apex Cooperative Housing
Societies and Private Builders, Developers,
Corporate Sector Agencies. Besides this, the
company also provides loans to individuals under
its retail finance scheme.
(b) The profile of borrowers for infrastructure loans

includes State Level Financing Institutions/
Corporations, Water Supply & Sewerage Boards,
Development Authorities, State Functional Agencies
for Housing and Urban Development, New Town
Development Agencies, Regional Planning Boards,
Improvement Trusts, Municipal Corporations/
Councils, Joint Sector Companies, Cooperative
Societies/Trusts, NGOs, Private Companies/
Agencies including BOT Operators, Concessionaires.
(c) The profile of borrowers under the Niwas scheme
of the company includes individuals and State
Government bodies/HFCs for lending to individuals
for housing purpose.
(ii) As per the guidelines of the company, any agency which
is undertaking housing and urban development
programme in the country can avail finance from the
company both for housing as well as urban infrastructure
schemes. Further, the housing and urban infrastructure
schemes are supplementary to each other and most of
the state borrowers undertake complete activity/
development, which includes housing as well as urban
infrastructure programmes.
(iii) Housing and infrastructure loans are provided after
appraising the project with respect to two aspects, viz.,
(i) scheme based appraisal, and (ii) agency based
appraisal. Under the scheme based appraisal, the project
submitted by the agency is evaluated from legal, technical
and financial point of view, keeping in view the objective
of each scheme and the respective guidelines. The
82
agency based appraisal focuses on (i) the agency’s

financial soundness, (ii) the organisational strength of
the agency, and (iii) the track record of the agency in
terms of execution and delivery of similar products in the
past. Accordingly, risk profile of common borrowers of
the housing loans and infrastructure loans is same.
Further, the process of providing loans, extent of financing
for housing and infrastructure loans, etc., is the same as
stated above.
(iv) The borrowing agencies for housing loan are involved in

various types of activities depending upon their
constitution, regulatory framework, e.g., housing board
for development of land, providing developed plots and
housing, etc.
(v) The borrowing agencies for infrastructure loans are

involved in various housing and urban development
activities depending on their constitution, Memorandum
and Articles of Association, etc.
9. According to the querist, being a housing finance company, it
is regulated by the National Housing Bank (NHB). Sub-paragraph
(2) of paragraph 25 of the Housing Finance Companies (NHB)
Directions, 2001 requires that the principal provisions made shall
be distinctly indicated under separate heads of accounts separately
for ‘housing’ and ‘non-housing finance business’ and individually
for each type of assets as under:
(a) Provisions for sub-standard, doubtful and loss assets;
and
(b) Provisions for depreciation in investments.
10. The querist has informed that since the above disclosure in
the balance sheet is required to be given by every housing finance
company (HFC), the principal outstanding and provision as on the
date of the balance sheet for housing business and non-housing
business were classified under standard, sub-standard, doubtful
and loss assets in the notes to accounts (note no. 27 of annual
accounts for 2003-2004).
83
11. Regarding the internal reporting system prevalent in the

company, the querist has informed that the reporting of performance
of housing and infrastructure business is done through MIS Report
(a copy of which has been provided by the querist for the perusal
of the Committee) which comprises data on releases, sanctions,
schemes in pipelines and progress of the schemes for regional
offices and all India level. This report is forwarded to the Ministry
and is also used for replying to parliament questions and queries,
etc. from the Ministry. It is further clarified by the querist that
although the performance of housing and infrastructure activities
alongwith their sub-heads is intimated to board of directors
separately, yet its purpose is to achieve better internal control and
effective monitoring and not for arriving at the profit/loss from both
types of activities. The querist has also stated that there is only
one department which is looking after entire sanctions of all types
of schemes, i.e., housing, urban infrastructure, commercial, Ministry
grant related schemes, etc. Similarly, there is only one department
which is responsible for all issues relating to releases and post
releases, i.e., recoveries, default, monitoring of defaults, etc.
Similarly, delegation of powers does not specify any different criteria
pertaining to housing, urban infrastructure or any other type of
schemes.
12. As regards making decisions about future allocations of
resources, the querist has stated that the resource progamme is
placed before the board for its approval for the full year in the
beginning of the financial year and there is no bifurcation between
resource generation for different types of schemes, i.e., housing,
urban infrastructure, etc. and the resources are raised subsequently
by considering overall fund requirement for all types of schemes.
13. The querist has also informed that the NHB norms dealing
with the provisions for Non-Performing Assets (NPA) etc., are the
same for housing and infrastructure loans. The main business of
the company is to make available finances for housing as well as
for infrastructure projects. Maintenance of account books/various
records and calculation of profit and loss account of the company
is made in a consolidated manner irrespective of the type of
schemes.
84
B. Query
14. The opinion of the Expert Advisory Committee has been sought
on the issue as to whether financing for housing and infrastructure
activities are to be shown as separate business segments as
observed by C&AG for the purposes of AS 17, ignoring the fact
that risks and returns for financing, i.e., interest rate, security,
agency, treatment of the defaults with reference to provisioning
norms of NHB guidelines are the same for both the products.

15. The Committee restricts its opinion to the issue raised by the
querist in paragraph 14 above, viz., whether financing for housing
and infrastructure activities should be shown as separate business
segments. Accordingly, the Committee has not addressed any
other issue that may arise from the Facts of the Case, e.g., whether
there can be business segments other than the housing loans and
infrastructure loans activities.
16. The Committee notes the definition of the term ‘business
segment’ reproduced in paragraph 4 above and paragraphs 11,
12 and 24 of AS 17 as below:
“11. Determining the composition of a business or
geographical segment involves a certain amount of judgement.
In making that judgement, enterprise management takes into
account the objective of reporting financial information by
segment as set forth in this Statement and the qualitative
characteristics of financial statements as identified in the
Framework for the Preparation and Presentation of Financial
Statements issued by the Institute of Chartered Accountants
of India. The qualitative characteristics include the relevance,
reliability, and comparability over time of financial information
that is reported about the different groups of products and
services of an enterprise and about its operations in particular
geographical areas, and the usefulness of that information for
assessing the risks and returns of the enterprise as a whole.
12. The predominant sources of risks affect how most
enterprises are organised and managed. Therefore, the
85
organisational structure of an enterprise and its internal

financial reporting system are normally the basis for identifying
its segments.”
“24. Business and geographical segments of an

enterprise for external reporting purposes should be those
organisational units for which information is reported to
the board of directors and to the chief executive officer
for the purpose of evaluating the unit’s performance and
for making decisions about future allocations of
resources…”
identification of a business segment involves consideration as to
whether different components of an enterprise meet the definition
of the term ‘business segment’ as reproduced in paragraph 4
above. Further, the factors specified in the definition, which need
to be considered in determining whether product or services are
related involves a certain amount of judgement. In the present
case, in making the judgement with regard to the factors stated in
the definition, apart from the information which is stated in the
Facts of the Case, the management may have to consider other
relevant factors since the list of the said factors is inclusive and
not exhaustive. On the basis of the information which is furnished
by the querist, the Committee notes as below:
(i) The returns from the housing loans and infrastructure
loans are the same except in case of certain housing
loans such as EWS housing projects and LIG housing
projects in respect of which interest rates are different
from the other housing loans and the infrastructure loans.
In other words, the returns are different in a few cases
even within the housing loans component.
(ii) The risk profile of the common borrowers of the housing

loans and infrastructure loans is the same. The
Committee, however, notes that only about 30% of the
borrowers were common (paragraph 3 of the Facts of
the Case) in the year ending 31.3.2005.
86
(iii) While the internal reporting system within the organisation

reports the performance of housing and infrastructure
activities to the board of directors separately, as per
paragraph 12 of the Facts of the Case, there is no
bifurcation between housing loans and infrastructure loans
for making decisions about the future allocation of
resources.
(iv) The organisation structure of the company also does not
appear to differentiate between the housing loans and
infrastructure loans as it is stated in paragraph 11 of the
Facts of the Case that there is only one department
which is responsible for various issues of releases and
recoveries of both housing and infrastructure loans.
18. On the basis of the above observations based on the facts
furnished by the querist, the Committee feels that the risks and
returns from housing loans do not appear to be different from the
risks and returns pertaining to infrastructure loans, even though
for prudential norms purposes, the management has to make
separate disclosures for housing loans and infrastructure loans.
Further, the internal reporting system and organisation structure of
the company is not structured in a manner that the management
makes various resource allocation decisions between housing loans
and infrastructure loans based on their respective performance.
D. Opinion
19. On the basis of the above, the opinion of the Committee on

the issue raised by the querist in paragraph 14 above is that on
the basis of the facts, the financing of housing and infrastructure
activities need not be shown as separate business segments for
the purposes of AS 17.
87
Query No. 14
Subject: Booking of export sales/purchases of wheat and
rice under subsidised quota of the Government of
India, purchased from another government
undertaking.1
A Facts of the Case

1. A company is a central public sector undertaking (hereinafter
referred to as ‘the company’) under the administrative control of
the Ministry of Commerce, Government of India, and is engaged
in trading activities by way of export, import and domestic trade. It
is purely a trading house. The company was a government
canalised agency upto decanalisation era. Total turnover of the
company during financial year 2003-04 was Rs. 8348.76 crore.
The company, in addition to many other items, also exported wheat/
rice under the Government allocation from another government
undertaking (hereinafter referred to as ‘the undertaking’) on
subsidised rates during financial years 2003-04 and 2004-05. No
private party was entitled to export these items directly from the
undertaking.
2. The querist has summarised certain basic facts of the case,
which are as below:
(i) Allocation of wheat and rice is done by the Ministry to
the company from the undertaking at the specific rates.
(ii) Accordingly, the undertaking sells wheat and rice only to
the company.
(iii) Purchase price is paid by the company to the undertaking
through demand draft (DD).
(iv) Release order is given by the undertaking in the name of
the company.
(v) RR/LR are in the name of the company.
1
88
(vi) Export order is in the name of the company though

arranged by business associates.
(vii) The company issues sales tax declaration Form-H to the
undertaking.
(viii) Letter of credit is opened by the importer in favour of the
company.
(ix) Export documents are in the name of the company.
(x) Export packing credit (EPC) from the banker is availed
by the company.
(xi) Bills are negotiated through the company’s banker and
the proceeds are used to discharge the EPC availed.
(xii) Stock is hypothecated to the company’s banker and the
bank has lien over the goods towards the EPC given to
the company.
(xiii) The port trust holds the stock for the company.
(xiv) The company is the beneficiary of the insurance policy.
(xv) Risks and rewards of ownership of goods, as per the

querist, are always with the company. In other words, at
no point of time, risks and rewards of ownership of goods
are transferred to business associates.
3. The querist has stated that to execute the export commitment
and trading operations, the company is having an arrangement
with its business associates to undertake the following activities:
(i) Lifting the material from the godown of the government

undertaking to port towns by road or rail.
(ii) Receiving the material at the port town and moving them
to the godown/transit port area.
(iii) Segregation, if necessary, as per the requirement of the

buyers.
(iv) Arranging shipments as and when vessels take berth.
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(v) Fumigation of stock.

(vi) Quality analysis.
(vii) Arranging necessary documents for negotiations by the

company.
4. The querist has stated that the company is primarily a trading

entity and contracting party. It procures and sells goods as required
by its associates on their behalf. It is one of the intermediaries in
the process of trading. The procurement and supply is undertaken
for and on behalf of business associates by the company. The
company is having a fixed trade margin on export quantity, i.e., on
Bill of Lading quantity. It takes 15% of the procurement price as a
margin from the associates. Wherever the company is availing
EPC/PCFC from its bank, interest cost is also being recovered
from the associates. The agreement with the associates has clauses
for indemnity to the company and recourse on the associate for
any damages that may arise to the company under the contract.
All the consideration for procurement and disposal flow through
the company. The company remits the net cash flows less its fixed
margin and the expenses incurred, to the associate.
5. According to the querist, the company records the purchases
and sales against the above contracts based on the legal and
contractual obligations assumed by the company and transfer of
title to the goods passing through it under the contract. The
Government Audit Party (GAP) is of the view that there is a violation
of Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by
the Institute of Chartered Accountants of India, in recognising the
purchase and sales since,
(a) the company is trading only with a fixed margin;
(b) all the activities from lifting of the material to the shipment
are carried out by the associate; and
(c) the contract provides for indemnity to the company and

allows the company to recover losses, if any, ultimately
from the associate.
90
According to the GAP, “the risks and rewards are with the associate
and there is an assignment of the contract to the associate”.
6. As per the querist, the company is of the view that AS 9 deals
only with the timing of recognition of revenue and does not deal
with the question of ownership which is more fundamental. Also,
AS 9 does not deal with accounting for purchases. The ownership
in the goods is passed on by the government undertaking to the
company and the company has to book the purchases. According
to the querist, the ownership rests throughout with the company
until it is transferred by the company to the foreign buyer and it
would be wrong if the company does not recognise the purchase
and sale. Restricting its trade margin, is the company’s decision
based on commercial considerations. The clauses for indemnity,
etc., in the contract only provide for recourse to the company in
case of loss but at first, the risk falls only on the company. AS 9
requires consideration of risks and rewards of ownership (emphasis
supplied by the querist). Risks and rewards cannot be separated
from ownership and AS 9 does not anywhere state that if there is
anybody who has been made responsible for the risks, he will
become the owner. The querist has argued that it should be
appreciated that if such be the case, since all the risks are covered
by insurance, the insurance companies would become the owner.
According to the querist, all the documents and the events as per
items (i) to (xv) of paragraph 2 above, confirm that the ownership
of the goods rests with the company and, accordingly, purchases
should be booked by the company.
7. The querist has also brought to the notice of the Expert

Advisory Committee, two opinions issued by the Committee on
booking of purchases and sales made through business associates
vide Queries No. 1.17 and 1.18 of Compendium of Opinions,
Volume XVI, wherein, as per the querist, the Committee has clearly
opined that the fact to be seen is whether the ownership in the
goods passes on to the company or not. Although, as per the
querist, the present query is addressed by the above opinions, the
Member, Audit Board (MAB) has desired that a fresh opinion may
be sought.
91
B. Query
8. The opinion of the Expert Advisory Committee is sought on
the following issues:
(i) Whether booking of the purchases and sales by the
company is in order.
(ii) If not, what should be the correct accounting treatment?
(iii) Whether the company is required to disclose such

purchases and sales in the notes to accounts as a
contravention of AS 9.
(iv) Whether AS 9 is applicable for booking of such
purchases.
(v) Whether such purchases and sales are to be treated as
assignment.
(AS) 1, ‘Disclosure of Accounting Policies’, issued by the Institute
of Chartered Accountants of India, which states as follows:
“17(b) Substance over Form

their substance, i.e., the economic reality of events and transactions,
and not merely in accordance with their legal form. In other words,
it is the ‘economic reality’ that is important in accounting and not
only the ‘legal reality’. In the context of revenue recognition, the
principle of ‘substance over form’ is recognised by paragraph 6.1
of AS 9 as reproduced below:
“6.1 A key criterion for determining when to recognise revenue

from a transaction involving the sale of goods is that the seller
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has transferred the property in the goods to the buyer for a

consideration. The transfer of property in goods, in most cases,
results in or coincides with the transfer of significant risks and
rewards of ownership to the buyer. However, there may be
situations where transfer of property in goods does not coincide
with the transfer of significant risks and rewards of ownership.
Revenue in such situations is recognised at the time of transfer
of significant risks and rewards of ownership to the buyer.
Such cases may arise where delivery has been delayed
through the fault of either the buyer or the seller and the
goods are at the risk of the party at fault as regards any loss
which might not have occurred but for such fault. Further,
sometimes the parties may agree that the risk will pass at a
time different from the time when ownership passes.”
(Emphasis supplied by the Committee.)
11. In the context of the query, the Committee notes that while
the legal form is that the title to the goods passes on to the
company, the substance of the transaction is that the company in
question is only an agent of the business associates because of
the following factors:
(a) The querist has specifically stated in paragraph 4 above

that the company undertakes procurement and supply
for and on behalf of business associates.
(b) The company is getting only a fixed percentage of trade
margin as its service charges. It is specifically stated in
paragraph 4 above that the company remits the net cash
flows less its fixed margin and the expenses incurred, to
the associate, which means that the risk of profit or loss
arising out of the whole transaction is borne by the
business associate and not by the company. The
company is assured of its fixed margin and, therefore, it
does not bear the risk of loss on this account.
(c) The agreement between the company and associates (a
copy of which has been separately provided by the querist
for the perusal of the Committee) clearly states that the
93
business associate will indemnify the company against

all claims/liabilities, if any, under the export contract.
(d) It is clear from the agreement with the business associate
that most of the expenses such as letter of credit charges,
amendment and negotiation fees, export duties/fares,
survey/inspection charges, etc. are to be borne by the
business associate. Also, the risk of inspection and quality
is to be borne by the business associate.
(e) It is clearly mentioned in the above-said agreement that

the business associate is fully responsible as to the
correctness of the export price etc. and role of the
company is limited to arranging EPC funds etc. and
facilitating release of allocations for rice from the
government undertaking.
12. With regard to the arguments advanced by the querist in
paragraph 6 above, the Committee notes that the principle of
substance over form does separate legal ownership from significant
risks and rewards of ownership. In other words, while AS 9 does
not state that if the buyer is made responsible for the risks he will
become the owner, it does provide that in case significant risks
and rewards in the goods are transferred to the buyer then only
the sale should be booked by the seller. With regard to the
argument advanced by the querist that if risks be the determining
factor for becoming an owner, the insurance company will be the
owner of all the goods, the Committee is of the view that this
argument is fallacious since AS 9 nowhere states that the transfer
of significant risks and rewards of ownership results into the
transferee becoming the owner of the goods. Further, the insurance
company may assume the risks yet it does not get the rewards
from the goods and for recognition of revenue, it is the transfer of
both significant risks and significant rewards that is of paramount
importance. In other words, as per paragraph 6.1 of AS 9 (as
reproduced in paragraph 10 above), in a situation where significant
risks and rewards of ownership are transferred, it is not necessary
that the property in the goods, i.e., the legal ownership is also
transferred. On the transfer of significant risks and rewards of
94
ownership, the buyer becomes the ‘economic owner’ of the goods

even though he is not the legal owner of the goods. This principle
has been recognised in many other accounting standards, for
example, Accounting Standard (AS) 19, ‘Leases’, issued by the
Institute of Chartered Accountants of India, recognises that in the
situation of a finance lease, the lessee should show the assets
acquired under such a lease in his balance sheet, even though he
is not the legal owner of the assets.
13. The Committee agrees with the querist that AS 9 does not
deal with recognition of purchases by a buyer. The Committee is,
however, of the view that the principle of recognition of revenue
stated in AS 9 can be extended to recognition of purchases by the
buyer. The Committee is, therefore, of the view that just as the
seller should recognise sale on the transfer of significant risks and
rewards of ownership in the goods, the buyer should recognise
the purchases when he assumes significant risks and rewards of
ownership in the goods. Accordingly, in the view of the Committee,
the buyer can recognise purchases, only when he has acquired
significant risks and rewards of ownership in the goods.
14. The Committee also notes that the opinions of the Expert
Advisory Committee on Queries No. 1.17 and 1.18 contained in
Volume XVI of the Compendium of Opinions are based on the
consideration of transfer of ‘significant risks and rewards of
ownership’ and not on whether the ‘ownership’ in the goods is
passed on as claimed by the querist in paragraph 7 above. On this
consideration, the Committee had opined that since the significant
risks and rewards in the goods do not pass on to the concerned
trading company, it cannot book the purchases/sales made on
behalf of the business associates as its own purchases and sales.
although the ownership of goods vests with the company, the
significant risks and rewards from the ownership of goods vest
with the business associates. Hence, in the present case, the
company is merely an agent of the business associate and
therefore, it should not recognise sale and purchase of goods in
its books of account, but should recognise only the service charges
as its revenue.
95
D. Opinion
(i) No, booking of the purchases and sales by the company
is not in order.
(ii) The correct accounting treatment would be to recognise
only service charges as its revenue.
(iii) Since the company should not recognise such purchases
and sales in its books of account, the question to disclose
the same as purchases and sales in the notes to accounts
does not arise. However, the company may, if it so
desires, disclose the gross amounts of the transactions
in the notes to accounts, but not as purchases and sales.
(iv) No, AS 9 is applicable in respect of revenue recognition
only. However, its principles can be extended to
recognition of purchases, as stated in paragraph 13
above.
(v) Since purchases and sales are made on behalf of the
business associates, the company in question is acting,
in substance, only as an agent.
Query No. 15
Subject: Overhead allocation for the purpose of inventory
valuation at quarter/year end.1
1. A company is having a “Continuous Process Plant” producing
a single product. The installed capacity, which has been reported
in the annual accounts, is 2,000 MT per annum. The actual
1
96
production has been higher for the past few years, the quantities
produced have been in the range of 2,400 MT to 2,500 MT.
2. According to the querist, the company has been consistently
following the method of valuation of inventories, viz., finished goods
and work-in-progress, by arriving at the cost of production (COP).
In arriving at the cost, all the direct costs are considered and the
fixed factory overheads are allocated on the basis of actual
production. It is also considered whether the cost is greater than
net realisable value (NRV) or not.
3. During the 1st quarter ended June 2005, the plant was shut
down for 21 days for planned maintenance and later during the
quarter due to a break-down for a period of 6 days, thereby the
effective working days during the quarter were 64. The actual
production during the 1st quarter was 340 MT.
4. The querist has stated that during the course of the company’s
internal review, a view was expressed that since the plant has
produced 340 MT during the 1st quarter, and the normal quantity
produced over the past few years is about 2,400 MT, and
recognising that the quarterly accounts must follow the same
principles followed as at the year-end, there is a need to quantify
the production capacity on a quarterly basis. The suggestion was
to do the pro-rating of the capacity over 4 quarters. The base
figure so arrived is 600 MT per quarter. Considering the quantity
actually produced, i.e., 340 MT, a view was that the fixed overheads
to be inventorised on the closing stock should only be to the
extent of 56% (340/600) as per Accounting Standard (AS) 2,
‘Valuation of Inventories’, issued by the Institute of Chartered
Accountants of India, and the balance 44% should be charged off
as an expense and should not be inventorised. In this connection,
the querist has drawn the attention of the Committee to paragraph
9 of AS 2, as given hereunder:
“9. The allocation of fixed production overheads for the
purpose of their inclusion in the costs of conversion is based
on the normal capacity of the production facilities. Normal
capacity is the production expected to be achieved on an
97
average over a number of periods or seasons under normal

circumstances, taking into account the loss of capacity resulting
from planned maintenance. The actual level of production
may be used if it approximates normal capacity. The amount
of fixed production overheads allocated to each unit of
production is not increased as a consequence of low production
or idle plant. Unallocated overheads are recognised as an
expense in the period in which they are incurred. In periods of
abnormally high production, the amount of fixed production
overheads allocated to each unit of production is decreased
so that inventories are not measured above cost. Variable
production overheads are assigned to each unit of production
on the basis of the actual use of the production facilities.”
5. The querist has interpretated from the above paragraph of AS
2 that the period of planned maintenance is to be excluded in
arriving at normal level of production. Accordingly, the actual days
of planned maintenance have been excluded (21 days), thereby
reducing the “base” quantity from 600 MT to 461 MT (600*70/91
days). Thus, allowable overheads for inventory valuation based on
available capacity utilisation works out to 74% (340/461).
6. The querist has further expressed his view that in arriving at

the normal level of production, if the period of break-down is also
to be excluded as per cost accounting principles where allowance
is given for unavoidable interruptions, like time lost for repairs,
inefficiencies, breakdown, inventory taking, etc., the period to be
considered reduces to 64 days. As per the querist, the base quantity
of 600 MT will get reduced to 422 MT (600*64/91 days). Allowable
overheads for inventory valuation based on available capacity
utilisation works out to 81% (340/422).
7. The querist has stated that the company in question has
never followed this method of identifying the actual production
against the rated production for the purpose of inventory valuation
and while the company might have been producing about 600 MT
per quarter, a so-called “normal production” had never been bench-
marked by the company – definitely not quarter-wise.
98
8. According to the querist, there was also a view that this issue
gets highlighted where there is a shortfall in quarter 1. In quarter 2
and quarter 3, the cumulative throughput normally brings the
average to an acceptable norm. As per the querist, the question
that needs to be addressed is whether this rule is to be for a
particular quarter or for the cumulative period.
9. As per the querist, financial impact of the treatment

recommended as above would have a bearing in the particular
quarter where there is a reduced production as the overhead cost
that is normally inventorised would be lower, thereby impacting the
bottom line. The next quarter’s opening stock would, to that extent,
have a lower carried forward unit rate. This inventory when sold
would generate a higher margin. However, if the under-absorbed
overheads for a quarter are frozen and not to be considered for
the year-end valuation and unallocated overheads are recognised
as an expense in the period in which they are incurred, then the
year-end stock valuation process will not consider this amount and
to that extent the year-end value of stock will be lower. The querist
has stated that since the year-end carry forward stock levels are
high, this also impacts the year-end profitability.
B. Query
Committee on the following issues arising from the above:
(a) Paragraph 9 of AS 2, inter alia, states “actual level of
production may be used if it approximates normal
capacity”. At what percentage of production over each
quarter would trigger the application of this Standard? Is
it 50%, 60%, 75%, 80% or 95%?
(b) Whether the normal level of production for each quarter
is to be arrived at on the basis of equal production for 4
quarters. Is this a reasonable method for determining
the capacity utilisation (refer paragraph 4 of the ‘Facts of
the Case’)? In the case of the company under
consideration, the main demand will be during the 3rd
and 4th quarters and it is expected that the normal
99
production level of about 2,400 MT will be achieved in

the current year. If this be the case, what is the treatment
to be given for the first quarter’s lower production?
(c) Whether this rule is to be for a particular quarter or for a

cumulative period?
In case the actual production in the 1st and 2nd quarters

are assumed at 600 MT and there is a fall in the 3rd
quarter to 340 MT as illustrated below what would be the
treatment:
Expected Annual Production – 2,400 MT
Pro-rated production per quarter – 600 MT
Actual Production – 1st and 2nd

quarters – 1,200 MT
(600 MT each)
Actual Production – 3rd quarter – 340 MT
Cumulative total of all the 3 quarters – 1,540 MT

In the above instance, in the 3rd quarter accounts as on
31st December, the Production:
• for the 3rd quarter is 340 MT or 56% utilisation
• for the cumulative period, the utilisation is 86%
(1540/1800)
(d) If the answer to (c) above is to consider the cumulative
production and not the production quarter-wise, whether
it should be recommended to the management to plan
for maintenance in the later quarters. Is the intention of
the Accounting Standard to split hair? Whether this, in
conjunction with the query, implies that the Accounting
Standards should be considered for production planning.
(e) Since the undertaking is a continuous process plant,

inspite of annual maintenance, there could be a major
break-down of a critical machinery. In such instances,
100
what should be the treatment of absorption of fixed

overheads?
In the instant case, if the annual production is 2,400 MT,
the average production per day would be 6.98 MT for
effective working days of 344 days (365days - 21 days
for planned maintenance) and the normal production for
70 days would be 461 MT - thereby achieving 74%
capacity utilisation on production of 340 MT. Alternatively,
if the break-down days of 6 days are also excluded, the
normal production for 64 days would be 422 MT –
achieving 81% capacity utilisation on production of 340
MT.
(f) If the answer to (c) above is to consider cumulative
production and not the quarter-wise production, in case
of fall in demand of the product or for whatever reasons,
the plant is shut down in the 3rd quarter with nil production,
what should be the treatment of absorption of fixed
overheads in such instances? The cumulative production
in such instance would be 1,200 MT, which will be 66%
of cumulative pro-rated production of 1,800 MT.
(g) If the overheads are disallowed for inventorisation in the
1st quarter, whether the expenditure to be considered for
the year-end inventory valuation excludes the overheads
disallowed in quarter 1 as it is frozen and charged-off as
expenditure in the 1st quarter, or the disallowed figure is
to be reinstated for the year-end working of inventory
valuation.

11. The Committee notes paragraph 9 of AS 2 reproduced by the
querist in paragraph 4 of the Facts of the Case. The said paragraph
is reproduced below again for ready reference:
“9. The allocation of fixed production overheads for the

purpose of their inclusion in the costs of conversion is based
on the normal capacity of the production facilities. Normal
capacity is the production expected to be achieved on an
101
average over a number of periods or seasons under normal

circumstances, taking into account the loss of capacity resulting
from planned maintenance. The actual level of production
may be used if it approximates normal capacity. The amount
of fixed production overheads allocated to each unit of
production is not increased as a consequence of low production
or idle plant. Unallocated overheads are recognised as an
expense in the period in which they are incurred. In periods of
abnormally high production, the amount of fixed production
overheads allocated to each unit of production is decreased
so that inventories are not measured above cost. Variable
production overheads are assigned to each unit of production
on the basis of the actual use of the production facilities.”
the first step for allocation of fixed production overheads is to
arrive at the quantum of normal capacity of the production facilities.
As per the above paragraph, the normal capacity is the production
expected to be achieved on an average over a number of periods
under normal circumstances, taking into account the loss of capacity
resulting from planned maintenance. In other words, in the view of
the Committee, the enterprise estimates the level of production
which will be achieved during a period, say a year, after considering
the planned maintenance and other normal wastages in the
utilisation of the facilities. For example, an enterprise may have an
installed capacity of say 10,000 MT a year, but after considering
the planned maintenance and other normal wastages in capacity
utilisation, the management may estimate on the basis of the past
average of 3 years and the demand of the product over the next 3
years, that the normal capacity per year would be 8,000 MT. It is
this quantity of 8,000 MT which will be considered as normal
capacity for the purpose of allocation of fixed overheads. According
to the Standard, the actual production capacity can be considered
only if it approximates the normal capacity. The Committee notes
that the Accounting Standard does not lay down any hard and fast
rule as to what should be considered as an approximation of the
normal capacity. The Committee is of the view that an enterprise
will have to consider under the facts and circumstances of each
102
case as to what can constitute an approximation keeping in view

the considerations of materiality and other factors, such as the
fluctuations in the actual production, vis-a-vis, the normal production.
For instance, in the aforesaid example, the enterprise may decide
that compared to the normal capacity of 8,000 MT, the
approximation should be within the range of, say, plus/minus 2%.
Thus, in the view of the Committee, the starting point is always the
normal level of production which is considered for allocation of
fixed overheads. It may be noted that the normal level of production
is not changed every time there is a change in actual production
as has been suggested by the querist. The normal level of
production remains the same. The allocation of the fixed overheads
to the actual production attained based on the allocation rate worked
out on the basis of the normal production gives rise to an under or
over allocation. The fixed production overheads that cannot be
allocated on the basis of normal level of production are required to
be charged to the profit and loss account as per paragraph 9 of
AS 2 reproduced above.
13. With regard to allocation of fixed production overheads for the

purpose of valuation of inventories for the financial results pertaining
to the interim periods, the Committee notes the following extracts
from Accounting Standard (AS) 25, ‘Interim Financial Reporting’,
issued by the Institute of Chartered Accountants of India:
“27. An enterprise should apply the same accounting

policies in its interim financial statements as are applied
in its annual financial statements, except for accounting
policy changes made after the date of the most recent
annual financial statements that are to be reflected in the
next annual financial statements. However, the frequency
of an enterprise’s reporting (annual, half-yearly, or
quarterly) should not affect the measurement of its annual
results. To achieve that objective, measurements for
interim reporting purposes should be made on a year-to-
date basis.
28. Requiring that an enterprise apply the same accounting

policies in its interim financial statements as in its annual
103
financial statements may seem to suggest that interim period

measurements are made as if each interim period stands
alone as an independent reporting period. However, by
providing that the frequency of an enterprise’s reporting should
not affect the measurement of its annual results, paragraph
27 acknowledges that an interim period is a part of a financial
year. Year-to-date measurements may involve changes in
estimates of amounts reported in prior interim periods of the
current financial year. But the principles for recognising assets,
liabilities, income, and expenses for interim periods are the
same as in annual financial statements.
29. To illustrate:
(a) the principles for recognising and measuring losses
from inventory write-downs, restructurings, or
impairments in an interim period are the same as
those that an enterprise would follow if it prepared
only annual financial statements. However, if such
items are recognised and measured in one interim
period and the estimate changes in a subsequent
interim period of that financial year, the original
estimate is changed in the subsequent interim period
either by accrual of an additional amount of loss or
by reversal of the previously recognised amount…”
14. The Committee also notes paragraph 19 of Appendix 3,
‘Examples of Applying the Recognition and Measurement
Principles’, of AS 25, which is reproduced below:
“19. Inventories are measured for interim financial reporting
by the same principles as at financial year end. AS 2 on
Valuation of Inventories, establishes standards for recognising
and measuring inventories. Inventories pose particular
problems at any financial reporting date because of the need
to determine inventory quantities, costs, and net realisable
values. Nonetheless, the same measurement principles are
applied for interim inventories. To save cost and time,
enterprises often use estimates to measure inventories at
104
interim dates to a greater extent than at annual reporting

dates…”
for the purpose of allocation of fixed production overheads, the
enterprise will have to apply the same accounting policies in its
interim financial results that are followed for annual financial
statements. However, as mentioned in paragraph 19 of Appendix
3 of AS 25, reproduced above, the enterprise may rely on estimates
to a greater degree. Thus, in case an enterprise estimates its
normal production on an annual basis, and if there are no quarterly/
seasonal variations, it can pro-rate the same appropriately, say
equally, over the 4 quarters, in case the enterprise is preparing
quarterly financial reports. In case there are quarterly/seasonal
variations, the enterprise will have to estimate its normal capacity
on the basis of the average of the relevant quarters/seasons of
past few years, say, 3 to 5 years, also considering the demand of
the product during the season. For example, where a company is
having seasonal variations say, in the 3rd quarter of the year, then
it should estimate the normal capacity for the 3rd quarter based on
the capacity utilisation of the 3rd quarter for the past few years, say
3 to 5 years, also keeping in view the future demand of the product
during the quarter. Once the normal capacity for a quarter is
determined, as aforesaid, the quarter should be considered for
measurement purposes, as per paragraph 27 of AS 25 on year-to-
date basis, i.e., on cumulative basis. If there is an abnormal
breakdown during a period, as per AS 2, the amount of fixed
production overheads not allocated to units of production is charged
to the profit and loss account. However, the result of under allocation
of overheads or over allocation of overheads should not affect the
measurement of its annual results since interim periods are parts
of a financial year. This process is illustrated by way of an example
as given in Annexure A.
D. Opinion
opinion on the issues raised by the querist in paragraph 10 above:
105
(a) As explained in paragraph 12 above, the approximation

to normal capacity should be based on the facts and
circumstances of each case.
(b) and (c) It is not always necessary to arrive at the normal level
of production for each quarter based on equal production
for all the quarters. Such a situation may arise only where
it is expected that there are no seasonal or quarterly
variations in production. In cases where quarterly/
seasonal variations in production are expected, the normal
level for the quarter(s) should be estimated based on the
average of past 3 to 5 years of that quarter(s). This may
be necessary in case of seasonal variations or where
otherwise the quarterly production is expected to be lower,
for example, the enterprise estimates that it will have to
shut down the plant for normal maintenance during the
quarter. In the case of the company in question, if the
main demand and, therefore, the production, is expected
rd th
in the 3 and 4 quarters, normal production should be
rd th
determined separately for the 3 and the 4 quarters as
explained above. Moreover, the above principles, as per
paragraph 27 of AS 25, will have to be applied on year-
to-date basis, i.e., cumulatively, as explained in paragraph
15 above.
(d) Normal level of production as per AS 2 and AS 25 should

be determined based on the expected maintenance and
not the other way round as indicated by the querist that it
should be used for production planning. The intention of
AS 25 is to inventorise fixed production overheads
measured on year-to-date basis so that the annual results
are not affected.
(e) In case of a major breakdown for a critical machinery, in
a particular quarter, as per paragraph 9 of AS 2, the
under allocation of overheads, if arrived at on year-to-
date basis, should be charged to the profit and loss
account for that quarter.
106
(f) In case there is nil production in a quarter because of

abnormal reasons, i.e., it was not factored in while
estimating normal level of production for the quarter,
and, if it results in under allocation of overheads on year-
to-date basis, it should be expensed in that quarter.
(g) Since the fixed production overheads are absorbed at
the normal level of production, the rate should remain
the same for year-end inventory valuation purposes.
Annexure A
Example:
Fixed production overheads for the financial year = Rs. 9,600.
Normal expected production for the year, after considering
planned maintenance and normal breakdown, also considering
the future demand of the product = 2,400 MT. In this example,
it is considered that there are no quarterly/seasonal variations.
Therefore, the normal expected production for each quarter is
600 MT and the fixed production overheads for the quarter
are Rs. 2,400.
Actual production achieved
First quarter 500 MT
Second quarter 700 MT
Third quarter 400 MT
Fourth quarter 700 MT
Fixed production overheads to be allocated per unit of
production in every quarter will be Rs. 4 per MT (Fixed
overheads/Normal production).
First quarter
Actual production overheads = Rs. 2,400
Fixed production overheads based on the allocation rate of
Rs. 4 per unit allocated to actual production = Rs. 4x500
=Rs. 2,000
107
Unallocated fixed production overheads to be charged as

expense as per paragraph 9 of AS 2 and consequently as per
AS 25 = Rs. 400
Second quarter
Actual fixed production overheads on year-to-date basis Rs.
4,800
Fixed production overheads to be absorbed on year-to-date
basis 1200x4 = Rs. 4,800
Rs. 400 were not allocated to production in the Ist quarter. To
give effect to the entire Rs. 4,800 to be allocated in the second
quarter, as per paragraph 29(a) of AS 25, Rs. 400 are reversed
nd
by way of a credit to the profit and loss account of the 2
quarter.
Third quarter
Actual production overheads on year-to-date basis = Rs. 7,200
Fixed production overheads to be allocated on year-to-date

basis 1,600x4 = Rs. 6,400
Under allocated overheads Rs. 800 to be expensed as per

paragraph 9 of AS 2 and consequently as per AS 25
Fourth quarter/Annual
Actual fixed production overheads on year-to-date basis Rs.
9,600
Fixed production overheads to be allocated on year-to-date
basis 2,300x4 = Rs. 9,200
Rs. 400, i.e., [2,800(i.e., Rs.4x700) - 2,400] over allocable in
th
the 4 quarter, are to be reversed as per paragraph 29(a) of
AS 25 by way of a credit to the profit and loss account.
Unallocated overheads for the year Rs. 400 are expensed in

the profit and loss account as per paragraph 9 of AS 2.
108
The cumulative result of all the quarters would also result in

unallocated overheads of Rs. 400, thus, meeting the
requirements of paragraph 27 of AS 25 that the quarterly
results should not affect the measurement of the annual results.
This example presumes that there are no quarterly/seasonal
variations. In a case where there are quarterly/seasonal
variations, the estimates of normal capacity would have to be
made on the quarterly/seasonal basis as discussed in
paragraph 15 of the Opinion, which would then be added up
to determine the normal capacity for the year on the basis of
which the absorption rate will be determined. The variations
between the seasons would thus be considered normal and
treated accordingly.
Query No. 16
Subject: Accounting treatment in respect of side-tracking
costs of wells.1
1. An Exploration & Production (E&P) company established under
the Companies Act, 1956, has the core activities of exploration,
development and production of hydrocarbons in inland as well as
in offshore areas.
2. The company had generally been following the Successful

Efforts Method of accounting as contained in Statement of Financial
Accounting Standard (FAS) 19, ‘Financial Accounting and Reporting
by Oil and Gas Producing Companies’, issued by the Financial
Accounting Standards Board (FASB) of USA. The Institute of
Chartered Accountants of India issued the ‘Guidance Note on
Accounting for Oil and Gas Producing Activities’ in March 2003,
which lays down the accounting treatment for costs incurred on
1
109
acquisition of mineral interests in properties, exploration,

development and production activities. According to the querist,
the company implemented the above Guidance Note from the
accounting year 2003-04 onwards and has been compiling its
financial statements as per the provisions of the Guidance Note.
3. As oil fields mature, sustenance of production levels and
techno-economics of hydrocarbon exploitation necessitate drilling
of development wells and work-over in tandem for gas shut-offs,
water shut-offs, layer transfer, inter-conversions between injectors
and producers, etc. Also, with recently introduced technology
induction, previously drilled well bores which are no longer producing
or producing below economic levels, are ‘side-tracked’. This is
accomplished by cutting a window in casing at appropriate depth
and drilling a side-tracked hole at different angle and terminating
them at the target depth within the same or different layer of the
reservoir, with a purpose to utilise the same well to reach a different
target to produce more oil and gas and at the same time to reduce
well cost.
4. Drilling of wells is an integral part of exploration activity.
Sometimes, due to complications in the drilled hole, the original
hole is side-tracked to drill further to achieve the target depth.
Side-tracking techniques are broadly covered under the application
of directional drilling technology. In case of an exploratory or
development well, side-tracking is carried out when an objective/
target could not be reached due to drilling complications like stuck
pipe, loss of cementation, etc. In the process, certain portion of
the drilled depth of the well or the entire well may have to be
abandoned, in order to achieve the objective of drilling the well.
5. The querist has stated that the Guidance Note on Accounting

for Oil and Gas Producing Activities does not specifically address
the issue of accounting treatment of side-tracking costs.
6. The querist has also mentioned that there is no specific
reference to the accounting treatment in the Significant Accounting
Policies of the company. There are also no specific guidelines
from any bodies like the Financial Accounting Standards Board,
USA (FAS 19 does not deal specifically with the issue). The
110
company, at present, is following the accounting treatment in this

regard, as given below:
(i) In case of exploratory wells, the cost of abandoned portion
of the well is considered as a part of the cost of the well
considering the well as a single unit and capitalised as
exploratory wells-in-progress.
(ii) In case of development wells, the cost of abandoned
portion of the well is considered as a part of the cost of
the well and capitalised under producing property.
(iii) In case of existing producing wells, the expenditure on
side-tracking is classified as workover expenditure, i.e.,
repair of the well, and, accordingly, charged to the profit
and loss account.
7. According to the querist, during the course of audit, a different
view, based on the internationally accepted accounting practices
given in (i) Fundamentals of Oil and Gas Accounting by Rebecca
Gallun and others, (ii) Petroleum Accounting – Principles,
Procedures and Issues – 4th Edition by Horace R Brock and others
and (iii) Council of Petroleum Accountants Society (COPAS) Bulletin
No. 10 and on the basis of treatment recommended under the
Guidance Note on Accounting for Oil and Gas Producing Activities,
issued by the Institute of Chartered Accountants of India (ICAI),
emerged as follows:
(i) Exploratory wells

As per paragraph 39 of the Guidance Note, under the
successful efforts method, costs incurred on exploratory dry
wells are to be expensed. On the same analogy, as the cost
of abandoned portion of the side-tracked exploratory well, i.e.,
from the point of side-tracking to the bottom of incomplete
well does not add to the value of side-tracked well, such costs
are to be expensed.
(ii) Development wells
Under successful efforts method, the costs incurred in drilling

development dry wells as well as development successful
111
wells are to be capitalised. Since the costs incurred on both

the successful and unsuccessful development wells drilled in
proved area are capitalised, the cost of abandoned portion of
the side-tracked well should also be capitalised.
(iii) Producing wells
In case of existing producing wells, the expenditure on portion

of side-tracking or portion of well drilled deeper below the
producing horizon, which is proved successful, should be
capitalised as its benefits will accrue over a number of years.
However, unsuccessful side-tracked portion(s) or portion of
well drilled deeper below the producing horizon (as mentioned
in COPAS Bulletin No. 10) should be expensed as it does not
add any value to the well. In case of side-tracking, if the
portion below the point of side-tracking is abandoned/plugged,
the cost should be expensed.
8. The querist has stated that if the accounting treatment
proposed in paragraph 7 above is followed and in case, it is decided
that abandoned portion of the side-tracked well adds no utility /
value to the well actually completed then the proportionate portion
of the well costs will have to be charged to expense either on
meterage basis or per drilling day basis or allocated costs on any
other reasonable basis which will have to be decided. On the
same principles, the side-tracking in respect of a producing well
(which proved successful) would have to be capitalised.
9. The querist has drawn the attention of the Committee to the

following references taken from two of the petroleum accounting
books on the Industry, which broadly incorporate the accounting
practices prevalent in the US:
(i) As per The Fundamentals of Oil & Gas Accounting by
Rebecca Gallun and Others,
“Costs of sidetracking are generally considered a part of drilling
costs and are capitalised or expensed, depending upon
whether the well is a development well or an exploratory well
and whether proved reserves are found. However, if the well
112
is an exploratory well, expensing the costs of the abandoned

portion of the well regardless of whether proved reserves are
found (emphasis provided by the querist) appears more
consistent with the theory of successful efforts because that
portion of well obviously has no future economic benefit”.
(ii) As per Petroleum Accounting-Principles, Procedures &
Issues, 4th Edition, by Horace R Brock and others
“Sometimes in the drilling of an exploratory well with a specific
formation or trap as an objective, difficult drilling conditions
may be encountered, making it necessary to abandon the
hole already drilled and to start a new well nearby. If the
second hole is completed as a producer, the question arises
for successful efforts as to whether the costs incurred on the
abandoned hole should be charged to expense or should be
capitalised as part of the cost of the completed well that
found proved reserves.
It appears that the former treatment is preferable and that the

costs applicable to the abandoned hole should be charged as
an exploratory dry-hole expense because the abandoned hole
added nothing to the utility or value of the well actually
completed. If the well originally being drilled were classified
as a development well, all costs involved would be capitalised.
If in drilling a well, difficulties are encountered and it is
necessary to abandon the lower portion of the well in order to
plug-back and side-track to reach the same objective through
directional drilling, the cost of abandoned portion should
likewise be charged to expense as dry-hole cost. (Emphasis
provided by the querist.)
Some companies do, however, capitalise costs of an
abandoned well if the target of the second well (or the side-
tracking) is the same as that of the abandoned well. The
second well (or the twin well) and the side-tracking are simply
unexpected additional costs, like fishing for stuck drill pipe, to
get a well drilled to the target.”
113
10. The querist has stated that there is no uniform standardised

practice as far as the accounting treatment of such cost is
concerned. A survey published in the Journal of Extractive Industries
Accounting, reported how companies are handling similar situations
in practice (Survey of Successful Efforts Accounting Techniques –
Summer 1982). In most of the situations, there appears to be little
agreement as to whether to expense or capitalise the cost of such
wells.
B. Query
(i) The appropriate accounting treatment in respect of cost
incurred on side-tracking and the abandoned portion of
well due to side-tracking of exploratory wells, development
wells and producing wells.
(ii) In case it is decided that the abandoned portion of the

side-tracked well adds no utility to the well actually
completed then the basis on which the costs will have to
be charged to the expenses may also be advised, i.e.,
whether on the basis of meterage or drilling days or any
other reasonable basis.
C. Points Considered by the Committee
12. The Committee is of the view that although the Guidance

Note on Accounting for Oil and Gas Producing Activities, issued
by the Institute of Chartered Accountants of India, does not
specifically deal with the accounting treatment in respect of costs
incurred on side-tracking and abandoned portion of oil well due to
side-tracking of exploratory wells, development wells and producing
wells, the treatment in respect thereof can be derived from the
treatment given in respect of the exploratory costs, development
costs and production costs given in the Guidance Note.
13. With regard to accounting treatment in respect of costs incurred
on side-tracking and the abandoned portions of the wells due to
114
side-tracking of exploratory wells, the Committee notes paragraph

39 of the Guidance Note which recommends as below:
“39. If the cost of drilling exploratory well relates to a well that
is determined to have no proved reserves, then such costs
net of any salvage value are transferred from capital work-in-
progress and charged as expense as and when its status is
decided as dry or of no further use. Costs of exploratory
wells-in-progress should not be carried over for more than a
period of two years from the date of completion of drilling
unless it could be reasonably demonstrated that the well has
proved reserves and development of the field in which the
well is located has been planned with required capital
investment such as development wells, pipelines, etc., in which
case the costs of the exploratory well can be carried forward
without any time limit.”
in case of side-tracking of an exploratory well, the abandoned
portion of the exploratory well is similar to that of an exploratory
well that is determined to have no proved reserves. Accordingly,
the treatment thereof should be the same as that of an exploratory
well that is determined to have no proved reserves, i.e., the costs
in respect of the abandoned portion of the exploratory well should
be transferred from capital work-in-progress and charged as
expense as and when its status is decided as dry or of no further
use. Further, the costs incurred on drilling of side-tracked
exploratory well is similar to the costs of drilling and equipping
exploratory wells (paragraph 9(iv) of the Guidance Note) and,
therefore, should be capitalised as recommended in paragraph 36
of the Guidance Note (reproduced in paragraph 16 below) as part
of the capital work-in-progress when incurred.
15. With regard to the treatment in respect of costs incurred on
side-tracking and the abandoned portion of the well due to side-
tracking of development wells, the Committee notes the definition
of the term ‘development wells’, as per paragraph 4 of the Guidance
Note which is reproduced below:
115
“Development Well: A well drilled, deepened, completed or

recompleted within the proved area of an oil or gas reservoir
to the depth of a stratigraphic horizon known to be productive.”
16. The Committee further notes paragraph 36 of the Guidance

Note as below:
“36. Under the successful efforts method, in respect of a cost

center, the following costs should be treated as capital work-
in-progress when incurred:
(i) All acquisition costs;
(ii) Exploration costs referred to in paragraph 9(iv) and

(v); and
(iii) All development costs.”

17. From the definition of the term ‘development well’, the
Committee notes that the said wells are drilled and developed in
an area within the area of proved oil or gas reserves and, therefore,
are different from the exploration wells in respect of which it is still
to be determined whether the area has proved oil reserves. The
Committee is of the view that expenditure incurred on developing
dry wells is like a normal loss/expenditure during construction or
creation of an asset and, therefore, should be capitalised. The
Committee is of the view that side-tracking of a developed well is
also like a normal loss/expenditure on the developing well and,
accordingly, the costs incurred on side-tracking as well as the
costs related to the abandoned portion of well due to side-tracking
of developing well should be capitalised as part of the capital
work-in-progress.
18. With regard to accounting treatment in respect of costs incurred
on side-tracking and the abandoned portion of wells due to side-
tracking of producing wells, the Committee notes that the Guidance
Note contemplates charging-off of the capitalised cost to the profit
and loss account by way of depreciation over the period of its
economic use. In this context, the Committee notes the definition
of ‘proved developed oil and gas reserves’ and paragraphs 42 and
116
44 of the Guidance Note, related to charging-off of the depreciation

on the producing wells as reproduced below:
“Proved Developed Oil and Gas Reserves: Proved developed
oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be
obtained through the application of advanced recovery
techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as proved
developed reserves only after testing by a pilot project or after
the operation of an installed programme has confirmed through
production response that increased recovery will be achieved.”
“42. The depreciation charge or the Unit of Production (UOP)
charge for all capitalised costs excluding acquisition cost within
a cost center is calculated as under:
UOP charge for the period = UOP rate x Production for
the period
UOP rate = Depreciation base of the cost center/ Proved
Developed Oil and Gas Reserves”
“44. ‘Proved Oil and Gas Reserves’ for the purpose of
paragraph 41 comprise proved oil and gas reserves estimated
at the end of the period as increased by the production during
the period. ‘Proved Developed Oil and Gas Reserves’ for the
purpose of paragraph 42 comprise proved developed oil and
gas reserves estimated at the end of the period as increased
by the production during the period. Additional reserves from
advanced recovery techniques are to be considered as proved
developed oil and gas reserves only after the required
investments have been capitalised.”
in case of side-tracking of producing wells, if the proved developed
oil reserves do not increase because of side-tracking, the cost of
side-tracking the producing wells is of the nature of ‘work-over’
which is defined in Clause 15 of the Appendix to the Guidance
Note as “Remedial work to the equipment within a well, the well
117
pipework or relating to attempts to increase the rate of flow”.

Accordingly, such cost of side-tracking should be expensed in the
year in which it is incurred. The depreciation charge on the cost of
the original producing well would continue to be charged as before.
However, in case the side-tracking results in additional proved
developed oil reserves, the side-tracking should be treated in the
same manner as advanced recovery techniques and the additional
cost should be capitalised in respect thereof. Consequently, the
depreciation charge would also have to be revised as indicated in
paragraph 44 of the Guidance Note reproduced above.
20. With regard to measurement of expenditure regarding
abandoned portion of the side-tracked well for the purpose of
accounting treatment given above, i.e., whether it should be on
the basis of the meterage or drilling days, the Committee is of the
view that the company in question should assess the relationship
of the costs with the basis and select the appropriate method in
this regard.
D. Opinion
21. On the basis of the above, the opinion of the Committee on
the issues raised by the querist in paragraph 11 above are as
below:
(i) The appropriate accounting treatment should be as

below:
(a) Exploratory wells

Costs incurred on side-tracking should be treated as
capital work-in-progress and the abandoned portion due
to side-tracking should be expensed.
(b) Development wells

Costs incurred on the side-tracking should be capitalised
and the cost related to abandoned portion due to side-
tracking of development wells should continue to be
capitalised.
118
(c) Producing wells

• In case the side-tracking does not result in increase
in proved developed oil and gas reserves, the cost
of side-tracking should be charged to expense and
the cost of abandoned portion should be depreciated
in the normal way.
• In case the side-tracking results in additional proved
developed oil and gas reserves, the cost of side-
tracking should be capitalised and the cost related
to the abandoned portion of well due to side-tracking
should be expensed.
(ii) The basis on which the costs have to be charged as
expense in respect of the abandoned portion should be
determined on a rational basis according to which the
costs relate best to the basis selected.
Query No. 17
Subject: Creation of provision for contingencies.1

1. A company was incorporated in March 1977 under section 25
of the Companies Act, 1956. The main objective of the company
is to promote India’s trade. One of the medium of promoting the
trade is organising trade fairs and exhibitions in various parts of
the country, as well as in other countries. The fairs/exhibitions
organised by the company as also by outside agencies attract
large crowds.
2. The querist has stated that from the year 2000-01, it was
decided to charge 5% contingency charges from the participants/
outside agencies on the income received from them by the
1
119
company. While, in the case of fairs organised by outside agencies,

5% contingency charges are levied separately in the invoice, the
contingency charges in respect of fairs organised by the company
are inbuilt in the space rent charged from the participants. Both
are credited to the income and expenditure account of the company.
The intention of levying these charges is to meet any unforeseen
liability which may arise in future. The instances of such unforeseen
liabilities could be on account of injury/loss of life of visitors/
exhibitors, etc., due to fire, terrorist attack, stampede, electrocution,
natural calamities and other public/third party liability, statutory
liabilities, etc. The chances of occurrence of these events are high
due to visit of large crowds to the fairs/exhibitions. Besides, the
likelihood of damage to participant’s exhibits due to any of the
reasons indicated above also exists.
3. According to the querist, as the recovery on account of
contingency charges is being made to meet such unforeseen
liability, as a prudent policy, a matching provision for the same is
also being made by the company in the accounts to reflect a true
and fair view of the state of affairs of the company. A suitable
disclosure to this effect is also made in the notes forming part of
accounts. The decision to levy the 5% contingency charges was
based on an assessment only as the actual liability on this account
cannot be estimated.
4. During the audit of accounts for the year 2002-03, the statutory
auditors of the company felt that provision against unknown liabilities
and the expenses of contingent nature, which are contingent/
unknown, is violative of the provisions of the Companies Act, 1956.
In other words, the statutory auditors were of the view that no
liability can be provided in the books of account unless the quantum
of the liability and the details of the payee are known.
5. The querist had drawn the attention of the auditors to
Accounting Standard (AS) 4, ‘Contingencies and Events Occurring
After the Balance Sheet Date’, issued by the Institute of Chartered
Accountants of India (ICAI), wherein the word ‘contingency’ had
been defined as a “condition or situation, the ultimate outcome of
which, gain or loss, will be known or determined only on the
120
occurrence, or non-occurrence, of one or more uncertain future

events.” In the opinion of the management, some events might
occur in future which might affect the profitability of the company,
and as a safeguard, a provision to meet unforeseen liability could
be made in the books of account. The company’s contention that
the matching provision was being made against the amounts being
recovered to discharge any future liability, which might or might
not occur, was however not accepted by the auditors and the
accounts of the organisation were qualified by the statutory auditors
on this aspect.
6. In order to sort out the issue, the querist had earlier referred
the matter to the Expert Advisory Committee of the Institute of
Chartered Accountants of India for the expert opinion as to whether
creation of provision for contingencies as detailed above was in
conformity with AS 4 issued by the ICAI. The Committee had
opined2 that under the facts and circumstances of the case, the
creation of the provision for contingencies was not in conformity
with AS 4 and Accounting Standard (AS) 29, ‘Provisions, Contingent
Liabilities and Contingent Assets’, issued by the ICAI and Schedule
VI to the Companies Act, 1956.
7. Accordingly, on the basis of the opinion received and after

discussion with the statutory auditors, the provision for contingencies
(balance sheet) standing in the books of account from 2000-01 to
2003-04 was reversed and credited as prior period income in the
income and expenditure account for the accounts of the
organisation for the year 2004-05. The Member Audit Board (MAB)
[Comptroller and Auditor General of India (C&AG)], while reviewing
the accounts, was, however, of the view that the provision for
contingencies should be transferred to a special reserve account.
This, according to the querist, was presumably on the basis of the
wording of paragraph 13 of the opinion of the Expert Advisory
Committee which, inter alia, states that “the Committee is of the
view that since the contingencies stipulated by the company are
not known at the balance sheet date, the provision in this regard
cannot be created. Accordingly, the provision for contingencies
2
Query No. 12 of Compendium of Opinions — Vol. XXIV.
121
created by the company is of the nature of a reserve.” (A copy of

the observation of the C&AG auditors and management reply has
been separately provided by the querist for the perusal of the
Committee).
B. Query

(i) Whether the accounting treatment given by the company

is in conformity with the earlier opinion of the Expert
Advisory Committee.
(ii) Whether the view of the MAB office on the above issue
that the provision for contingencies should be transferred
to a special reserve account is correct.
(iii) If the answer to (ii) above is in the affirmative, then what
entry is required to be passed by the company for creating
the special reserve in the books of account, i.e., whether
the entry should be passed through the income and
expenditure account or through general reserve account
to the special reserve account.

querist had earlier sought its opinion on the issue as to whether
creation of provision for contingencies not known at the balance
sheet date is appropriate, and that the Committee had opined that
such a creation of provision for contingencies is not in conformity
with AS 4, AS 29 and Schedule VI to the Companies Act, 1956.
Accordingly, the Committee has not touched upon this issue again
and has considered only the issue regarding accounting treatment
of the provision erroneously created in the books of account in
past.
10. With regard to the treatment of the provision for contingencies
wrongly created in the books of account, the Committee notes the
definition of the term ‘prior period items’ and paragraph 15 of
122
Accounting Standard (AS) 5, ‘Net Profit or Loss for the Period,

Prior Period Items and Changes in Accounting Policies’, issued by
the Institute of Chartered Accountants of India, which state as
follows:
prior periods.”

the provision for contingencies wrongly created in the financial
statements of prior periods is a prior period item and hence, should
be written back in the statement of profit and loss for the current
period for determining the profit or loss for the period and should
be shown separately. Thus, the question of transfer of such
provision to ‘reserve’ account, as argued by the government
auditors, does not arise. Regarding the expression used by the
Committee, in its earlier opinion, based on the definitions of the
terms, ‘provision’ and ‘reserve’ as per Schedule VI to the Companies
Act, 1956 that such a provision is of the nature of reserve, the
Committee is of the view that the aforesaid expression refers only
to the nature of an item rather than recommending the accounting
treatment. The company may, however, if it so desires, create a
special reserve account in this regard by way of appropriation of
profits.
D. Opinion

(i) Yes, the accounting treatment given by the company is

in conformity with the earlier opinion of the Expert Advisory
Committee.
123
(ii) No, the view taken by MAB office on the issue that the
provision for contingencies should be transferred to a
special reserve account is not correct.
(iii) Answer to this question does not arise as the answer to

query (ii) above is not in the affirmative.
Query No. 18
Subject: Creation of deferred tax liability on special reserve

created u/s 36(1)(viii) of the Income-tax Act, 1961.1

1. A wholly owned Government of India undertaking, registered
under the Companies Act, 1956, is engaged in financing the power
generation projects, transmission and distribution works and
renovation and modernisation of power plants etc., in India. The
company is also notified as a ‘Public Financial Institution’ under
section 4A of the Companies Act, 1956. The company is giving
term loans, working capital loans, bridge loans etc., to finance the
power projects. The company is also engaged in leasing activities
and has leased out equipments to power producing companies on
which it is charging lease rent from the lessees.
2. The Institute of Chartered Accountants of India has issued
Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’,
which is applicable from 1.4.2001 to all listed enterprises. The
querist has stated that since the bonds issued by the company are
listed on the National Stock Exchange (NSE), the company is a
listed company, and therefore, AS 22 became applicable to the
company w.e.f. 1.4.2001.
3. The querist has stated that AS 22 requires the recognition of

deferred tax asset or liability for the timing differences. As per the
Standard, “Timing differences are the differences between
1
124
taxable income and accounting income for a period that

originate in one period and are capable of reversal in one or
more subsequent periods”. “Permanent differences are the
differences between taxable income and accounting income
for a period that originate in one period and do not reverse
subsequently.” The Standard also provides that permanent
differences do not result in deferred tax assets or deferred tax
liability.
4. According to the querist, at the time of implementation of AS
22, the following timing differences between accounting income
and taxable income were identified by the company:
(i) Accrual of expenses and short term income.

(ii) Translation loss on foreign currency loans.
(iii) Lease equalisation amount
(iv) Depreciation on leased assets and owned assets

As per the querist, the tax effect on the above items was ascertained
and dealt with in accordance with the Standard in the books of
account by creation of deferred tax asset or liability.
5. The querist has reproduced extracts from section 36(1) of the

Income-tax Act, 1961, which provides as under:
“36. (1) The deductions provided for in the following clauses

shall be allowed in respect of the matters dealt with therein, in
computing the income referred to in section 28 –
...
(viii) in respect of any special reserve created and

maintained (emphasis supplied by the querist) by a
financial corporation which is engaged in providing long-
term finance for industrial or agricultural development or
development of infrastructure facility in India or by a
public company formed and registered in India with the
main object of carrying on the business of providing long-
term finance for construction or purchase of houses in
125
India for residential purposes, an amount not exceeding

forty percent of the profits derived from such business of
providing long-term finance (computed under the head
“Profits and gains of business or profession” before
making any deduction under this clause) carried to such
reserve account:
Provided that where the aggregate of the amounts

carried to such reserve account from time to time exceeds
twice the amount of the paid-up share capital and of the
general reserves of the corporation or, as the case may
be, the company, no allowance under this clause shall
be made in respect of such excess.”
The querist has stated that the company has been claiming a
deduction under section 36(1)(viii) on account of special reserve
created and maintained (emphasis supplied by the querist) @
40% of profits derived from the business of long-term finance from
the taxable income every year.
6. Further, the querist has mentioned that section 41(4A) of the
Income-tax Act, 1961, provides that in case the special reserve is
utilised/withdrawn the same will become taxable in the year in
which it is so utilised/withdrawn. Hence, the deduction claimed in
the year of creation of special reserve becomes taxable in the
year of utilisation/withdrawal of special reserve.
7. The querist has also intimated that the special reserve is
appropriated out of the profits available for appropriation every
year. It is not charged to profit and loss account, while the same is
deducted from the taxable income. The company is treating special
reserve as permanent difference and is not creating deferred tax
liability on it.
8. Besides the above, as per the querist, the company has also
examined the matter and noted that in the various examples given
in the Standard, the items identified as timing differences are
capable of reversal subsequently themselves (emphasis supplied
by the querist), such as the difference in the method of depreciation
in case a company charges depreciation on straight-line method
126
(SLM) basis in its books, which is different from the written down
value (WDV) method acceptable under the Income-tax Act. This
results in timing difference. In the books, the depreciation on SLM
basis would be spread evenly over the life of the asset while on
WDV basis under the Income-tax Act, depreciation would be more
in initial years and would reduce in the later years of life of the
asset. The total amount of depreciation would be the same under
both the methods and differences and tax effects on the timing
differences would square up themselves over the life of the asset.
Whereas, in case of special reserve, the difference would square
up only when the company utilises/withdraws the special reserve,
otherwise not. Till the time the company utilises the special reserve,
section 41(4A) of Income-tax Act does not become operative; thus,
the difference remains of permanent nature. It is not squared up
itself as in the case of revenue items.
9. During the course of audit, however, a view has arisen that

deferred tax liability should be created on the special reserve u/s
36(1)(viii) of the Income-tax Act, 1961. The view expressed was
that such reserves are created under the relevant sections of the
Income-tax Act and are not free reserves as any withdrawals
therefrom are subject to tax liability at prevalent rates. The tax
implications of the reserves of aforesaid type stand deferred till
withdrawal from such reserves. The creation of special reserve
creates a difference between taxable income and accounting
income, which is not a permanent timing difference.
10. The querist has informed that as on 31.3.2004, the balance
sheet of the company carries the special reserve of Rs. 2636.29
crore and the deferred tax liability, if created on it, would amount
Rs. 500 crore (approximately). Further, the paid-up share capital
and general reserve of the company as at 31st March, 2004 stood
at Rs. 3578.74 crore; and as per section 36(1)(viii) of the Income-
tax Act, the company can create special reserve to the extent of
twice its paid-up capital and general reserve (i.e. upto Rs.7157.48
crore) against which the special reserves so far created are Rs.
2636.29 crore. As there is a big gap between the paid-up capital
and general reserve and the special reserve, need for withdrawal
from special reserve may never arise. The deferred tax liability, if
127
created on special reserve, would be carried forward in the balance

sheet of the company for a number of years (and may be, during
the entire life of the company) which would create an imbalance
and distort the solvency ratios (emphasis supplied by the querist).
Also, keeping in view the concept of going concern, the company
may not utilise the special reserve for a sufficiently long time.
11. The querist had earlier sought the opinion of the Expert
Advisory Committee on the issue as to whether the company is
required to create the deferred tax liability on the special reserve
created and maintained under section 36(1)(viii) of the Income-tax
Act, 1961 as of now, which will become chargeable to tax as per
section 41(4A) of the Act, only in the event of withdrawal therefrom
and which may or may not happen (emphasis supplied by the
querist). In response to the aforesaid query, the Committee had
expressed the following opinion:
“The Committee is of the opinion that the company is required
to create deferred tax liability on the special reserve created
and maintained under section 36(1)(viii) of the Income-tax
Act, 1961, irrespective of the fact that withdrawal of the reserve
may or may not happen since the company is capable to
withdraw the reserve resulting into reversal of the difference
between accounting income and taxable income (i.e., timing
difference).”
12. The querist has now submitted the following additional facts/
arguments in favour of not creating a deferred tax liability:
(i) The company has no intention whatsoever of making
any withdrawal from the reserve. It has been earning a
healthy profit, a large part of which has been retained
resulting in a healthy net worth, which act as a cushion
for any unforeseen losses. In this context, select data
relating to the performance of the company has been
submitted by the querist. The querist has also submitted
the Board Resolution to the effect that the company does
not have any intention of withdrawing from the reserve in
question.
128
To be a liability, the obligation must be probable

(ii) The querist strongly feels that the provisions of AS 22
relating to creation of a deferred tax liability need to be
interpreted harmoniously with the definition of the term
‘liability’ as generally accepted in accounting. The querist
believes that the following definitions of ‘liability’ have a
universal application:
(a) “The financial obligation of an enterprise other than
owners’ funds” (Guidance Note on Terms Used in
Financial Statements).
(b) “A liability is a present obligation of the enterprise
arising from past events, the settlement of which is
expected to result in an outflow from the enterprise
of resources embodying economic benefits.”
(Accounting Standard (AS) 29, ‘Provisions,
Contingent Liabilities and Contingent Assets’ and
the Framework for the Presentation of Financial
Statements).
The querist has stated that he is firmly of the view that
since the chances of a future withdrawal from the special
reserve are remote, it does not give rise to a ‘liability’.
Generally accepted accounting principles require
obligations of an enterprise to be classified into two
categories:
(a) ‘Probable’ obligations (i.e., it is more likely than not
that an obligation exists on the balance sheet date).
(b) ‘Possible but not probable’ obligations (i.e., it is not
more likely than not that an obligation exists on the
balance sheet date).
Even though AS 22 does not state so specifically, the
timing differences contemplated (and illustrated) in AS
22 are only those that must be probable of reversal in a
future period, though the reversal may take place at a
point of time considerably distant in future. In the view of
the querist, the term ‘capable of reversal’ used in the
129
definition of ‘timing differences’ should be interpreted as

‘probable of reversal’. If this is not done, it will result in
an item being recognised as a liability even though it
does not meet the definition of ‘liability’. To take an
extreme case, it will result in creation of a deferred tax
liability the chances of whose settlement are one in a
million. This would result in making the balance sheet
not “true and fair”. The querist is of the view that the
present case clearly does not fall in the category of
obligations which are probable. The amount of deferred
tax liability of Rs. 888.02 crore due to transfer to special
reserve does not represent a liability since the chance of
its having to be settled is remote. To the extent the
liability is recognised, the balance sheet would
misrepresent the reality.
(iii) In the view of the querist, the fact that a deferred tax
liability is required to be recognised only when the outflow
on account of the relevant obligation is probable is
unequivocally recognised in Accounting Standards
Interpretation (ASI) 3, ‘Accounting for Taxes on Income
in the situations of Tax Holiday under Sections 80-IA
and 80-IB of the Income-tax Act, 1961’, and Accounting
Standards Interpretation (ASI) 5, ‘Accounting for Taxes
on Income in the situations of Tax Holiday under Sections
10A and 10B of the Income-tax Act, 1961’. Relevant
excerpts from ASI 3 are reproduced below (the position
under ASI 5 is identical):
“In the situation of tax holiday under Sections 80-IA and
80-IB of the Act, it is probable that deferred tax assets
and liabilities in respect of timing differences which
reverse during the tax holiday period, whether originated
in the tax holiday period or before that (refer provisions
of section 80-IA (2) of the Act), will not be realised or
settled. Accordingly, a deferred tax asset or a liability for
timing differences which reverse during the tax holiday
period does not meet the above criteria for recognition of
asset or liability, as the case may be, and therefore is
not recognised to the extent the gross total income of
130
the enterprise is subject to the deduction during the tax

holiday period.”
Thus, ASIs 3 and 5 clearly provide, in the view of the
querist, that a deferred tax liability should be recognised
only if it is probable that it will be settled. If it is possible
but not probable that the obligation will need to be settled,
the obligation does not meet the criteria for recognition
as a liability. The querist has also emphasised that the
applicability of the above principle is not restricted to tax
holiday situations; it is all-pervasive.
(iv) Whether a possible obligation is ‘probable’ or ‘possible
but not probable’ of crystallisation depends on the facts
and circumstances of each case. In this case, in the
view of the querist, the utilisation of special reserve implies
a higher tax liability for the company. It is obvious that
the company would not make a transfer from the above
reserve except in the remotest circumstances making it
inescapable. The company has been earning a healthy
profit and is in sound financial health. Thus, the possibility
of its having to withdraw from the special reserve is not
more than remote. The querist has stated that he is
aware that AS 29 does not deal with recognition of
deferred tax liabilities. However, the querist also believes
that the principles for recognition of liabilities laid down
in AS 29 have, more or less, a universal application –
other standards primarily apply these principles to specific
types of transactions or situations. This fact is clearly
recognised in ASIs 3 and 5 referred to above. In any
case, the gulf between AS 29 (and the Framework
referred to earlier) on the one hand and AS 22 on the
other cannot be so wide that an item that is considered
no more than a remote obligation under AS 29 has to be
considered a probable obligation under AS 22.
(v) There are many other provisions in the Income-tax Act
whereby the deductions/exemptions given to the assessee
are withdrawn if the assessee does not fulfill the
prescribed conditions. The withdrawals of the deductions
are only contingent on the happening of a certain event
131
and act more as a preventive penalty than anything else.

In view of this, a distinction needs to be made between
automatically reversible tax concessions/deductions and
conditionally reversible tax concessions/deductions. In the
latter case, reversibility of the tax concessions/deductions
is often within the control of the assessee. In such cases,
a deferred tax liability should be required to be recognised
only when it becomes probable – due to the intent of the
assessee or due to attendant circumstances – that the
tax concessions/exemptions would get reversed. Until
this happens, the situation remains one of a contingent
liability, which should be disclosed on the basis of the
principles laid down in AS 29.
Is it a timing difference
(vi) Apart from the above, the querist has also requested the
Committee to consider whether such a transfer really
constitutes a timing difference. The opinion of the
Committee that transfer to special reserve results in a
timing difference is based on the following definition of
‘timing differences’ given in AS 22:
“Timing differences are the differences between
taxable income and accounting income for a period
that originate in one period and are capable of
reversal in one or more subsequent periods.”
The earlier opinion of the Committee has observed as
follows:
“14. From the above, the Committee is of the view that
there are two essentialities for timing differences to arise:
(i) There should be difference between taxable
income and accounting income originating in
one period; and
(ii) The difference so originated should be capable
of reversal in one or more subsequent periods.
The Committee notes that there is no condition of any
limitation of the period for reversal of such differences,
132
i.e., as per the definition quoted above, the reversal of

the difference can take place at any time in future.
15. The Committee notes that in the period in which
special reserve is created, the accounting income remains
unaffected as the same is created below the line.
However, the taxable income for the same year gets
reduced by the amount of the special reserve thus
resulting into lesser tax liability. Thus, a difference arises
between the accounting income and the taxable income
for that period. The Committee also notes that this
difference is capable of reversal in the period in which
the special reserve is utilised or withdrawn as in the year
of utilisation or withdrawal, the amount of special reserve
would be added to taxable income thus resulting into a
higher taxable income than the accounting income of
that period. Therefore, the Committee is of the view that
the creation of special reserve results into timing
differences as per AS 22.”
The querist has expressed his views on the above
observations of the Committee as follows:
The definition of ‘timing differences’ given in the Standard
and explanation of the nature of timing differences given
in paragraph 7 of the Standard need to be given a
harmonious interpretation. Paragraph 7 specifically notes
that:
“… Timing differences arise because the period in
which some items of revenue and expenses are included
in taxable income do not coincide with the period in
which such items of revenue and expenses are included
or considered in arriving at accounting income…”
In the view of the querist, the above statement is
absolutely unequivocal – a timing difference arises (and
arises only) if an item of revenue or expense enters the
computation of both accounting income and taxable
income in different periods. The various examples given
133
in the Standard (paragraph 7 and Appendix 1) fully

support this view. Nothing else can give rise to a timing
difference. If an item enters the computation of only
accounting income but not taxable income (or vice versa),
it does not result in a timing difference. This view is
strongly supported by the fact that the Standard contains
specific deeming provisions for unabsorbed depreciation
and carried forward losses. These items do not arise
from the same items of revenues or expenses entering
the computation of accounting income and taxable income
in different periods and, in the absence of the specific
dispensation in paragraph 8 of the Standard, would not
have been covered in AS 22. It is, therefore, the view of
the querist that special reserve under discussion does
not constitute a timing difference. While both the creation
and the utilization of Special Reserve affect taxable
income, neither affects accounting income.
Other reasons
(vii) The querist has also submitted that the industry practice
is also such that no deferred tax liability is created on
such transfer to reserves.
(viii) The querist has also pointed out that the concession
under the Income-tax Act is aimed at encouraging
infrastructure financing and providing a basis for higher
earnings to such companies. The concession is not aimed
at deferring or postponing the income-tax liability but at
providing a relief from tax liability. The provision regarding
taxability of withdrawal is meant only to ensure that this
concession is not abused – it is only a penal measure.
Thus, the relevant provisions have the effect of providing
a permanent relief as a rule and a mere postponement
only as an exception. Accounting, which is aimed at
reflecting the economic substance, should be guided by
the general rule; it should reflect the exception only when
the circumstances so warrant – it cannot reflect the
exception as a rule. If one has to create an income-tax
provision (by way of deferred tax liability) for transfer to
special reserve also, the very purpose of law is defeated
134
since the profits after tax would be the same whether

this concession exists or not.
(ix) There is very little economic justification for the company
to make a withdrawal from the special reserve. As long
as the company is making profits, there is no reason for
it to withdraw from the reserve. Even hypothetically if it
makes losses, why should it lose further by paying taxes
on withdrawals specifically when it has substantial other
reserves to cushion its losses.
B. Query
13. The querist has sought the opinion of the Committee whether
it is necessary to create deferred tax liability on the special reserve
created and maintained under section 36(1)(viii) of the Income-tax
Act, 1961.
14. The Committee notes the definition of the term ‘timing
differences’ contained in the Accounting Standard (AS) 22,
‘Accounting for Taxes on Income’, issued by the Institute of
Chartered Accountants of India, reproduced below:
“Timing differences are the differences between taxable
income and accounting income for a period that originate
in one period and are capable of reversal in one or more
subsequent periods.”
15. From the above, the Committee is of the view that there are
two essentialities for timing differences to arise:
(i) There should be difference between taxable income and
accounting income originating in one period; and
(ii) The difference so originated should be capable of reversal
in one or more subsequent periods.
The Committee notes that there is no condition of any limitation of
the period for reversal of such differences, i.e., as per the definition
quoted above, the reversal of the difference can take place at any
time in future.
135
16. The Committee notes that in the period in which special reserve
is created, the accounting income remains unaffected as the same
is created below the line. However, the taxable income for the
same year gets reduced by the amount of the special reserve thus
resulting into lesser tax liability. Thus, a difference arises between
the accounting income and the taxable income for that period. The
Committee also notes that this difference is capable of reversal in
the period in which the special reserve is utilised or withdrawn as
in the year of utilisation or withdrawal, the amount of special reserve
would be added to taxable income thus resulting into a higher
taxable income than the accounting income of that period.
Therefore, the Committee is of the view that the creation of special
reserve results into timing differences as per AS 22.
17. The Committee also notes paragraph 14 of AS 22 which
states as below:
“14. This Statement requires recognition of deferred tax for
all the timing differences. This is based on the principle that
the financial statements for a period should recognise the tax
effect, whether current or deferred, of all the transactions
occurring in that period.” (Emphasis supplied by the
Committee.)
18. The Committee further notes paragraph 8 of Accounting
Standards Interpretation (ASI) 6, ‘Accounting for Taxes on Income
in the context of Section 115JB of the Income-tax Act, 1961’,
which, inter alia, describes one of the principal conceptual bases
of AS 22 as below:
“8. There are two methods for recognition and measurement
of tax effects of timing differences, viz., the ‘full provision
method’ and ‘partial provision method’. Under the ‘full provision
method’, the deferred tax is recognised and measured in
respect of all timing differences (subject to consideration of
prudence in case of deferred tax assets) without considering
assumptions regarding future profitability, future capital
expenditure etc. On the other hand, the ‘partial provision
method’ excludes the tax effects of certain timing differences
136
which will not reverse for some considerable period ahead.

Thus, this method is based on many subjective judgements
involving assumptions regarding future profitability, future
capital expenditure etc. In other words, partial provision method
is based on an assessment of what would be the position in
future. Keeping in view the elements of subjectivity, the ‘partial
provision method’ under which deferred tax is recognised on
the basis of assessment as to what would be the expected
position, has generally been discarded the world-over. AS 22
also does not consider the above assumptions and, therefore,
is based on ‘full provision method’.”
19. From the above, the Committee notes that even if an enterprise
expects that a difference between accounting and taxable income
will not reverse (partial provision approach), the difference should
be recognised as timing difference if it is capable of reversal at
any time in future (full provision approach). Thus, deferred tax is
to be provided for all timing differences. Accordingly, the Committee
is of the view that in the present case, the eventuality of utilisation/
withdrawal of special reserve is not of relevance. So long as the
utilisation/withdrawal is capable of taking place, the creation of
special reserve results into timing differences for which deferred
tax should be provided.
20. With regard to the other arguments advanced by the querist
in paragraph 12 above, the views of the Committee are as follows:
(i) Passing of a Board resolution that the company will not
utilise the special reserve is only a voluntary action and
is capable of reversal. Accordingly, the capability of
reversal of the timing differences is not affected.
(ii) to (v) Had the intention in AS 22 been to consider the
general requirements of creating a provision in terms of
probability of incurrence of a liability, e.g., as laid down
in AS 29, ‘Provisions, Contingent Liabilities and Contingent
Assets’, the Standard would have laid down the probability
requirements similar to those provided in that Standard
or the Standard prevailing at the time of the issuance of
137
AS 22, i.e., Accounting Standard (AS) 4, ‘Contingencies

and Events Occurring After the Balance Sheet Date’.
This was not done in view of the fact that the accounting
standards on deferred taxation all over the World are
based on the ‘full provision method’ rather than the ‘partial
provision method’ as discussed in paragraph 17 to 19
above. Adoption of the criteria for creation of provision
as per AS 4/AS 29 would have resulted in creation of
deferred tax liability in accordance with the partial
provision method. In any case, the specific requirements
prescribed in a standard override the general
requirements as has been recognised in the ‘Framework
for the Preparation and Presentation of Financial
Statements’, issued by the Institute of Chartered
Accountants of India. Paragraph 3 of the Framework
states as follows:
“3. The Accounting Standards Board recognises
that in a limited number of cases there may be a
conflict between the Framework and an Accounting
Standard. In those cases where there is a conflict,
the requirements of the Accounting Standard prevail
over those of the Framework. As, however, the
Accounting Standards Board will be guided by the
Framework in the development of future Standards
and in its review of existing Standards, the number
of cases of conflict between the Framework and
Accounting Standards will diminish through time.”
Further, ASI 3 and ASI 5 consider the probability of
reversal of timing differences in the sense that, during
the tax holiday period, the timing differences are not
capable of reversal.
(vi) Whether creation of special reserve results in ‘timing

differences’ or not has been dealt with in paragraphs 14
to 19 above. The Committee also does not agree with
the contention that paragraph 7 of AS 22 requires that
an item of revenue and expense must necessarily appear
138
in the computation of accounting income as well as in

the computation of taxable income. In the view of the
Committee, paragraph 7 should be read along with the
definition of the term ‘timing differences’ which does not
stipulate that an item should affect both the accounting
income as well as the taxable income.
(vii) An industry-practice, if it is not in accordance with an

accounting standard, does not imply that the accounting
treatment is correct.
(viii) The opinion is based on the requirements of AS 22 with
the specific objective that accounts give a true and fair
view. There are various instances where the treatment
of items of income and expenses is different for
accounting purposes than that under the Income-tax Act
because the objectives of the two are different.
(ix) The argument is conjectural in nature as it presupposes
‘as long as the company is making profits there is no
reason for it to withdraw from reserve’. Further, a
company may have many other reasons to withdraw from
reserve even at the expense of paying taxes, e.g., issue
of bonus shares.
D. Opinion
21. On the basis of the above, the Committee reiterates its earlier
opinion that the company is required to create deferred tax liability
on the special reserve created and maintained under section
36(1)(viii) of the Income-tax Act, 1961, irrespective of the fact that
withdrawal of the reserve may or may not happen since the
company is capable to withdraw the reserve resulting into reversal
of the difference between accounting income and taxable income
(i.e., timing difference).
139
Query No. 19
Subject: Capitalisation of certain expenses related to
acquisition of an investment.1
1. A public limited company (hereinafter referred to as ‘the Indian

company’) whose shares are listed on the Bombay Stock Exchange
is engaged in the business of manufacture and sale of electrical
and electronic items. During the financial year 2005–06, the
company acquired a company in Europe carrying on similar
business. The European company’s shares were acquired through
a subsidiary of the Indian company in the Netherlands.
2. The acquisition was completed in May 2005 and the Indian
company has incurred the following expenses upto May 2005, for
the acquisition of the European company:
INR in Lakh
(a) Travelling 200
(b) Legal 100
(c) Due Diligence 100
(d) Other Expenses 50
––––––
Total 450
––––––
3. The Indian company has remitted an amount of US$ “x” to its
subsidiary in the Netherlands for acquiring the shares. The
Netherlands subsidiary actually incurred only US$ “y” for the
acquisition of the shares of the European company and remitted
back the balance US$ (x-y) to the Indian company. On account of
this excess money returned, the Indian company has incurred an
exchange loss of Indian Rupees 200 lakh (approx).
B. Query
1
140
(a) Whether the amount of expenditure incurred by the Indian

company can be treated as part of the cost of investment.
(b) Whether the exchange loss incurred by the Indian
company on account of sending and receiving back
excess US$ from its Netherlands subsidiary can be
treated as part of the cost of investment.
(c) Any another points/issues which, in the opinion of the
Committee, should be taken care of under any Law or
Accounting Standards.
5. The Committee presumes from the Facts of the Case as
supplied by the querist, that the subsidiary of the Indian company
in the Netherlands acted only as an agent of the Indian company
in the acquisition of shares of the European company.
6. The Committee notes paragraph 9 of Accounting Standard

(AS) 13, ‘Accounting for Investments’, issued by the Institute of
Chartered Accountants of India, which states that “the cost of an
investment includes acquisition charges such as brokerage, fees
and duties”. Keeping in view the nature of the items of acquisition
charges mentioned in AS 13, the Committee is of the view that the
cost of acquisition should include only those direct charges which
are incurred ‘on’ acquisition of investment, i.e., the expenses,
without the incurrence of which, the transaction could not have
taken place such as share transfer fees, stamp duty, registration
fees, and duties and levies by regulatory agencies and stock
exchanges. The expenses incurred ‘before’ the acquisition, even
though directly attributable to acquisition should not be added to
the cost of acquisition of shares as these do not represent the
worth of the shares acquired.
7. Keeping in view the above principles, the Committee is of the
view that in the present case, the exchange loss incurred by the
Indian company on sending and receiving back of foreign currency,
travelling cost and due diligence cost should not form part of the
cost of acquisition, rather, these should be expensed in the period
in which these are incurred. The legal costs and ‘other expenses’
141
should form part of the cost of investment only if and only to the
extent these costs meet the considerations for inclusion in the cost
of investment as stated in paragraph 6 above.
8. The Committee answers only specific queries raised by the

querist on accounting and/or auditing principles and allied matters
and as a general rule, the Committee does not answer open-
ended queries. Accordingly, the Committee has not examined the
Facts of the Case in the light of any Law or other Accounting
Standards.
D. Opinion

opinion on the issues raised by the querist in paragraph 4:
(a) The various items of expenses incurred by the Indian

company as mentioned in paragraph 2 above, should be
treated in the manner described in paragraphs 6 and 7
above.
(b) The exchange loss incurred by the Indian company on
account of sending and receiving back excess US$ from
its Netherlands subsidiary cannot be treated as part of
the cost of the investment.
(c) This is not answered in view of paragraph 8 above.
Query No. 20
Subject: Accounting treatment on cancellation of foreign

exchange forward contract.1

1. An Indian shipping company has placed an order for a new
ship with a company based in Singapore and payments are to be
1
142
made on the completion of various stages in Singapore Dollar

(SGD). The company has entered into foreign exchange forward
contract for buying SGD against the equivalent US Dollar (USD)
with a maturity date as 31st March, 2006 (the company has a
natural hedge as most of its revenue is USD denominated/based).
This was done to cover exposure in terms of SGD/USD fluctuations
at the time of installment payments becoming due to the vendor in
Singapore for the new vessel, during the period vessel construction
is in progress.
2. The company has cancelled the forward contract before the

maturity date and the cancellation has resulted in a gain/loss. The
querist has given various arguments for different accounting
treatments for such gain/loss as below:
Arguments for treating the same as profit/loss:
(i) Paragraph 36 of Accounting Standard (AS) 11, ‘Changes
in Foreign Exchange Rates’, issued by the Institute of
Chartered Accountants of India, inter alia, states that
“profit or loss arising on cancellation or renewal of a
forward contract should be recognised as income or as
expense for the period.
(ii) The Announcement of the Institute of Chartered
Accountants of India on Treatment of exchange
differences under Accounting Standard (AS) 11 (revised
2003), The Effects of Changes in Foreign Exchange
Rates vis-à-vis Schedule VI to the Companies Act, 1956
and the requirement to capitalise the foreign exchange
differences do not deal with paragraphs 36 to 39 of AS
11 which deal with forward contracts. The Announcement
deals with paragraph 13 of AS 11 which prescribes
requirements in respect of normal exchange differences.
(iii) The recent Announcement of the Institute of Chartered
Accountants of India on ‘Accounting for exchange
differences arising on a forward exchange contract
entered into to hedge the foreign currency risk of a firm
commitment or a highly probable forecast transaction’
143
(published in ‘The Chartered Accountant’, January 2006

(pp.1090)), also, inter alia, states, “exchange differences
arising on the forward exchange contracts entered into
to hedge the foreign currency risks of a firm commitment
or a highly probable forecast transaction should be
recognised in the statement of profit and loss in the
reporting period in which the exchange rate changes.
Any profit or loss arising on renewal or cancellation of
such contracts should be recognised as income or
expense for the period.”
(iv) The Announcement (referred in clause (iii) above) also
does not distinguish between any liabilities for capital
expenditure (imports) and others.
(v) The requirement of Schedule VI relating to capitalisation
of foreign exchange differences could not have
contemplated such matters when it was drawn up and
hence, cannot be extended to cover forward exchange
transactions, etc., even if related to capital expenditure
liabilities and loans.
(vi) The Exposure Draft of the proposed Accounting Standard

on Financial Instruments: Presentation, also inter alia
states in paragraph 56 that gains related to financial
instruments should be recognised as income in the
statement of profit and loss, and in the ‘definitions’
paragraph of the said Exposure Draft, derivatives are
included in the definition of the term ‘financial instruments’.
(vii) Also, as the company has an Indian loan on which interest
at 8.5% is paid, the requirement of Accounting Standard
(AS) 16, ‘Borrowing Costs’, issued by the Institute of
Chartered Accountants of India, regarding consideration
of the foreign exchange differences on foreign currency
loan to the extent of difference between the interest on
Indian loan and interest on foreign currency loan is not
relevant in the present case. Hence, interest capitalisation
is not affected (if such an issue arises).
144
(viii) Hence, the gain, which arises because the foreign

currency liability in Singapore dollars was covered for a
US dollar amount (in view of natural hedge of the
company) and the forward contract to hedge the loan
was cancelled, should be taken to the statement of profit
and loss only. Similarly, premia paid, if any, or losses
incurred should also be taken to the profit and loss
account only and not capitalised.
Arguments for capitalising the gain on cancellation of the forward
contract:
(i) Schedule VI to the Companies Act, 1956, under the
‘Instructions in accordance with which assets should be
made out’ for the head ‘Fixed Assets’, inter alia, states:
“where the original cost aforesaid and additions and
deductions thereto, relate to any fixed asset which has
been acquired from a country outside India, and in
consequence of a change in the rate of exchange at any
time after the acquisition of such asset, there has been
an increase or reduction in the liability of the company,
as expressed in Indian currency, for making payment
towards the whole or a part of the cost of the asset or for
repayment of the whole or a part of moneys borrowed by
the company from any person, directly or indirectly, in
any foreign currency specifically for the purpose of
acquiring the assets (being in either case the liability
existing immediately before the date on which the change
in the rate of exchange takes effect), the amount by
which the liability is so increased or reduced during the
year, shall be added to, or, as the case may be, deducted
from the cost, and the amount arrived at after such
addition or deduction shall be taken to be the cost of the
fixed asset.”
(ii) The asset in the present case is acquired from Singapore,
a country outside India.
(iii) The liability is in Singapore dollars.
145
(iv) The cover is taken to protect against any adverse

movement of Singapore dollars, e.g., in case it
appreciates and the company needs to pay more.
(v) The cover protects the company against future liabilities;

liability can be interpreted to mean future liability also;
after all, it is a commitment which would have been
disclosed as per Schedule VI, Part I anyway.
(vi) When the company makes the payment, it is going to
capitalise the payment made actually. Hence, any such
cancellation is part and parcel of the same thing and
hence, whether plus or minus, is a part of cost; hence,
as per Schedule VI, the amount of gain should be reduced
from the cost of capital work-in-progress (WIP).
(vii) AS 11 (revised 2003) does not deal with this aspect in

paragraph 36 inadvertently. If a cost is incurred to freeze
the liability in Indian rupee, then that cost would logically
be part of the cost of fixed assets only as these two are
inseparable.
B. Query
3. In the light of the above, the opinion of the Expert Advisory
Committee has been sought on how the gain/loss on cancellation
of the forward contract is to be accounted for in the books of
account of the company, i.e., (a) whether to be shown as an
income or an expense for the period, or (b) to be deducted from/
added to the capital work-in-progress for new ship.

4. The Committee, while answering the query, has restricted
itself to the query raised in paragraph 3 above and has not
considered any other issue arising from the Facts of the Case.
company has placed an order for purchase of a ship, the payments
for which are to be made in future on completion of various stages
of construction of the ship and the transaction was hedged against
146
the foreign exchange fluctuations by entering into a forward contract

by the company.
6. In this context, the Committee notes the definition of the term
‘firm commitment’, as provided in the footnote to the Announcement
on ‘Accounting for exchange differences arising on a forward
exchange contract entered into to hedge the foreign currency risk
of a firm commitment or a highly probable forecast transaction’,
issued by the Institute of Chartered Accountants of India, which
states as follows:
“A firm commitment is a binding agreement for the exchange
of a specified quantity of resources at a specified price on a
specified future date or dates.”
On the basis of the above, the Committee is of the view that in the
present case, a forward exchange contract was entered into to
hedge the foreign currency risk of a firm commitment and
accordingly, the accounting treatment prescribed by the said
Announcement is applicable in the present case.
7. The Committee further notes paragraph 3 of the aforesaid
Announcement, which inter alia, states as follows:
“3. ... Any profit or loss arising on renewal or cancellation of
such contracts should be recognised as income or expense
for the period”.
The Committee also notes that the Institute of Chartered

Accountants of India, through its Announcement published in ‘The
Chartered Accountant’, June 2006 (pp. 1774), deferred the
applicability of its Announcement on ‘Accounting for exchange
differences arising on a forward exchange contract entered into to
hedge the foreign currency risk of a firm commitment or a highly
probable forecast transaction’ upto April 1, 2007 and hence, this
Announcement would now be applicable in respect of accounting
period(s) commencing on or after April 1, 2007. Since it represents
the present view of the Council of the Institute in respect of such
transactions, in the view of the Committee, the treatment prescribed
by the said Announcement should be followed for such transactions.
147
8. Regarding the arguments set out in favour of capitalising/

deducting to/from the cost of the fixed asset as required by
Schedule VI to the Companies Act, 1956, the Committee notes
that the requirement of Schedule VI is in respect of capitalisation
of foreign exchange variations to the cost of the fixed asset. The
said requirement deals only with the increase/decrease in foreign
exchange liability related to the acquisition of fixed asset from
abroad and can not be extended to the profit or loss arising on
cancellation of forward contract entered into to hedge a firm
commitment for purchase of a fixed asset. Hence, the said
requirement of Schedule VI is not applicable in the present case.
D. Opinion
9. On the basis of the above, the Committee is of the opinion on
the query raised in paragraph 3 above that the gain/loss on
cancellation of the forward contract should be recognised as income
or expense in the statement of profit and loss for the period rather
than deducting/adding the same from/to capital work-in-progress
for new ship.
Query No. 21
Subject: Accounting treatment of Duty Credit Entitlement
under the Target Plus Scheme.1
1. The querist has stated that the Ministry of Commerce and
Industry introduced the Target Plus Scheme (TPS) as part of its
foreign trade policy 2004-09. The objective of the scheme is to
accelerate growth in exports by rewarding Star Export Houses. All
high performing Star Export Houses are entitled to a duty credit
based on incremental exports substantially higher than the general
annual export target fixed. The TPS credit can be subsequently
1
148
utilised towards payment of customs duty on specified imports

under this scheme.
2. The querist has mentioned certain important features of the
scheme, which are as follows:
(i) All Star Export Houses, which have achieved a minimum
export turnover in free foreign exchange of Rs. 10 crore
in the previous licensing year, are eligible for consideration
under the Target Plus Scheme. (Emphasis supplied by
the querist.)
(ii) An exporter is eligible to claim duty credit as a specific
percentage of the incremental growth in FOB value of
the export in the current licensing year over the previous
licensing year, as follows (emphasis supplied by the
querist):
% Incremental growth Duty credit entitlement
as a % of incremental
growth
20% & above but less than

25% 5%
25% & above but less than

100% 10%
100% & above 15% (maximum upto

100% growth)
(iii) A company has to apply for TPS credit on post-export

basis on realisation of export proceeds. The TPS credit
can be subsequently utilised towards payment of customs
duty on import of specified inputs and capital goods for
either own use or use by supporting manufacturer.
(Emphasis supplied by the querist.)
(iv) There are some restrictions for the utilisation of TPS
credit, which are as follows:
(a) the duty credit certificate cannot be sold or
transferred to a third party; and
149
(b) the duty credit certificate is valid for a period of 24

months from the date of issue.
3. The querist has stated that a company is in the business of
manufacturing colour televisions for sale in the domestic and export
market, with the turnover of Rs. 1,145 million for the year ended
31st March, 2005. The shares of the company are listed on the
Bombay Stock Exchange and the National Stock Exchange.
According to the querist, the company was eligible under the
scheme for duty credit against exports made in the financial year
2004-05 as it had achieved a minimum export turnover of Rs. 100
million in the previous year, i.e., 2003-04 and had been awarded a
status of ‘Star Export House’. The company applied under the
scheme to the Director General Foreign Trade (DGFT) on 9th
September, 2005. Since the company had achieved a 114%
increase in exports for the year 2004-2005 over 2003-2004, the
company was given a duty credit entitlement @ 15% and was
granted 12 duty credit entitlements worth Rs. 36 million of which
Rs. 3 million has been utilised by the company till 31st March,
2006.
4. The company has achieved incremental growth of 26% of
exports in the year 2005-2006 as compared to the year 2004-2005
and would be applying for the duty credit on realisation of the
foreign exchange from export sales and after completion of the
statutory audit for the year ended 31st March, 2006. The duty
credit accruing to the company is estimated at Rs. 13 million. As
per the querist, as regards recognition of TPS credit, following are
the two possible views:
A. Credit should be recognised on utilisation basis, i.e., in
the period when the TPS credit is used to pay duty on
imports.
B. TPS credit should be recognised in the period when

relevant exports are made provided recovery is
reasonably certain.
5. The querist has advanced the following arguments in favour
of the first view, viz., credit should be recognised on utilisation
150
basis, i.e., in the period when the TPS credit is used to pay duty
on imports:
(i) Accounting Standard (AS) 9, ‘Revenue Recognition’,
issued by the Institute of Chartered Accountants of India,
lays down the principle that revenue should not be
recognised until its realisation is reasonably certain. Even
though TPS credit may not strictly fall within the definition
of ‘revenue’, the querist believes that the above principle
would still be applicable. The basic argument for
recognising TPS credit only at the time of utilisation is
that until its actual utilisation, there may not be a
reasonable certainty as to whether or not the company
would be able to utilise the aforesaid credit. This is on
account of the following factors:
(a) The Target Plus Scheme does not allow the sale/
transfer of the duty credit entitlement.
(b) TPS credit certificate is valid for a period of 24

months from the date of issue. The certificates
remaining unutilised at the end of the 24 month
period would lapse.
(c) The Government reserves the right in public interest,
to specify from time to time, the category of exports
and export products which shall not be eligible for
calculation of incremental growth/entitlement.
Similarly, the Government may from time to time
also notify the list of goods, which shall not be
allowed for import under the duty credit entitlement
certificate issued under the scheme. In this regard,
the querist has drawn the attention of the Committee
to the following two recent notifications:
• Notification No. 57 (RE-2005)/2004-2009 dated
31st March, 2006 abolished the Target Plus
Scheme for exports from 1st April, 2006 onwards.
• Vide Notification No. 48 (RE-2005)/2004-2009
dated 20.02.2006, the Government has
151
withdrawn the benefit of Target Plus scheme in

respect of certain items, like ores and
concentrates, sugar, cereals and crude/
petroleum products with retrospective effect from
1st April, 2005.
It may be noted that the above mentioned
notification does not have any direct impact on
the target plus incentive to be received by the
company since the company does not fall in the
above mentioned categories of exporters.
However, it serves to highlight the uncertainty
attached to TPS credit.
(ii) There is already a view taken by the Expert Advisory
Committee on the accounting treatment of advance
licenses wherein the Committee has stated as follows
(Vol. XVI of Compendium of Opinions, p. 53):
“4. With regard to entitlements of advance licenses,
the Committee is of the view that the cost of such
entitlements is not reliably ascertainable, and their
net realisable values may fluctuate considerably
since they would also depend on many uncertain
factors such as demand for imported goods, change
in prices of domestic goods, rate of custom duty
prevailing at the relevant point of time etc.”
(iii) According to Accounting Standard (AS) 1, ‘Disclosure of
Accounting Policies’, issued by the Institute of Chartered
Accountants of India, ‘prudence’ is one of the major
considerations in selection of accounting policies. The
Standard explains ‘prudence’ as follows:
“In view of the uncertainty attached to future events,
profits are not anticipated but recognised only when
realised though not necessarily in cash. Provision is
made for all known liabilities and losses even though
the amount cannot be determined with certainty and
represents only a best estimate in the light of
available information.”
152
In its opinion on treatment of advance licenses referred

to above, the Expert Advisory Committee has explicitly
recognised the role of prudence in determining the
appropriate accounting treatment of advance licenses.
(iv) There is a specific provision in the scheme as per which
the Government has the power to withdraw the category
of export and also the list of goods, which shall not be
allowed for import at any point of time. The same is
reproduced below:
“3.7.8
Government reserves the right in public interest, to

specify from time to time the category of exports
and export products, which shall not be eligible for
calculation of incremental growth/entitlement.
Similarly, Government may from time to time also
notify the list of goods, which shall not be allowed
for import under the duty credit entitlement certificate
issued under the scheme.”
(v) There is a difference between Duty Entitlement Pass
Book (DEPB) Scheme and the TPS in the sense that
whereas the credit under DEPB Scheme can be sold /
transferred to a third party, the duty credit under TPS
scheme can only be utilised for settling import for own
use or for the use of supporting manufacturers which
affect the realisability of the entitlement especially in view
of the fact that the Government has withdrawn the TPS
vide notification No. 48(RE 2005)/2004-2009 dated
20.02.2006 in respect of certain items retrospectively from
1st April, 2005, as mentioned above. The entitlement of
DEPB is on shipping bill basis whereas TPS eligibility is
decided on annual basis based on the incremental growth
in exports. Therefore, both the schemes are entirely
different from each other.
Based on the above, it may be ascertained that the TPS
and DEPB schemes are designed with different
153
perspectives by the Ministry of Commerce. DEPB is to

compensate the tax, infrastructure and other constraints
to exporter on regular basis. Whereas TPS is to boost
future growth of exports to enable the exporters to survive
in global competition.
(vi) Moreover, if the example of a company is taken, which is
making local procurement and getting the target plus
incentive, since the license is not transferable, the
utilisation is impossible for such a company. Therefore,
the accounting treatment of Target Plus incentive cannot
be the same as that for the DEPB.
6. In addition to the above, the querist has also mentioned the

following points for the consideration of the Committee:
(a) Apart from the above mentioned restrictions for the

utilisation of TPS, the market is very sensitive in terms of
price war, which may force the company to switchover
from import component to domestic component. In such
cases, the certainty of utilisation of TPS is doubtful as
the period during which it can be utilised is 24 months
from the date of issue. Further, if there is any change in
TPS scheme, the company may opt for ‘Advance License’,
and in that case, TPS cannot be used.
(b) As per the generally accepted accounting principles
(GAAP), accounting or recording of transactions is not
appropriate on signing a contract or agreement. Since
TPS is like a contract under which duty credit is awarded
on post-export basis, but the actual realisation is made
later, i.e., as and when the entity utilises this benefit,
TPS accounting, in the view of the querist, should be on
utilisation basis as per the GAAP.
7. The querist has also submitted the arguments for the other
alternative, viz., TPS credit should be recognised in the period
when relevant exports are made provided recovery is reasonably
certain, which are as follows:
(i) The basic argument in support of recognition of TPS

154
credit in the year in which the exports giving rise to the

credit take place is that this treatment results in a proper
matching of efforts and accomplishments.
(ii) It is the activity of export which results into entitlement of

duty credit and accordingly, this credit can not be related
to duty payable at the time of subsequent imports. At the
time of subsequent imports, the full duty payable on
such imports should form part of the cost which is met
partly or fully by way of adjustment of TPS credit
depending on the policy of the Government of India at
that time.
(iii) The utilisation of duty credit is a mode of payment of

duty. In other words, it is not an exemption from duty in
the year of import but is a benefit/right arising out of the
earlier export performance. Thus, the duty earned
represents an asset in the nature of advance payment of
duty to be utilised towards subsequent payment of
customs duty on specified imports.
(iv) The decision as to when the credit under the TPS should
be recognised as income should broadly be based on
the principles similar to those applicable to recognition of
revenue. Performance related to TPS credit should be
considered to be complete when the exports which give
rise to the credit have been made, provided the other
criteria for recognition of revenue are fulfilled, viz., those
laid down in AS 9. However, according to the querist, AS
9 provides that revenue should be recognised only when
there is no significant uncertainty regarding the amount
of the consideration that will be derived and when there
is no significant uncertainty as to its ultimate collection.
Where such uncertainties exist, the recognition of revenue
should be postponed.
(v) There is also an opinion of the Expert Advisory Committee
on the accounting treatment of DEPB benefit, wherein it
has been opined that the credit under DEPB Scheme
should be recognised as income when the exports
155
(against which the credit has been granted) are made

provided the criteria for recognition of revenue under AS
9 have been fulfilled (query No. 28 of Vol. XX of
Compendium of Opinions, page 96). In the said opinion,
the Committee has stated, inter alia, the following:
“Under the facts and circumstances of the query,
the DEPB credit should be recognised in the books
of account when no significant uncertainties as to
the amount of consideration that would be derived
and as to its ultimate collection exist. In the case of
DEPB credit on post-export basis when the company
applies for the credit on realisation of export
proceeds and the credit is to be utilised for imports
by the company, there seems to be no such
significant uncertainty and, therefore, the DEPB
credit should be recognised in the year in which the
export was made in accordance with paragraph 6
above.”
According to the querist, the incentive under TPS is similar
to that under the Duty Entitlement Pass Book (DEPB)
Scheme except that the credit under DEPB can be sold/
transferred to a third party. This difference only affects
the assessment as to the realisation of the entitlement.
Due to transferability, there may be greater assurance of
realisation of DEPB credit than that of TPS credit. Thus,
if there is a reasonable assurance of utilisation of TPS
credit, it should be treated at par with DEPB credit and,
accordingly, recognised in the year in which the exports
giving rise to the credit take place.
(vi) The opinion of the Committee on treatment of DEPB
credit is later in time than its opinion on treatment of
advance license. Accordingly, it is only logical to conclude
that in formulating its opinion on treatment of DEPB credit,
the Committee would have considered non-recognition
of credit on account of advance licenses, viz., cost of the
entitlement being not reliably ascertainable and
156
uncertainty as to realisation and realisable value of the

entitlement, etc.
(vii) It is also noteworthy that as per the Update on
Compendium of Opinions Volumes I – XX, the
Committee’s opinion on advance license needs to be
viewed in the light of subsequent issuance of AS 26.
However, there is no such mention in respect of the
opinion on DEPB credit.
8. Based on the above, the querist has argued that if there is

reasonable certainty that the company has satisfied all the stipulated
conditions and it will be entitled to credit of duty if it imports raw
material, spares or capital goods as per the scheme, duty credit
under the TPS should be accounted for in the year of relevant
exports to the extent there is reasonable certainty that the company
would be able to utilise it in accordance with the terms of the
scheme. In assessing whether there exists a reasonable certainty
of utilisation of the duty credit, all relevant factors should be taken
into consideration including the documented plans of the company
showing the likely imports of the relevant items. In case of capital
goods, the detailed plans of the company should be considered.
9. The querist has further provided the following facts:
(i) The amount of incentive for the financial year 2004-2005

of Rs. 36 million has already been received in the form
of duty credit entitlement in the month of January 2006,
out of which Rs. 3 million has been utilised. Thus, there
is no uncertainty to the extent of only Rs. 3 million.
(ii) The incentive for the financial year 2005-2006 can be

derived based on the incremental exports made during
the year 2005-2006, which is Rs. 13 million.
(iii) As mentioned earlier, the company is yet to make
application to DGFT for grant of TPS credit for the
financial year 2005-06. The application will be made after
the statutory audit for the year is over and the export
proceeds have been realised.
157
(iv) The company imported major raw material items for the
production of colour TV in the year 2005-2006. The import
duty expense of the company is approximately Rs. 10-
15 million per month.
(v) It may also be mentioned that the company has been
receiving DEPB benefit and recognising it as income
when the exports (against which the credit has been
granted) are made.
10. The querist has stated that the Bank Realisation Certificate
not having been obtained by 31st March, 2006 and the application
not being made to DGFT by that date are not significant enough to
conclude that inflow of TPS benefit is not probable. Due to the
time factor, the aforesaid certificate cannot be obtained, and
application to DGFT cannot be made, before the close of financial
year. The issuance of these licenses depends on the policy of the
Government of India at the time when these are actually issued,
which is uncertain based on the above facts. The querist has also
mentioned that the Government notification regarding withdrawal
of the scheme is effective prospectively from 1st April, 2006 but
the Government has the power to withdraw the scheme as
mentioned above retrospectively.
11. The querist has also brought to the notice of the Committee
that vide DGFT notification No. 8(RE2006)/2004-2009 dated
12.06.2006, the Central Government has recently made an
amendment to the Target Plus Scheme for the period April 1,
2005 to March 31, 2006 which states as follows:
“The entitlement under this scheme would be contingent on
the minimum percentage incremental growth of 20% in the
FOB value of exports in the current licensing year over the
previous licensing year, and the rate of entitlement shall be
5% of the incremental growth”.
“This will take effect from 01.04.2005”.
With this notification, the Central Government has restricted the
benefit of Target Plus Scheme to a maximum of 5% of incremental
158
growth which was earlier at 15% of the incremental growth and

this has been effected retrospectively from April 1, 2005. This has
resulted in the loss of revenue in the case of the companies which
had recognised revenue at 15% earlier. These companies would
now have to adjust their accounts for entitlement of 5% and this
will affect the revenues of the current year or they will have to
reopen the accounts for the earlier years to provide for this situation.
B. Query
(i) Whether TPS credit should be recognised in the period

when the exports which give rise to the credit have been
made or whether it should be recognised on utilisation,
i.e., in the period when the TPS credit is used to pay
duty on imports.
(ii) In case credit is required to be recognised in the period

of exports, whether it would make any difference, if the
target has been achieved but the application is still to be
filed with the DGFT.
13. The Committee, while giving its opinion, has answered only
the issues raised in paragraph 12 above, and has not touched
upon any other issue arising from the Facts of the Case, such as,
accounting treatment of DEPB credit being availed by the company,
valuation of subsequent imports, etc.
relates to recognition of the benefit of duty credit under Target
Plus Scheme, i.e., when should this benefit be recognised in books
of account – whether at the time when relevant exports are made
or at the time TPS credit is utilised to pay duty on subsequent
imports.
15. Keeping in view the recognition principles laid down in AS 9,
the Committee is of the view that the TPS credit should be
159
recognised at the time when and to the extent there is no significant

uncertainty as to its measurability and ultimate realisation, i.e.,
utilisation of the TPS credit. The assessment of the level of
uncertainty is a matter of judgement based on the facts and
circumstances of each case on considering factors, such as,
utilisation of duty credit within the specified period as evidenced by
the existence of a binding contract for purchase of inputs within
the specified period against which the duty credit can be utilised,
the expected cost of purchase of the imported inputs vis-à-vis the
cost of the inputs available within the domestic market, expectation
of future amendments in the scheme, realisability of export proceeds
in convertible foreign exchange, etc. Events occurring after the
balance sheet date may remove the uncertainty about the utilisation
of the duty credit. For example, imports are made after the balance
sheet date but before the approval of accounts by the governing
authority, against which the duty credit has been utilised. The
Committee is, therefore, of the view that it is not necessary that
uncertainty regarding measurement and utilisation of duty credit is
removed only on actual utilisation of the credit, i.e., at the time
when the import of specified goods is made.
D. Opinion
(i) TPS credit should be recognised in the period when
there is no significant uncertainty about the measurability
and ultimate realisation of TPS credit, i.e., utilisation of
the duty credit, after considering the factors, such as
those indicated in paragraph 15 above.
(ii) The basis for recognition of TPS credit is indicated at
(i) above.
160
Query No. 22
Subject: Treatment of spares.1

1. A public sector company is in the business of refining and
marketing of petroleum products. The company’s books of account
are subjected to audit by both the statutory auditors and the
Comptroller and Auditor General of India (C&AG). According to
the querist, accounting policy of the company as disclosed in the
Notes to Accounts is in conformity with the Accounting Standards/
Guidance Notes issued by the Institute of Chartered Accountants
of India.
2. The querist has referred to an earlier opinion sought by him
from the Expert Advisory Committee on a similar subject (published
in Volume XXV of the Compendium of Opinions, Query No. 16).
The querist has stated that although he agrees with the views of
the Committee, it is observed that there are certain practical
difficulties in implementing the same retrospectively. In order to
explain the issues to the Committee, the querist has elaborated
the case in the following paragraphs.
3. The querist has mentioned that as per Accounting Standard
(AS) 10, ‘Accounting for Fixed Assets’, issued by the Institute of
Chartered Accountants of India (paragraph 8.2), “machinery spares
are usually charged to the profit and loss statement as and when
consumed. However, if such spares can be used only in connection
with an item of fixed asset and their use is expected to be irregular,
it may be appropriate to allocate the total cost on a systematic
basis over a period not exceeding the useful life of the principal
item”. Further, as per paragraph 4 of Accounting Standards
Interpretation (ASI) 2, ‘Accounting for Machinery Spares’,
“machinery spares of the nature of capital spares/insurance spares
should be capitalised separately at the time of their purchase
whether procured at the time of purchase of the fixed asset
concerned or subsequently. The total cost of such capital spares/
1
161
insurance spares should be allocated on a systematic basis over a

period not exceeding the useful life of the principal item, i.e., the
fixed asset to which they relate”.
4. The querist has stated that the earlier opinion of the Committee
mentioned above, states that “the new spare purchased to replace
the capital spare so used should be capitalised separately and
depreciated over the remaining useful life of the principal asset”
(paragraph 18 of the Opinion). According to the querist, in order to
implement the views of the Committee, it is essential that the
original spares are capitalised separately, independent of the main
equipment and depreciated over the life of the parent asset.
However, the practice followed consistently over the years by the
company is that the main equipment, in combination with several
machinery spares together is treated as a single unit. Accordingly,
it is capitalised and depreciated as one unit. When some spares
of this main equipment need to be replaced, taking out the worn
out parts and replacing the same with a new spare is while possible
physically, dropping the spare from the fixed asset register is not
possible in view of the absence of separate identity for the individual
spares. In these circumstances, charging-off the carrying value of
these replaced spares (hitherto, held in warehouse) to the profit
and loss account is not feasible and consequently, replacement
spares (new spares) are being charged to revenue in the year of
purchase. Original spares not being dropped from the gross block,
continue to be depreciated even after replacement.
5. Accordingly, the querist has stated that the significant
accounting policy published by the company includes the following
clause:
“Machinery spares which could be used only in connection

with an item of fixed asset and their use is expected to be
irregular are depreciated over a period not exceeding the
useful life of the principal item of fixed asset. Replacement of
such spares is charged to revenue”.
6. The querist has further stated that the Accounting Standards

Board of the Institute of Chartered Accountants of India has recently
issued an Exposure Draft of Revised AS 10, ‘Tangible Fixed Assets’,
162
which upon coming into effect would supercede, among others,

the existing Accounting Standard (AS) 10, ‘Accounting for Fixed
Assets’ and Accounting Standards Interpretation (ASI) 2,
‘Accounting for Machinery Spares’. The said exposure draft,
according to the querist, has considered the practical aspects of
some of the issues faced by the industry and, in the context of
what is discussed above, provides companies an option either to
capitalise the cost of replacement spares with the consequent
derecognition of the replaced parts or to recognise such costs in
the statement of profit and loss (refer paragraph v, Appendix B to
the draft). As per the querist, the policy of the company is in line
with the relevant paragraph of the exposure draft. In refineries,
most of the assets are such that the main equipment, in combination
with several machinery spares, together form a single unit. Being
so, the cost of replacement is charged to revenue in view of the
difficulties of derecognising the carrying value of original spares.
As per the querist, the draft visualises these situations where
major parts of a tangible fixed asset are not capitalised separately
and for replacement of such spare parts, suggests as one of the
treatment that the enterprise should recognise the cost of replacing
a major part of an asset in the statement of profit and loss as
incurred (paragraph 14 and 14(b) of the exposure draft) (emphasis
supplied by the querist).
B. Query
7. In the light of the problems/difficulties faced by the company
as described in the above paragraphs and the treatment suggested
in the exposure draft as discussed by the querist above, the querist
has sought the opinion of the Expert Advisory Committee on the
following issues:
(i) It is expected that the exposure draft would be finalised
soon and its implementation date would be notified. It is
the standard practice that on notification of the Standard,
earlier adoption by the companies would be encouraged
though the Standard could come into effect at a later
date. In view of the accounting policy of the company
being in consonance with the treatment permitted in the
163
exposure draft, the company desires to continue its

accounting policy, viz., “machinery spares which could
be used only in connection with an item of fixed asset
and whose use is expected to be irregular, are
depreciated over a period not exceeding the useful life
of the principal item of fixed asset. Replacement of such
spares is charged to revenue”. The quantum of the
machinery spares so charged to the profit and loss
account in the year of purchase will be disclosed suitably
by way of a note. The querist has sought the opinion of
the Expert Advisory Committee as to whether this will be
in order.
(ii) Otherwise, if the company has to implement the earlier

opinion of the Expert Advisory Committee, whether it will
be correct to implement the opinion prospectively for the
assets (main equipment) that are to be commissioned
from the current financial year onwards.

8. The Committee notes that the querist has relied upon the
treatment prescribed in the exposure draft of Revised AS 10, while
insisting upon the charging-off of replacement of capital spares to
revenue. The Committee notes that the said exposure draft
distinguishes between the accounting for major spare parts and
accounting for major components forming part of the fixed asset.
As per paragraph 8 of the exposure draft, the major spare parts
which are expected to be used during more than one period as
also the spare parts that can be used only in connection with a
tangible fixed asset, have to be capitalised separately as a tangible
fixed asset. The exposure draft does not provide any alternative
treatment for such spare parts. The paragraphs referred to by the
querist, viz., paragraphs 14 and 14(b) of the exposure draft, and
paragraph (v) of Appendix B to the exposure draft deal with the
accounting treatment of components forming part of the fixed asset.
Paragraph 14(b) of the exposure draft provides that where an
enterprise is not following the components approach of capitalising
fixed assets, the cost of replacement of any major part should be
164
charged to revenue. Similarly, if the component part in such a

situation is replaced by an existing spare part (which is separately
capitalised by virtue of paragraph 8 of the exposure draft), the
carrying amount of such spare part should be charged to revenue.
Paragraph 14(b) does not deal with the spare parts that are
purchased to replace an existing spare part (which replaces a
component part of the tangible fixed asset). In any case, the
Committee is of the view that the exposure drafts are the proposed
guidelines which are subject to amendments/changes based on
the comments received thereon and hence, cannot form the basis
for determination of accounting treatment before the final accounting
standard comes into force.
9. As far as the accounting treatment in respect of replacement

of a major part of a fixed asset with a spare is concerned, the
Committee notes from the Facts of the Case that the company is
treating the main asset and its several machinery spares as a
single unit. However, as per paragraph 4 of ASI 2 (reproduced in
paragraph 3 above), capital spares have to be capitalised separately
from the principal fixed asset. Hence, in the present case, the
company should apportion the carrying amount of the fixed asset
to various machinery spares, which hitherto were being treated as
a part of the value of fixed asset. At the time of replacement of the
component part of the fixed asset by a spare part, the carrying
amount of the spare should be charged to the profit and loss
account and the new spare which is purchased to be kept in the
store for replacement of the capital spare so used should be
capitalised separately and be depreciated over the remaining useful
life of the principal asset. With regard to the practical difficulties in
determining the carrying amount of the replaced part, the Committee
is of the view that the Accounting Standard does not envisage any
relaxation on this ground. The company should estimate the carrying
amount of the replaced spare part on a reasonable basis, e.g., the
cost of replacement may be used as an indicator of what the cost
of the replaced part was at the time it was acquired.
10. The Committee is also of the view that the principles of
accounting for spare parts are contained in Accounting Standard
(AS) 10, ‘Accounting for Fixed Assets’ which has been in existence
165
since 1985. If the company has not followed the principles contained
therein, it should rectify the error for the existing assets and account
for accordingly. In the view of the Committee, it would be incorrect
to apply the said principles prospectively, only for the assets that
are to be commissioned from the current financial year onwards,
as stated by the querist.
D. Opinion
(i) No, the charging-off of the capital spares to the profit
and loss account in the year of purchase is not in order
in the light of accounting treatment prescribed in the
applicable Accounting Standard. Please refer to
paragraphs 8 and 9 above.
(ii) No, the company should implement the above-said
opinion for all the existing assets.
Query No. 23
Subject: Disclosure of interest on shortfall in payment of
advance income-tax in the financial statements.1
1. A company is a premier electronics company under the Ministry
of Defence, Government of India, having its shares listed at the
major stock exchanges in India. The turnover of the company for
the year 2005-06 was Rs. 3,536 crore.
2. The querist has stated that as per an earlier opinion issued by

the Expert Advisory Committee (published in the Compendium of
Opinions, Volume XXIV, Query No.21), the interest payable under
1
166
section 234B and section 234C of the Income-tax Act, 1961, should
not be considered as a part of tax expense. The Opinion further
states that this may, however, be separately provided for in
accordance with the requirements of Accounting Standard (AS)
29, ‘Provisions, Contingent Liabilities and Contingent Assets’, issued
by the Institute of Chartered Accountants of India. As per the
querist, the Opinion of the Expert Advisory Committee does not
indicate as to where the interest expenditure under section 234B
and section 234C should be disclosed in the profit and loss account,
i.e., whether as a part of ‘interest costs’, or as a separate item
above the line (i.e., before profit before tax (PBT)), or whether it
can be included in ‘other expenses’.
3. The querist has stated that the company has been including
this amount as a part of tax expense in the profit and loss account
after profit before tax and indicating the same as part of ‘Provision
for Income-tax’ and grouping the same under the head ‘Provisions’
in the balance sheet. The company is of the view that the interest
in question does not fall under the purview of AS 29 since AS 29
defines a provision as “a liability which can be measured ‘only
by using a substantial degree of estimation’.” As per the querist,
calculation of interest on the shortfall of advance income tax does
not call for a substantial degree of estimation.
4. According to the querist, interest costs generally reflect the
efficiency or otherwise with which an organisation is able to meet
its financing requirements. The expenditure on interest under
section 234B and section 234C does not reflect the above. On the
other hand, this amount is to be paid to the income tax department
at predetermined rates of interest, irrespective of the position of
the funds availability with the company. Moreover, this interest
amount is not in the nature of ‘borrowing costs’ as defined under
Accounting Standard (AS) 16, ‘Borrowing Costs’, issued by the
Institute of Chartered Accountants of India. The querist has stated
that the company is of the view that the ‘interest cost under section
234B and section 234C’ reflects the efficiency or otherwise with
which the company is able to estimate its taxable income, and
hence, should ideally form part of the ‘tax expense’. If required, a
separate disclosure can be made of the element of interest cost
167
included in the ‘tax expense’, in the same manner as the current

tax and deferred tax expense/income in the schedules to the profit
and loss account. The liability aspect of the same can be shown
under the head ‘Provisions’ in the balance sheet as a part of
‘Provision for Income-tax’.
B. Query
(i) Whether the accounting treatment adopted by the
company, i.e., accounting for the interest under section
234B and section 234C of the Income-tax Act, 1961, as
part of tax expense in the profit and loss account,
disclosing the interest amount in the Schedule on
‘Provision for Taxation’ and grouping the same (Provision
for Taxation) as part of ‘Provisions’ in the balance sheet,
is in order.
(ii) If not, what should be the treatment/disclosure to be
made in the profit and loss account and the balance
sheet for the same.
6. The Committee notes that section 234B and section 234C of
the Income-tax Act, 1961, appear under ‘Part F – Interest
Chargeable in Certain Cases’ of Chapter XVII – ‘Collection and
Recovery of Tax’. The Committee further notes that the sections
prescribe payment of interest where advance tax is not paid in
accordance with the requirements of the said sections. The
Committee thereby concludes that the nature of income-tax is
different from that of interest chargeable under these sections
even though the levy of interest is automatic. In this context, the
Committee notes the definition of the term ‘tax’ as per section
2(43) of the Income-tax Act, 1961, as reproduced below:
“ “tax” in relation to the assessment year commencing on the
st
1 day of April, 1965, and any subsequent assessment year
168
means income-tax chargeable under the provisions of this

Act, and in relation to any other assessment year income-tax
and super-tax chargeable under the provisions of this Act
prior to the aforesaid date and in relation to the assessment
st
year commencing on the 1 day of April, 2006, and any
subsequent assessment year includes the fringe benefit tax
payable under section 115WA”.
On the basis of the above, the Committee is of the view that
interest chargeable under section 234B and section 234C cannot
be considered as ‘income-tax’ within the meaning of the provisions
of the Income-tax Act, since the said sections do not deal with
computation of income-tax but deal with payment of interest on
the lower amount paid as advance tax in specified cases. The
Committee notes that the above conclusion had also been drawn
in the earlier opinion issued by the Expert Advisory Committee
(mentioned in paragraph 2 above). The Committee feels that the
said interest can be viewed as of the nature of interest since it is
paid as a compensation for the amount used by the assessee
which, otherwise would have been paid by him to the Government
as income-tax.
7. The Committee further notes that the earlier opinion of the

Committee did not deal in detail with the aspect of disclosure of
the interest under section 234B and section 234C of the Income-
tax Act, 1961, in the profit and loss account since the matter was
not specifically raised by the querist in that query. The opinion of
the Committee stated that a provision for such interest should be
made separately as per the requirements of AS 29 provided the
company considers the payment of interest probable on the date
of the balance sheet and the amount of interest can be estimated
reliably, presuming that a substantial degree of estimation would
be required. The Committee is of the view that even in case the
calculation of the interest under section 234B and section 234C of
the Income-tax Act, 1961, does not call for a substantial degree of
estimation as argued by the querist, it could still not be considered
as ‘income-tax’. The Committee is of the view that in case the
amount of such interest is certain, it would then be considered as
169
a crystallised ‘liability’, as defined in paragraph 10 of AS 29 and

paragraph 49 of the Framework for the Preparation and
Presentation of Financial Statements, issued by the Institute of
Chartered Accountants of India, as below:
“A liability is a present obligation of the enterprise arising from
past events, the settlement of which is expected to result in
an outflow from the enterprise of resources embodying
economic benefits.”
8. On the basis of the above, the Committee is of the view that a

crystallised liability should be recognised as an expense in the
profit and loss account. Accordingly, the interest under section
234B and section 234C of the Income-tax Act, 1961, is required to
be recognised as an expense in the profit and loss account, even
if it is a crystallised liability and substantial degree of estimation is
not involved in its estimation.
9. As regards the disclosure of the expense on account of interest
under section 234B and section 234C in the profit and loss account,
the Committee notes the provisions of Part II of Schedule VI to the
Companies Act, 1956, as reproduced below:
“2. The profit and loss account –
(a) shall be so made out as clearly to disclose the

result of the working of the company during the
period covered by the account; and
(b) shall disclose every material feature, including credits
or receipts and debits or expenses in respect of
non-recurring transactions or transactions of an
exceptional nature.”
From the above, the Committee is of the view that the interest in
question should be disclosed as a separate sub-item under the
head ‘interest’ with a proper disclosure of its nature or as a separate
line item in the profit and loss account. It can be clubbed with
other items, if any, under the head ‘interest and penalties’, in case
it meets the requirements of paragraph 3(x)(i) of Part II of Schedule
VI to the Companies Act, 1956, as reproduced below:
170
“(i) Miscellaneous expenses:

Provided that any item under which the expenses exceed
1 per cent of the total revenue of the company or
Rs.5,000, whichever is higher, shall be shown as a
separate and distinct item against an appropriate account
head in the Profit and Loss Account and shall not be
combined with any other item to be shown under
‘Miscellaneous expenses’.”
10. With respect to disclosure in the balance sheet, the Committee

is of the view that the interest expense under section 234B and
section 234C, under the circumstances of the query, is a ‘current
liability’ and should be disclosed accordingly. Such interest expense
cannot be disclosed as a ‘provision for income-tax’.
D. Opinion
11. On the basis of the above the Committee is of the following
(i) No, the treatment given by the company is not correct.
(ii) If the interest in question is a crystallised liability and no
substantial degree of estimation is required for estimation
of interest under section 234B and section 234C of the
Income-tax Act, 1961, the same should be accrued and
recognised as an expense in the profit and loss account
and disclosed as discussed in paragraphs 8 and 9 above.
The liability for such interest should be disclosed in the
balance sheet under the head ‘Current Liabilities’ (and
not as a ‘provision’).
171
Query No. 24
Subject: Accounting for conversion of membership rights of
erstwhile BSE (AOP) into trading rights of BSEL
and shares.1
1. The querist has stated that the BSE had till recently been
functioning as an Association of Persons (AOP). Brokers/members
of the erstwhile BSE (a recognised stock exchange registered as
an association of persons) had been holding membership card
which gave them (a) the ownership rights in the AOP and (b)
exclusive rights to carry on business as a stock broker.
2. In the past, one could trade in this membership card with the
value being in the range of Rs. 7 million to Rs. 40 million. According
to the querist, before the introduction of Accounting Standard (AS)
26, ‘Intangible Assets’, issued by the Institute of Chartered
Accountants of India, as no specific guidance was available, this
membership card was classified as a fixed asset or as an
investment. In case it was classified as an investment, it was
evaluated for diminution other than temporary. Similarly, if it was
classified as a fixed asset, the same might or might not have been
depreciated as it was considered to have perpetual life.
3. With the introduction of AS 26, this membership right was
considered to fall under the purview of the Standard. Accordingly,
the same was classified as part of intangible assets (disclosed as
fixed asset). The membership right was considered to have
perpetual existence and there was no defined useful life. As there
is a presumption in AS 26 that the useful life of an intangible asset
is 10 years (unless substantiated otherwise), the stockbrokers were
amortising this intangible asset over a period of 10 years. This
treatment had been confirmed by an earlier opinion of the Expert
Advisory Committee of the Institute of Chartered Accountants of
India (published in the Compendium of Opinions – Volume XXIV,
Query No. 2).
1
172
4. The BSE (Corporatisation and Demutualisation) Scheme 2005

seeks to convert BSE from association of persons to a corporate
body, ‘Bombay Stock Exchange Limited’ (BSEL), with effect from
the due date. This scheme, subject to certain conditions and
modifications, had been approved by the Securities and Exchange
Board of India (SEBI) on 29th May, 2005. The scheme has been
effective from 19th August, 2005 (due date). The objective of the
scheme is to separate the ownership of BSE from the right to
trade. Thus, as per the scheme, owners would no longer necessarily
be traders and vice versa.
5. As per this scheme, all the existing members of the AOP shall
be entitled to 10,000 fully paid-up equity shares of face value of
Re.1/- each for cash at par of the corporate entity, BSEL. The
scheme also mentions that BSEL may list its securities at any time
on a recognised stock exchange. The net book value of each
share, according to the querist, is over Rs. 1,000. In the view of
the querist, the intention seems to be that the owners of the AOP
should be compensated for the loss in the value of exclusive
trading right and proportionate ownership of AOP up to the date of
the scheme.
6. An existing member of AOP who is registered with SEBI has

the trading rights with BSEL with effect from the due date. After
the due date, a person (other than the existing member of AOP)
desirous of carrying stock brokerage business of any segment of
Bombay Stock Exchange Limited can also be admitted if he
complies with the requirements and brings in specified fees and
deposits as specified in the rules, bye-laws and regulations of
BSEL. SEBI has allowed a provision for additional privileges to the
existing members with its prior approval. The querist has informed
that currently no such privileges have yet been given.
7. With regard to the transfer/surrender of the BSEL trading
rights given to the existing members of AOP, the scheme does not
specify as to whether any money would be received by the erstwhile
AOP member on his surrendering the trading right. For trading
members having deposit-based membership rights, the deposit is
refundable. The Scheme also does not specify as to whether this
173
trading right given to the erstwhile AOP members can be transferred

to any other person. However, a deposit-based trading membership
right of BSEL is available to any person who satisfies the requisite
conditions.
8. The scheme clearly mentions that:
• Trading right holder may or may not be a shareholder.

• A shareholder may or may not be a trading right holder.
As per the querist, all the assets and liabilities of the erstwhile
BSE would be transferred to BSEL.
9. The querist has summarised the benefits accruing to the
members of the erstwhile BSE as follows:
• They would continue to have the trading rights on the
BSEL similar to the new deposit-based membership rights
without making the deposit.
• They have received 10,000 shares for a total
consideration of Rs. 10,000, i.e., at Re. 1/- per share.
However, the fair value of BSEL’s shares is expected to
be significantly higher than the value at which the
corresponding shares have been issued. This is based
on the expected book value of the net assets and the
earnings per share of the erstwhile BSE to be transferred
to BSEL.
10. The querist has stated that in case an old member intends to
surrender the trading right, he may not get any value for the right
as there may not be any willing buyers for this right when there is
a refundable deposit-based right available. However, by virtue of
being a shareholder of BSEL and the fact that the book value is
expected to be significantly higher than the cost of acquisition of
such shares, the old members are expected to benefit from the
shares allotted to them.
11. The querist has given two views for the above mentioned
transactions and also the possible accounting treatments thereof
which are as follows:
174
(i) View 1
As far as the trading right is concerned, there is no exchange
of assets and this should be continued to be carried forward
as an intangible asset. The shares of the BSEL received
under the corporatisation scheme of the BSE should be shown
as an investment at acquisition cost, i.e., Rs. 10,000. This
view is based on the premise that as a result of corporatisation
and demutualisation, the trading rights of a member of the
erstwhile BSE (AOP) remain unaffected, while he additionally
gets 10,000 shares at a price of Re. 1 each.
Proposed accounting treatment:
The WDV of the membership card of AOP in the books at the
effective date should continue to be carried forward as an
intangible asset and written off over its balance useful life out
of the original ten years (and not 10 years counted afresh).
The 10,000 shares of BSE should be shown as an investment
at Rs. 10,000, i.e., acquisition cost.
(ii) View 2
A cardholder of the erstwhile BSE (AOP) gets shares in BSEL
which is an entity totally separate and distinct from BSE (AOP).
He also gets trading rights which are otherwise available
against deposit. Thus, from a legal angle, the transaction
involves giving up the rights of one legal entity [BSE (AOP)]
and acquiring trading rights and shares of another legal entity
(BSEL). The membership card of BSE and shares of the new
company are two distinct and separate legal instruments and
holding thereof gives to the holder separate and distinctive
legal rights. From the angle of economic substance also, the
membership card of the erstwhile AOP now results in two
separate assets, viz., the trading right and the equity shares.
The new trading right and issue of shares are part of a single
package given to the existing members of the BSE (AOP) in
exchange of their old trading right. Acknowledging the fact
that the new trading right received by the existing member
may have a lower fair value (because there is no market for
175
this trading right and the fair value will primarily reflect the
cost savings, i.e., the present value of the cost of deposit), it
appears that the loss in the value of the old right due to
corporatisation of BSE has been compensated through issue
of equity shares at a nominal price. Thus, the fair value of the
old trading right (before corporatisation) will now be available
to the member as gain through the fair value of the equity
shares so received. If this were not the business rationale,
the equity shares would not have been issued at a nominal
price. The present situation is one where the membership
card of the AOP was an intangible asset. Against this intangible
asset, two assets have been acquired. The first is the right of
trading which is no longer an exclusive right. The second is
an investment in the new company. As far as the shares of
BSEL are concerned, their allotment to members of AOP
recognises the fact that earnings of the AOP till date belong
to the members of the AOP. It is also evident that the
arrangement is such that the existing members are
compensated through the shares for the loss of their exclusivity
of trading rights. It is clear that allotment of shares at Re. 1
each is not representative of the economic reality. Thus, it
would not be proper to record these shares at Re. 1 each.
Proposed accounting treatment:
In this case, one needs to apply paragraph 29 of Accounting

Standard (AS) 13 ‘Accounting for Investments’, paragraphs
11.1 and 22 of Accounting Standard (AS) 10, ‘Accounting for
Fixed Assets’, paragraph 34 of AS 26 and the concept of
prudence as per Accounting Standard (AS) 1, ‘Disclosure of
Accounting Policies’, issued by the Institute of Chartered
Accountants of India. The card of BSE (AOP) entitles the
holder to two distinct rights described above. Therefore, the
existing carrying amount of the card plus Rs. 10,000 needs to
be allocated to the two rights on the basis of their fair values
at the date of their acquisition (emphasis supplied by the
querist).
176
The fair value of 10,000 shares of BSEL can be determined

on the basis of any one of the several widely used share
valuation models, e.g., on the basis of book value per share,
or earnings per share. In valuing the shares, one would, of
course, need to also consider whether the earnings of BSEL
would be distributable to members or not (it seems that at
least the assets acquired from BSE (AOP) are not distributable;
the position regarding distributability of earnings of newly
formed BSEL is not clear).
The fair value of new trading right should reflect the differential
advantage that the BSE (AOP) holder has over a new trading
member, e.g., the erstwhile cardholder of BSE (AOP) does
not have to pay the required deposit. This value would be
ascribable to the present value of the cost of deposit, i.e., the
net interest payable plus other costs of the funds. In case the
aggregate fair value of shares and new trading right exceeds
the carrying amount of the card, excess should not be
recognised (effectively not recording any gain). If, on the other
hand, the carrying amount of the card exceeds the above-
mentioned aggregate, the excess would need an immediate
write-off. As far as the value of the shares is concerned, their
carrying amount and disclosure would depend upon the intent
whether they are being held as long term investments or
current investments.
B. Query
Committee as to which of the two views stated above should be
followed.
13. The Committee notes from the Facts of the Case that under
the BSE corporatisation and Demutualisation Scheme 2005, a
member of the erstwhile BSE (AOP) receives two assets, namely,
10,000 shares in the BSEL for a nominal value of Rs. 10,000 and
a trading right in the BSEL. Thus, a member of the AOP gets an
investment in the form of shares in BSEL and an intangible asset
177
in the form of trading rights in BSEL in exchange of his existing

intangible asset, i.e., membership card.
14. As far as the value at which the shares in the BSEL should be
recorded, is concerned, the Committee notes paragraph 11 of AS
13, which states as follows:
“11. If an investment is acquired in exchange, or part

exchange, for another asset, the acquisition cost of the
investment is determined by reference to the fair value of the
asset given up. It may be appropriate to consider the fair
value of the investment acquired if it is more clearly evident.”
15. The Committee further notes paragraph 34 of AS 26 and

paragraphs 11.1 and 22 of AS 10 which state as follows:
AS 26
“34. An intangible asset may be acquired in exchange or
part exchange for another asset. In such a case, the cost of
the asset acquired is determined in accordance with the
principles laid down in this regard in AS 10, Accounting for
Fixed Assets.”
AS 10
“11.1 When a fixed asset is acquired in exchange for another
asset, its cost is usually determined by reference to the fair
market value of the consideration given. It may be appropriate
to consider also the fair market value of the asset acquired if
this is more clearly evident. An alternative accounting treatment
that is sometimes used for an exchange of assets, particularly
when the assets exchanged are similar, is to record the asset
acquired at the net book value of the asset given up; in each
case an adjustment is made for any balancing receipt or
payment of cash or other consideration.”
“22. When a fixed asset is acquired in exchange or in

part exchange for another asset, the cost of the asset
acquired should be recorded either at fair market value
or at the net book value of the asset given up, adjusted
178
for any balancing payment or receipt of cash or other

consideration. For these purposes fair market value may
be determined by reference either to the asset given up
or to the asset acquired, whichever is more clearly evident.
Fixed asset acquired in exchange for shares or other
securities in the enterprise should be recorded at its fair
market value, or the fair market value of the securities
issued, whichever is more clearly evident.”
16. On the basis of the above, the Committee is of the view that,
in the present case, the assets exchanged are dissimilar – the
asset given up is a membership card which is an intangible asset
and the assets acquired are an investment and an intangible asset,
which entitle the holder separate and distinct legal rights. In view
of this, the alternative accounting treatment provided in paragraph
11.1 of AS 10 would not be appropriate. Accordingly, the fair value
approach prescribed in that paragraph should be followed for
determining the value at which the assets acquired should be
recorded, i.e., fair value of the asset given up or fair value of the
asset acquired, whichever is more clearly evident. Also, in view of
the requirements of paragraph 11 of AS 13, the Committee is of
the view that it would be appropriate to adopt fair value approach
for valuing investment in the shares of BSEL. Further, since the
querist has stated in paragraph 10 above that in the present case
there may not be potential buyers for the existing card (the asset
given up), in the view of the Committee, the fair value of the asset
given up is not clearly evident. Accordingly, as per the above
reproduced provisions of AS 10 and AS 13, investment in the
shares of BSEL and trading rights in the BSEL should be recorded
at their respective fair values. The resultant gain or loss should be
transferred to the profit and loss account. This view is different
from the View 2 suggested by the querist in paragraph 11 above
as in this approach the shares and the new trading rights acquired
have to be recorded at their respective values rather than the
carrying amount of the existing card being allocated to the two
assets on the basis of their fair values.
17. The Committee is of the view that the accounting treatment

suggested by the querist as View 1 of paragraph 11 above, which
179
is based on the historical approach should not be followed in the

present case as the Accounting Standards do not envisage historical
cost based accounting treatment in case of transactions involving
exchange of assets.
18. Regarding the amortisation of trading right, the Committee is
of the view that, as discussed in paragraph 16 above, the trading
right in the BSEL is an altogether different asset from the erstwhile
trading and membership right in the BSE (AOP). Accordingly, it
should be amortised afresh over the best estimate of its useful life
subject to the rebuttable presumption of 10 years, in accordance
with the requirements of paragraphs 63 and 72 of AS 26 as
reproduced below:
“63. The depreciable amount of an intangible asset should
be allocated on a systematic basis over the best estimate
of its useful life. There is a rebuttable presumption that
the useful life of an intangible asset will not exceed ten
years from the date when the asset is available for use.
Amortisation should commence when the asset is
available for use.”
“72. The amortisation method used should reflect the

pattern in which the asset’s economic benefits are
consumed by the enterprise. If that pattern connot be
determined reliably, the straight-line method should be
used. The amortisation charge for each period should be
recognised as an expense unless another Accounting
Standard permits or requires it to be included in the
carrying amount of another asset.”
D. Opinion
that the querist should not follow either of the views suggested in
paragraph 11 above; rather, the accounting treatment suggested
in paragraphs 16 and 18 above should be followed.
180
Query No. 25
Subject: Recognition of duty credit entitlement under ‘Served
from India Scheme’.1
1. A multinational company has the main object, as per the

Memorandum of Association and as approved by Foreign
Investment Promotion Board (FIPB), to carry on the business of
research and development of products, processes, systems,
investigation and experiments on drugs, pharmaceuticals and
chemicals of any nature and kind whatsoever and production of
bulk pharmaceuticals and chemicals.
2. The objective of process research and development is to
design practical, efficient, environmentally responsible and
economically viable chemical synthesis for existing bulk
pharmaceuticals and chemicals.
3. The company undertakes process research and development
work on existing bulk pharmaceuticals and chemicals identified by
group companies and works exclusively for the group companies.
For providing the services to its group companies, the company
earns income in foreign exchange.
4. As the company earns foreign exchange from its activities, it
is eligible to avail the benefits under the “Served from India Scheme”
(hereinafter referred to as ‘the Scheme’) as provided under the
Foreign Trade Policy 2004-2009. The querist has stated that as
per the Scheme, the company received a license dated January
15, 2006, granting a duty credit entitlement of Rs. 50,00,000 for
use in the import of capital goods including spares, office equipment
and professional equipment, office furniture and consumables,
related to the main line of business of the applicant. The license
issued under the Scheme is valid for a period of 24 months from
the date of issue.
5. According to the querist, as per the Scheme, the Indian
1
181
Customs Assessing Officer, based on the assessable value, arrives

at the import duty payable and adjusts the said import duty against
the license amount. In effect, the company is provided the said
benefit as part of the Scheme (emphasis supplied by the querist).
6. During the financial year 2005-06, the company has utilised
the duty credit entitlement of Rs. 10,00,000 towards the import of
capital equipments, Rs. 3,00,000 towards the import of spares and
Rs. 2,00,000 towards the import of consumables. The following
accounting entries were passed in the books of the company for
the financial year 2005-06:
Fixed assets Dr. 10,00,000
Other income Cr. 10,00,000
(being the amount of duty entitlement utilised)

Cost of spares Dr. 3,00,000

Consumables Dr. 2,00,0000

B. Query
7. Under the given facts and circumstances of the case, the
querist has sought the opinion of the Expert Advisory Committee
on the following issues:
(i) Whether the amount of duty credit entitlement is required
to be accounted for as income in the books of account
as per the applicable Accounting Standards, Guidance
Notes, Opinions, etc.
(ii) Whether the value of fixed assets/spares/consumables
is to be increased by the value of duty credit entitlement
182
utilised as per the applicable Accounting Standards,

Guidance Notes, Opinions, etc.
(iii) If the value of fixed assets is to be increased by the
value of duty credit entitlement utilised, then whether it
will be allowed to claim depreciation on such addition.
(iv) In case the duty credit entitlement is required to be

recognised as income, whether the same is to be
recognised in the year of export of services, receipt of
license or at the time of actual utilisation of such credit
or some other event.

8. The Committee notes that the basic issues raised in the query
relate to recognition of benefit under the ‘Served from India
Scheme’, i.e., how should this benefit be recognised in the books
of account and whether this benefit should be recognised at the
time of export of services, or on receipt of license, or at the time of
actual utilisation of such credit. The Committee has, therefore,
considered only these issues and has not touched upon any other
issue arising from the Facts of the Case.
9. The Committee notes that even though the benefit received
under the Scheme does not strictly fall within the definition of the
term ‘revenue’, as defined under Accounting Standard (AS) 9,
‘Revenue Recognition’, such credit is of the nature of revenue and
accordingly, the principles enunciated under AS 9 would be
applicable in the present case. In this context, as far as timing of
recognition of duty credit is concerned, the Committee notes
paragraph 9.1 of AS 9, which states as follows:
“9.1 Recognition of revenue requires that revenue is
measurable and that at the time of sale or the rendering of
the service it would not be unreasonable to expect ultimate
collection.”
10. The Committee further notes from the Served from India
Scheme that the duty credit entitlement under the Scheme shall
be non-transferable. It signifies that there are certain uncertainties
183
associated with the utilisation of duty credit entitlement since if this

credit is not utilised within the specified time period, i.e., 24 months,
the credit shall lapse. Hence, keeping in view the above-mentioned
recognition principle of AS 9, the Committee is of the view that the
credit under the Scheme should be recognised only at the time
when and to the extent there is no significant uncertainty as to its
measurability and ultimate realisation, i.e., utilisation of the credit
under the Scheme. The assessment of the level of uncertainty is a
matter of judgement based on the facts and circumstances of
each case on considering factors, such as, utilisation of duty credit
within the specified period as evidenced by the existence of a
binding contract for purchase of allowable capital goods including
spares, office equipment and professional equipment, office
furniture and consumables against which the duty credit can be
utilised; the expected cost of purchase of the imported allowable
specified goods vis-à-vis the cost thereof in the domestic market;
etc. Events occurring between the balance sheet date and the
date on which the financial statements are approved by the Board
of Directors, may remove the uncertainty about the utilisation of
the duty credit, e.g., imports are made after the balance sheet
date but before the approval of the financial statements by the
Board of Directors, against which the duty credit has been utilised.
The Committee is, therefore, of the view that it is not necessary
that uncertainty regarding measurement and utilisation of duty
credit is removed only on actual utilisation of the credit, i.e., at the
time when the import of specified goods is made.
11. As far as the question regarding how this duty credit entitlement
should be recognised in the books of account is concerned, the
Committee notes from the entries passed by the company as
indicated in paragraph 6 above that the company has increased
the value of fixed assets, spares, consumables, etc. with the amount
of duty credit utilised. It appears that at the time of purchase of
these items, the company is recording these at the cost incurred
net of duty. In this regard, the Committee notes paragraph 9.1 of
Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, and
paragraphs 6 and 7 of Accounting Standard (AS) 2, ‘Valuation of
Inventories’, issued by the Institute of Chartered Accountants of
India, which state as follows:
184
AS 10

plant; and

and engineers.

factors.”
AS 2
“6. The cost of inventories should comprise all costs
of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and
condition.
7. The costs of purchase consist of the purchase price

including duties and taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities),
freight inwards and other expenditure directly attributable to
the acquisition. Trade discounts, rebates, duty drawbacks and
other similar items are deducted in determining the costs of
purchase.”
From the above, the Committee is of the view that the cost of
purchase of fixed assets, consumables, spares, etc. should be
recorded at their full value inclusive of the import duties payable
185
thereon whether by way of payment in cash or whether by way of

utilisation of duty credit, with a view to provide the fairest possible
approximation to the costs incurred in bringing these items to their
present location and working condition. Hence, the question of
separately increasing the value of fixed assets, consumables, etc.
by the duty amount does not arise, as is being presumably done
by the company. Further, the Committee is of the view that as
mentioned in paragraph 10 above, when and to the extent the
significant uncertainty as to measurability and ultimate realisation
of the duty credit is removed, the company should recognise the
duty credit entitlement as its ‘other income’ by debiting the ‘duty
credit entitlement account’ and crediting the profit and loss account
and further, at the time of purchase of fixed assets, spares,
consumables, etc., such credit entitlement is adjusted against the
duty payable on the import thereof.
D. Opinion
opinion on issues raised in paragraph 7 above:
(i) The benefit of duty credit entitlement should be
recognised as ‘other income’ at the time and to the extent
there is no significant uncertainty as to its measurability
and ultimate realisation as discussed hereinbefore.
(ii) The value of fixed assets/spares/consumables should be
inclusive of the duty payable whether by way of payment
in cash or by way of utilisation of duty credit entitlement.
Hence, there is no question of increasing the value of
fixed assets/spares/consumables separately by the
amount of duty credit entitlement utilised, as discussed
in paragraph 11 above.
(iii) The cost of the fixed asset (inclusive of duty payable

whether by way of payment in cash or by way of utilisation
of duty credit entitlement) is eligible for depreciation.
(iv) The duty credit should be recognised when and to the
extent there is no significant uncertainty about the
measurability and ultimate realisation of the duty credit
186
available under the ‘Served from India Scheme’, after

considering the factors such as those indicated in
paragraph 10 above.
Query No. 26
Subject: Accounting for expenditure on distribution of

mementos to employees during construction
period.1
1. A company is a Government of India undertaking, incorporated

in 1975 under the Companies Act, 1956. One of its objectives is to
set up thermal/hydro-power plants in the country for supply of bulk
power to various State Electricity Boards / successor entities.
2. The querist has stated that during the construction stage of a
project, the company accounts for the expenditure on employee
remuneration and benefits as incidental expenditure during
construction. In case of projects which are partially under operation
and partially under construction, the expenditure on employee
remuneration and benefits is analysed and as far as possible,
identified with operation or construction activities and accounted
for accordingly. Further, such expenses that are common to revenue
and capital activities are allocated in the proportion of sales to
accretion to capital work-in-progress and charged to the profit and
loss account or the statement of incidental expenditure during
construction, as the case may be. In the case of expansion projects,
only the expenditure directly attributable to the construction/
expansion activities is capitalised, keeping in view the provisions
of paragraph 16.2 (b) of the Guidance Note on Treatment of
Expenditure during Construction Period, issued by the Institute of
1
187
3. At one of the projects where new units are being set up for
expansion of generating capacity, mementos were distributed to
all the employees, whether engaged in operations, construction or
other common services/functions, on the occasion of
synchronisation of a new generating unit ahead of the schedule.
Synchronisation is a major milestone preceding the readiness for
commercial operations. The expenditure on the mementos was
capitalised as incidental expenditure during construction. The
government auditor while reviewing the accounts observed that
the expenditure is not directly attributable to the construction of
the unit and should have been charged to revenue.
4. The company is of the view that the expenditure on distribution
of mementos on the occasion of synchronisation ahead of schedule
is an additional expenditure directly related to the construction of
the unit. Synchronisation before schedule results in significant
benefits to the company in terms of cost reduction and shorter
project construction schedule. The mementos were distributed to
the employees to enhance employee morale and team spirit.
B. Query

Committee on the issue as to whether capitalisation of the
expenditure on the mementos distributed to all the employees of
the project on synchronisation of unit, as indirect expenditure related
to construction activity, is in accordance with the Guidance Note
on Treatment of Expenditure during Construction Period.
6. The Committee, while expressing its opinion, has considered

only the issue raised in paragraph 5 above and has not touched
accounting policy of the company in respect of expenditure during
construction period, as indicated by the querist in paragraph 2
above.
7. The Committee notes that the Guidance Note on Treatment
of Expenditure during Construction Period allows the capitalisation
of only those expenses which are incurred during the construction
188
period and which are related to or are incidental to construction

activities directly or indirectly. The Committee notes that the nature
of these expenses is such that these are generally incurred in
connection with the construction activity and had these expenses
not been incurred, construction activity would not have proceeded/
accomplished. In this regard, the Committee notes that paragraph
5.2 of the said Guidance Note, which deals with ‘indirect expenditure
incidental and related to construction’, inter alia states as follows:
“5.2 The following list of some of the possible items of
expenditure which would qualify for inclusion under this heading
is by no means exhaustive but is merely illustrative of the type
of expenditures which are discussed in this paragraph:—
(a) Expenditure on employees who are either assigned
to construction work or to supervision over
construction work including salaries, provident fund
and other benefits, staff welfare expenses, etc.”
8. The Committee notes from the above, particularly, the

expenditure on employees as contained in clause (a) of paragraph
5.2 of the Guidance Note as reproduced above that the nature of
the expenses to be capitalised, is such that these expenses are
generally part of a formal plan or an informal practice of the
organisation to provide such benefits to its employees and are
relatable to the construction activity, i.e., these expenses directly
or indirectly benefit the construction activity and are responsible
for bringing the asset to its working condition. Accordingly, in the
view of the Committee, if the giving of mementos to the employees
is pursuant to a formal plan or an informal practice of the company
to provide incentive to the employees for early completion of the
construction activity, or the expenditure directly or indirectly benefits
the construction activity, the cost of these mementos should be
capitalised as then, these would be attributable to the cost of
bringing the asset under construction to its working condition for
its intended use. However, if these mementos are not a part of
any formal plan or an informal practice as stated above, and are
given only as an after-thought, i.e., as an award/reward to the
employees for meeting the target, i.e., synchronisation of the unit
ahead of schedule, the cost thereof cannot be attributed to bringing
189
the asset under construction to its working condition for its intended
use, and hence, the same should not be capitalised. Further, in
case the cost of the mementos is to be capitalised on the
aforementioned basis, it should be capitalised only to the extent of
such benefit given to the employees who are engaged in the
construction activity. In this regard, the Committee notes from the
Facts of the Case that the company has distributed the mementos
to all employees, whether engaged in operations, construction or
other common services/functions.
D. Opinion
that the capitalisation of the expenditure incurred on mementos
distributed to the employees would be in accordance with the
Guidance Note on Expenditure during Construction Period only if
it is part of a formal plan/informal practice of the organisation to
provide incentives to the employees for achieving certain
construction activity ahead of schedule, or it directly or indirectly
benefits the construction activity. In case it is to be so capitalised,
it should be capitalised only to the extent such expenditure is
related to the employees engaged in the construction/expansion
activity, as discussed in paragraph 8 above.
Query No. 27
Subject: Books of account of franchise business and
accounting implications thereof.1
1. A public limited company is engaged in the business of
manufacturing and marketing of country liquor, spirit and IMFL
(Indian Made Foreign Liquor). It is engaged in the business of
manufacturing of IMFL products of certain brand owners under an
arrangement with them.
1
190
2. The querist has stated that the liquor is subject to state excise.
It involves import duty on purchase of goods from another state
and export duty implication on the sale of goods to the buyers
located in another state (within India). Such duties on purchases
and sales are called as import duty and export duty, respectively.
Hence, the brand owners are getting their products manufactured
and sold through manufacturing entities located in respective states.
Further, being non-excise licensees for the concerned states, the
brand owners are not allowed to do business in their name.
3. The products are being manufactured and sold in the name

of the company. Being the permit based business, excise licences
are also in the name of the company. Import permits for the
purchase of finished goods by out of the state buyers are being
obtained in favour of the company from the concerned state excise
department and the export permit in respect of the same are being
released in the name of the company by Madhya Pradesh Excise
Department (for each consignment). The purchase invoices in
respect of raw material, packing material and consumables are
being issued in the name of the company (inspite of the fact that
the purchases of the same are in absolute control of the brand
owners). The sales invoices for the finished goods are also being
issued in the name of the company (strictly in accordance with the
specifications and instructions of the brand owners). The special
bank account for the operation of the said business is also operated
in the name of the company.
4. The necessary compliances under sales tax (filing of returns,
necessary declarations/‘C’ Forms, assessments etc.), income tax
(TDS, TCS under section 206C, etc.) and service tax on Goods
Transport Agency (GTA) (registration, return, payment etc.) are
also being done in the name of the company.
5. According to the querist, the business is under the control of
the brand owners; they decide purchases (price, parties, quality
and other terms/conditions) and sales (price, parties and other
terms/conditions). The company is acting under the instructions/
specifications of the brand owners in accordance with the
agreement executed between the parties.
191
6. The business is funded by the brand owners. The assets of

the business (consisting of inventory, debtors/other current assets)
and liabilities (creditors for supply of raw material, packing materials
and consumables) are appearing in the name of the company but
the company is under the obligation to deal with the assets in
accordance with the instructions of the brand owners and is having
right to recover/indemnify itself against the liabilities/losses arising,
if any, in the said business.
7. The company is working for a fixed charge/ margin per case
by using its factory/other infrastructure (irrespective of profits and
losses of the business). The separate set of books of account,
including inventory records are maintained by the company in
respect of the arrangement with each concerned brand owner for
the said business. The surplus in the business is being withdrawn
by the brand owners as “brand owners entitlement” and in case of
deficit (losses), the same will be funded/borne by the brand owners.
8. The querist has also referred the following issues for the
consideration of the Expert Advisory Committee in the given
situations:
(i) When the books of the business are considered to be

forming part of the books of account of the company
(a) The documents of the transactions of the business

(purchase/sales invoices, licence, permits related
TCS certificates under section 206C, TDS
certificates in respect of the payments/expenses)
are in the name of the company. On the basis of
supportings vis-a-vis the provisions of section 209(1)
of the Companies Act, 1956, if the books of account
of the business are treated to be forming part of the
business of the company, the issue of implication of
TDS on the brand owners entitlement vis-à-vis
accounting implication on presentation of the same
in the profit and loss account needs to be analysed.
(b) According to the brand owners, since they are
responsible for the profit/ loss of the business,
192
including the liabilities of the business, if any, (in

spite of holding the same in the name of the
company in view of technical requirements of excise
laws) the said withdrawal is basically the surplus
from the business. Hence, no implication of TDS
would arise under any of the provisions of part B of
Chapter XVII of the Income-tax Act, 1961. The
querist has requested the Committee to consider
the situation of treating books of account of the
said business as forming part of books of account
of the querist company in view of the provisions of
section 209 (1) of the Companies Act, 1956
alongwith the relevant documents and at the same
time, non-implication of TDS on the debit to the
profit and loss account as the brand owners
entitlement.
(ii) When books of the business are not considered to be
forming part of the books of account of the company
Alternatively, if the company decides about non-inclusion of
the said business in the financial statements of the company
(in spite of sales/purchases etc., lying in the name of the
company), the querist has referred the following issues:
(a) Differences in the details of TDS/TCS certificates

issued vis-a-vis income-tax return filed and the books
of account considered for the purpose of financial
statements (as TDS/TCS pertaining to the division
will not be included in the financial statements of
the company). What would be the implication of
delay/default in respect of the same vis-à-vis
provisions of section 40 (a) and (ia) of the Income-
tax Act, 1961 in the assessment of the company?
(b) Further, since the supporting documents are not in
the name of the brand owners (inspite of the control,
risks/rewards of the business), they are not in a
position to consider the said transactions in their
financial statements. In case of non-inclusion of the
193
same in the financial statements of the company,

what would be the implication?
(c) Further, in case of non-inclusion of the said business,
in the financial statements, how the company is
going to justify itself for issuance of TDS/TCS
certificates and payments of service tax in respect
of the said business?
(iii) Accounting treatment alongwith implication of the TDS
on the brand owners entitlement.
B. Query
(i) What is the correct accounting treatment of the said
transactions?
(ii) Whether the books of account of the business shall be
forming part of books of account of the company or of
the brand owner.
10. The Committee notes from the Facts of the Case that basically
there are three issues raised by the querist, viz., (i) accounting
treatment of the transactions carried on by the company in respect
of the business of IMFL products on behalf of the brand owners,
(ii) whether books of account of the said business shall form part
of the books of account of the company or of the brand owners
and (iii) Income-tax, TDS/TCS and other legal implications of the
said transactions. Regarding the third issue, the Committee has
not expressed any opinion since as per Rule 2 of the Advisory
Service Rules of the Expert Advisory Committee, the Committee
does not answer queries involving legal interpretation of various
enactments. The opinion of the Committee, expressed hereinafter,
is therefore, only from the accounting point of view.

(AS) 1, ‘Disclosure of Accounting Policies’, which states as follows:
194
“b. Substance over Form

their substance, i.e., the economic reality of events and transactions,
and not merely in accordance with their legal from. In other words,
it is the ‘economic reality’ that is important in accounting and not
only the ‘legal reality’. From the Facts of the Case, the Committee
notes that while the legal form is that all the documents such as
excise licenses, import permits, purchase invoices in respect of
raw material and packing material, sales invoices in respect of
finished goods, special bank account for the operation of the said
business, etc., are in the name of the company, the substance of
the transaction is that the company is acting only as an agent of
the brand owners as the significant risks and rewards of the
business vest with the brand owners which is clear from the
following facts:
(a) The querist has specifically stated in paragraph 5 above

that the business is under the control of brand owners
and the company is just acting under the instructions/
specifications of the brand owners.
(b) The company is getting only a fixed charge/margin per
case irrespective of the profits or losses of the said
business. The surplus of the business is being withdrawn
by the brand owners and in case of deficit (losses), the
same will be funded/borne by the brand owners.
(c) The company has the right to recover/indemnify itself
against the liabilities/losses, if any, arising during the
course of business. Thus, all significant risks related to
the business are assumed by the brand owners.
(d) The control over the assets vest with the brand owners
as the company is under obligation to deal with the assets
in accordance with the instructions of the brand owners.
195
The liabilities of the business are also assumed by the

brand owners.
(e) The terms and conditions related to purchases and sales
such as price, parties, quality, etc. are decided by the
brand owners.
since the significant risks and rewards related to the ownership of
IMFL products do not vest with the company, the sales and
purchases of the said products should not be recognised in the
books of account of the company; instead these should be
recognised in the books of account of the brand owners. Similarly,
the assets and liabilities of the said business should also not be
recorded in the books of account of the company as these are
being controlled by the brand owners, even though the supporting
documents in respect of the same are being maintained by the
company. The company should recognise its fixed charge/margin
as its income in its financial statements. Regarding the accounting
treatment of the brand owners’ entitlement, the Committee is of
the view that surplus from the business which is the brand owners’
entitlement and withdrawn by the brand owners, is merely a cash
outflow for the company and should, therefore be recorded as
such in the books of the company. Hence, any such entitlement
due to the brand owners should be credited to their respective
accounts in the books of the company.
14. As far as the books of account to be kept by the company is
concerned, the Committee notes that section 209(1) of the
Companies Act, 1956, provides as follows:
“209.(1) Every company shall keep at its registered office

proper books of account with respect to –
(a) all sums of money received and expended by the

company and the matters in respect of which the
receipt and expenditure take place;
(b) all sales and purchases of goods by the company;
(c) the assets and liabilities of the company; and
196
(d) in the case of a company pertaining to any class of

companies engaged in production, processing,
manufacturing or mining activities, such particulars
relating to utilisation of material or labour or to other
items of cost as may be prescribed, if such class of
companies is required by the Central Government
to include such particulars in the books of account
...”
On the basis of the above and considering the fact that sales,
purchases, assets and liabilities in respect of the business of IMFL
products should not be recognised in the financial statements of
the company, the Committee is of the view that for the purposes
of Companies Act, 1956, the books of account maintained that
enable the company to reflect various items of income (e.g. fixed
charge per case) and expense in the financial statements of the
company should be deemed to be the books of account of the
company. In this regard, the Committee also wishes to again point
out that the opinion expressed by the Committee is purely from
the accounting point of view without consideration of any
implications thereof, from the point of view of the provisions of
TDS/TCS, Income-tax Act, 1961, or any other legal/statutory
requirement.
D. Opinion
(i) The correct accounting treatment of the said transactions
in the books of account of the company would be to
recognise only the fixed margin/charge received by it
rather than to recognise sales and purchases of the
business of IMFL products as discussed in paragraphs
12 and 13 above. The company should also not recognise
any asset or liability of the said business in this regard in
its books of account. The brand owners entitlement paid
by the company should be booked as a mere cash
outflow. On the other hand, the brand owners should
197
recognise the sales, purchases, assets and liabilities of

the said business as their own, in their books of account.
(ii) Books of account of the company for the purposes of
the Companies Act, 1956, should be the books of account
maintained that enable the company to reflect various
items of its income (e.g., fixed charge per case) and
expense in the financial statements of the company.
Sales, purchases, assets and liabilities relating to the
business controlled by the brand owners should not be
recorded in the books of account of the company even
though supporting vouchers are in the name of company
and are maintained by it.
Query No. 28
Subject: Capitalisation of establishment expenses of
Rehabilitation & Resettlement office after
commissioning of the project.1
1. A joint venture between a Government of India enterprise and
the Government of Madhya Pradesh was incorporated as a
company on 01.08.2000, with 51% stake being held by the former
and the rest by the latter, to exploit the hydroelectric potential of
the Narmada Basin. The company, having its headquarters at
Bhopal, Madhya Pradesh (M.P.), presently has two projects, viz.,
Indira Sagar Project (ISP) of 1,000 MW under operation and
Omkareshwar Project (OSP) of 520 MW under construction. Both
these projects are situated in the state of M. P.
2. The querist has stated that ISP is the mother project of the
Narmada Basin. It supplies water to three major downstream
hydroelectric projects, viz., Omkareshwar & Maheshwar Projects
1
198
(both in M.P.) and Sardar Sarovar Project in Gujarat. The installed

capacity of the project is 1,000 MW, i.e., 8 units of 125 MW each.
The project cost of ISP is Rs. 4,277.03 crore.
3. ISP is a multipurpose project, having both power generation

and irrigation components. It has a catchment area of 61,642 sq.
km. and its reservoir of 913 sq. km. will be the largest reservoir in
India. Besides generation of electricity, the project would irrigate
an area of 2.70 lakh hectares covering 564 villages, provide drinking
water to downstream areas and enable production of an additional
4.00 lakh tons of food grains and 10.55 lakh tons of other crops.
Other benefits of the project include annual production of
approximately 1,500 tons of fish from the reservoir, creation of
jobs through development of tourism and establishment of Industrial
Training Institute (ITI), etc.
4. The queist has further stated that the work of Rehabilitation &
Resettlement (henceforth referred to as R&R) of the Project
Affected Families (PAFs) of the project is being carried out by the
R&R office situated at Khandwa. The work of R&R office includes,
inter alia, land acquisition, preparation and payment of land
compensation awards, development of infrastructure at various
resettlement sites and transportation of PAFs to these sites. As
per the approved cost estimate of ISP, the entire expenditure
incurred on the R&R activities is chargeable to the dam of ISP and
is to be capitalised therewith. A total number of 249 villages are
covered in the submergence area of the project, out of which 75
villages are being fully submerged and the balance 174 villages
are being partially submerged. In addition to these, some more
villages being submerged / families affected by the back waters of
the reservoir are also to be resettled. The original cost estimate
for R&R was Rs. 1,160 crore which was later revised to Rs. 1,570
crore vide the Cabinet Committee on Economic Affairs (CCEA)
clearance dated 28.03.2002. The total proportionate establishment
expenditure pertaining to R&R works of ISP incurred on R&R
office from 24.08.2005 to 31.03.2006 works out to Rs. 6.43 crore
which has been transferred to Incidental Expenditure During
Construction (IEDC) and thus got capitalised in the annual accounts
of 2005-06 of ISP, as the project is fully operational.
199
5. The first unit of ISP was commissioned on 13.01.2004 and

the remaining seven units were commissioned on different dates
thereafter. Though the first unit was commissioned on 13.01.2004,
a substantial amount of civil, electrical and hydro-mechanical work,
apart from R&R work was yet to be completed. Even after the
commissioning of the last unit (i.e., 8th unit) on 30.03.2005, some
of these works were still incomplete. Accordingly, the company
has been preparing both profit and loss account and IEDC account
since 2003-04 because the construction activities of the project
were being carried out simultaneously with the operation of the
commissioned units. The capitalisation of the project expenditure
has been carried out in stages and at different times. All the units
of ISP were commissioned by 30.03.2005 and the rated capacity
of 1,000 MW was achieved on 24.08.2005.
6. The querist has stated that though the rated capacity of 1,000
MW was achieved on 24.08.2005, the total expenditure incurred
till that date was only Rs. 3,786.89 crore as against the estimated
project cost of Rs. 4,277.03 crore. The unspent amount of Rs.
490.14 crore is on account of balance civil, electrical and finishing
works of dam and power house, pending claims of various
contractors and remaining R&R works as well as the balance
expenditure on compensatory afforestation and catchment area
treatment.
7. Though the dam has been raised to its maximum height of EL

262.13 M, the Hon’ble High Court, Jabalpur has ordered that the
water level may be maintained at or below EL 255 M, due to the
fact that R&R work of many villages in submergence area has not
yet been completed.
8. The querist has stated that the comments of the Comptroller

and Auditor General of India (C&AG) on this issue during the audit
of the company for the year ended 31.03.2006 were as follows:
“All the generating units of ISP were commissioned by
30.03.2005 and the rated capacity of 1,000 MW was achieved
on 25.08.2005. As the project was complete and fully
operational by this date, all the revenue expenditure and
income should have been booked in the Profit and Loss
200
Account. However, net revenue expenditure of Rs. 642.53

lakh incurred by R&R Division, Khandwa, in respect of ISP
from 25.08.2005 to 31.03.2006 were transferred to IEDC and
capitalised instead of charging to Profit & Loss Account.
This has resulted in understatement of revenue expenditure
and overstatement of profit for the year by Rs. 642.53 lakh.”
9. As per the querist, the company’s reply to the above comments
of C&AG was as follows:
“The office of R&R Division, Khandwa is doing only the work
of land acquisition and related activities and is not engaged in
any Operation & Maintenance Work of the project. All its
expenses are therefore charged to IEDC. Even after
24.08.2005, the work of land acquisition, etc., continued which
is a direct capital expenditure. This practice is continuing since
last two years as per Accounting Policy no. 17 which is as
follows:
“Payments made provisionally towards compensation and
other expenses relatable to land, which is going to be
submerged, are treated as Rehabilitation & Resettlement
Expenses to be capitalised as Dam Cost.”
In view of the above, expenses pertaining to R&R activities

have been correctly booked to IEDC and capitalised
accordingly.”
10. The querist has stated that the reply of the company was
further elaborated upon in the supplementary reply to the C&AG
comments as follows:
“The office of R&R Division, Khandwa is engaged in balance
R&R activities including land acquisition and payment of
compensation to oustees falling between EL 255 M to EL 261
M or Maximum Water Level (MWL). This particular elevation
is essential for the filling of reservoir to its maximum capacity
for its maximum economic use. It is again for the information
of audit that although the project has started commercial
generation since 25.08.2005, but its complete commercial
201
benefit as projected in the detailed project report will only be

possible once the balance R&R works are completed. We
have not yet fully spent the projected capital expenditure.
Payment of compensation and incidental expenses are met
out of the projected capital expenditure and charging of same
to O&M expenses will be beyond the norms of Central
Electricity Regulatory Commission (CERC).”
11. According to the querist, the following are the supporting facts
for the reply:
(a) The land acquisition and R&R work of a few villages,
which come under submergence of back waters of ISP
dam at Full Reservoir Level (FRL) to Maximum Water
Level (MWL) are still in progress and shifting of PAFs is
also in progress.
(b) Apart from this, 8 villages have been totally surrounded
by the back waters of ISP dam at FRL to MWL and have
become islands. Land acquisition, R&R work and shifting
of PAFs are still in progress.
(c) In view of the above, the Hon’ble High Court, Jabalpur

has permitted the company to raise the water level of
ISP upto EL 255 M only against the FRL of EL 262.13
M. The rated capacity of 1,000 MW was achieved on
24.08.2005 at the water level of EL 255 M and not at EL
262.13 M.
(d) The work of dam will be completed only after the
completion of all land acquisition, R&R work, shifting of
all PAFs and getting the permission of the Hon’ble High
Court to raise the water level up to EL 262.13 M, i.e.
FRL. The work of the project can only be considered to
be completed when the dam along with all R&R activities
is complete and is filled up to MWL of EL 262.13 M. Until
then, the expenditure incurred on project related activities,
including establishment expenditure will be included in
IEDC and capitalised subsequently. Further, the full
benefits of the project, as envisaged in the approved
202
detailed project report and referred to in the company’s

reply to C&AG’s comments, can only be exploited after
the filling of reservoir up to the MWL of EL 262.13 M.
(e) As per the CERC guidelines no. 34.4 for tariff fixation,
capital expenditure incurred after the completion of the
project is also to be considered for the fixation of tariff.
The generating company can file two revised tariff
petitions, apart from the original tariff petition, within a
tariff period, i.e., five years of the completion of the project,
to include the capital expenditure incurred after the
commissioning of the project in the total project cost and
consider the same towards tariff fixation of the project.
(f) Accordingly, the company is of the view that the treatment
of the expenditure of Rs. 6.43 crore incurred on R&R
works from 24.08.2005 to 31.03.2006 as IEDC and
capitalisation of the same is correct and as per the
provisions of Accounting Standard (AS) 10, ‘Accounting
for Fixed Assets’, the company’s accounting policy and
CERC guidelines.
B. Query
12. In view of the facts of the case, the querist has sought the
opinion of the Expert Advisory Committee on the following issues:
(i) Whether the treatment given to R&R expenditure for the
period from 24.08.2005 to 31.03.2006 is correct and as
per the relevant Accounting Standards and practices.
(ii) If not, the corrective steps to be taken.

13. The Committee notes from a comprehensive reading of
paragraphs 4 and 8 that the query relates to the issue of
appropriateness of capitalisation of establishment expenses of
Rehabilitation and Resettlement (‘R&R’) office incurred from
24.08.2005 till the end of the accounting year though, in paragraph
12, the querist has raised the issue with respect to R&R expenditure
203
in general. Therefore, the Committee has not touched upon any

other issue that may be contained in the Facts of the Case, such
as the asset to which the R&R expenditure is to be capitalised with
in case capitalisation criteria are met, treatment of R&R expenditure
from the date of commissioning to the date of achieving 100 per
cent rated capacity, etc.
14. The Committee further notes that the querist has mentioned
two dates as the date of reaching 100 percent rated capacity, viz.,
24.08.2005 and 25.08.2005. Also, at one place it is mentioned that
Full Reservoir Level and Maximum Water Level are one and the
same while at another place, they are stated to be different.
However, such matters do not affect the accounting treatment for
the issue involved.
15. The Committee notes that the last unit (i.e., 8th unit) of the
mother project (ISP) was commissioned on 30.03.2005 itself while
the rated capacity of 1,000 MW was achieved on 24.08.2005
(25.08.2005). There is huge unspent amount on account of balance
civil, electrical and finishing works of dam and power house, pending
claims of various contractors and remaining R&R works as well as
the balance expenditure on compensatory afforestation and
catchment area treatment. Further, the rated capacity is reached
against the water level of EL 255 M and not at the maximum level,
i.e., EL 262.13 M.
16. In the context of the comments of the C&AG contained in
paragraph 8 above, the Committee notes the following portions of
the Guidance Note on Treatment of Expenditure during Construction
Period, issued by the Institute of Chartered Accountants of India:
“…from the moment the plant is completed and commissioned

and is ready for commercial production, all expenditures of
revenue nature must be charged to the profit and loss account.”
[Paragraph 12.3]
“The term “commercial production” refers to production in
commercially feasible quantities and in a commercially
practicable manner.” [Paragraph 12.2]
204
From the above, the Committee is of the view that it is the

commissioning date that signifies readiness for commercial
production and not the date of achieving 100 per cent rated capacity
so far as power plant units are concerned. Accordingly, in respect
of commissioned units, revenue expenditure related to post-
commissioning period should be charged to profit and loss account.
17. With respect to capitalisation of expenses, the Committee

notes the following paragraphs from Accounting Standard (AS)
10, ‘Accounting for Fixed Assets’:

plant; and
(iv) professional fees, for example fees for architects

and engineers.

factors.”
“9.3 Administration and other general overhead expenses are
usually excluded from the cost of fixed assets because they
do not relate to a specific fixed asset. However, in some
circumstances, such expenses as are specifically attributable
to construction of a project or to the acquisition of a fixed
asset or bringing it to its working condition, may be included
as part of the cost of the construction project or as a part of
the cost of the fixed asset.”
205
18. The Committee also notes that paragraph 23 of AS 10 states

as below:
“23. Subsequent expenditures related to an item of fixed
asset should be added to its book value only if they
increase the future benefits from the existing asset beyond
its previously assessed standard of performance.”
The Committee is of the view that the ‘subsequent expenditure’
mentioned above can be capitalised, only if:
(a) it is a directly attributable cost;
(b) it is probable that the expenditure will increase the future

benefits from the relevant asset beyond the previously
assessed standard of performance; and
(c) such expenditure can be measured reliably.
The expression ‘subsequent expenditure’ indicates that expenditure

incurred after the initial recognition of a fixed asset or completion
of a project is also eligible for capitalisation, subject to meeting the
aforesaid three conditions.
19. The Committee is of the view that for determining whether the
subsequent expenditure is a ‘directly attributable cost’, factors,
such as, whether the concerned expenditure directly benefits or is
related to the relevant asset may be considered. In establishing
whether the expenditure directly benefits or is related to an asset,
a nexus between the expenditure and the benefit/relationship with
the asset can be established technologically.
20. The Committee notes that R&R expenditure, including the
establishment expenditure, is incurred as a direct consequence of
the project. The R&R office is doing only the work of land acquisition
and related activities and is not engaged in any operation and
maintenance work. Though the R&R office expenditure is
administrative in nature, it is specifically attributable to the project
and not general in nature. Thus, it is a directly attributable cost.
21. The querist has not stated what incremental benefits will flow
206
from raising the existing water level to the maximum level. However,
the querist has indicated in paragraphs 10 and 11(d) above that it
is probable that future benefits from the relevant asset will increase
beyond the previously assessed standard of performance. Thus, it
seems that the R&R expenditure is continued with a view to
exploiting the commercial benefits of the project fully by raising
the water level from the existing level of EL 255 M to the maximum
level of EL 262.13 M, after obtaining the Court’s approval. Though
the dam has already been raised to the maximum height of 262.13
M, to raise the water level to this height, Court’s permission is
necessary. It seems that for getting the Court’s permission, R&R
work must be complete, for which the R&R office is to be
maintained.
22. The Committee notes that R&R office is exclusively devoted
to R&R activities only. Hence, the expenditure incurred by the
R&R office can be reliably measured.
23. In view of the above, all the three conditions mentioned in
paragraph 18 above appear to be satisfied. Though the capacity
of the dam is not going to be increased further, the standard of
performance so far assessed in terms of benefits is related to
existing level of water only. Since it is probable that the raising of
existing water level to the maximum level will increase the future
benefits and the expenditure thereon can be measured reliably,
continued incurrence of the R&R expenditure, including R&R office
expenditure, which is a directly attributable cost in the case of the
querist, is eligible for capitalisation as part of cost of the relevant
asset.
24. The Committee is of the view that even if the continued
incurrence of R&R expenditure is to be capitalised on the
considerations mentioned in paragraph 23 read with paragraph 18
above, incidental expenditure, such as, establishment expenses of
R&R office should not be capitalised if no activity is in progress or
the delay in the progress of R&R activities is avoidable. In this
connection, the Committee notes the following paragraphs from
Accounting Standard (AS) 16, ‘Borrowing Costs’:
207
“17. Capitalisation of borrowing costs should be

suspended during extended periods in which active
development is interrupted.
18. Borrowing costs may be incurred during an extended

period in which the activities necessary to prepare an asset
for its intended use or sale are interrupted. Such costs are
costs of holding partially completed assets and do not qualify
for capitalisation. However, capitalisation of borrowing costs
is not normally suspended during a period when substantial
technical and administrative work is being carried out.
Capitalisation of borrowing costs is also not suspended when
a temporary delay is a necessary part of the process of getting
an asset ready for its intended use or sale. For example,
capitalisation continues during the extended period needed
for inventories to mature or the extended period during which
high water levels delay construction of a bridge, if such high
water levels are common during the construction period in the
geographic region involved.”
The Committee is of the view that the above principle can be
applied to other expenditure also.
D. Opinion

(i) The treatment of R&R expenditure, so far as it relates to

establishment expenses of R&R office for the period from
24.08.2005 to 31.03.2006, is correct, provided R&R
activities are in progress during this period and delay, if
any, is unavoidable.
(ii) In view of (i) above, this question does not arise. However,
in case R&R activities are not in progress or the delay in
R&R activities is avoidable, capitalisation of establishment
expenditure of R&R office is an error, the correction of
which should be accounted for as a prior period item in
accordance with Accounting Standard (AS) 5, ‘Net Profit
208
or Loss for the Period, Prior Period Items and Changes

in Accounting Policies’.
Query No. 29
Subject: Accounting and reporting of interest in jointly
controlled entity.1
1. A company, which is a Government of India enterprise, having
a 3 MMTPA refinery, desires to purchase natural gas from M/s.
XYZ Limited and has already entered into an agreement with it for
the supply of natural gas for a period of 15 years for its use in the
refinery, with a provision to further extend the term of the agreement
by another 5 years by mutual consent.
2. The company has entered into an agreement with another
company, ABC Ltd., a State Government enterprise, on 27th June,
2005. According to the querist, there was an advantage available
in entering into this agreement with ABC Ltd., having a network of
gas pipeline and presently, operating in the business of gas
transportation in the State and other near-by areas. Under the
agreement, ABC Ltd. agreed to set up gas transportation system
to transport gas from XYZ Ltd.’s off-take point to the company’s
refinery for the use of the company in its refinery as per the terms
and conditions of the agreement. The tenure of this agreement
was initially meant for 15 years from the date of commencement
of gas transportation and renewal for a further period of 5 years
on terms and conditions mutually agreed to.
3. The above agreement with ABC Ltd. was entered into to
construct a gas transportation system with 2.00 MMSCMD of gas
(1.00 MMSCMD for the company and other 1.00 MMSCMD for the
consumers other than the company). The transmission charges
1
209
etc. were also calculated based on the revenue to be generated

from 2.00 MMSCMD of gas. Consequent upon signing of the
memorandum of understanding (MOU) as referred to above, it
was spelt out by XYZ Ltd., that it would not be able to supply 2.00
MMSCMD of gas and instead settle for 1.00 MMSCMD of gas as
committed to the company. Accordingly, in a meeting held on 23/
06/06, it was decided to reconfigure the project as follows:
(i) The pipeline diameter will be changed to be adequate to
transport 1.00 MMSCMD of gas to the company.
(ii) Instead of 6 compressors initially planned, ABC Ltd. will
install only 3 compressors in the system.
(iii) Provision will be made in the pipeline for augmentation
of capacity in future to transport additional quantity of
gas in case it is available.
(iv) The project cost will be reworked with the new
configuration and the company’s transmission charges
will be revised based on the parameters of the agreement
and finalised on mutually agreed terms.
(v) Necessary changes shall be made to the agreement
already signed on 27/6/05.
4. In view of the above developments and considering that the
pipelines would only be for the dedicated use of the company, it
was felt that an unincorporated joint venture (JV) would be formed
to carry out the project. Salient features of the JV are as under:
(i) The company shall be co-investor in the JV on 1:1 basis

with ABC Ltd. as the partner/co-venturer.
(ii) The JV unit will have the status of unincorporated jointly

controlled entity.
(iii) The estimated cost of the project is Rs. 320 crore and
the same will be shared by the two venturers on an
agreed debt/equity basis.
210
B. Query
5. Having regard to the above facts and probability of the
company entering into an agreement with ABC Ltd. to be partner/
co-venturer in a JV under special purpose vehicle (S.P.V.)
arrangement, the querist has sought the opinion of the Expert
Advisory Committee with regard to accounting in the separate
financial statements of the company on the following matters, in
the context of the requirements of Accounting Standard (AS) 27
‘Financial Reporting of Interests in Joint Ventures’, issued by the
Institute of Chartered Accountants of India:
(i) Treatment in the books of account of contribution by the
company towards JV equity, and the borrowings and
liability taken by the company for funding the JV.
(ii) Basis of recognition of share of jointly controlled assets

in the books of account of the company during the project
period as well as after commissioning.
(iii) Basis of recognition of share of any liability incurred jointly
with other venturers in relation to the JV.
(iv) Basis of recognition of any income from the sale or use
of its share of the output of the JV, together with its
share of any expenses incurred by the JV or by the
company in respect of the JV.
(v) Availment of benefit on account of excise benefit on

capital procurements of the JV, cenvatable service tax
and modality of billing of TC charges.
(vi) Requirement of maintaining separate records for the JV
or S.P.V.
6. The Committee notes from the Facts of the Case that a joint
venture (JV) or a special purpose vehicle (S.P.V.) arrangement is
proposed to be entered into by the company with another company.
It is also mentioned in the Facts of the Case that the JV unit will
have the status of unincorporated jointly controlled entity. The
211
Committee further notes paragraph 1 and the definitions of the

terms ‘joint venture’ and ‘joint control’ as contained in paragraph 3
of Accounting Standard (AS) 27, ‘Financial Reporting of Interests
in Joint Ventures’, issued by the Institute of Chartered Accountants
of India, which state as below:
“1. This Statement should be applied in accounting for
interests in joint ventures and the reporting of joint venture
assets, liabilities, income and expenses in the financial
statements of venturers and investors, regardless of the
structures or forms under which the joint venture activities
take place.”
“A joint venture is a contractual arrangement whereby

two or more parties undertake an economic activity, which
is subject to joint control.
Joint control is the contractually agreed sharing of control
over an economic activity.”
irrespective of the form in which the joint venture activity is entered
into by the company, i.e., irrespective of the fact whether it is
termed as a JV or an S.P.V. arrangement, if the above-mentioned
conditions are met, the provisions of AS 27 would be applicable
for determining the accounting treatment for interests of the
company in the entity. Further, since in the present case, the J.V.
activity shall be carried on as an unincorporated jointly controlled
entity and there is a joint control over that entity, in the view of the
Committee, the provisions related to ‘jointly controlled entities’ as
contained in AS 27 would be applicable as against jointly controlled
operations and jointly controlled assets. In this context, the
Committee also notes paragraph 22 of AS 27, which states as
follows:
“22. A jointly controlled entity is a joint venture which involves
the establishment of a corporation, partnership or other entity
in which each venturer has an interest. The entity operates in
the same way as other enterprises, except that a contractual
arrangement between the venturers establishes joint control
over the economic activity of the entity.”
212
8. The Committee further notes that the querist has raised the
query only in respect of accounting and reporting of financial interest
in the jointly controlled entity in the separate financial statements
of the company. Accordingly, the opinion of the Committee is only
on this aspect. In this context, the Committee notes the provisions
related to ‘separate financial statements’ as contained in paragraphs
27 and 28 of AS 27 reproduced as below:
“27. In a venturer’s separate financial statements, interest
in a jointly controlled entity should be accounted for as
an investment in accordance with Accounting Standard
(AS) 13, Accounting for Investments.
28. Each venturer usually contributes cash or other resources

to the jointly controlled entity. These contributions are included
in the accounting records of the venturer and are recognised
in its separate financial statements as an investment in the
jointly controlled entity.”

the contribution made by the company towards the JV equity should
be accounted for as an investment in accordance with Accounting
Standard (AS) 13, ‘Accounting for Investments’, issued by the
Institute of Chartered Accountants of India. Further, since this
investment is intended to be held by the company for more than
one year, it should be accounted for as ‘long-term investment’ in
the books of the company. This investment should be carried in
the financial statements at cost in accordance with paragraph 32
of AS 13 which sates as follows:
“32. Investments classified as long term investments
should be carried in the financial statements at cost.
However, provision for diminution shall be made to
recognise a decline, other than temporary, in the value of
the investments, such reduction being determined and
made for each investment individually.”
10. The Committee is also of the view that borrowings made and
the liabilities assumed by the company for funding the JV,
presumably by contributing to the equity of the JV will appear as
213
the borrowings and liabilities of the company. However, if the

company undertakes to repay the borrowings and liabilities of the
JV, the same should be considered as a part of investment and
treated as suggested in paragraphs 8 and 9 above.
11. The Committee notes that the querist has also raised an
issue with respect to the use or sale of the output of the JV entity
by the company in question in paragraph 5(iv) above. The
Committee is of the view that such transactions constitute the
transaction of sale by the JV to the venturer (i.e., the company in
question) and, therefore, should be accounted for accordingly in
the books of both the venturer and the JV. In this context, the
Committee notes paragraph 45 of AS 27 reproduced below:
“45. In the separate financial statements of the venturer, the
full amount of gain or loss on the transactions taking place
between the venturer and the jointly controlled entity is
recognised. However, while preparing the consolidated financial
statements, the venturer’s share of the unrealised gain or loss
is eliminated. Unrealised losses are not eliminated, if and to
the extent they represent a reduction in the net realisable
value of current assets or an impairment loss. The venturer,
in effect, recognises, in consolidated financial statements, only
that portion of gain or loss which is attributable to the interests
of other venturers.”
Accordingly, if any of the output of jointly controlled entity is
purchased or used by the venturer, it should be recognised in the
separate financial statements of the venturer in its full respect, as
if the transaction has taken place with an independent party.
12. With regard to the maintenance of separate records for the

joint venture, the Committee notes that paragraph 26 of AS 27
provides as below:
“26. A jointly controlled entity maintains its own accounting
records and prepares and presents financial statements in
the same way as other enterprises in conformity with the
requirements applicable to that jointly controlled entity.”
214
Accordingly, the Committee is of the view that the JV should

maintain separate books of account in accordance with the laws
applicable to the entity.
13. As far as recognition of the share of the company in the

assets, liabilities, income and expenditure of the jointly controlled
entity in the separate financial statements of the company is
concerned, the Committee is of the view that a jointly controlled
entity has a separate identity different from that of its venturers
and accordingly, the assets, liabilities, income and expenditure of
the jointly controlled entity should be recognised in its own books
of account rather than in the separate financial statements of the
venturers. However, the venturer should disclose in its notes to
accounts, the aggregate amounts of each of the assets, liabilities,
income and expenses related to its interest in the jointly controlled
entities, as required by paragraph 54 of AS 27 reproduced below
and should also disclose other information as required by
paragraphs 51, 52, and 53 of AS 27.
“54. A venturer should disclose, in its separate financial

statements, the aggregate amounts of each of the assets,
liabilities, income and expenses related to its interests in
the jointly controlled entities.”
14. With respect to recognition of share in the assets of jointly
controlled entity during the project period and after commissioning,
in the separate financial statements of the company as raised by
the querist in paragraph 5(ii) above, the Committee is of the view
that there will be no difference in the accounting treatment as
suggested in the above paragraph.
15. Regarding the issue raised by the querist in paragraph 5(v)

above, with respect to the availment of benefit on account of
excise benefit on capital procurements of the JV, cenvatable service
tax and modality of billing of TC charges, the Committee notes
that it involves pure interpretation of the concerned laws. In view
of Rule 2 of the Advisory Service Rules of the Committee, the
Committee does not answer issues that involve pure interpretation
of the legal enactments. Accordingly, this issue is not answered by
the Committee.
215
D. Opinion
opinion in respect of the issues raised in paragraph 5 above:
(i) The contribution made by the company towards the JV
equity should be accounted for as an investment in the
separate financial statements of the company as
suggested in paragraphs 8 and 9 above. The borrowings
made and the liabilities assumed by the company for
funding the JV, presumably by contributing to the equity
of the JV should appear as the borrowings and liabilities
of the company. However, if the company undertakes to
repay the borrowings and liabilities of the JV, the same
should be considered as a part of investment and treated
as suggested in paragraph 10 above.
(ii) The company should not account for such a share in the
assets of JV in its separate financial statements, only a
disclosure is required as discussed in paragraph 13
above. Further, the recognition principles will remain the
same for both, during the project period as well as after
commissioning, as discussed in paragraph 14 above.
(iii) Any share in the liabilities of the jointly controlled entity
should not be recognised in the separate financial
statements of the company, however, a disclosure in
respect thereof is required in the notes to accounts as
(iv) Any expense incurred by the company on behalf of the
jointly controlled entity should be accounted for as an
investment as per the requirements of AS 13. As far as
any transaction of sale and purchase between the
company and jointly controlled entity is concerned, it
should be recognised as a normal sale or purchase
transaction as discussed in paragraph 11 above.
However, any share in the income earned or expenses
incurred by the jointly controlled entity should not be
recognised by the company but only disclosed as per
216
the requirements of AS 27, as discussed in paragraph

13 above.
(v) This issue has not been answered by the Committee as
(vi) The jointly controlled entity should maintain its own
records and books of account as mentioned in paragraph
12 above.
Query No. 30
Subject: Accounting for fixed assets held for sale.1

1. The querist has stated that the question on which the opinion
of the Expert Advisory Committee is sought relates to fixed assets
with reference to Accounting Standard (AS) 10, ‘Accounting for
Fixed Assets’, issued by the Institute of Chartered Accountants of
India and more particularly with reference to paragraph 27 of AS
10 reproduced below:
“27. When a fixed asset is revalued in financial
statements, an entire class of assets should be revalued,
or the selection of assets for revaluation should be
made on a systematic basis. This basis should be
disclosed.”
2. According to the querist, the above provision permits a selective
revaluation, provided it is on a systematic basis. The querist has
stated that the dictionary meaning of systematic is as under:
“pertaining to, or consisting of, for the purpose of, observing,

or according to system:methodical: habitual: intentional”
3. The querist has further stated that a company is engaged in
1
217
manufacturing, namely, textiles, engineering precision tools;

investment; and business automation, shipping and allied services.
The querist has further clarified that the company is not in real
estate business. The company has properties (land and buildings)
at several places in India, in various business segments, comprising
manufacturing plants, offices, residential quarters as well as non-
operational assets. The company has identified three of its
properties as the properties held for sale and has revalued these
three properties, which are held for sale. Apart from these three
properties, there are other properties which are not held for sale
and which are not revalued. Thus, in revaluing the properties, the
company has adopted a system, namely, properties held for sale
are revalued and the properties not held for sale are not revalued.
B. Query
4. The querist has sought the opinion of the Committee as to

whether the principle followed, namely, revaluation of all properties,
i.e., land and buildings held for sale, and continuing other land and
buildings not held for sale at historical cost, amounts to a systematic
basis and whether such systematic revaluation is within the
requirements of the above referred paragraph 27 of AS 10, i.e.,
whether AS 10 is complied with.
querist has stated that the company in question is not in the real
estate business. It can be inferred from the aforesaid that the
query does not relate to assets which are held for sale in the
ordinary course of business, i.e., inventories.
6. The Committee further notes that when an entity identifies a
fixed asset as ‘held for sale’, it expects that carrying amount of
that asset will be primarily recovered through its sale rather than
from its continuing use in the production of goods or rendering of
services. Thus, these assets will no more be of the nature of fixed
assets, rather these will be of the nature of current assets.
Accordingly, valuation principles applicable to current assets should
be applied in the present case. The Committee notes that as per
218
the generally accepted accounting principles, current assets are

valued at the lower of the net book value and net realisable value.
7. The Committee notes that AS 10 also prescribes similar type
of treatment in case of fixed assets retired from active use and
held for disposal. In this context, the Committee notes paragraphs
24 and 26 of AS 10, which state as follows:
“24. Material items retired from active use and held for
disposal should be stated at the lower of their net book
value and net realisable value and shown separately in
the financial statements.”
“26. Losses arising from the retirement or gains or losses

arising from disposal of fixed asset which is carried at
cost should be recognised in the profit and loss
statement.”
the company should ascertain the net realisable value of the three
properties (land and buildings) held by the company for sale and
should value the same at the lower of their net book value and net
realisable value. The resultant loss, if any, should be transferred
to the statement of profit and loss. Hence, in the view of the
Committee, the question of revaluation does not arise in the present
case. Accordingly, paragraph 27 of AS 10 is not applicable here.
D. Opinion
that the land and buildings held by the company for sale should be
valued at the lower of their net book value and net realisable value
and, accordingly, the question of systematic revaluation of these
assets does not arise in the present case as discussed in
paragraphs 6 to 8 above.
219
Query No. 31
Subject: Treatment of conversion rights for calculation of
diluted EPS.1
1. A flagship company of a major group is manufacturing textiles.

The group is one of the largest textile houses in the country with a
turnover of about Rs. 2200 crore and employs around 18,000
people. The group has sizeable presence in spinning, weaving,
sewing threads, textile processing, acrylic fibre manufacturing and
alloy steels.
2. The querist has stated that the company funds its various
expansions and modernisations through long-term debt. The lender
banks usually have certain covenants (financial and non-financial),
which the company is required to adhere to for the tenure of the
loan. One of the clauses in the loan agreement of certain banks
(the querist has separately provided a copy of a loan agreement
with the lender for the perusal of the Committee) is conversion
right in case of default (emphasis supplied by the querist). The
essence of the said clause is that, in case the company commits
default in interest payments and/or repayments due to the bank
under the loan facility, it would give the bank the right to convert
the whole or part of the outstanding amount of the facility into fully
paid-up equity shares of the company at par.
3. The querist has further stated that the Institute of Chartered

Accountants of India (ICAI) issued Accounting Standard (AS) 20,
‘Earnings Per Share’, which is applicable to the accounting periods
commencing on or after April 1, 2001 and is mandatory in nature
to all the companies that are required to give information under
Part IV of Schedule VI to the Companies Act, 1956. According to
the querist, AS 20 requires disclosure of the basic and diluted
earnings per share (EPS) on the face of the profit and loss account
in the annual report of the company. As per the querist, for the
calculation of diluted EPS, net profit or loss for the period attributable
to equity shareholders and the weighted average number of equity
1
220
shares outstanding during the period should be adjusted for the

effects of all dilutive potential equity shares (emphasis supplied by
the querist). A potential equity share has been defined under AS
20 as “a financial instrument or other contract that entitles, or
may entitle, its holder to equity shares”. Further, the examples
of potential equity shares, inter alia, include “shares which would
be issued upon the satisfaction of certain conditions resulting from
contractual arrangements (contingently issuable shares), such as
the acquisition of a business or other assets, or shares issuable
under a loan contract upon default of payment of principal or
interest, if the contract so provides.”
4. The querist has also stated that although this dilution is
conditional, still, in order to comply with the requirements of AS
20, at the time of calculation of the diluted EPS of the company,
the company assumes that the entire loan outstanding with the
bank for the relevant period is converted into equity shares at par
[in accordance with the definition of potential equity shares, “a
financial instrument or other contract that entitles, or may
entitle, its holder to equity shares”(emphasis supplied by the
querist)].
5. According to the querist, disclosure of diluted EPS dilutes the

equity and creates a confusion in the minds of investors that either
the company has defaulted or has given a commitment to a lender
to convert the loan into equity at par. The basic and diluted EPS of
the company for the last 2 years is as follows:
Particulars As on 31.03.05 As on 31.03.06

Basic EPS 20.90 33.98
Diluted EPS 9.47 16.50
Thus, in the view of the querist, EPS gets deteriorated on the

dilution basis and does not represent the clear and fair portrayal of
the company’s performance, even though the contingent event
has not occurred and is not likely to occur, going by the past track
record of the company which has never defaulted on a single
payment to a financial institution. But, in order to adhere to the
requirements of AS 20 (i.e., disclosure of diluted EPS), the company
221
has to calculate and disclose the diluted EPS also. It creates a

negative impression about the company’s performance to the
existing investors or potential investors. It is not possible for the
company to explain this phenomenon to each and every
shareholder.
6. Considering the above, as per the querist, disclosing a diluted
EPS under the said conversion clause of the lender gives a distorted
picture about the company and the company feels that non-
incorporation of this clause for the calculation of diluted EPS may
not be misleading. Furthermore, this conversion clause is a part of
the standard documentation of a few of the major term lenders in
the market and every industry would be availing loans from them.
However, the querist has noted from the results of these companies
that none of such companies appear to reflect the impact of this
particular clause in their diluted EPS. The querist, therefore, believes
that the interpretation made by the company with regard to this
clause may not be correct.
B. Query
7. On the basis of the above, the querist has requested the
Expert Advisory Committee to give its interpretation of this clause
vis a vis the covenant of conversion clause in the loan
documentation and give its opinion on inclusion of this covenant
for calculation of diluted EPS. Also, since the company has never
defaulted, the querist has argued that this condition of conversion
becomes superfluous for the company and has requested that the
stipulation regarding the disclosure of the diluted EPS be interpreted
in a manner that only companies which have defaulted in payment
of debt are required to disclose the same.
8. The Committee while answering the query has considered

only the issues raised in paragraph 7 above and has not touched
whether the potential equity shares under conversion clause are
dilutive or anti-dilutive, etc.
9. The Committee notes from clause (b) of Section 8.3, ‘Other

222
Consequences of Default’ of the agreement of the company with

the lender that it provides for the conversion right to the lender
and specifically states that if the borrower commits a default in
payment or repayment of three consecutive instalments of principal
amounts of the loan(s) or interest thereon or any combination
thereof, then, the lenders shall have the right to convert at their
option the whole of the outstanding amount of the loans into fully
paid-up equity shares of the borrower, at par, in the manner
specified in the notice of conversion to be given by the lenders to
the borrower. The Committee notes the examples of potential
equity shares, as given by paragraph 7 of AS 20, which are as
follows:
“7. Examples of potential equity shares are:

(a) …
(d) shares which would be issued upon the satisfaction
of certain conditions resulting from contractual
arrangements (contingently issuable shares), such
as the acquisition of a business or other assets, or
shares issuable under a loan contract upon default
of payment of principal or interest, if the contract so
provides.”
10. The Committee further notes paragraphs 26, 27(b) and 34 of

AS 20, which provide as follows:
“26. For the purpose of calculating diluted earnings per

share, the net profit or loss for the period attributable to
equity shareholders and the weighted average number of
shares outstanding during the period should be adjusted
for the effects of all dilutive potential equity shares.
27. In calculating diluted earnings per share, effect is given

to all dilutive potential equity shares that were outstanding
during the period, that is:
(a) …
(b) the weighted average number of equity shares

outstanding during the period is increased by the
223
weighted average number of additional equity shares

which would have been outstanding assuming the
conversion of all dilutive potential equity shares.”
“34. Equity shares which are issuable upon the satisfaction

of certain conditions resulting from contractual arrangements
(contingently issuable shares) are considered outstanding and
included in the computation of both the basic earnings per
share and diluted earnings per share from the date when the
conditions under a contract are met. If the conditions have not
been met, for computing the diluted earnings per share,
contingently issuable shares are included as of the beginning
of the period (or as of the date of the contingent share
agreement, if later). The number of contingently issuable
shares included in this case in computing the diluted earnings
per share is based on the number of shares that would be
issuable if the end of the reporting period was the end of the
contingency period. Restatement is not permitted if the
conditions are not met when the contingency period actually
expires subsequent to the end of the reporting period. The
provisions of this paragraph apply equally to potential equity
shares that are issuable upon the satisfaction of certain
conditions (contingently issuable potential equity shares).”
11. The Committee notes from the definition of ‘potential equity
share’ (as reproduced in paragraph 3 above) and the above
reproduced paragraphs of AS 20 that AS 20 requires adjustment
of the net profit attributable to equity shareholders and the weighted
average number of shares, for the effects of all dilutive potential
equity shares for the purpose of calculating diluted EPS. The
Standard does not exempt a dilutive potential equity share from
inclusion in the computation of diluted EPS on any ground, e.g.,
as argued by the querist in paragraph 4 above that the dilution is
conditional. In the view of the Committee, the objective of disclosing
the diluted EPS is to give an idea to the readers/users of the
financial statements about the potential equity shares that may
dilute the earnings attributable to the equity shareholders, even
though the dilution is conditional and contingent. Moreover, the
contingently issuable shares mean those potential equity shares,
224
where there is a possibility of issuance of these shares on fulfillment

of certain conditions, even though such circumstances do not exist
at present and are not even experienced in the past. Had there
been no contingency and the conditions had been met, then these
would have been included in the calculation of basic EPS as well.
Accordingly, in the view of the Committee, the contingently issuable
shares on default of payment of loan or interest, under the
conversion clause of the loan agreement, should be included for
calculation of diluted EPS. The fact that some other companies
are not including the aforesaid conversion rights for the purpose of
computing ‘potential equity shares’ is no argument for not
considering such shares as ‘potential equity shares’.
D. Opinion
that the disclosure of diluted EPS can not be interpreted in the
manner to include only those potential equity shares under the
conversion clause where the companies have either defaulted in
the past or will default in future, in the computation of diluted EPS.
Accordingly, the company should include all dilutive potential equity
shares, including those shares, which are issuable upon default of
payment of loan or interest under a loan agreement, in the
calculation of diluted EPS.
Query No. 32
Subject: Recognition of Duty Credit Entitlement Certificates

issued under the ‘Served from India Scheme’.1

1. An enterprise was formed by merger of two enterprises on 1st
April, 1995 by an Act of Parliament. The enterprise is not
incorporated under the Companies Act. It is governed by the
1
225
Airports Authority of India (AAI) Act, 1994. Its mission is to progress

through excellence and customer satisfaction with world-class
airport and air traffic services fostering economic development. Its
main functions are to build, operate and maintain airports and
airstrips; and provide air-traffic services to airlines.
2. The enterprise maintains 127 airports throughout India, viz.,
15 international airports, 86 domestic airports and 26 civil enclaves.
It earns foreign exchange by providing air-traffic services and other
airport services to foreign airlines in India. It also provides enroute
air traffic services to foreign airlines passing through/over India.
3. The querist has stated that the accounts of the enterprise are
drawn up in the format approved by the Government under section
41 of the AAI Act, 1994 and the AAI (Annual Report and Annual
Statement of Accounts) Rules, 2003. The enterprise is broadly
following Accounting Standards prescribed by the Institute of
Chartered Accountants of India. The Comptroller and Auditor
General of India (C&AG) is the sole auditor of the enterprise.
4. The querist has further stated that the Government of India
has introduced many schemes for promotion of exports, like export
incentives under Duty Entitlement Pass Book (DEPB) scheme,
EPCG scheme, etc. The enterprise is entitled to import goods
specified in list 20 appended to Notification No. 21 / 2002-Customs
dated 01.03.2002, required for development of airports at
concessional customs duty of 10%.
5. According to the querist, the Director General of Foreign Trade

(DGFT), Government of India, has announced a ‘Served from
India Scheme’. Under the Scheme, all service providers (other
than hotels and restaurants) shall be entitled to duty credit
equivalent to 10% of the foreign exchange earned by them in the
preceding financial year. During March 2005, the enterprise obtained
duty credit certificates (duty credit entitlement) from the DGFT
under the ‘Served from India Scheme’ amounting to Rs.70.84
crore. The certificates were issued on 30th March, 2005.
6. The salient features of the duty credit certificates as per the
querist are as under:
226
(a) These certificates are valid for 2 years from the date of
issue.
(b) Duty credit entitlement may be used for import of any
capital goods including spares, office equipment and
professional equipment, office furniture and consumables,
provided it is part of the main line of business.
(c) The entitlement and the goods imported shall be non-
transferable (emphasis supplied by the querist.)
7. The querist has stated that during the year 2005-06, the
enterprise utilised duty credit certificates amounting to Rs.11.25
crore for use in the import of capital goods and Rs.7.21 crore for
import of spares, totalling Rs.18.46 crore. As the enterprise had
not paid any customs duty for capital items imported during the
year 2005-06 for its operation, only the cost paid by the enterprise
(i.e., without customs duty) was capitalised in the books of account.
Similarly, as no customs duty was paid for import of spares, the
cost actually paid by the enterprise was charged to the profit and
loss account without customs duty.
8. The querist has further informed that the enterprise has

appointed a consultant for liaisoning with the customs department,
who is paid service charges based on duty credit certificates utilised
on import of any consignment for its operations.
9. The querist has also stated that before getting duty credit
certificates, the enterprise used to get concessional duty benefits
on certain items and used to account for such items on cost basis
and customs duty (concessional) actually paid.
10. In the view of the querist, as the enterprise has not paid any
customs duty for capital items imported during 2005-06 for its
operation, only the cost paid by the enterprise (without customs
duty) should be taken as the cost for capitalisation of assets in its
books of account on the basis of requirement of Accounting
Standard (AS) 10, ‘Accounting for Fixed Assets’, issued by the
Institute of Chartered Accountants of India, which states that the
cost of an item of fixed asset comprises its purchase price, including
import duties and other non-refundable taxes or levies and any
227
directly attributable cost of bringing the asset to its working condition

for its intended use; any trade discounts and rebates are deducted
in arriving at the purchase price. Similarly, no customs duty was
paid for import of spares, accordingly, the cost paid by the enterprise
was charged to the profit and loss account without customs duty.
B. Query
11. During audit of annual accounts of the enterprise for the
financial year 2005-06, the following issues came up for decision,
on which the querist has sought the opinion of the Expert Advisory
Committee:
(i) Whether the amount of Rs. 70.84 crore being the value
of duty credit entitlement certificates obtained from DGFT
under the ‘Served from India Scheme’ is required to be
considered as income of the enterprise and booked as
income in the books of account.
(ii) Whether the duty credit entitlement certificates utilised

for payment of customs duty in respect of capital items
procured should be added to the cost of such items.
(iii) Whether the value of duty credit entitlement certificates
utilised for purchase of stores and spares should be
included in the cost of such spares.
(iv) Whether the commission/service charges payable to
consultant for utilising the duty credit entitlement
certificates is to be added to the cost of the items imported
by the enterprise for its use or to be charged off.
(v) Whether the balance value of duty credit certificates (Rs.
70.84 crore minus Rs. 18.46 crore = Rs. 52.38 crore)
st
lying unutilised at the end of the year, i.e., 31 March,
2006, is to be treated as a current asset and accounted
for as such.
relates to the recognition of duty credit entitlement certificates
228
issued under the ‘Served from India Scheme’, i.e., how this benefit
should be recognised in the books of account, and whether the
balance of duty credit entitlement certificates lying unutilised at the
end of the year should be recognised as ‘current assets’, i.e., the
timing of recognition of the duty credit entitlement and presentation
thereof. In this regard, the Committee notes that even though the
entitlement received under the Scheme does not strictly fall within
the definition of the term ‘revenue’, as defined under Accounting
Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of
Chartered Accountants of India, such duty credit entitlement is of
the nature of revenue and accordingly, it should be recognised as
‘other income’ in the books of account of the enterprise provided
the conditions for recognition of revenue as discussed in paragraph
14 below are satisfied.
13. As far as the question regarding whether the duty credit
entitlement certificates, i.e., duty credit entitlement utilised for
payment of customs duty in respect of capital items and stores
and spares should be added/included in the cost of such items is
concerned, the Committee notes from paragraph 7 above that at
the time of purchase of these items, the enterprise is recording the
capital items, and stores and spares at the cost incurred net of
duty. In this regard, the Committee notes paragraph 9.1 of
Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, and
paragraphs 6 and 7 of Accounting Standard (AS) 2, ‘Valuation of
Inventories’, issued by the Institute of Chartered Accountants of
India, which state as follows:
AS 10

229

plant; and
and engineers.
factors.”
AS 2
“6. The cost of inventories should comprise all costs

of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and
condition.
7. The costs of purchase consist of the purchase price
including duties and taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities),
freight inwards and other expenditure directly attributable to
the acquisition. Trade discounts, rebates, duty drawbacks and
other similar items are deducted in determining the costs of
purchase.”
From the above, the Committee is of the view that the cost of
purchase of fixed assets, consumables, spares, etc. should be
recorded at their full value inclusive of the customs duties payable
thereon whether by way of payment in cash or whether by way of
utilisation of duty credit entitlement, with a view to provide the
fairest possible approximation to the costs incurred in bringing
these items to their present location and working condition. For
the errors in the preparation of financial statements of prior periods,
necessary adjustments should be made. Any income or expense
arising as a consequence of making such adjustments should be
disclosed as ‘prior period item’ in the determination of net profit or
loss for the current period as per the provisions of Accounting
Standard (AS) 5, ‘Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies’, issued by the Institute
of Chartered Accountants of India.
230
14. With regard to the issue raised by the querist in paragraph

11(v) above, relating to accounting treatment of the balance value
of duty credit entitlement certificates lying unutilised at the end of
the year, the Committee notes that it depends on when the revenue
in respect of the duty credit entitlement certificates is recognised.
As far as the timing of recognition of the revenue in respect thereof
is concerned, the Committee is of the view that since there are
certain uncertainties involved with respect to the utilisation of duty
credit as these certificates are non-transferable and are valid only
for 2 years from the date of issue, as stated by the querist in
paragraph 6 above; and since this benefit is of the nature of
revenue, as discussed in paragraph 12 above, the principles
enunciated under paragraph 9.1 of AS 9 regarding timing of
recognition would be applicable, which states as follows:
“9.1 Recognition of revenue requires that revenue is
measurable and that at the time of sale or the rendering of
the service it would not be unreasonable to expect ultimate
collection.”
Keeping in view the above-mentioned revenue recognition principle
of AS 9, the Committee is of the view that the credit under the
Scheme should be recognised only at the time when and to the
extent there is no significant uncertainty as to its measurability and
ultimate realisation, i.e., utilisation of the credit under the Scheme.
The assessment of the level of uncertainty is a matter of judgement
based on the facts and circumstances of each case on considering
factors, such as, utilisation of duty credit within the specified period
as evidenced by the existence of a binding contract for purchase
of allowable specified goods against which the duty credit can be
utilised; the expected cost of purchase of the imported allowable
specified goods vis-à-vis the cost thereof in the domestic market;
etc. Events occurring between the balance sheet date and the
date on which the financial statements are approved by the
governing authority may also remove the uncertainty about the
utilisation of the duty credit, e.g., imports are made after the balance
sheet date but before the approval of the financial statements by
the governing authority, against which the duty credit has been
utilised. Thus, in the view of the Committee, the enterprise should
231
recognise the duty credit entitlement in the profit and loss account
as its ‘other income’ on the above basis, by debiting the ‘duty
credit entitlement account’ and crediting the profit and loss account.
At the time of purchase of fixed asset or spares, etc., such credit
entitlement should be adjusted against the duty payable on the
import of these items. The balance of duty credit entitlement
standing in the books of account, remaining unutilised, if any, at
the end of the year should be disclosed under the head ‘Loans
and Advances’, on the ‘Assets’ side of the balance sheet since, it
is of the nature of pre-paid expenses which would be adjusted
against the customs duty expenses in future period.
15. As regards the commission/service charges payable to
consultant for utilising the duty credit entitlement certificates, the
Committee is of the view that these charges do not add any value
to the items so imported and are not directly attributable expenses,
i.e., the costs without the incurrence of which the transaction would
not have taken place. Accordingly, these should not be added to
the cost of the items; instead, these should be charged to the
profit and loss account when incurred.
D. Opinion
(i) The revenue in respect of the duty credit entitlement
certificates should be recognised as income in the books
of account when and to the extent there is no significant
uncertainty as to their ultimate realisation, i.e., utilisation
of the credit under the Scheme as discussed in paragraph
14 above.
(ii) The capital items procured should be recorded at the
value inclusive of the customs duty payable thereon
whether by way of cash or by way of adjustment of the
duty credit entitlement. Please refer to paragraph 13
above.
(iii) The stores and spares should be recorded at the value
232
inclusive of the customs duty payable thereon whether

by way of cash or by way of adjustment of the duty credit
entitlement. Please refer to paragraph 13 above.
(iv) The commission/service charges payable to consultant

for utilising the duty credit entitlement certificates should
not be added to the cost of the items imported by the
enterprise. These expenses should be charged to the
profit and loss account as discussed in paragraph 15
above.
(v) The balance value of duty credit entitlement certificates
lying unutilised at the year-end should be disclosed under
the head ‘Loans and Advances’ on the ‘Assets’ side of
the balance sheet provided they have been recognised
as revenue on the basis of considerations discussed in
paragraph 14 above.
233
ADVISORY SERVICE RULES OF

THE EXPERT ADVISORY COMMITTEE
1. Queries should be stated in clear and unambiguous language.
Each query should be self-contained. The querist should
provide complete facts and in particular give the nature and
the background of the industry or the business to which the
query relates. The querist may also list the alternative solutions
or viewpoints though the Committee will not be restricted by
the alternatives so stated.
2. The Committee would deal with queries relating to accounting
and/or auditing principles and allied matters and as a general
rule, it will not answer queries which involve only legal
interpretation of various enactments and matters involving
professional misconduct.
3. Hypothetical cases will not be considered by the Committee.
It is not necessary to reveal the identity of the client to whom
the query relates.
4. Only queries received from the members of the Institute of
Chartered Accountants of India will be answered by the Expert
Advisory Committee. The membership number should be
mentioned while sending the query.
5. The fee charged for each query is as follows:
(i) Rs. 25,000/- per query where the query relates to:
(a) an enterprise whose equity or debt securities are listed
on a recognised stock exchange, or
(b) an enterprise having an annual turnover exceeding
Rs.50 crore based on the annual accounts of the
accounting year ending on a date immediately
preceding the date of sending the query.
(ii) Rs. 10,000/- per query in any other case.
The fee is payable in advance to cover the incidental expenses.
Payments should be made by crossed Demand Draft or cheque
or Postal Order payable at Delhi or New Delhi drawn in favour
234
of the Secretary, The Institute of Chartered Accountants of

India.
6. Where a query concerns a matter which is before the Board
of Discipline or the Disciplinary Committee of the Institute, it
shall not be answered by the Committee. Matters before an
appropriate department of the government or the Income-tax
authorities may not be answered by the Committee on
appropriate consideration of the facts.
7. The querist should give a declaration in respect of the following
as to whether to the best of his knowledge:
(i) the equity or debt securities of the enterprise to which the
query relates are listed on a recognised stock exchange;
(ii) the annual turnover of the enterprise to which the query
relates, based on the annual accounts of the accounting
year immediately preceding the date of sending the query,
exceeds Rs. 50 crore;
(iii) the issues involved in the query are pending before the
Board of Discipline or the Disciplinary Committee of the
Institute, any court of law, the Income-tax authorities or
any other appropriate department of the government.
8. Each query should be on a separate sheet and five copies
thereof, typed in double space, should be sent. The Committee
reserves the right to call for more copies of the query. While
sending the hard copies of the query is necessary, a copy of
the query can also be sent on a floppy or through E-mail at
eac@icai.org
9. The Committee reserves its right to decline to answer any
query on an appropriate consideration of facts. If the
Committee feels that it would not be in a position to, or should
not reply to a query, the amount will be refunded to the querist.
10. The right of reproduction of the query and the opinion of the
Committee thereon will rest with the Committee. The
Committee reserves the right to publish the query together
with its opinion thereon in such form as it may deem proper.
235
The identity of the querist and/or the client will, however, not
be disclosed, as far as possible.
11. It should be understood clearly that although the Committee
has been appointed by the Council, an opinion given or a
view expressed by the Committee would represent nothing
more than the opinion or view of the members of the
Committee and not the official opinion of the Council.
12. It must be appreciated that sufficient time is necessary for the
Committee to formulate its opinion.
13. The queries conforming to above Rules should be addressed
to the Secretary, Expert Advisory Committee, The Institute of
Chartered Accountants of India, ‘ICAI Bhawan’, Indraprastha
Marg, New Delhi-110 002.
236
*
INDEX Vols. I to XXVI
A for changes in foreign

exchange rates, effects of
X-6; XIII-11, XIII-28,
Abnormal losses in nature XIII-56; XIV–56; XVIII-1,
demurrage XX-20 XVIII-71; XIX-56; XXI-15
Above the line I-29, I-60 to 61, (See also under “Foreign”
I-108 and “Foreign exchange
Absorption costing VII – 62 rate fluctuations,
Account books lost / damaged / accounting for”)
destroyed 1-252 to 253 for cheques received after
Accounting balance sheet date XXIV-
basis of, for Income tax 71
purpose XVII-50 for costs in a service
estimates XXI - 72 organisation XVI-24
for additional costs expected for credit card reward point
due to pay scale revision schemes XXI-129
under a cost plus contract for customs duty and excise
XVIII-13 duty X-23; XI-157; XII-19;
for additional interest cost to XXI-57
hedge foreign exchange for deduction from invoice
risk XXI-181 price XIX-71; XXI-61
for advance training fees and for deferred entitlement of
registration fees XXI-177 LTC/LLTC XXII-16
for amount received on for development and leasing
transfer of right to receive of industrial estate XX-71;
power XXII-86 XXVI-12
for amount received under for disputed telephone bills
tatkal scheme from XV-58; XIX-71
customers XIX-102 for duty credit entitlement
for assets whose title is sub- under Served from India
judice XI-48 Scheme XXVI-181, 225
for cash rebate for prompt for duty credit entitlement
payment XXII-169 under Target Plus
for change in treatment of Scheme XXVI-148
current assets as fixed for duty free import under
assets XI-95 DEPB scheme (see also
*
Prefix ‘I’, ‘II’, ‘III’, ‘IV’, ‘V’, ‘VI’, ‘VII’, ‘VIII’, ‘IX’, ‘X’, ‘XI’, ‘XII’, ‘XIII’, ‘XIV’, ‘XV’, ‘XVI’, ‘XVII’, ‘XVIII’, ‘XIX’,
‘XX’, ‘XXI’, ‘XXII’, ‘XXIII’, ‘XXIV’, ‘XXV’ and ‘XXVI’ before the page numbers indicate the respective
volumes of Compendium of Opinions.
Compendium of Opinions – Vol. XXVI
‘DEPB scheme’) XX-96; for interest wrongly received

XXIV-12 XVI-36
for excess provision for bad for internally manufactured
and doubtful debts XI-39 spares IX-87
for expenditure during shut – for land development IX-2,
down period XVI-19 IX-9, IX-56; X-49; XX-71
for expenditure incurred after for lease rentals XIX-17; XX-
capitalisation date XI-33 30
for expenditure on for left over materials XIV-39
distribution of mementos for licence fee payable to
to employees during DoT XVI-1
construction period XXVI- for loan arranged by
187 contractor through a
for exports by business tripartite agreement XIX-9
associates XVI-43, XVI- for loan transactions
47; XXVI-88 involving petroleum
for export credit receivable products XV-31;
under DEPB Scheme XVI-14
(see also ‘DEPB scheme’) for loss incurred on the sale
XVIII-40; XX-96 of non-convertible
for factored debts XXI-202 debentures XIII-89
for gain arising on account of for loss of fixed asset IX-92;
foreign exchange X-39
fluctuations XVIII-1; XX- for mandatory refurbishment
64 cost XXIV-128
for goods sent for customer’s for MODVAT credit on capital
approval XIV-32 goods XVI-2; XXI-190
for incidental expenditure on for moulds and dies XX-4
transmission lines ready for notional loss/premium on
for use but not in sales XIII-107
operation XXIII-58 for operating lease by manu-
for income and expenditure facturers XIII-103
incurred during
for orchid plants XXI-35
development of ore body
of the existing mine XXII- for premium received on land
129 XII-71
for initial issue expenses by for professional fees paid to
open-ended mutual fund directors I-200
schemes XX-115 for profit on settlement of
for interest earned on funds insurance claim XI-89
received from government for profit arising from a sale
for acquisition of fixed
& lease back transaction
assets XVIII-29
XIII-101
for interest on overdue out-
standings XV-2; XIX-159
238
for provisions made in earlier repayment of loan taken

years XII-92 for fixed assets and
for renunciation of rights capitalised interest XVIII-
36
shares
for surcharge in the nature of
XI-41
interest on overdue
for replacement cost of a part outstandings XVIII-6
of fixed asset XVIII-66 for taxes on income VII-73;
for revision in pay scales XI-171
retrospectively XII-102; for technical know-how XVIII-
XVIII-13 20
for rolls used in a mill XIV-87 for unclaimed amount of
for sales and purchases bonds
XII-61
made by business
for unencashable leave XIX-
associates XVI-43,
124; XX-90
XVI-47, XVI-73
for unsold site XVI-9
for sales tax concession XI- for waiver of interest
51; XX-14 capitalised as part of the
for salvaged fixed assets X- cost of fixed assets prior
84 to commencement of
for service charges for commercial production
repairs/replacement of XXIII-131
goods in transit XI-70 for waiver of loan and
interest thereon XVIII-47;
for settlement allowance paid
XIX-99
to employees on
for waiver of penal interest
retirement XVIII-60; XXII- XI-27; XXII-70
183 hybrid system 1-91, 1-96;
for share issue expenses XIV-70
and interest earned on of additional interest payable
surplus funds, pending after repayment of
commence-ment of principal
commercial production XXI-220
XIII-75 of import duty and voyage
for software development expenses on import of
cost dredger XXI-231
XI-146; XVI-11 of penalty & interest payable
for special tools, jigs and under the Income Tax
fixtures XVIII-53 Act, 1961 XIII-48
for stores MODVAT A/c in a not-for-profit
adjusted to Excise Duty organisation
paid A/c XXI-190 VII-67
for subsidy received from method, change in I-54 to 55,
state government for I-91 to 93; VII-47; XII-38,
239
XII-111; XIII-93; XIX-66; ship under construction

XX-121; XXI-13 XXI-187
period/year I-96 to 98; III-36 standard 9, applicability to
to 37 dredging contracts XV-65
standard 9, increase in
policies I-115, I-144; IV – 11;
revenue because of sales
VII-47, VII-87; XII-38; tax exemption XX-14
XVIII-72; XXI-13; XXIII- standard 10, spares (see
157 also ‘machinery spares’)
real estate IX-2, IX-9; XXVI- XX-40;
12 XXIII-14
standard 2, applicability in standard 11, applicability to
power sector companies transactions entered into
XXV-148, XXV-182 before 1-4-2004 XXIV-36
standard 2, regarding standard 11, gain/loss from
cancellation of foreign
MODVAT credit on inputs
exchange forward
XV-11
contract XXVI-142
standard 3, applicability to standard 12, Sales Tax
section 25, Govt. unlisted exemption XX-14
company XXVI-58 standard 17, identification of
standard 4, applicability in reportable segment XXVI-
income-tax demands 49, 79
XIV-64 standard 18, applicability
standard 7, applicability to XXIII-174; XXVI-58
dredging contracts XIV-71 standard 19, applicability for
applicability to an unsold assets leased before 1-4-
site XVI-9 2001 XXIV-28
applicability to standard 20, computation of
consultancy business weighted average no. of
XXV-140 shares in case of bonus
applicability to turnkey issue XXV-113
projects XXI-109 standard 20, treatment of
percentage of completion conversion rights for
method XX-100; XXI-103, calculation of Diluted EPS
109; XXV-140 XXVI-220
applicability to enterprises standard 21, applicability
undertaking construction XXI-193; XXII-172
activities on their own standard 22, XXV-135, XXV-
account as a venture of 201
commercial nature XXIII- standard 23, applicability in
95 the preparation of
standard 7, valuation of separate financial
equipment to be used in statements XXV-57
240
standard 27, accounting and revision of V-30; VI-23

reporting of interest in unaudited III-18 to 20
jointly controlled entity Accrual of LTC payable XIV-84;
XXVI-209 XXII-16
standard 28, applicability to Accrual system/basis of
petroleum industry XXIV- accounting
105 IX-42; X-16; XI-180; XIII-
applicability to telecom 93; XV-3; XVI-85; XX-80;
industry XXV-131 XXI-211, 220; XXII-16, 45,
standards interpretation 6, 169; XXIII-29
MAT resulting into timing Accrued income, share in
differences XXV-145 undistributed surplus of
standards interpretation 9, an AOP XIX-90
virtual certainty XXIV-54 Accumulated deferred tax
system for an advertising liability XXII-45
company VII-33 Actuarial valuation XXI-72;
year different from uniform XXIII-99
accounting year VIII-101 Admission of partner in CA firm
Accounts IX-106
adoption of accounts by a Advance licence VII-4; X-46, X-
special committee III-40 58; XII-48; XIV-52; XVI-51
amendment in VII-36 (see Advance training fees,
also ‘reopening’ and accounting XXI-177
‘revision’ under this head) Advance tax I-249, XXIV-96;
annual general meeting and XXVI-166
III-18 to 20 Advances
annual, where management against depreciation to be
taken over X-18 recovered through tariff
authentication / approval of XVII-98; XXV-37
II-42; III-5; VI-34; XIII-121 against purchase of fixed
certification of I-80 assets VIII-52
finalisation of previous years’ bridge loans, whether XII-67
accounts XIV-115 on capital account IV-15
not adopted (use in partly secured bank
subsequent years’) I-256 advances
not approved by board IX – I-5
15 received for export XIX-49
of Public Provident Fund received under Tatkal
Trust XI-6 scheme for LPG cylinders
re-opening of I-78 XIX-102
receivable/payables, write- Adverse opinion (‘See Negative
off/ back XIV-90 opinion’)
recertification of VI-23 Advertisement cost on purchase
reconstruction of I-252 of investments XIX-94
rectification of XVI-5; XX-1 Advertisement expenses VII-9
241
Advertising company Annual maintenance contracts

accounting system for VII-33 X-32
disclosure of turnover by an Appointment of Auditors (see
X-88 also ‘Auditors’)
Agency fee XX-150 as internal auditors after
Agency relationship, revenue completion of tenure as
recognition XXVI-88, 190 statutory auditors XXI-217
Agent I-6, I-116, I-154 to 156; as internal auditors of a bank
XXVI-88, 190 where a partner of the
Agricultural operations I-233; III- firm is a guarantor of a
12 to 15; XXI-35 loan exceeding Rs. 1000
Agricultural company, land VIII-65
development expenditure as statutory auditors, when
by X-49 one of the firm’s partners
Air conditioning plant XVII-79 is a director in holding
Aircraft XXV-62, XXV-80 company XVII-84
brother of director’s wife, for
Allocable surplus I-259, I-272
XIV-137
Allotment of shares by holding
by a non-operator for audit of
company to its subsidiary
the operator’s accounts
XIV-139
XXII-1
Allotment of shares to
promoters XXI-124 disqualifications, for IX-1
in an adjourned General
Amalgamation
Meeting VI-1
accounting treatment of
in case of Extraordinary
reserves XXIII-109
General Meeting VII-81
accounting treatment of
in case of voluntary
revaluation reserve in V-1
liquidation
approval of Central
VII-80
Government for
appointment of directors, in place of retiring auditor
XIII-128
in case of VIII-103
in the nature of merger V-4; of a relative of a director VI-
58
XXIII-109
of a sole proprietor in a
in the nature of purchase V-5
company in which a
transfer of Reconstruction
partner of the sole
reserve to General
proprietor in another firm
reserve XV-23
of Chartered Accountants
Amortisation of goodwill, has interest VII-50
trademarks and
of an employee Chartered
copyrights XVII-86
Accountant V-50
Amortisation of right to use of
of an erstwhile director VIII-
land not having future
64
economic benefits XXV-
170 of government company XI-1
Annual General Meeting VI-1
242
of statutory auditor as salvaged, used for other

internal auditor XXII-1 fixed assets X-84
of the same firm by both self constructed III-7
operator and non-operator sold after completion of
of a venture separately construction project XII-4
XXII-1 taken over I-22; X-18
through memorandum and title sub-judice XI-48
articles of association I-
total, meaning thereof as per
189
schedule VI of Companies
Apportionment, basis for
Act, 1956 XXIV-146
overheads XI-38; XXII-72,
132 used in foreign projects X-
Apportionment of amount 140
received between valuation from incomplete
principal and interest XIX- records IX-50
159 valuation of BSE trading
Apportionment of product cost rights acquired in
XXI-28 exchange of BSE
Arbitration award XXV-1 membership cards XXVI-
Arrears of preference dividend 172
XI-219 valuation, treatment of
Assets (See also ‘Fixed Assets’) liquidated damages XI-
constructed on behalf of 177
others valuation where all costs
VII-75 debited to a composite
disclosure in the balance account IX – 61
sheet of lessor IV-2 with outside agency XXV-
disclosure where purchased 157
for a consolidated price X-
written off without prior
11
authority VI-18
exchange of IX-50 to 56
written off valuing below Rs.
in use but completely written
10,000 IX-18
off VI-71; IX-18
Associates, valuation of
location of, under
investments in XXV-57
MAOCARO X-78
Association of persons,
loss of IX-92; X-39, X-147
investments in XIV-109
non-depreciable XXV-170
Association of persons, share in
not belonging to the undistributed surplus XIX-
company XV-8 90
provided to an outside Audit
agency XXV-157
authentication of documents
revalued I-4, I-39 to 41, I-51, during XIV-122
I-162 to 172; X-172
based on duplicate books I-
right of use of XIX-119; XIX- 81; IX-32
128; XXV-170
243
branch I-9,I-10, I-236 where relatives holding place

by C&AG XXIV-101 of profit I-77; V-13; VI-58,
change in the name of firm VI-60
VII-24; IX-106 where supporting vouchers
compliance with accounting /records seized by I.T.
standards XXIII-14 authorities IV-28; IX-27,
confirmation of debtors’ IX-32
balances VIII-48 working papers, period of
damaged books of account I- maintenance XVII-74
252 Audit materiality XXI-211; XXIII-
evidence VIII-44, VIII-62; IX- 105
27, IX-32; XI-60; XXI-55, Audit report
215; XXIII-117 adverse opinion in VII-17; X-
fees I-175, I-176, I-178, I- 109; XXV-225
181; XI-223 amendment / suppression of
of banks II-29 to 30; VI-58 I-51; IV-30
of consolidated financial branch auditors’ comments
statements XXIV-101 in VII-50 to 53
of co-venturer by the consolidated financial
statutory auditor XXII-1 statements XXII-172
of expenditure incurred by a disclaimer in VIII-46, VIII-63;
director on foreign trips IX-28; XXV-225
XXIII-117 in the context of S. 227(2) &
of gifts VIII-62 227(3)(d) XXI-11, 20, 72,
of government company 98, 227
XXIV-101 in the context of S. 295 II-43;
of provident fund trust XI-6 VI-14
of subsequent period’s manner of qualification
accounts when preceding where AS 22 not complied
period’s accounts not with XXII-45
considered by the general MAOCARO-VII-37 [See also
body XII-100 ‘Manufacturing and Other
of previous years’ accounts Companies (Auditor’s
in current year XIV-115 Report) Order’]
of quarterly / half-yearly negative opinion in VII-17;
complete set of financial X-109; XXV-225
statements XXII-149 ‘nil’ comments in CAG’s XI-
supplementary III-34 to 36 24
under Income Tax Act, by on accounts not approved by
statutory auditor XVII-50 the board of directors IX-
where firm reconstructed 15
VIII-24; IX-106 on quarterly / half-yearly
where opening balances not complete set of financial
available VIII-43 statements XXII-149
244
qualifications regarding consent of previous auditors

capitalisation of I-177
Revaluation Reserve disqualifications IX-1
pertaining to an earlier in place of retiring auditor
year XVII-1 XIII-128
qualifications regarding initial independence of I-180; V-54;
issue expenses XX-115 VII-33; IX-1; XXI-217
qualifications, manner of internal I-2, I-9, I-273; V-12;
making in XII-107 VII-36; VIII-84
qualification on accrual basis joint I-213
of accounting regarding of a relative of a director VI-
pre-paid expenses XXI- 58
211 reappointment of existing
qualifications on revised auditors’, where new
accounts XVI-91 auditors’ appointment is
qualifications regarding not as per law XIV-117
contra-vention of statutes reappointment, where the
VI-13, VI-78; VII-1 new auditor’s appointment
qualifications regarding is not as per law XIV-117
inventory valuation XI-65; relationship between
XXI-98 statutory auditors and
qualifications regarding non- limited purpose auditor V-
genuine commission 10
payments XII-50 relationship between
regarding matter contained in statutory main auditor and
the Directors’ Report VI- branch auditor VII-50
80 removal of XIII-129
revised V-30; VI-24 retiring III-18 to 20; VI-1
stock V-11 shareholders enquiries from
where deemed public VII-64
company becomes private tax VIII-84; XI-197; XVII-50
company X-177 tenure of I-206; III-18
when evidence is not written letter of appointment
sufficient appropriate not given to XV-2
audit evidence XXI-215 Auditors’ duties and
Auditors (See also ‘Appointment responsibilities I-58, I-70,
of Auditor’) I-95, I-236, I-251; VI-80;
as tax and other consultants VII-64; XVI-67; XXI-11,
III-44 to 45; VII-31 20, 72
authentication of documents Auditors’ expenses I-104, I-190
by XIV-122 Award
branch I-299; VI-24; VII-50 accounting treatment of
brother of director’s wife, performance V-33
whether can be appointed arbitration XXV-1
as XIV-137
245
for enhanced compensation Bank deposits, doubtful XIX-25

and interest thereon XXV- Bank deposits, whether
159 investment u/s 292(1)(d)
XXII-191
Bank guarantees I-155 to 156;
B II-18 to 19, II-35 to 36; III-
3; XIX-31
Bad and doubtful debts Bank, payment of salaries
accounting for deferred tax through
on provision for XXIV-75 VII-10
accounting for excess Bank, provision on NPA in
provision of XI-39 Quarterly Accounts XIX-
created pursuant to provision 88
u/s (36(I) (viia) of ITA, Bank scheduled I-253
accounting for XV-50 Bankers acceptance facility XII-
of a bank VI-67 33
Badla I-189; XI-16 Banking company I-5
Balance sheet date, cheques Banking Regulation Act I-274;
received thereafter XXIV- III-6; VI-58, VI-67
71 Base stock method X-159
Balance sheet of a Provident Basis of accounting for tax
Fund Trust XI-9 purposes XVII-50
Balance sheet Abstract and Below the line (see Profit & Loss
Company’s General Appropriation Account)
Business Profile XXIV- Bill of lading I-261, I-263 to 264
146 ‘Billed’ meaning under Schedule
Balance sheets, preparation of XIII X-172
two XXV-28 Bills discounted I-125, I-243; II-
Bank advances 12 to 15; III-3; XIII-54;
against book debts I-32 XIX-109
against hire purchase Bills discounting charges XIII-41
hundies Bills paid, disclosure in profit
I-33 and loss account I-1 to 2
against motor receipts I-32 Bonded warehouse I-64; V-18,
against usance bills V-26; XIV-112
discounted I-125 Bonds VIII-67; XII-61; XIX-31;
Bank audit II-29 to 30; III-5; XXVI-55
V-20; VI-58; VIII-65 Bonds, partly secured XXVI-55
Bank balance I-57; III-28 to 30, Bonds, unclaimed XVII-73
III-31 to 33; XXIV-93 Bonus issue I-46, I-69, I-79;
Bank charges XIII-41 XXIII-109; XXV-113
Bank deposits, against site Bonus, payment of I-79; V-61
restoration fund, Books, depreciation on V-39
disclosure XXIV-95. Books of account
246
damage I-253 classification into freehold

closure in case of retirement and leasehold XXIII-34
of partner X-146 factory, meaning thereof
duplicate I-81; IX-32 XXIV-119
of franchise business XXVI-
Bullet proof jackets XXV-157
190
of jointly controlled entity
XXVI-209
preservation of I-187 C
retained by CBI I-81
Borrowing costs Call money on notice XIX-109
inclusion of interest on land C&AG’s audit applicability to
acquisition XXV-16 govt. company XXIV-101
increase in foreign currency
C&AG’s audit report, ‘nil’
liability XXIV-17 (see also
comments in XI-24
under ‘interest’)
Borrowing power of a company C&AG’s directive I-192
I-197 to 198; VII-I; XII - Capacity, normal XX-45; XX-
120; XIX-1 108
Borrowings, utilisation of XXII- Capacity utilization,
177; XXIII-164 measurement of VII-61 to
Branch audit I-9, I-10, I-236 to 62
238; V-20 Capital
Branch Audit Exemption Rules account VII-70
I-84, I-188 commitments I-109, I-186;
Branch auditor I-273; III-5; VII- VII-9
50 contributions from
Branch returns / statements, consumers, whether part
incor-poration of I-73 of net worth XXI-223
Branch, foreign I-253; XII-75; employed I-247
XIV-132 expenditure I-28; III-7; IX-14,
Bridge loan XII-67 IX-81; XI-52; XV-8; XIX-
Broker (stock) 120
applicability of section 44AB fund VII-67 to 71
X-166 gains I-59, I-90; X-160
membership rights XXIV-4; goods, MODVAT credit on
XXVI-172 XVI-2; XXI-190
prepayment fees XXIV-80 paid–up VIII – 98
Brokerage I-7, I-207 profits VI-49; VII-20
Builders, revenue recognition reorganisation account XIV –
XXIII-25 80
Buildings
247
reserve I-163, VIII-41 to 43, expenditure on distribution of

XI-161; XIX-61; XX-17; mementos to employees
XXIII-109 during construction period
spares (see also ‘Insurance XXVI-187
spares’ and ‘Machinery expenses related to
spares’) XIV-102; XVII-8; acquisition of an
XVII-95; XX-40; XX-50; investment XXVI-140
XXI-196; XXIII-14; XXIV- foreign exchange differences
168; XXV-62, XXV-80, on loan amount XXI-151,
XXV-90, XXV-95; XXVI- 164
161 future interest on unpaid
work-in-progress I-150, I-186 lease premium XXV-19
IV-15; VII-9 insurance spares held in
Capitalisation of stock XXIII-153
awards during construction interest on borrowings VI-35;
period XXV-1 VIII-70, VIII-78; X-8, X-39
completed parts of project to 45; XI-168; XII-95,
XXII-160 XVIII-36; XIX-106; XXI-
construction cost, cut-off 114; XXII-93, 177; XXIII-
date for XX-139 164; XXV-16
cost of plantations (see interest on enhanced
under ‘Plantation’) compensation awarded
cost before issuance of XXV-159
certificate of completion interest on unpaid lease
XX-140 premium XXV-18
construction cost, cut-off loan processing fee XXV-19
date for XX-139 materials produced in an
engineering overheads XI- expansion project III-7
165; XXII-132 operational support credit
expenditure incurred after XXI-160
cut-off date XI-33 plant where commercial
expenditure incurred on production delayed XVII-
developing ore body of 63
existing mine, whether premium on leasehold land
appropriate XXII-129 XXV-19
expenditure incurred on provisions for final mine
expansion of a project XI- closure expenses XXV-
52 185
expenditure incurred on rent XXV-19
replacement/ stamp duty XXV-19
improvements in Capital grants (See under
machines XIV-75; XXV-80 ‘grants’)
expenditure on catchment Carting agent I-154
area XXIV-40
248
Cash against cheques by Change in accounting policy

mangers whether a loan XXI-13; XXIV-174
II-43 to 44 Change in the name of firm of
Cash and cash equivalents CAs VIII-24; IX-106
XXIV-93 Change in method of accounting
Cash assistance received in lieu from accrual to cash basis
of customs duty drawback in respect of interest
I-135 income XIII-93; XV-3
Cash basis, from accrual to XIII- Chartered Accountant
93; XV-3 employee I-80; V-50, V-51
Cash book VI-78 in full-time employment XI-
Cash credit I-12; VII-24; XIX-1 216
Cash discount XXIII-29 minimum fee for audit by XI-
“Cash” for section 297 VII-85 223
Cash generating units, whether competent to
determination of net comment on draft
selling price thereof XXVI- rehabilitation scheme and
28 impact of qualifications in
Cash generating units, the auditor’s report on
identification of XXIV-105; profitability of company
XXV-131 XXI-208
Cash incentives I-15; I-135; III- Cheques
8; payments by VI-78
VIII-97 received after balance sheet
Cash instead of cheques, date, accounting of XXIV-
payments by VI-78 71
Cash rebates XXII-169 CIF contracts I-269; XI-56; XX-9
Cash securities VII-22 City development IX-3, IX-9
Casual vacancy VIII-24 (See also ‘Colonies,
Catchment area, expenditure development of’)
thereon XXIV-40 Claim
Central Excise Rules, 1944, estimation of outstanding
Rule 57 R (8) XXI-190 liability XXII-188; XXIII-
CENVAT credit treatment 145
consequent to changes in for export incentive,
Central Excise Act, assessment of uncertainty
whether change in regarding XI-60
accounting policy XXIV- for interest from the due date
174 to date of repayment XVI-
CENVAT scheme, inventory 88
valuation XX-106 insurance VII-2; XI-89; XX-
Certificate by a Chartered 54; XXII-188; XXIII-145
Accountant V-51 not certified or accepted by
Certificate of deposits XVI-111; the clients XXV-13
XIX-109
249
profit on settlement of under served from India

insurance XI-89 scheme XXVI-225
self insurance VII-2; XI-88 Committee of Board, approval of
treatment of unsettled I-55 modified accounts by a
Classification of subordinated III-40 to 42
securities held by the Companies (Acceptance of
originator in a Deposit) Rules, 1975
securitisation transaction capital contributions from
XXIII-149 consumers XXI-223
Clause 7(2) of Part III of deposits in the form of share
Schedule VI XXI-129 application IX-104
Clause 32 of Listing Agreement deposits from a director who
XXII-172 was a shareholder VII-83
Clause 41 of Listing Agreement deposits from firm whose all
XX-84; XXII-149 partners are directors VII-
Closed jobs XXV-13 84
Club, whether covered by deposits from partnership
MAOCARO XI-124 under same management
Clubbing of expenses XIII-41 I-238; VIII-101
Coaching assignment by a maintenance of liquid assets
Chartered Accountant I- (Rule 3A) IV-36
179 treatment of development
Coal stock used as fuel XXI-80 rebate reserve I-75
Code of conduct, assignments treatment of un-provided
allowed XXI-208 depreciation VIII-98
Coins I-128 treatment of un-provided
Colonies, development of I-239 gratuity VIII-98
(See also ‘City Companies Deposits
development’) (Surcharge on Income
Commencement of commercial tax) Scheme, 1976
production, gross block of II-22
fixed assets XXIII-40 Companies under the same
Commencement of operations, management, disclosure
timing XVII-63, XVII-75; of loans and advances
XXII-160
XXI-237
Commercial paper XII-65; XIX-
Company secretary, signing of
18
accounts by VI-34
Commercial production delayed
XVII-63 Compensation
Commission I-5, I-8 to 9 I-113, for certain losses and
I-255; VI-33; VII-34; XII-3; interest thereon XXV-1
XXIII-29 for loss of revenue and
Commission/service charges for interest due to delay in
duty credit entitlement delivery of asset XXI-160
250
for waiting time in respect of whether mandatory XXI-193;

relocation of unit to an XXII-172
alternate place XVII-107 Consolidated purchase of
interest paid on enhanced assets X-10
XXV-159 Construction project,
taxability of X-154 development of industrial
estate XX-71
Compliance with Accounting
Construction contracts (See
Standards XXIII-14, 34,
also ‘contract(s)’)
83
advances against material
Components, allocation of cost XV-54
of fixed assets into XXV- billable pay revision, revenue
80 recognition XVIII-13
Components, manufactured III- contribution received from
1, III-22 to 24; V-43; VI-51 state government towards
Components, worn-out and XIX-82
replaced by spares XXV- design engineering XXI-85
90 equipment used after
Comprehensive inter-period tax completion of VIII-19
allocation VII-74 for supply of material XX-156
Computation of weighted foreseeable losses XIX-4
average shares on bonus godowns on behalf of others
issue XXV-113 VII-75
Confirmation of debtors’ housing projects XXIII-95
balances indirect costs included in cost
VIII-48 XIX-4
Concessional duty XI-157 in foreign countries,
Consent of previous auditors I- accounting for XIV-20
177 long production cycle items,
revenue recognition X-98;
Consignment purchase XII-1
XXVI-72
Consignment sales VI-33; XII-1 loss from damage of asset
Consolidated financial during construction XVII-
statements 68
applicability to listed Govt. meaning of ‘total turnover’
company XXIV-101 XXIV-84
applicability of Segment percentage of completion
Reporting XXII-12 method XX-100; XXI-103;
audit by C&AG XXIV-101 XXIV-84; XXV-14; XXVI-
format of audit report XXII- 72
149, 172 procurement projects XXI-85
provision of losses of project management XXI-85
subsidiaries I-88 provision for foreseeable
losses XXI-103, 187
retention money XX-33
251
recognition of revenue at capitalisation of expenditure

early stages XX-100; XXI- on catchment area XXIV-
103 40
sale of fixed assets after capitalisation of expenditure
completion of XII-4 on distribution of
sales and inventories under
mementos to employees
XII-27
XXVI-187
staff salaries paid for idle
period awaiting transfers capitalisation of ground rent
VIII-21 X-8
surplus material, accounting capitalisation of interest X-8,
and disclosure XXI-126 X-118; XXIII-58 (see also
unconsumed materials XVII- under ‘Capitalisation of
17 interest on borrowings’)
valuation of equipment to be capitalisation of know – how
used in specific contract fees X-39 to 45; XXIII-19
XXI-187 capitalisation of trial run
valuation of work-in-progress expenditure X-39 to 45;
XXI-187; XXV-13 XXI-114
Construction costs borne by cut-off date XX-139; XXII-
lessee in lieu of lease 160
premium XIX-27 depreciation on power
Construction cost, cut-off date projects XIX-76
for capitalisation of XX- expenditure during XII-9;
140; XXII-160 XIV-66, XIV-91
Construction material, treatment interest earned, during XIII-
of surplus XXI-126 64; XVIII-31; XX-18
Construction period loss from damage /
accounting for income tax obsolescence XVII-68
liability during XVI-53 preparation of profit and loss
allocation of incidental account during XI-128
expenses to packages sales of intermediary product
in VIII-76
XXII-160
Consultancy III-44 to 45; VII-32;
capitalisation of depreciation
XI-17; XXV-140
during X-121; XXIII-40
Consultancy fee XXI-85
capitalisation of
Containers
establishment expenses
income from complete
of rehabilitation and
logistic services XXIV-138
resettlement office after
commissioning of the income from freight and
project XXVI-198 handling XXII-114
income from ground rent
XXII-138
252
Contingency XXI-71 Contract(s) (see also

Contingency, creation of ‘construction contract(s)’)
provision in respect accounting I-93; VI-62; VII-
thereof XXVI-119 12,
Contingency reserve XXIV-88 VII-44, VII-54; X-98, X-
111; XII-86
Contingent gain III-9
annual maintenance X-32
Contingent liability
commencement of
additional power tariff XXI-78 operations XVII-63, XVII-
bank guarantees/indemnity 75
bonds XIX-31 composite III-3 to 5
classification and definition contribution received from
I-10; XIX-40 state government towards
defamation case XIX-79 cost of construction XIX-
disputed payments of earlier 82
years XV-58 costs, inclusion of indirect
disputed tax liability / costs XIX-4
demands dredging XIV-71
I-172; III-11; XIV-64; XXV- for supply of materials XX-
53 150, XX-156
gratuity net-of-tax, whether a foreign XIV-20
VII-74 fully completed VI-62
in respect of show cause lumpsum turnkey, for
notices VII-21 process design, detailed
investments partly paid I-6 engineering, etc. XXVI-1
outstanding reward points materials supplied under XX-
XXI-129 150, XX-156
payment as per Bonus Act manufacturing units X- 1
I-259 performance of III-3 to 5
tax liability under retention money in the books
investigation IX-82 of contractee XX-33
under Form 3CD of Income- revenue, disclosure of XXV-
tax Rules XIX-38 13
under tripartite agreement revenue recognition by
XIX-9 builders XXIII-95
unknown liability at the sales and inventories under
balance sheet date XXIV-
XII-27
50; XXVI-119
service XIII-113
zero based debentures XII-
treatment of foreseeable
114
losses in V-17; VII-54; XII-
Contingent loss VII-58; XIII-105 105; XIX-4
Continuous process plant XIV- unexecuted I-186, I-199, I-
124, XIV-125; XV-20;
245
XVII-30, XVII-46, XVII-79
253
valuation of work-in-progress Credit card, provisioning of

in IX-23, IX-35, IX-76; reward points XXI-129
XXI-187; XXV-13 Creditors VIII-50; IX-63 (See
Control, determination for also ‘Sundry Creditors’)
preparation of Crude oil stock in pipelines and
consolidated financial tanks XXI-93
statements XXI-193 Cumulative Interest Scheme
Conversion of partnership into VIII-18
company, revaluation of Current assets I-129, I-142 to
fixed assets XIX-117 145; III-14; VI-41; VIII-55;
Converion rights for calculation X-140; XI-95; XII-64;
of EPS XXVI-220 XXI-126; XXII-35; XXVI-
Conveyor belts replacement I- 12
106; XVI-100; XVIII-66; Current Investments, valuation
XXI-42 of XI-11
Cooley loan I-49 Current liability
Cooperative banks I-24 classification I-41; VII-22;
Cooperatives I-77; XII-15 VIII-50
Cooperative Societies, dues to employees XVI-57
applicability of Taxation financing facility against
Laws (Amend-ment) Act, purchase of raw materials
1991 to XIII-117 IX-63
Copyrights, amortisation of for deferred payments I-13
XVII-86 interest accrued but not due
Corporate office overheads, VIII-18
allocation to units XXII-72 Current rate VI-51
Corresponding figures for the Customs bonded warehouse I-
previous year, disclosure 64; V-18, V-26; X-36; XIV-
of IV-10 112
Cost XX-5 Customs duty credit
Cost allocation to joint products Served from India Scheme
XXI-25 XXVI-181, 225
Cost, directly attributable – Target Plus Scheme XXVI-
whether or not XXVI-198 148
Cost inefficiencies III-7 Customs duty drawback, cash
Cost of conversion III-15; XX-24 assistance in lieu of I-135
Cost of plots given on lease XX- Customs duty, provision for
30 exempted goods XXI-57
Cost of purchase, contribution to Customs duty, provision for
Gas Pool Account XXV- goods in bonded
164 warehouse X-36; XIV-
Costs on side-tracking and 112; XXI-57
abandoned portion of Cut-off date, expenditure
wells XXVI-109 incurred after XI-33
Counter guarantee I-10 to 11
254
Cut-off date, determination for Defaulted interest payments X-

capitalisation of cost XX- 106
139 Deferral of revenue due to
different rates of
D depreciation XXIV-123
Deferred credit I-13 to 15, I-42,
Damaged books of account I- I-76, I-141, I-243; VIII-7,
253 VIII-16, VIII-70
Damaged stores II-34 to 35 Deferred foreign currency
Damages (see ‘Liquidated fluctuation asset XXV-
damages’) 206, XXV-216
Dam, capitalisation of Deferred payment liabilities
expenditure on catchment (See ‘deferred credit’)
area XXIV-40 Deferred revenue expenditure
Dearness allowance, interim I-28; VI-26; VII-9; XXI-42;
relief of VIII-23 XXIII-29, 58
Debenture Redemption Deferred taxes VII-73; XI-171
Reserve, creation of XI- Deferred tax asset, brought
212; XV-83 forward depreciation
Debentures guaranteed by XXIV-54
Govt. of India, whether Deferred tax asset in respect of
secured or unsecured IV- MAT credit XXV-145;
1 XXVI-64
Debentures premium receivable Deferred tax asset in respect of
on maturity in case of provision for doubtful
Mutual Fund XVII-103 advances and claims
Debentures, unclaimed XVII-73 XXVI-37
Debentures, zero based XII-115 Deferred tax asset in respect of
Debt, long-term VIII-8 provision for final mine
Debts factored XXI-202 closure expenditure XXV-
185
Debt-Equity Ratio VIII-7
Deferred tax asset/liability under
Debt outstanding, translation of
Tonnage tax scheme
foreign currency XVIII-1
XXV-43, XXV-72
Debtors (See also ‘sundry
Deferred tax effect of adjusting
debtors’)
impairment loss directly
capacity to repay debt XXII-
against revenue reserve
35
pursuant to transitional
Debtors balances, confirmation provisions XXV-22
for VIII-48
Deferred tax liability XXII-45;
Debts, write-off of suit filed XXIII-83; XXIV-64; XXV-
XII-70 135, XXV-201; XXVI-124
Deemed public company, Deferred tax liability on creation
conversion to private of special reserve u/s
limited company X-177
Defamation case XIX-79
255
36(1)(viii) of IT Act XXV- applicability of schedule XIV

135, XXV-201; XXVI-124 X-69, X-79, X-128; XI-73;
Deferred tax on provision for XI-80; XV-30; XIX-76; XX-
doubtful debts XXIV-75 69; XXI-234; XXV-62,
Deferred tax reserve XXIII-83 XXV-80, XXV-153; XXVI-
Delayed commercial production 42
XVII-63 arrears of XI-82; XX-68
Delegation of powers by as a special reserve I-3, I-
directors III-40 to 42 183
Demurrage paid whether part of as prescribed by Bureau of
inventory cost XX-20 Public Enterprises V-36
Deodani kayars I-103 asset-wise disclosure of VIII-
DEPB Scheme XVII-20, XVII- 57
93; XVIII-40; XX-96; based on technical
XXIV-12 assessment
Deposit investment IX-95 V-36; VI-23, VI-71; XIX-
Deposits 66; XXV-62; XXVI-42
acceptance of money of block concept IX-58
current account I-238 brought forward, deferred tax
along with share application in respect of XXIV-54
money IX-104 capitalisation of assets used
applicability of Companies during construction period
(Acceptance of Deposits) X-21; XXIII-40
Rules VII-83; VII-84; VIII- change in cost due to foreign
101 currency fluctuations XIII-
for using office space VIII-25 61, XIII-66; XIV-48; XV-68
lease payment IX – 80 change in method I-19, I-99;
long-term u/s 33 ABA of I.T. I-196; V-47; VII-87; XII-38;
XII-111; XIX-66; XX-121
Act XXIV-93
short-term, whether change in previous year IV-
investment u/s 292(1)(d) 21
XXII-191 construction period XIX-76
with scheduled bank I-253 cost changed due to foreign
Depreciable amount XX-6; XXV- currency fluctuations XIII-
61, XIII-66; XIV-48;
62
XV-68
Depreciable asset XX-5
creation of Investment
Depreciation
Allowance Reserve on
additions to fixed assets I- write-back of VII-87
196; II-8 to 12; XV-25;
crushing plant situated within
XXV-199
mining lease area XX-67
advance against, recovered
customs duty capitalised in
through tariff XVII-98;
sub-sequent year XVI-65
XXV-37
differential depreciation
rates, deferred tax effect
256
in respect thereof XXV- on assets between date

216 project ready to
different methods for same commence commercial
class of assets VIII-72; production and the date
XXI-234 on which production
disclosure, asset-wise VIII-57 actually commences
extra shift depreciation X- XXIII-58
174; XIII-69; XIII-83; XIII- on bullet proof jackets XXV-
85; XV-25; XVII-57; XX- 157
69; XXV-153 on capital spares XXI-196;
for computing divisible profits XXIII-14, 153; XXIV-168;
I-19 to 20 XXV-62
for computing net worth I-99 on continuous process plant
for computing work-in- XIV-124; XIV-125; XV-20
progress I-93 on energy-saving devices IV-
for section II5J IX-30; X-129 24; V-48
in absence of legal on foreign exchange
requirement in leases XX- fluctuation
80 XIII-61; XIII-66; XIV-48;
XV-68
in absence of specific rate
under Schedule XIV of on helicopter XVII-87
Companies Act XXV-153; on jetties and handling
XXVI-42 equipments used at sea-
in accordance with Income ports XXV-153
Tax Act I-82; I-157; II-8 to on land having limited useful
12 life XXV-170
on additions during the year on leased out assets XI-93,
I-196; II-8 to 12; XV-25; XI-98; XX-80
XXIII-126 on leasehold building XXIII-
on assets developed on 34
leasehold land XVI-108 on library books V-39
on assets leased out XI-93, on low cost items XIX-114;
XI-98; XX-80 XXIII-105
on assets not used II-31 to on mass rapid transport
32; V-7 system XXVI-42
on assets not owned but on moulds & dies used in
having right of use XIX- manufacture of a
119; XIX-128 component XX-4
on assets taken over I-122 on pump trucks XIX-136
on assets used during cons- on revalued assets I-5, I-34,
truction period I-151 to I-163
154; on ‘rolls’ used in rolling mill
II-6 to 8; VIII-28; X-121; XIV-87
XXIII-40 on rolling stock, escalators
and elevators, and tract
257
works used in mass rapid Development of Industrial

transport system XXVI-42 Estate
on spares when capitalised XX-71
XX-40, XX-128; XXV-62 Development of new towns,
on surface machinery XX-87 accounting for IX-3, IX-9
on water treatment and (See also ‘colonies
sewage treatment plant development of’)
XXIV-119; XXVI-22 Development of ore body of
prior period adjustment XX- existing mine XXII-129
67; XXVI-22 Development of property I-145;
pro-rata IX-58, IX-68, IX-70; III-14
X-79; XI-73; XII-24; Development of prototypes XIV-
XV-25 1; XXV-3
rates applicable to assets V- Development of surplus funds –
35; presentation in balance
X-12; IX-58; XV-30; XIX- sheet
136 XVI-110
rates higher than those Development Rebate Reserve I-
prescribed VI-21, VI-71; 22 to 24, I-59 to 61, I-66;
IX-30; IX-68; XIII-63; XIX- IV-17; VII-88
66 Diamonds
revision of rates XIX-66 net realisable value of XXIV-
selection of method XXI-234 22
subsequent to recognition of valuation of WIP of XI-143
impairment loss XXIV-113 Direct taxes, notional I-272
u/s 115 J of Income Tax Act Directives of C& AG I-192 to
IX-30 193
u/s 350 in relation to section Director (s)
205 (2) I-82; IV-21; IX-30; appointment as auditor of a
IX-70 former VIII-64
under Electricity (Supply) appointment of a relative of
Act, 1948 V-36; XIX-76; III-38 to 39
XXIV-123 delegation of powers by III-
under industries 40 to 42
(Development and fees I-200, I-213, I-217; III-42
Regulation) Act, 1951 I- to 43
194 interest I-204
under MAOCARO II- 1 to 2 interpretation of the term II-
unprovided VII-98; IX-11 42 to 43
useful life XIX-66 payment of guarantee
Detachable warrants XIII-89 commission to I-209
Development expenditure on remuneration (see ‘Director,
land fees’)
X-49; XVI-105; XX-71 report, comments on
qualifications in auditor’s
258
report / under MAOCARO of funds invested in short

VI-80; XI-76 term deposits XVI-110
report, where deemed public of gains arising from
company becomes private translation of foreign
company X-177 currency debts, on the
working II-42 to 43 balance sheet date XVIII-
Disclaimer of opinion VIII-46, 4
VIII-63; IX-28; XXV-225 of gross block of fixed assets
Disclosure used for construction
in company balance sheet, of activities during
receivables I-141 construction period XXIII-
in consolidated financial 40
statements, of different of interest accrued but not
accounting policies XXI- due on loans X-144
193 of interest on shortfall in
of accounting policy in payment of advance
respect of export sales income-tax XXVI-166
XVIII-63 of leasehold buildings XXIII-
of amount due towards 34
subscription of shares of loan and advances from
XI-222 companies under the
of bank guarantees / same management XXI-
indemnity bonds XIX-31 237
of buildings into freehold and of loan arranged by
leasehold XXIII-34 contractor through
of buildings purchased tripartite agreement
alongwith land X-10 XIX-9
of cash securities received of loss on translation of work-
from borrowers VII-22 in-progress on severe
of class ‘B’ PTCs held by the devaluation XIX-21
Originator XXIII-149 of particulars of options on
of discounted pre-payment of unissued shares XV-73
deferrable sales-tax of provision for incomplete
liability XXIII-122 assignments XXV-175
of doubtful bank deposits, of provision of loss in current
provision for XIX-25 asset XIX-25
of dues to employees VIII-51; of provision of outstanding
XVI-57 reward points XXI-129
of factored debts XXI-202 of provisions in respect of
of fixed assets given on expenses XIX-41
operating lease XVI-32 of related party transactions
of funds invested in XXIII-174
Certificates of Deposits of sale/lease of houses/land
XVI-111 XXII-20
of special items I-128
259
of stocks of inter-unit Doubtful debts XVII-90

transfers Doubtful deposits, provision for
XI-133 XIX-25
of surplus construction Draft rehabilitation scheme,
material XXI-126 comments of chartered
of unutilised monies out of accountant XXI-208
equity issue XXI-124 Dredging contracts XIV-71;
regarding revalued fixed XV-65
assets Dredger, capitalisation cost of
XV-16; XX-163 XXI-231
Discount charges of bills XIII-41 Drum discounts VI-56
Discount on issue of shares Duplicate books of account I-81
XXV-121 Duty credit entitlement XXVI-
Discounting factor in actuarial 148, 181, 225
valuation XXI-72
Discounts VI-56; XIII-39; XXII-
169; XXIII-29 E
Disputed liabilities, provision for
XXV-53 Earnings Per Share
Dissolution of firm, withdrawal of computation of weighted
Investment Allowance in average number of shares in
case of VII-86 case of bonus shares XXV-
Distance discount VI-56 113
Distributable incomes as per treatment of conversion
Income-tax Act I-90 rights for calculation of
Disposal of flats by a diluted EPS XXVI-220
cooperative housing Electric arc furnace - whether a
society XII-15 continuous process plant
Dividend XIV-124
accounting for XIX-44 Electricity company (See under
from reserve created on ‘Power sector’)
amalgamation XXIII-109 Empties, valuation and
preference VI-44; XI-214, disclosure of IV-8
XI-219 Energy - saving devices IV-24
unclaimed IV-34 Engineering overheads,
warrants I-221, I-19 to 29, capitalisation of XI-155;
I-43, I-116, I-195, I-220 XXII-132
declaration of, u/s 205 XII- Entertainment tax VI-83
123 Entry tax XIX-41
Divisible profits I-19; III-12; Equipments
VI-49, VI-87; VII-88 to 90; manufactured against
XII-123 customers’ orders VI-53
Documentary proof of DA/TA to owned by an enterprise
Board members I-70 installed with another
Documents, to self I-155
260
enterprise for use by the Expenditure, capital I-28; III-7;

latter XXIII-53 IX-14, IX-81; XI-52; XII-9
used after completion of Expenditure during construction
construction VIII-19 period (see under
Equity VIII-8 ‘Construction period’)
Equity issue, disclosure of Expenditure on catchment area
unutilised monies XXI-124 XXIV-40
Equity method I-89; XXV-57 Expenditure on development of
Equity pending allotment I-118; ore body of existing mine
II-27 to 29; XV-34 XXII-129
Errors (see ‘Mistakes’) Expenditure on land not
Escalation claims, treatment of represented by tangible
V-24 assets IX-81; XII-10 to 19
Escalation clause I-55, I-177 Expenditure on moulds & dies
Escalation cost I-75 used XX-4
Events occurring after balance Expenditure on removal of
sheet date II-28; III-9, III- overburden from
11, III-32; XI-62; XII-89; limestone quarries X-26
XIX-71; XXI-61, 79, 148 Expenditure on renewal of
Evidence, audit VIII-44, VIII-62; sleepers and rails for
IX-27, IX-32 railway sidings IX-14
Evidence of salaries paid VIII-10 Expenditure on replacement/
Excess provisions, writing back improvements in
of machines, capitalisation
of XIV-75; XXIII-126
XIV-95
Exchange rate (see under Expenses
‘Foreign exchange’ and classification of I-29 to 130;
‘Foreign exchange rate VII-77
fluctuations, accounting clubbing of XIII-41
for’) current I-110
Excise duty I-109; III-8, III-22 to during construction period I-
24; VI-53; VII-15; X-23; 147, I-149; II-6 to 8; X-8,
XI-2, XI-55; XII-19; XX- X-118; XII-9; XIV-66, XIV-
106, XX-118; XXI-11, 20, 91 XVIII-32 (see also
67 under ‘Construction
Exemption from branch audit period, expenditure
I-184, I-188 during’)
Exemption, sales tax XX-15 recognition of IX-44
Exim policy XVII-20; XVII-93 sharing of VII-72
Expansion project, capitalisation Exploration expenditure IV-12;
in case of III-7; XI-52 VI-25
Expendable wells in upstream Exploratory wells XXX-193
oil industry, accounting of Export credit receivable under
XXV-193 DEPB Scheme XVII-
261
20,XVII-93; XVIII- 40; XX- accrual of costs in

96 IX-42
Export House VIII-93 revenue recognition in VIII-5
Export incentive III-8; VI-43; VII- Final accounts
4; XI-60; XII-48; XVII-20, authentication / approval of I-
XVII-93; XVIII-40; XX-96 190; II-42 to 43; III-5, III-
Export marketing expenses, 40 to 42
grant for VIII-96 certification of I-80
Export sales, disclosure of preparation after take over
XVIII-70 X-20
Exports made by business Finance business, applicability
associates XVI-43, XVI- of section 44AB to XI-184
47, XVI-73 Finance company, segment
Extraordinary items VIII-74; XX- reporting XXVI-79
32; XXIII-122; XXIV-96 Finance income from lease XI-
Extraordinary meeting held at 101
place other than Financial year III-36 to 37
registered office VII-81 Fire
Extrashift depreciation (See loss of fixed assets in XIV-98
under ‘Depreciation’) loss of stock in I-241
Extractive industry IX-78, XXIV- Firm commitment, meaning
22, 93, 156; XXV-193; thereof XXVI-142
XXVI-109 Firm of chartered accountants,
appointment as statutory
F auditors when one of
firm’s partners is a
director in holding
Face value, defined V-23 company XVII-84
Face value of capital investment Firm, reconstruction of audit
V-21 VIII-24
Factored debts, accounting for Fixed assets (see also ‘Assets’)
XXI-202 additional interest incurred to
Fee, agency XX-150 hedge foreign exchange
Fees, market XII-89 risk XXI-181
Fees paid to SEBI in respect of addition to, depreciation in
purchase of investments respect thereof XXV-199
XIX-94 adjustment of difference
Fees paid to merchant bankers between swap rate and
for purchase of exchange rate XXI-181
investments XIX-94 advance against purchase of
Fertiliser industry, segment VIII-24
reporting XXIII-1 acquired on lease XIX-17
Fictitious asset/liability XXII-121 allocation of cost into
Film industry components XXV-80
262
building whose title is for projects outside India X-

subjudice XI-48 140
bullet proof jackets provided foreign currency fluctuation
to outside security (see under ‘Foreign
personnel XXV-157 exchange rate
capitalisation of arbitration fluctuations, accounting
award in respect of for’)
certain losses and interest gross block where assets
thereon XXV-1 used for Capital Project
capitalisation of interest on XXIII-40
borrowings VI-35; XI-168; held for sale XXVI-217
XII-95; XVIII-29; XXI-114 inclusion of import duty and
capitalisation of interest on initial delivery costs XXI-
compensation for land 231
acquired XXV-159 installed with another
charge-off of small value enterprise XXIII-53
items XXIII-105 jigs XVIII-53
classification into freeholds land having limited useful life
and leaseholds XXIII-34 XXV-170
depreciation (see under leasehold land (See under
‘Depreciation’) ‘Lease’)
discarded or surplus, loss of IX-92; X-39; X-147;
valuation of XXI-148 XIV-98; XVII-68;
disclosure of special items in machinery spares (see also
balance sheet I-128; VIII- ‘capital spares’) XVII-95;
57 XX-40, XX-50, XX-112,
disclosure under MAOCARO XX-128; XXI-42, 196;
II-1; X-78 XXV-62, XXV-80, XXV-
expenditure incurred on 90, XXV-95
raising plantations III-12 operating lease XVI-32
expenditure on acquiring operational support credit
right of use XIX-119; XIX- treatment XXI-160
128 profit on sale of XIX-61
expenditure on construction ready but not in operation
of VII-75 XXIII-58
expenditure on detailed renovation/overhauling XXIII-
engineering and process 126
design XXVI-1 replacement cost XV-37
expenditure on renewal of retired XIV-94
mining lease XIX-46 retired from active use XXVI-
expenditure on user licence 217
fee for SAP software revaluation of XIV-19; XV-36;
XXVI-6 XIX-117; XX-121, XX-163
fixtures XVIII-53 right of use of land XIX-119,
XIX-128; XXV-170
263
sale proceeds in excess of FOB/FOR contracts I-269; VII-

cost XIX-61 28; VIII-46; X-98; XI-117;
salvaged material from XX-9; XXI-52; XXII-27
dismantled fixed asset Foreseeable loss in contracts
used in construction of XIX-4
other Foreign
X-84 branches I-253; XII-75; XXII-
spares XVII-95;XX-40, XX- 121
50, XX-112, XX-128; company, liaison office of a
XXIII-14; XXV-62, XXV- XII-125
80, XXV-90, XXV-95 currency loan, forward cover
subsequent expenditure XVII-112
XXIII-126; XXVI-198 exchange rate XX-146, XX-
subsidy for acquiring XVIII- 160; XXI-15
36 project sites, whether
tools XVIII-46 branches under the
trademark, accounting for Companies Act, 1956,
XXIII-135 XIV-132
used in other construction projects, accounting of fixed
activities after completion assets X-140
of construction of a travel, audit of XXIII-117
project VIII-19 Foreign exchange rate
utilisation of loan for fluctuations, accounting
acquisition of XXI-151, for
164 swap transaction XXI-181
valuation in case of advance for export of goods
incomplete records IX-50; XIX-49
XI-177 currency/bank account
waiver of interest capitalised abroad III-20; XIII-28;
XXIII-131 XVII-5; XIX-138; XX-64,
water and effluent treatment XX-143; XXI-20
plants XXVI-22 date of transaction for import
when ready to commence of material XXII-7
operation XXIII-58 date of transaction for import
write off VI-18 of natural gas XXIII-89
Fixed Deposits VII-24; X-86; X- difference between date of
155; XIX-109 transaction and date of
Fixed overheads XX-45; XXVI- settlement XXII-7; XXIII-
96 89
Fixtures XVIII-53 difference between prevailing
Flats, disposal of XII-15 exchange rate and swap
Float, interest on XIII-21 rate XXI-181
Flood, loss of stock in I-241 disclosure under Schedule VI
II-19; XI-127
264
expenses incurred at foreign translating work-in-progress

liaison office XIX-138 XIX-21
fixed assets acquired within translation of debt
India XXIV-32 outstanding
gain XX-64 XVIII-1
gain/loss on cancellation of
Forest (see ‘Timber’)
forward contract XXVI-
142 Form 3CD, clause 9(c) XIX-38
gain/loss recoverable under Forward cover IX-47; XI-106;
power purchase XIV-74; XVII-112; XXVI-
agreement XXV-206 142 (see also under ‘Roll-
in case of life insurance over contract’)
business XXII-121 Forward exchange contracts
interest income XIX-59; XXI- (see also ‘Forward
20 Cover’) XIV-74; XVII-112;
XXVI-142
long term liability not relating
Framework for the Preparation
to fixed asset I-161
and Presentation of
long term liability relating to Financial Statements
fixed asset VIII-3, VIII-27; XXIII-8, 122, 135; XXIV-
XI-28; XII-52, XII-58, XII- 71
82; XIII-56; XIV-56; XXI- Free Reserve IV-29; VIII-98;
151, 164; XXIV-17, 32 XXIII-171
severe devaluation XIX-21 Freight and handling income
transactions for the benefit of XXII-114
the subsidiaries I-112 Freight, inclusion in cost of
translating current assets / inventory XXIII-49; 157
current liabilities VI-38; Full Costing Approach IV-12; VI-
25
VIII-53; X-6; XII-33; XIII-
11; XIV-12; XVI-75; XIX- Fund II-3 to 6; IV-7; VII-67 to 71
21; XIX-49; XX-64, XX- Future profit, treatment of I-85
146
translating financial G
statements of foreign
branches XXII-121
Gas Pool Account, contribution
translating fixed assets / long to XXV-164
term liability VIII-3, VIII- Gifts, audit of VIII-62
27; VIII-53; X-6; XII-33, Global method for stock
XII-82; XIII-11; XIV-12; valuation
XVI-75; XX-9, XX-160 I-140
translating items of income Going concern assumption XVI-
and revenue expenditure 61; XX-124
VIII-53; XIII-11; XIV-12;
XVI-75; XX-160
265
Goodwill, valuation and debentures guaranteed by

amortisation X-135; XVII- government of India IV-1
86 debtors backed by II-18; II-35
Goods sent for customer’s disputed performance VII-81
approval margin money on account of
XIV-32 XVII-71
Govt. companies, audit of I-129 revenue recognition on
Grading and levelling of land I- completion of
53 performance XV-60
Grants Guaranteed business XXV-121
definition XX-16 Guidance Note on Accounting
for acquisition of fixed assets for Credit Available in
I-103; III-16, III-24; IX-19; respect of Minimum
XI-161; XVI-20 Alternative Tax under the
for control & distribution of Income-tax Act, 1961
essential commodities XXVI-64
XX-76; XXIV-164 Guidance Note on Accounting
for meeting revenue for Depreciation in
expenses VI-31; VIII-86 Companies XXI-234;
interest on XV-76 XXV-62
of the nature of promoters Guidance Note on Accounting
contribution XI-137, XI- for Oil and Gas Producing
140; XIII-99 Activities XXIV-156; XXV-
unspecified XI-140; XIV-27 193; XXVI-109
unspent XIV-46 Guidance Note on accounting
Gratuity liability I-110; VII-38; for securitisation XXIII-
VIII-98; XI-180; XV-40; 149
XVII-22; XXI-72; XXIII-69, Guidance Note on Accrual Basis
99 of Accounting XXI-227;
Gratuity trust fund XXII-45, 114
whether interest earned on Guidance Note on Audit of
investments included to Expenses XXII-7
arrive at contribution Guidance Note on audit reports
XXIII-69 and certificates for special
accrued amount of liability purposes XXII-149
XXIII-99 Guidance Note on Clause 9 of
Gross receipts u/s 44 AB VI-83 Part I of the Chartered
Accountants Act VI-3
Ground rent X-8; XXII-138
Guidance Note on
Guarantee
Independence of Auditors
bank XIX-31
XXI-217
bills discounted III-3
Guidance Note on terms used in
commission paid to directors financial statements XXI-
I-209 223; XXIII-8
counter guarantees I-10
266
Guidance Note on treatment of transitional provision

expenditure during XXV-22
construction period XXIII-8, Impairment of assets
19, 40, 58; XXV-1; XXVI-
applicability to petroleum
187, 198
industry XXIV-105
applicability to telecom
H industry XXV-131
determination of net selling
Half-pay leave encashment XX- price of cash generating
90 unit XXVI-28
Handling expenditures, inclusion intangible XXIV-4
in cost of inventory XXIII- Import duty payable, adjustment
157 against license amount
Head office accounts I-73 under Served from India
Hedging foreign exchange risk Scheme XXVI-181, 225
XXI-181
Import duty payable, provision
High sea sales and purchases I-
for I-64
262
Hire purchase VII-45; IX-1; X- Import duty and voyage
106; XIX-18; XIX-154 expenses, capitalisation
Housing projects, applicability of of XXI-231
standard 7 XXIII-95 Import entitlement I-99; VII-4
Housing society, co-operative VIII-97; XVI-51
XII-15 Import licence terms, verification
Hybrid system I-19, I-96; XIV-70 of compliance with I-251
Hydro electric power project, Imported commodities I-260,
expenditure on catchment I-263; XX-7; XXIII-89
area XXIV-40 Imported goods-in-transit,
valuation XV-11
I Improvements XV-39
Incentives
IDA credit I-135 cash I-15 to 19
Idle capacity costs VII-58; XX- cash compensatory support
108 III-8
customs duty drawback I-16,
Idle project funds, interest on
I-18, I-135 to 137
XX-18
export I-16, III-8; VI-43
Impairment loss on purchase of investments
basis of depreciation after XIX-64
recognition of XXIV-113 Income from installation charges
deferred tax effect on collected XXV-29
adjustment against Income from sale of ore mined
revenue reserve as a during development work
XXII-129
267
Income recognition from mutual Initial issue expenses by open

fund XIX-44 ended mutual fund
Income recognition on assets schemes XX-115
leased out XI-31; XXVI-12 Injection moulding machine -
Income recognition on whether a continuous
investments in an AOP process plant XIV-125
XIV-109 Instalment payments I-13 to 15,
Income and Expenditure I-41 to 43, I-75 to 76;
Account of a Public VII-45; VIII-16, VIII-59
Provident Fund Trust XI- Installation charges collected by
10 a telephone company
Income-tax Act, accounting for XXV-29
penalty & interest payable Installation cost II-23 to 24
under XIII-48 Installed capacity XIV-119; XX-
Income-tax – basis of 45
accounting Insurance business VII-2; XI-70;
XVII-50 XXII-188; XXIII-145
Income-tax deducted at source Insurance claims VII-2; XI-89;
from interest paid XX-54; XXII-188; XXIII-
overseas IX-99 145
Income-tax demands, whether Insurance spares (see also
contingency XIV-64; XIX- ‘Machinery spares’) XVII-
38 95; XX-128; XXI-196;
Income-tax liability during XXIII-153; XXIV-168;
construction period, XXV-62, XXV-80, XXV-
accounting for XVI-53 90, XXV-95
Income-tax recovery from Intangible assets
customers XXI-47 acquisition through exchange
Incomplete assignments, of another asset,
provision for XXV-175 valuation thereof XXVI-
Incomplete records, valuation of 172
assets from IX-50 amortisation XVII-86; XXV-
Income-tax Rules, Form 3CD 121; XXVI-172
XIX-38 expenditure during
Indemnity bond XIX-18 construction period XXIII-
Indian Stamp Act I-95 58
Indirect expenditure during expenditure on user licence
construction I-149; XIX-4 fee for SAP software
Industrial estate, development XXVI-6
and leasing XX-71 know – how costs XXIII-19
Industries (Development and prototypes, development
Regulation) Act I-194 to thereof XXV-4
219 right to guaranteed business
XXV-121
268
sale of right to receive power for usance period X-16; XV-

XXII-86 70
stock exchange from bank deposit prior to
cards/membership rights their use in construction
XXIV-4; XXVI-172 activities of a company I-
trademark XXIII-135 147; X-118; XIII-75
Intended use, meaning thereof from due date to date of
XXIV-40 repayment XVI-85; XIX-
Inter-division transfer IX-87 159
Interest in jointly controlled entity,
accrued but not due I-12; X- accounting and reporting
16, in separate financial
X-144 statement of venturer
additional, payable after XXVI-209
repayment of loan XXI- incidence VI-45
incurred to hedge foreign
220
exchange risk XXI-181
and principal, apportionment
liability for deferred
of amount between XIX- payments I-13
159 notional saving of XX-148
as an element of cost IX-23 on borrowings for purchase
bills of exchange I-243; XIII- of fixed assets VI-35; VII-
41 75 XI-168; XII-95; XXII-93
capitalisation of XXII-93; on borrowings during trial run
XXIII-164; XXV-16 XXI-114
change of method XIII-93 on cash credit taken against
deductibility under Income fixed deposit VII-24
Tax Act IX-99; X-154 on compensation paid on
deduction of notional saving land acquired XXV-159
XX-149 on credit available against
demands from Income-tax purchase of raw materials
authorities XXV-53 IX-63
during construction period X- on deposits made out of
8; grants in aid from
XIII-64; XVIII-31; XXIII-58 government of India XV-
during period asset ready but 76
not in operation XXIII-58 on funds borrowed generally
earned on idle project funds XIX-106; XXII-93, 177;
XX-18 XXIII-164
earned on fixed deposit X-86 on hire purchase/instalment
earned, whether to include in X-106; XIX-154
gratuity trust fund balance on investments against
XXIII-69 specific funds XXIV-61
for construction of property
for sale XIX-106
269
on loans from Government Intermediary products sold

for acquisition of fixed during construction period
assets XVIII-29 VIII-76
on outstanding borrowings Internal audit I-2, 9, 273; VII-36;
XXII-177 VIII-65, 84; XXII-1
on overdue outstanding XV-2 Internal auditor (see ‘Internal
on shortfall in payment of audit’)
advance tax XXIV-96; Internal transfers, inclusion in
XXVI-166 turnover XV-18
on unpaid lease premium Internally manufactured spares,
XXV-18 accounting for IX-87
on working capital relating to Internet ticketing, recognition of
inventories held in stock revenue & costs XXIV-43
XXI-1, 4, 7, 31, 98 Inter-period tax allocation VII-
recognition of revenue from 74; XI-171
XIX-113, XIX-159 Inter-related transactions XIX-49
penal interest XIII-48 Inter-unit transfers of stock,
penal interest on hire disclosure XI-133
purchase XIX-154 Inventory of internal transfers
provision for goods held in XI-137
custom warehouse (see Inventory, inclusion of goods in
under ‘Customs bonded transit XII-46
warehouse’) Inventory valuation
subsidy on capitalised XVIII- administrative cost inclusion
36 in
surcharge in the nature of IX-37, IX-64; XII-41, XII-
waiver of XI-27; XVIII-47; 45; XIII-77; XX-24, XX-
XXII-70 136
waiver on loan XIX-99; XXIII- at cost XI-63, XXIV-12
131 at lower of cost and net
wrongly received XVI-36 realisable value XXI-137,
Interim financial statements, 143, XXIV-22; XXV-148
audit of XXII-149 at market price as on the
Interim financial statements, date of signing of
overhead allocation for accounts II-36
inventory valuation XXVI- at raw materials cost III-15
96 by builders XXIII-95
Interim relief VIII-23 catalyst XX-47
Intermediary components (see change in the method of I-72;
‘Components, manufact- XI-63
ured’) coal XXI-80
Intermediate product, valuation construction contract XII-27
of stock of XVIII-25; XXI- cost of purchase, inclusion of
137 contribution to ‘Gas Pool
Account’ XXV-164
270
crude oil XXI-93 in sugar industry XXI-1, 4, 7,

demurrage XX-20 31
depreciation unprovided, for in tea industry VIII-14; X-75
inclusion in IX-11 in textile industry IX-46
divisional head-quarter in-transit V-11; XVII-12
expense XX-24 in-warehouse XVII-12; XX-
duty credit under Served 20, XX-118
from India Scheme XXVI- inclusion of handling
181, 225 expenditure XXIII-157
excise duty in XI-55; XX-11, inter-division transfers XI-133
XX-106, XX-119; XXI-11, interest cost inclusion IX-21,
20, 67 IX-23, IX-37, IX-64; X-
factory administration 124; XIX-106, XIX-132;
overheads inclusion XII- XXI-1, 4, 7, 31, 98
41; XIII-77; XX-136 intermediate product XVIII-
fixed production overhead 25; XX-49; XXI-137
XX-45, XX-106; XXVI-96 located at different points
FIFO XX-93 having different realisable
for internal use XX-37 value XX-76
gas in pipelines XX-37 left-over materials XIV-39
headquarter expenses XX-24 MODVAT, inclusion in VIII-
housing projects XXIII-95 29, VIII-32, VIII-35; XX-
grouping of items for I-140 11, XX-118; XXI-190
held in field godowns XXIII- negative realisable value
49, 157 VIII-1
idle capacity costs VII-58; net realisable value
XX-106 determination for I-86; II-
in bonded warehouse V-18; 36; IV-26; IX-46; XX-76,
XI-55 XX-132; XXI-137, 143
in case finished products are non-moving XIV-36
expected to be sold at or normal capacity XX-45, XX-
above cost XXV-145; 108
XXV-182 obsolete XIV-36; XX-50
in case of buffer stocks held of books by a publishing
in godown XX-76 company XVI-41
in extractive industry IX-78; of capital stores (see also
XI-143; XX-37; XXIV-22 ‘Machinery spares’) XX-
in petroleum industry XXI-93 50
in power industry XXI-80; of components used
XXV-148, XXV-182 internally, sold V-43
in rubber industry X-77 of cotton bales, seeds etc.
in software development XI-68
industry XVI-11 of gold jewellery, for tax
purposes X-157
of hedged materials XX-93
271
of imported goods against tax implications of change in

advance licence XVI-51; method of IX-41
XXIV-12 transportation cost inclusion
of imported goods under XXIII-49, 157
DEPB scheme (see also used for internal
‘DEPB Scheme’) XX-96 consumption as well as
of in-process material in direct sale XX-37
continuous process XVII- waste products I-53; XI-22;
46 XVI- 117
of intervening waste products work-in-process XVIII-25
XVI-34 Investigation, special III-34 to 36
of items handled on behalf of Investment
government VI-29 allowance reserve V-57; VII-
of joint products XXI-25 87, VII-88; X-151; X-162;
of machinery spares XVII-95; XVI-113; XVI-117
XX-40, XX-50, XX-112, allowance, withdrawal of VII-
XX-128; XXI-42, 196 86
of natural gas in pipelines capital store (see also
XX-38 ‘machinery spares’) XX-
of oil stock in pipelines and 50
tanks XXI-93 company VII-66
of orchid plants XXI-35 deposit IX-95
of raw materials XX-49, XX- in an AOP, recognition of its
93; XXI-137 income XIV-109; XIX-90
of raw materials purchased invoices, composite charge I-
in exchange of steam IX- 62
21 u/s 292(1)(d) XIII-124; XXII-
of raw materials where set- 191
off of excise duty under Investments
CENVAT XX-106 advertisement, travelling,
of salt XV-48 legal cost etc., part of
of samples VIII-11 XIX-94; XXVI-140
of stores XX-50 against specific funds,
of spares XIV-35; XX-40; interest thereon XXIV-61
XX-50, XX-112, XX-128; amount deposited with a
XXIII-153; XXV-148 bank in a fixed deposit III-
of work-in-progress, by 31
builders XXIII-95 call money XIX-109
qualification with regard to certificate of deposits XVI-
XI-64 111; XIX-109
R & D cost, inclusion in IX- commercial paper XII-65;
37; IX-64; XXV-3 XIX-109
specific identification method cost of XXVI-140
XX-94
selling prices, different XX-76
272
determination of carrying verification and treatment in

amount of lot sold XXIII- accounts I-6
112 Invoiced amount, deduction
disclosure of unutilised allowed XIX-66; XXI-61
monies under Schedule Irrigation sector, expenditure on
VI XXI-124 XIX-82
fair value XXII-39 Issue expenses, initial XX-115
in associates XXV-57 Issue price, difference with the
incentive on direct purchase market price of share
XIX-64 XXV-121
interest in jointly controlled
entity XXVI-209
long-term, determination of J
carrying amount XXIII-112
long-term, recognition of Jewellery, valuation of inventory
interest in jointly of X-157
controlled entity XXVI-209 Jigs XVIII-53
long-term, valuation XXV-57; Job work XX-59
XXVI-140 Joint
of surplus funds, during auditors I-213
construction period XVIII- products cost allocation XXI-
31 25
profit/loss on sale VII-17; Joint venture
VIII-39; XXIII-112
as a separate segment XXII-
provision for shortfall in value 76
of VII-17; XXII-3, 39, 145
audit of operator’s accounts
Schedule-VI (disclosure) XXII-1
I-206; XVI-110
interest in jointly controlled
section 372 (5) of entity XXVI-209
Companies Act I-189
treatment of a future profit
valuation in case of unexecuted rights I-85
acquisition to obtain
synergies XXI-51
valuation in case of K
acquisition through
exchange of BSE
membership cards XXVI- Know how, expenditure on VI-
172 68; X-39 to 45; XV-45;
XVII-108; XVIII-20; XXIII-
valuation in case of banks
19
XVI-39
valuation of long-term XXV-
57 L
valuation of unquoted
investments for NBFC’s
XV-15 Land
273
acquired on long-term lease financial X-133; XI-98; XXII-

XXV-16 20; XXIII-53; XXIV-29
interest on compensation hold land expenditure XVI-
paid on acquired XXV-159 105;
deposit with state/central XXIII-8
govt. agencies for holds, disclosure XXIII-34
acquisition of XII-45; housing project XX-71; XXII-
XXIII-8 20
development company, industrial estate XX-71;
application of Schedule VI XXVI-12
and MAOCARO to IX-56 land acquired on perpetual
development expenditure I- lease VIII-56; XI-164
146; X-49; XVI-105; XX- long-term XXV-16; XXVI-12
71; XXVI-12 office space XIX-17
having limited useful life operating XIII-103
XXV-170 period closure XI-164
leased XXII-20; XXVI-12 permium on XII-71; XIX-27
purchased along with rentals, XIII-42; XIX-17; XX-
building X-10 80
reclamation contracts XIV-71 rentals received on
right of use XIX-119, XIX- premature closure of
128; XXV-170 primary period of
Lease XI-164
99 years XIX-17; XX-31, XX- rights, capitalized value of I-
71; XXII-20; XXVI-12 60
accounting for lumpsum rights, surrender of XIII-34
payments in respect of I- security deposit, for XIX-17;
26; XXII-20 XXIII-8
asset bought by a leasing stamp duty & registration fee
company for letting out IV- on renewal XIX-46; XXV-
2; XXIV-29 13
asset installed with another taxability of lease
enterprise XXIII-53 equalisation charge XIV-
back IX-72; X-132; XIII-101 130
classification XIV-106; XXIII- where sum paid by lessee at
53 inception is repaid by
construction cost borne by lessor at the expiry of the
lessee in lieu of premium lease term IX-80; XIX-17,
XIX-27 XIX-42
depreciation on leased Leave encashment XI-180; XV-
assets 42; XVI-81; XVI-94; XVI-
XI-93; XX-80; XXIII-34 97; XVII-51; XVII-59; XIX-
equalisation charge/credit, 38; XX-26; XXI-72, 227
XIV-130; XX-80 Leave travel concession VI-84;
XIV-84
274
Leave unencashable XIX-124; advance VIII-4; X-46, X-58;

XX-90 XII-48; XIV-52
Left-over materials, accounting capitalisation of fee XXIII-19
for XIV-39 Licence fee for radio paging
Letter of credit I-260; I-262; III-3; business XVI-1
VII-85; IX-63; XVII-71 Life insurance premium I-110
Letter of commitment for issuing Life insurance business,
debt guarantees XIV-62 applicability of AS 11
Levy quota obligation, treatment XXII-121
of shortfall in IV-3 Limestone quarries X-26
Liaison office of a foreign Limited Review under clause-41
company XII-125 of Listed Agreement XX-
Liabilities subject to 84
performance tests VII-8 Liquidated damages I-117;
Liabilities, classification I-74, XI-177; XIII-49; XV-55;
VIII-50 XVI-58
Liability, estimation of Liquidation of a company
outstanding claims XXII- appointment of auditors in
188; XXIII-145 case of VII-80
Liabilities, time barred VI-47 dues recoverable from XXII-
Liability on contribution to Gas 35
Pool Account XXV-164 Listed company, definition
Liability on account of deferred XXIV-101
entitlement towards Listing agreement, clause 32
LTC/LLTC XXII-16 XXIV-101
Liability on account of interest Livestock, valuation of I-97
on shortfall in payment of Loan of petroleum products
advance income-tax amongst oil companies
XXVI-166 XV-31
Liability on account of market Loans
fees XII-89 against receivables due on
Liability taken over VIII-101 sales on deferred credit
Liability under outstanding credit terms I-141
card reward point scheme against usance bills
XXI-129 discounted I-125
Liability under voluntary applicability of section 293
retirement scheme XVII- XIX-1
81 applicability of S.295 II-43;
Liability, long term VI-41; VIII-27 VI-14
Liability, short term (see also applicability of S.370 (I B) to
‘Current liability’) VI-41 Govt. Companies II - 39
Library books, depreciation on application of S.269 of I.T.
V-39 Act XII-118
Licence arranged by a contractee for
contractor XIX-9
275
cash securities received in in valuation of work-in-

respect of VII-23 progress V-15
classification of interest notional V-41; XIII-110
accrued but not due on I- of stock in flood / fire I-241
12; VIII-18 of subsidiary companies,
companies under the same provision for I-88; II-15 to
management XXI-237 16
deferred payment, on abondment of expansion
classification as I-15, I-42; scheme XX-168
VIII-17 on fixed assets, in fire X-39;
demand loan XIX-1 X-147; XIV-98
disclosure of I-49; VI-50; X- on exchange rate XII-33, XII-
144; XII-67 58 (see also ‘Foreign
guaranteed by banks/Fls/ exchange rate
Govt., etc. I-74; II-18; IV-1 fluctuations, accounting
instalments repaid before for,’)
due date VIII-59 on sale of non-convertible
materials given as XII-44; debentures XIII-89
XV-31; XVI-14 setting off I-52 to 53
secured, disclosure of partly surcharge waived XXII-70
secured bonds XXVI-55 treatment in construction
temporary XIX-1 contracts VII-54; XII-105
tripartite XIX-9
waiver of XVIII-47; XXII-70
working capital demand loan
M
XIX-1
write off when suits have Machinery and equipment, held
been filed XII-70 for use in specific
utilisation for acquisition of contracts XXI-187
fixed assets XXI-151, 164 Machinery spares (see also
Long production cycle items V- ‘Capital spares’) valuation
24; X-98; XVII-35; XXVI- XVII-95; XX-40, XX-50
72 XX-112, XX-128; XXI-42,
Long - term debt VIII-7 196; XXIII-14; XXIV-168;
Long term investments, XXV-62, XXV-80, XXV-90,
valuation of XXI-51; XXII- XXV-95, XXV-103; XXVI-
3, 39, 145; XXIII-112 161
Long term settlement with Maintenance cost reserve, write
employees VIII-74 back XI-91
Loss accumulated VIII-100; Maintenance spares under an
XVII-115 O&M agreement XXV-103
during construction period Management consultancy
XVII-68 services VII-32; XXI-208
for the purpose of section Management fee, portfolio XI-44
115J XI- 183, XI-195
276
Management fees, disclosure of directors’ comments on

XIII-41 obser-vations made in
Management taken over by auditor’s report XI-76
Govt., of a textile unit X- engaged in growing and
18 export of flowers XVI-7
Manager III-38 to 39 engaged in research
Managerial remuneration (see activities VII-82
‘Remuneration’) form of auditor’s report VII-37
Managing director’s frequency of physical
appointment in case of verification of stores and
amalgamation VIII-103 spare parts II-32
Managing director’s fees I-255; interpretation I-239
II-17 to 18 investment company VII-66
Managing director’s, land development company
contribution to provident IX-56
fund of IX-105 location of fixed Assets X-78
Mandatory costs of share issue service company X-32
IX-208 valuation of inventories XI-63
Mandatory refurbishment cost Market fees XII-89
XXIV-128 Market value, derived I-31 to 33
Manufactured components Matching concept XXIII-29
classification of III-1 MAT credit, creation of deferred
for internal use V-43 tax asset in respect
for sister units V-43 thereof XXV-145; XXVI-64
valuation of V-43 Material
Manufacture consumed VI-51
contractX-1 in-transit I-138; XII-46
defined X-4 left-over XIV-39
Manufacturers, supporting loaned XII-44
(section 80 HHC) VIII-93 packing IX-86
Manufacturing and Other produced, used in expansion
Companies (Auditor’s project III-7
Report) Order rejected I-138
club registered as a unconsumed in case of cost
company XI-124 plus contracts XVII-17
company engaged in under inspection I-138
agricultural operations I-
Materiality XXI-211; XXIII-
233
105;XXV-36, XXV-140
companies under the same
Mehta Sukhdi I-7
management XXI-237
Mementos distributed among
depreciation of fixed assets
employees during
under II-1 construction period,
accounting thereof XXVI-
187
277
Memorandum amounts due NBFC’s disclosure of partly

from subscribers to XI- secured bonds XXVI-55
222 NBFC’s presentation of NPA
Mercantile system I-7, I-92 to provision in the balance
93, I-96 to 98 sheet XXV-26
Mine closure expenditure, NBFCs’ valuation of unquoted
provision for XXV-185 investments XV-15
Minimum fee for audit by CAs Negative opinion VII-17; X-109;
XI-223 XXV-225
Mining contract work-in- Negative realisable value VIII-1;
progress X-111 XX-76
Mining industry, development of Net-of-tax VII-73
ore body XXII-129 Net realisable value XXI-137
Miscellaneous expenditure IV- materials and other supplies
14; XV-79 XXI-143
Mistakes I-25, I-26, I-129 to 130; of assets discarded/declared
XX-1 surplus XXI-148
Mistakes in billing XXI-61 Net worth
MODVAT for inputs VIII-29, VIII- computation of I-99, I-158,
32, VIII-35; XI-12; XIII-44, I-161
XIII-110; XX-11, XX-118; inclusion of capital
XXI-190 contribution from
MODVAT for capital goods XVI- consumers XXI-223
2; XXI-190 Nominee 1-6
MOU arrangements XX-59 Non-current asset VI-41
Molasses II-3 to 6 Non-convertible debentures XIII-
Monetary item XIX-49 89
Money market instruments XIX- Normal capacity utilisation for
109 the purpose of fixed
Motor Car Accident Tribunal production overhead XX-
award X-154 45, XX-108; XXII-132;
Moulds and dies used in XXVI-96
manufacture of a Not-for-profit organisation VI-67
component XX-4; XXIV- Not-for-profit organisation –
150 applicability of AS 3 and
MRTP Act, treatment of AS 18 XXVI-58
revalued assets X-172 Notional direct taxes I-272
Mutual Funds, initial issue Notional income VII-79; XVI-9;
expenses XX-115 XX-148
Notional loss/premium off sales
XIII-107
N Notional loss, adjustment
against notional premium
Name of CA firm, change in VIII- V-41; XIII-107
24; IX-106
278
NPA provision in quarterly Options on unissued shares,

accounts XIX-89 disclosure XV-73
NPA Provision, Presentation Orchid plants, accounting for
thereof in the balance XXI-35
sheet of an NBFC XXV-26 Ordinary activities XX-32; XXII-
70
Ore body, development of XXII-
O 129
Outgoings II-40 to 42
Obligation, constructive XXIV- Overburden, removal of II-16;
128 X-26
Office space, deposit made for Outstanding amounts I-41; XV-
using VIII-25 2;
Officer, for Part I of Schedule VI XVIII-6
of the Companies Act XV- Outstanding claims in insurance
81 business, estimation of
Oil and gas industry XXII-188; XXIII-145
expendable wells, Overdue outstandings XVIII-6
accounting for XXV-193 Overhead rates I-72
foreign currency transactions Overheads, allocation for
XXIII-89 inventory valuation XXVI-
producing properties, 96
exploratory wells and Overheads, basis of
development dry wells, apportionment
accounting for XXIV-156 XI-38, XI-155; XX-136;
segment reporting XXII-76 XXII-72, 132
side-tracking and abandoned
portion costs of wells
XXVI-109 P
Opening balances not available,
audit where VIII-43 Packing materials supplied by
Opening balance of inventory, customers XIII-52
restatement XXI-13 Packing materials, disclosure
Operating lease, disclosure of under Schedule VI IX-86
fixed assets XVI-32 Paid-up capital VIII-98
Operational support credit, Partner’s retirement, issues
accounting for XXI-160 involved X-146
Opinion, disagreement with Partly secured advances I-5
management XIX-79 Pass book credit XVII-20; XVII-
Opinion, disclaimer of VIII-46, 93
VIII-63 and 64; IX-28 Patent development cost XIV-10
Opinion, adverse/negative VII- Pay scales
17; X-109 (see under revision, retrospectively
‘Negative Opinion’) XII-102; XVIII-13
279
Payments of Bonus Act I-259, Plant & machinery, meaning

I-272; V-61 thereof XXIV-119; XXVI-
Penalty, accounting for XIII-48 22
Percentage of completion Plant & machinery, retired XIV-
method VI-62 to 65; VIII- 94 (see also under
48; XX-100; XXI-103, 109; ‘Retired Assets’)
XXIV-84; XXV-112, XXV- Plant II-24
140; XXVI-72 Plantation (see also ‘Timber’)
Performance award, accounting VII-72; VIII-14; VIII-60;
treatment of V-33 XIII-35, XIII-96; XXI-35
Performance guarantees VIII- Pond, tailing XXV-170
81; XV-60 Portfolio management services
Performance of a guarantee I- fees, recognition of XI-43
111 Portfolio management services,
Performance tests VII-8; VIII-81 disclosure in financial
Performance, when complete in statements XIV-100
a service contract XXII- Ports trusts Act, 1963, interest
114 on investments against
Petroleum industry specific funds XXIV-61
cash generating unit XXIV- Post-retirement medical facilities
105 XVII-51; XIX-150
segment reporting XXII-12 Post-shipment packing credit I-
side-teaching and 141
abandoned portion costs Potential equity share XXVI-220
of wells XXVI-109 Power sector
valuation of crude oil XXI-93 advance against depreciation
valuation of inventories XXI- XVII-98; XXV-37
137 applicability of AS 11(1994)
Petroleum products - accounting for transactions before
of loan transactions XV- 1-4-2004 XXIV-36
31 asset ready but not in
Physical verification of stores operation XXIII-58
etc. II-32 to 34 capital contributions received
Physical verification of work-in- from consumers XXI-223
progress I-118 catchment area, expenditure
Physician’s samples, valuation thereon XXIV-40
of deferred tax liability on
VIII-11 special reserve XXIV-64
Pisciculture I-96 deferred tax reserve XXIII-83
Plant & equipment, write-off electicity supply annual
small value items XXIII- account rules, 1985 XXII-
105 86
Plant & Machinery, bullet proof exchange differences in
jackets XXV-157 respect of fixed assets
280
acquired within India in Prepayment fees on borrowing

foreign currency XXIV-32 XXIV-80
foreign exchange gain/loss Previous auditor’s consent I-177
XXV-206 Previous years’ accounts I- 1 to
machinery spares XXIII-14 2, I-58 to 59; III-18 to 20;
segment reporting XXVI-49 XIV - 115; XVI-5
Power purchase agreement, Previous year’s figures,
foreign exchange disclosure of
difference XXV-206 corresponding IV-10
Power purchase agreement, Price escalation clause I-55 to
revenue recognition in 57, I-117
respect of deferred tax Price revision with retrospective
liability recoverable on effect VIII-75
actual payment XXV-216 Primary period of lease closure
provisions for mandatory XI-164
refurbishment cost XXIV- Principal and interest,
128 apportionment between
recovery of income tax from XIX-159
customers XXI-47 Prior period item I-28 to 29, I-84
revenue recognition, deferral to 85; VI-71, VI-75; VII-47
due to different rates of to 50; XI-27, XI-77; XX-1,
depreciation XXIV-123 XX-67; XX-71; XXI-13, 98;
sale of right to receive power XXII-121; XXIII-153; XXV-
XXII-86 34; XXVI-6, 22, 37, 119
valuation of coal XXI-80 Prior year accounts (see
valuation of inventories XXV- ‘Previous years’
148; XXV-182 accounts’)
Power tariff, additional Pro-rata depreciation IX-58,
demanded by IX-68, IX-70; X-79; XI-73;
Government XXI-78 XII-24 ; XV-25
Pre-acquisition profit IV-17 Process wastes I-53 to 55
Preference capital, redemption Processing industries I-234 to
of VI-44; XI-219; XVII-26 236
Preference dividend VI-44; Processors, TDS on charges
XI-214, XI-219 paid VIII-88
Premium payable on Production, third party X-1
investments Profession XI-193, XI-200
VIII-69; XIII-41 Profit and Loss account debit
Premium receivable on maturity balance, whether part of
of debentures XVII-103 free reserve XXIII-171
Premium received on land XII- Profit and Loss Account during
71 construction period XI-128
Premium, notional VI-41; XIII- Profit and Loss Account when
107 going concern assumption
Prepaid expenses I-110 inappropriate XX-124
281
Profit and Loss Appropriation Provision for doubtful advances

Account I-29, I-60 to 61, and claims, considered
I-108 recoverable XXVI-37
Profit determination Provision for doubtful bank
for section 32 AB VIII-91 deposits XIX-25
for section 80 HHC VIII-89, Provision for doubtful debts
VIII-97 XXIV-75
Profit on cancellation of roll-over Provision for excise duty XXI-67
contract XIII-1, XIII-30 Provision for expected
Profit on sale of investments expenditure in respect of
VIII-39 alterations/amendments
Profit on sale of machine VIII-86 XXV-175
Profit on surrender of leasehold Provision for final mine closure
rights XIII-34 expenditure XXV-185
Profit arising from a sale & lease Provision for gratuity liability
- back XIII-101 XXI-72; XXIII-69, 99
Progress payment II-24 to 27; Provision for incomplete
VII-44 assignments and
Proportionate completion disclosure thereof XXV-
method (see ‘percentage 175
of completion method’) Provision for interest on
Prototype development costs advance tax XXIV-96;
XIV-1; XXV-3 XXVI-166
Provident fund I-60 to 61; IX- Provision for losses on contracts
104; XIII-105; XXI-187
XI-6 Provision for leave encashment
Provision for contingent liability (see also ‘Leave
XIX-31; XXIV-50; XXVI- encashment’) XX-27; XXI-
119 72, 227
Provision for contingent loss, Provision for losses on current
writing back of XIII-105 assets XIX-25
Provision for credit card reward Provision for mandatory
points scheme XXI-129 refurbish-ment cost XXIV-
Provision for customs duty XXI- 128
57 Provision for NPA XIX-88; XXV-
Provision for deferred 26
entitlement of LTC/LLTC Provision for obsolescence of
XXII-16 stores and spares XXV-62
Provision for diminution in value Provision for outstanding claims
of investments XXII-3, 39, XXII-188; XXIII-145
145 Provision for redundancy, non-
Provision for disputed income- moving and slow moving
tax demands XXV-53 items XXI-143
Provision for scheduled
maintenance under an
282
O&M Management XXV- Qualifications in auditor’s report,

103 comments in director’s
Provision for stamp duty XXIII-8 report on VI-80
Provision for wear and tear of Qualifications in auditor’s report,
stores, presentation XXIV- manner of making XII-
172; XXV-148 107; XXI-11, 20, 72, 98
Provision of earlier years no Qualifications regarding
longer required XII-92 capitalisation of
Provision of market fees XII-89 revaluation reserve
Provisions’ adjustment for pertaining to an earlier
section 32AB purposes year XVII-1
VIII-91 Qualifying asset
Provisions for expenses acquisition of land XXV-16
disclosure of XIX-41 use of borrowed funds or
Provision whether required, equity inflow XXII-93
when dues recoverable use of borrowed funds or
from company under internal accruals XXIII-
liquidation XXII-35 164
Purchase consignment XII-1 Quantity discount VI-56; XIII-39
Purchase, consolidated X-10 Quarterly results, provision for
Purchase cost, inclusion of NPAs in XIX-88
contribution to ‘Gas Pool Quota obligation treatment of
Account’ XXV-164 shortfall in levy IV-3
Purchases, determination of
time to recognise XX-9;
XXII-7 R
Purchases, high sea I-262
Purchases, MOU arrangements Railways siding IX-14
XX-59 Railway receipts, accounting for
sales XXII-27
Raw materials consumed VI-51;
Q IX-86
Real estate accounting IX-2; IX-
Qualification in audit report re. 9
non-genuine commission Rebates (see also ‘Discounts’)
payments XII-50 XIII-39; XXII-169
Qualification in auditor’s report Receipts, gross VI-83
in case of statutory Recognition of duty credit
violations VI-13, VI-78; entitlement under
VII-1, VII-18 to 20, VII-38 served from India scheme
Qualifications in auditor’s report XXVI-181, 225
in case of revised target plus scheme XXVI-148
accounts XVI-91 Reconstitution of audit firm VIII-
24; IX-106
283
Reconstruction Reserve, managing director (see

transfer to General ‘Managing director’s
Reserve on amalgamation fees’)
XV-23 set-off of previous years’
Recovery of amount received, losses, for managerial
apportionment between XI-217
principal and interest XIX- to employees of subsidiaries
159 I-113 to 114
Recovery of income tax from Renewal of sleepers and rails,
customers XXI-47 expenditure on IX-14
Redemption of borrowings, Rent I-27 to 28; XX-71
sinking fund for IV-6 Renunciation of rights shares,
Redemption of builders’ loan accounting for XI-41
XVII-75 Rephasement of builder loans
Redemption of preference XVII-75
capital VI-44; XI-219; Replacements IX-14; XIV-75;
XVII-26 XV-37; XVI-100; XVIII-66;
Redemption Reserve I-51; I- XXIII-126
163; V-1; XIV-80; XVII-1; Research and development
XVII-115 costs XIV-1; XXV-3
Refurbishment cost, accounting Research and Development
for XXIV-128 Fund III-31 to 33
Registration fee on Research institution,
execution/renewal of applicability of
lease XIX-46; XXV-16 MAOCARO to VII-82
Regrouping of previous year’s Reserve, arising in
figures IV-10 amalgamation in the
Rehabilitation and resettlement nature of merger XXIII-
office, accounting for 109
establishment expenses Reserve, creation and utilisation
thereof XXVI-198 XXIV-88
Related party XXIII-174 Reserve, definition XX-17; XXIII-
Relative I-77 to 78; III-38 to 39; 171; XXIV-75; XXVI-37
V-13; VI-58, VI-60; VII-41 Reserve fund II-3 to 6; VII-70;
Reliance on the work of internal XXIV-61
auditor V-12 Reserves no longer required,
Relocation of a unit- write back of XI-88, XI-91
compensation to Residual reserve for bonus
employees XVII-107 issue I-48 to 49
Remuneration Retainership basis, appointment
directors (see ‘Director’s of auditors for other
fees’) services on VII-31
managerial I-8, I-209 to 212, Retention money, in the books
I-214 to 217; II- 40 to 42; of contractee XX-33
VII-47 Retired assets VIII-21; XIV-94
284
Retirement benefits (see also export on CIF basis XI-56

‘Voluntary retirement for a service organisation
scheme’) XVII-51, XVII- XVI-24; XXII-114; XXV-
59; XVIII-60; XIX-145, 140
XIX-150; XX-90; XXI-72; from internet ticketing XXIV-
XXII-183; XXIII-69, 99 43
Retirement of partner X-146 from lease of housing /
Retirement scheme, voluntary industrial projects XX-71;
X-81; XVII-81; XIX-145 XXII-20; XXVI-12
Retrenchment benefits, from unmanned PCOs XXIV-
treatment of VI-27 1
Revaluation reserve I-51, I-163; ground rent XXII-138
V-1, XIV-80; XVII-1, XVII- housing projects XXIII-95
115; XX-163 in an advertising company
Revalued assets I-4, I-34 to 41, VII-33
I-51, I-162 to 172; X-172; in case of insurance claims
XIV-19; XV-36; XX-163 (see also ‘Insurance
Revenue recognition (see also claims’) XX-54
‘Sales’) in case of construction
against FOR destination contracts VII-12
contracts VII-28; VIII-46; in case of lease XX-71; XXII-
X-98; XXI-52; XXII-27 20; XXVI-12
arising from freight and increase in revenue due to
handling of containers sales tax exemption XX-
XXII-114; XXIV-138 14
before delivery of goods in respect of moulds sold, but
XVII-35; XXII-98 retained for further
by builders XXIII-95 production XXIV-150
credit arising on pre-mature of amounts receivable on
repayment of sales tax completion of
liability otherwise performance guarantees
deferrable XXIII-122 XV-60
customs duty credit under of billable, retrospective
Served from India revision of pay scales
Scheme XXVI-181, 225 XVIII-19
customs duty credit under of gain on conversion of
Target Plus Scheme foreign currency into
XXVI-148 Indian currency XX-64
deduction allowed from of gains arising from
invoiced amount XXI-61 translation of foreign
deferral due to different rates currency debts on
of depreciation XXV-123, balance sheet date XVIII-
XXV-216 4; XX-64
design engineering XXI-85
dredging contracts XV-65
285
of goods manufactured payment basis

against customers’ orders XVII-42
VI-53 on sale of natural gas,
of goods delivered to the inclusive of amount
transporter for despatch contributed to ‘Gas Pool
to the customer’s godown Account’ XXV-164
and issue of sales invoice
on time proportion basis XXI-
but delivery on payment
XXII-98 177; XXII-138
of income from consultancy percentage of completion
fees XXI-85; XXV-175 method XXI-103; XXV-
of income from units XIX-44 140
of income from interest XIX- power sector XVII-98; XXIV-
109: XXIV-61 123; XXV-37, XXV-216
of income from interest on premium on maturity of
idle project funds XX-18 debentures XVII-103
of income tax recovery from procurement projects XXI-85
customers XXI-47 project management XXI-85
of insurance claims XX-54 rendering portfolio
of interest on investments management services XI-
against specific funds 43
XXIV-61 sale of sub-distribution rights
of non-refundable deposit of a film VIII-5
XIX-102 sales effected by documents
of proceeds from leasing of through bank by a
land XX-30; XXII-20
company and not cleared
of sales made by business
by parties within
associates of a company
stipulated time, whether
XVI-43, XVI-47, XVI-70;
XXVI-88 amounts to XVI-17
of sales made by a service contracts XIII-113;
franchisee XXVI-190 XX-156; XXI-109; XXII-
of surcharge on outstanding 114, 138
dues XVIII-6 transfer of rights not
of training fees and belonging to company
registration fees XXI-177 XVI-93
of undistributed surplus in waiver of interest XIX-99
AOP XIX-90 where rates of depreciation
on contracts at early stages are different for financial
XX-100; XXI-103 statements and tariff
on long production cycle fixation XXIV-123; XXV-
items XVII-35; XXVI-72 216
on sale of goods on Revenue reserve, adjustment of
documents against impairment loss XXV-22
286
Revenue stamps I-95 S

Review, limited XX-84
Revision of accounts V-30; XVI-
Sale of Goods Act I-269; XXII-
67, XVI-89, XVI-113
98
Revision of prices with
Sales (see also ‘Revenue
retrospective effect VIII-75
recognition’)
Revision of pay scales with
and leaseback IX-72; X-132;
retrospective effect XII-
XIII-101
102; XVIII-13
before delivery of goods
Right of use of land XIX-119,
XVII-35; XXII-98
XIX-128; XX-30;XXV-170
consignment VI-33; XII-1
Right to use the trademark
XXIII-135 contract I-117; IV-27
Right of shares renunciation, export XVIII-70
accounting for XI-41 high sea I-262
Risks and rewards, transfer of in case of advertising
XXI-52; XXII-7, 27, 98; company X-88
XXIV-150; XXVI-190 in case of franchise business
‘Rolls’ used in a rolling mill, XXVI-190
accounting of XIV-87 intangible asset XXII-86
Roll-over contract IX-47; XVI- notional loss/premium on
106 XIII-107
for long term liabilities IX-47 MOU arrangements XX-59
XI-106 of intermediary product
for liabilities for purchasing during construction period
raw materials XIII-19 VIII-76
interest on float arising in of wheat and rice under the
XIII-21 Government allocation,
profit on cancellation of XIII- purchased from another
1; XIII-30; XIV-74 government undertaking
treatment of estimated XXVI-88
charges payable in future on documents against
under XIII-24 payment basis XVII-42
Royalty I-59, I-105 recognition of I-154 to 157;
Rule 3A of the Companies VIII-46; XI-56, XI-117;
(Acceptance of Deposits) XXII-98
Rules IV-36 sub-distribution rights of films
Rule 57R(8) of the Central VIII-5
Excise Rules, 1944 XXI- tax I-62, I-109, I-263 to 269;
190 XI-51; XX-14
value variation X-91
where variation between
loading port and
discharge port X-91
Sales tax
287
credit arising on pre-mature Section 43 B of Income-tax Act,

repayment of 1961, VII-15; X-165; XI-4
accumulated liability Section 44AB of Income-tax Act,
otherwise deferrable 1961
XXIII-122 applicability to a finance
Samples VIII-11 business XI-184
Schedule VI applicability to a hospital XI-
change in basis of 193
accounting XXIV-174 applicability to a stock broker
companies under the same X-166
management XXI-237 applicability to a travel agent
current liability, interest on XI-198
shortfall in payment of audit under clause II of form
advance tax XXVI-166 3CD IX-95
disclosure of partly secured appointment of auditors XI-
bonds XXVI-55 197
format of balance sheet exempted institution V-56
XXIII-171 provisions under clause 9(c)
information provided under of Form 3CD XIX-38
part IV XXIV-146 Section 80A of Companies Act,
provision for wear and tear of 1956, arrears of
stores and spares, preference dividend XI-
disclosure XXIV-172 219
Schedule XIII X-172 Section 80 HHC of Income-tax
Schedule XIV XXIII-126; XXVI- Act, 1961, VIII-89, VIII-93,
42 VIII-97
Scheduled Bank I-253 Section 115J of Income-tax Act,
Seasonal business stock held 1961, XI-183, XI-194
XXI-1, 4, 7, 31 Section 115JAA(IA) of Income-
Secretary, signing of accounts tax Act, 1961, XXV-145;
by VI-34 XXVI-64
Section 32 AB of Income-tax Section 209 (3)(b) of
Act, 1961 VIII-91; IX-95; Companies Act, 1956,
XI-186, XI-190, XI-201, XXI-211; XXII-45, 114
XI-204 Section 211 of Companies Act,
Section 33 ABA of Income-tax 1956, XXII-45; XXIII-83
Act, 1961, Disclosure of Section 212 of Companies Act,
long-term deposit XXIV- 1956, particulars required
93 to be attached under XIII-
Section 36(1)(viii) of Income-tax 21
Act, 1961, deferred tax Section 221 and 227 of
liability on special reserve Companies Act, 1956,
XXIV-64;XXV-135, XXV- applicability to a liaison
201; XXVI-124 office of a foreign
company XII-125
288
Section 227(1A) of Companies Section 619(2) of Companies

Act, 1956, XXIII-117 Act, 1956, appointment of
Section 227(2) of Companies auditor XXI-217
Act, 1956, XXII-45 Securitisation, disclosure of
Section 227(3) of Companies class ‘B’ PTCs held by
Act, 1956, XXI-215; XXII- Originator XXIII-149
45 Security VI-50
Section 224 (I-B) of Companies Segment Reporting XXII-12, 76;
Act, 1956, application to XXIII-1; XXIII-75; XXVI-
CA in full-time 49, 79
employment XI-216 Self-insurance claims VII-2; XI-
Section 225 of Companies Act, 70
1956, compliance with Self insurance reserve, write-
XIII-128 back of XI-88
Section 234B and 234C of Served from India Scheme,
Income-tax Act, 1961, accounting for duty credit
disclosure of interest entitlement XXVI-181, 225
XXIV-96; XXVI-166 Service charges for repairs in
Section 269T of Income-tax Act, transit XI-70
1961, application to loans Service company, applicability
squared up by means of of MAOCARO to VII-82;
book entries XIII-118 X-32
Section 292 (1) (d) of Service contracts, revenue
Companies Act, 1956, recognition in XIII-113;
applicability of XIII-124; XXI-109; XXIV-43
XXII-191 Servicing equipment, defined
Section 293(1) (d) of XX-40
Companies Act, 1956 Setting off losses I-52 to 53
clarification of borrowing limit Settlement allowance, whether
XII-120; XIX-1 retirement benefit XVIII-
inclusion of debit balance of 60; XXII-183
profit and loss account in Share application money as
free reserves XXIII-171 deposit
Section 295 of Companies Act, IX-104
1956, contravention of VI- Share application money
13 pending allotment I-118;
Section 297 of Companies Act, II-27 to 29;
1956, VII-85 XV-34
Section 370(1B) of Companies Share applications rejected,
Act, 1956, applicability for whether part of
MAOCARO 1988 and subscribed share capital
Schedule VI XXI-237 XII-121
Section 372 (A) of Companies Shareholders’ enquires from
Act, 1956, XIX-142 auditors VII-64
289
Share in undistributed surplus in Sinking fund for redemption of

an AOP XIX-90 borrowings IV-6
Share issue expenses, Societies Registration Act,
classification of XI-208; appointment and tenure of
XIII-75 auditor XV-1
Share premium XXV-121 Society, co-operative XII-15, XII-
Shares allotted against cash 117
XVI-114 Software development cost
Shares allotted against debt XI-146; XVI-11
XVI-114 Software use licence cost XXVI-
Shares issued against cash and 6
intangible asset XXV-121 Spares, allocation of total cost
Sheera Niyantran Adhiniyam II- XXIV-168; XXV-62
3 to 6 Spares capital/insurance XVII-
Shipping industry 95; XXI-196; XXIII-153;
deferred tax asset/liability XXV-162, XXV-80, XXV-
upon adoption of tonnage 90, XXV-95; XXVI-161
tax scheme XXV-43, Spares for resale VI-51
XXV-72 Spares, high value XXV-95
interest earned on Spares, initial pack procured
investments against with plant XXI-196
specific funds XXV-61 Spares, mandatory XIV-102;
Short-fall in the payment of XVII-8
advance income-tax, Spares, replacement of worn-
disclosure of interest out components XXV-90,
thereon XXVI-166 XXV-95; XXVI-161
Short-fall in the value of Spares sold along with
investments VII-17 equipments, treatment of
Short production cycle items VI-12; XIV-102
XI-117 Spares, valuation of XXI-42
Show-cause notices VII-21 Spares, where principal item of
Shut-down period, expenditure fixed asset fully
during XVI-19 depreciated XXIII-14;
Significant accounting policy XXV-62, XXV-90, XXV-95
XVIII-72 Special rebates allowed by
Silver rupee coins I-128 suppliers XIII-39
Sick Industrial Companies Act, Special reserve, deferred tax
treatment of Bond liability thereon XXIV-64;
Redemption Reserve and XXV-135, XXV-201
miscellaneous Special tools, nature of XVIII-57
expenditure XV-79 Specified period I-123 to 124,
Side-tracking costs of wells, I-157, I-158; XXV-62,
accounting thereof XXVI- XXV-80
109 Spin - off XIV-80
Stamp duty
290
on registration of land XXV- Subsequent years’ accounts I-

19 256
on renewal of lease XIX-46 Subsidiaries, expenses incurred
payable on execution of for the benefit of I-112 to
lease, provision for XXIII- 114; XIX-94
8 Subsidiary company losses,
Stand by equipment, whether provision for I-88; II-15 to
fixed asset XI-85; X-40; 16
XXI-196; XXV-95 Subsidiary company, loan sub-
State-controlled enterprise, lent by parent XXIV-17
applicability of AS 18 Subsidiary company under
XXIII-174; XXVI-58 liquidation, dues
Statement on Qualifications in recoverable from XXII-35
Auditor’s Report XXII-45; Subsidiary, wholly owned XIX-
XXIII-12, 117 142
Statutory auditors Subsidy I-102; I-135; IV-30; XI-
appointment for special 161; XVII-12; XVIII-36;
purpose assignment XXII- XX-79; XXIV-164
1 Substantial interest V-14; VI-59,
appointment of firm when a VI-60; VII-40 to 41
partner is director in Successful costing approach IV-
holding company XVII-84 12
Statutory reserve fund II-3 to 6 Sugar industry, inclusion of
Statutory reserve, interest on interest cost in inventory
investments there against valuation XXI-1, 4, 7, 31
XXIV–61 Sundry creditors I-21, I-74, I-
Staff loans X-144 111; VIII-50; XVI-57; XIX-
Stock broker 102
applicability of section 44AB Sundry debtors I-111 to 112; I-
X-166 142 to 144; II-35 to 36; III-
membership rights XXIV-4; 3 to 5; XVII - 90; XXII-35
XXVI-172 Supplementary cash assistance
Stock exchange cards XXIV-4; I-135
XXVI-172 Surcharge in the nature of
Stock lost in flood / fire I-241 interest on outstanding
Stores & spares, provision for dues XVIII-9, XVIII-11
XXIV-172 Surplus funds deployment,
Stores & spares replacement I- disclosure of XVI-110
106 Surplus, undistributed XIX-90
Stores repairs I-29 to 30 Sur-tax Act X-51
Sub-distribution rights from films Swap transaction
VIII-5 additional interest cost for
Subscription shares, amounts XXI-181
due towards XI-222 difference in exchange rate
and swap rate XXI-181
291
of grant for meeting export

marketing expenses VIII-
T 96
of interest accrued X-16, X-
Tailing pond XXV-170 165
Tangible security VI-50 of lease equalisation charge/
Target Plus Scheme, credit XIV-130
accounting for duty credit Taxation, provision for I-43,
entitlement XXVI-148 I-172, I-248 to 249
Tatkal scheme XIX-102 Taxation, deferred VII-74
Tax audit (see also ‘Section 44 Taxes on income, accounting
AB’) for VII-73; XI-171; XXII-
clause 9(c) XIX-38 45; XXV-22, XXV-43,
fees, disclosure of VII-64 XXV-72, XXV-135, XXV-
185, XXV-193, XXV-201;
of exempted institutions V-56
XXVI-124
of stock broker X-166
Tea industry, valuation of
report, accounts not audited
inventories in VIII-14; X-
under any other statue
75
X-147
Telecom industry
under clause II of Form 3 CD
applicability of AS 28 XXV-
IX-95
131
where accounting year is
equipments - whether
different from previous
continuous process plant
year XIV-128
XVII-79
Tax auditor, appointment of
revenue from PCOs XXIV-1
internal auditors as VIII-86
installation charges collected
Tax consultants, appointment of
from customers XXV-29
auditors as III-44 to 45
Telegraphic transfers
Tax deduction at source I-244;
adjustment against cash
VIII-88; IX-99
credit account
Tax expense, whether interest
V-28
on shortfall in payment of
Telephone Bills, disputed
advance tax included
amounts
XXIV-96; XXVI-166
XV-58
Tax implications of profit on sale
Telephone company, installation
of machine VIII-86
charges collected by
Tax implications of assets
XXV-29
destroyed in fire X-39;
Temporary construction I-151 to
X-147
153
Tax liability, disputed I-173,
Temporary loan IX-1
I-250; III-11; XXV-53
Termination benefits, treatment
Taxability
of
VI-26; X-81
292
Textile unit, management taken underutilisation of capacity

over by Govt. X-18 XXII-160
Third parties, goods produced Trust I-21, I-82 to 83, I-116,
by I-180; XI-6
X-1 Turnover
Timber, expenditure on raising in case of advertising
III-12 company X-88
Time barred liabilities VI-47 in case of construction
Timing differences VIII-74 to 75; company XXIV-84
XI-171; XXIV-64; XXVI- inclusion of internal transfers
124 in
Title of an asset sub-judice XI- XV-18
48
Tonnage tax scheme, deferred
tax assets/liabilities under U
XXV-43, XXV-72
Tools XVIII-53 Unclaimed bonds/debentures
Town development IX-3, IX-9 XII-61; XVII-73
(See also ‘Colonies, Unclaimed credit balance,
development of’) writing back of I-104; XIV-
Trade discount VI-57; XIX-71; 95
XXI-63 Unclaimed dividends, treatment
Trade investments VII-17 of IV-34
Trade marks Uncommitted reserve I-66 to 70
accounting for XXIII-135 Undercutting of audit fees I-175,
amoritisation of XVII-86 I-176, I-180, I-181
Trading receipts VIII-15 Underwriting commission I-207
Transfer pricing XI-133 to 209
Transfer of rights not belonging Undistributed surplus in AOP
to the company XVI-93 XIX-90
Translation of financial Unencashable leave XIX-124;
statements of foreign XX-90
branches XII-75 Unexecuted contracts I-186, I-
Travel agent 199, I-209
applicability of section 44AB Unexecuted rights I-85
XI-198 Uniform accounting year VIII-
revenue from internet- 101
ticketing XXIV-43 Unissued shares, options on
Travel expenditure liability XVIII- XV-73
60; XIX-38, 41; XXII-16, Units VIII-67; XIX-44
183 Unpaid dividends I-220
Trial run Unpaid wages / salary / bonus,
capitalisation of borrowing writing back of XIV-95
costs XXI-114
293
Unquoted investments, Valuation balance sheet XXII-

valuation of XV-15 121
Unsecured loan XXII-86 Valuation of
Unserviceable stores II-34 to 35 empties IV-8
Unsettled claims I-55 fixed assets, duty credit
Unsold or unutilised DEPB under Served from India
credit XVIII-42 Scheme XXVI-181, 225
Unsold site, accounting for XVI- fixed assets held for sale
9 XXVI-217
Unspent capital based grant, fixed assets retired from
disclosure XIV-46 active life XXI-148
Unutilised duty credit certificates inventories (See ‘Inventory
under Served from India Valuation’)
Scheme at the year end intermediate products XX-49;
XXVI-225 XXI-137
Unutilised MODVAT credit XIII- investments (see
113 ‘Investments’)
Unutilised monies, disclosure wastes (see ‘Wastes’)
under Schedule VI XXI- Value in use of cash generating
124 unit, determination on the
Urban development IX-3, IX-9 basis of valuer XXVI-28
US 64 of UTI XIX-44 Voluntary retirement scheme
Usance bills I-244 X-81; XV-40; XVII-81;
Usance period, interest during XV-70 XIX-145
Useful life Vouchers, ownership and place
construction plant/equipment of maintenance of XII-98
VIII-19
determinatin thereof XXVI-42 W
intangible assets XXIV-4
revision of XXV-62
whether same as that of Waiting time in respect of
principal asset XXV-80 relocation of unit,
Usual working charges II-40 to compensation to
42 employees XVII-107
Utilisation of borrowed funds Waiver of loan and interest
XXII-93, 177; XXIII-164 thereon XVIII-47
Utilisation of contingency Waiver of interest XI-27; XIX-99;
reserve XXIV-88 XXIII-131
Waiver of surcharge XXII-70
Warehouse charges VIII-15
V Warehousing Corporation VI-71;
XXIII-75
Vacancy, casual VIII-24 Warranties XI-180
Warrants, detachable XIII-89
294
Wastes I-53 to 55; XI-22; XVI-34 in foreign country where

Weighted average cost of stock foreign currency devalued
I-87 XIX-21
Weighted average no. of Working capital, borrowing for
shares, computation in VIII-16; XIX-1
case of bonus issue XXV- Working charges II-40
113 Working papers XVII-74
Wells, expendable XXV-193 Works contracts I-115; II-24 to
Whole time directors, 27 III-3, III-14
appointment in case of Write-back of provision for a
amalgamation VIII-103 contingent loss XIII-105
Wholly-owned subsidiary XIX- Write-back of reserves XI-88;
142 XI-91
Winding up petition XVII-90 Write-back of time-barred
Windmill, continuous process liabilities VI-47
plant XVII-30 Write-back of unclaimed credit
Work-in-progress, balances, excess
capital I-150, I-186; VII-9; provision and unpaid
VIII-61 wages / salary / bonus etc
classification III-1 XIV-95
construction contract, Write-off of
valuation of XXI-187; assets IV-18
XXV-13 debts XXII-70
construction, of builders investments XXI-51
XXIII-95 small value items XXIII-105
depreciation as an element suit-filed debts XII-70
of cost I-93 Write-off/write-back of accounts
disclosure II-24; VI-61; VII-42 receivable and payable in
exploratory wells XXV-193 profit & loss account
in case of consultancy XIV-90
organisation XXV-140
in case of mining contract X-
III Y
inclusion of amount
receivable against extra Year, uniform accounting VIII-
work and other claims not 101
certified or accepted by YTM method XVI-40
the clients XXV-13
losses in valuation V-15
of consultancy projects XI-17 Z
valuation I-119; III-15; IX-35;
IX-76; XI-143; XIV-20; Zero based debentures XII-115
XVI-11; XVII-46; XIX-21;
XXI-103; XXV-13
295

Compendium - of - Opinions - Vol. - XXVI - Expert Advisory Committee - Query 25 & 32 PDF

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Volume XXVI

ISBN : 978-81-8441-064-8 (Volume XXVI)

Expert Advisory Committee

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this publication may be translated, reprinted

(This twenty sixth volume contains opinions finalised between February

Price : Rs. 200

ISBN : 978-81-8441-064-8 (Volume XXVI)

ISBN : 81-85868-05-0 (Set)

Published by : The Publication Department on behalf of The

Printed at : Sahitya Bhawan Publications, Hospital Road,

New Delhi CA. T.N. Manoharan

CA. K.P. Khandelwal

1. Treatment of engineering fee paid to a lumpsum turn

1. A public sector undertaking is engaged in refining and

(a) Price for residual process design and detailed

(b) Price for supply portion, and

engineer-in-charge of the company. Upon satisfactory conclusion

‘Accounting for Fixed Assets’, issued by the Institute of Chartered

(i) site preparation;

“10.1 In arriving at the gross book value of self-constructed

(a) Whether the accounting treatment of capitalising the

(c) If the answer to (b) above is also in the negative, the

“20. The cost of a fixed asset should comprise its

3. Prior to Accounting Standard (AS) 26, ‘Intangible Assets’,

maintenance of the software, right to use the latest version of the

58. Expenditure on an intangible item that was initially

(a) it is probable that the expenditure will enable

1.4.2003 and also further expected to be incurred for total

(b) In case the answer to (a) above is in the negative, what

(i) Expenditure incurred on licence fee for SAP software

C. Points considered by the Committee

“6.1 Fixed asset is an asset held with the intention of being

“Prior period items are income or expenses which arise

be recognised as an intangible asset. Paragraph 58 of AS 26

14. The Committee notes paragraph 4.3 of the ‘Preface to the

(a) The accounting treatment of charging expenditure, on

(b) Subject to the condition that the user licences exist on

(i) expenditure incurred on purchase of SAP software

1. A government company, registered under the Companies Act,

amount is collected towards 100% of the estimated development

4. According to the querist, the above accounting treatment was

should be recognised as income in the profit and loss account in

6. The Accountant General (Commercial) had commented on

(a) The query was regarding a government company, which

(f) In the light of the above considerations, the Expert

(ii) The lessee shall pay 100% of the estimated development

period of lease and take possession of the said allotted

11. According to the querist, the condition, “performance of the

12. Besides, as per the querist, if the cost of acquisition of land

be taken into consideration with all other relevant factors and

(c) recognising the proportionate amount of lease premium

(d) charging the depreciation to the profit and loss account

C. Points considered by the Committee

“17(b) Substance over Form

a similar period. The Committee is of the view that taking into

the significant rights of economic ownership of the land leased for

Subject: Depreciation of Water Treatment Plant (WTP) and

A. Facts of the Case

1. A public sector company with majority shareholding by a state

Water Treatment Plant (WTP)

2. The company constructed a WTP in 1985 to treat raw water

(ii) De-mineralisation plants (DM plants)