NATIONAL THERMAL POWER CORPORATION LIMITED

MANUAL ON ASSET ACCOUNTING

November 2002

A.F.FERGUSON & CO. NEW DELHI

CONTENTS Process No 01 02 03 04 05 06 07 08 09 10 Process Introduction Establishment of Asset Control authorities Allotting of Asset Identification Number Capitalisation of assets Allocation of common expenses and IDC Capitalisation of bought out assets Depreciation Accounting Transfer of Assets Disposal of Assets Maintenance of Fixed Asset Register (FAR) Physical verification of fixed assets List of Formats Format Asset Control Register-departmental Fixed Asset Register-Land Fixed Asset Register-Plant & Machinery Fixed Asset Register-MBOA MIR FORMATS Report on Physical Verification Appendices attached Appendix I Appendix II Appendix III Commercial Generation - identification of cut-off date Illustration of IDC calculations Program for physical verification Format No FA/01 FA/02 FA/03 FA/04 FA/MIR/01 Page No 8 9 11 16 19 21 24 27 28 29

Manual on Asset Accounting

INTRODUCTION This manual provides the policies/ guidelines to be followed in respect of physical control of fixed assets, various accounting issues such as capitalisation, depreciation, amortisation and adjustments of discrepancies on physical verification. Fixed Asset is defined as an asset held with the intention of being used for the purpose of producing or providing goods and services and is not held for sale in the normal course of business. The fixed asset costs should be recorded in the book of accounts on a historical cost basis. Classification of fixed assets Fixed assets should be classified in the following categories: Goodwill Land Freehold and leasehold Buildings Plant and administrative, township, Guest house and others Roads and Bridges Railway Sidings Plant and Machinery Water supply, drainage and sewerage Electrical installations Temporary erections Construction Equipment Vehicles Furniture, fixtures and other office equipments Communication Equipments EDP Equipments Unserviceable/ obsolete items Capital expenditure on assets not owned by the company Components of cost of an asset The cost of an item of fixed asset should comprise of its purchase/ contract price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition or for its intended use. Trade discounts and rebates, if any, should be deducted in arriving at the purchase price. Directly attributable costs include the following items: Site preparation Initial delivery and handling costs Installation costs, such as special foundations for plant Professional fees (fees to architects, engineers, etc.)

Determination of cost of an asset under certain circumstances Assets acquired for a consolidated price Manual on Asset Accounting

In case of several fixed assets purchased for a consolidated price, the total consideration should be apportioned to the various assets on a fair basis (as determined by competent valuers)

Assets acquired for consideration other than cash The cost of the fixed assets acquired in exchange for another asset is usually determined by reference to the fair market value of the consideration given. The fair market value of the asset acquired may be considered if that is more clearly evident. Fixed assets acquired in exchange of 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.

Assets acquired on hire purchase Fixed assets acquired on hire purchase should be recorded at their cash value, which, if not readily available, should be calculated by assuming an appropriate rate of interest. These assets should be shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have the full ownership thereof.

Assets held jointly with others Where an asset is held jointly with others, proportionate value of the original cost, accumulated depreciation and net book value of the asset are to be stated in the balance sheet. Alternatively, the pro-rata cost of such jointly owned assets can be grouped together with similar fully owned assets. Details of such jointly owned assets should be indicated separately in the fixed assets register.

Construction of several assets for a lumpsum consideration In respect of projects under turnkey contracts various assets are constructed for a lumpsum contract value. The policies to be followed in this respect are as under: The fixed assets should be capitalised as per the account heads given in the Chart of Accounts. The total contract value should be broken up into the various assets that are being constructed under the contract. The break-up of the cost of the contract into the various items of assets being constructed should be obtained from the contractor/ supplier at the time of finalisation of the Letter of award. In circumstances where the system-wise break-up of the contract value is not available, the total cost is to be apportioned to the various systems on the basis of technical estimates keeping in view the project cost as approved by the GOI as well as past experience of actual cost incurred in respect of the various systems in similar projects.

Manual on Asset Accounting

In case of other contracts common to more than one system also the total contract value should be broken into the systems covered under the contract (on a similar basis as mentioned above).

Capital expenditure not represented by assets In respect of capital expenditure incurred, which is not represented by assets (e.g. approach roads, diversion of roads, etc), the expenditure should be amortised over a period of 4 years and the same should also be disclosed as such in the financial statements.

Compensation, rehabilitation and other expenses relatable to land Any deposits, payments/ liabilities made towards compensation, rehabilitation and other expenses relatable to land in possession should be treated as cost of land. Site leveling and grading expenditure (expenditure on landscaping) should be added to the cost of the building/ structures built up on such land and should not be added to the cost f the land

Adjustment to the cost of the assets The cost of an asset may be subsequently adjusted due to any of the following: Adjustments arising on passing of bills / adjustment of bills Upward or downward revision due to exchange variation on loans/ foreign currency liabilities for acquiring / construction of assets Incidental / additional expenditure due to renovation and modernization The accounting treatment in respect of each of the above items has been discussed subsequently. Treatment of specific expenditure incurred during construction Survey and Investigation expenses The expenses as incurred for survey and investigation i.e. on account of project reports, feasibility studies, surveys, etc. should be accounted for as 'Miscellaneous expenses' till such time as the administrative approval of the project is obtained from GOI. On receipt of the approval from GOI the balance on this account should be transferred to the CWIP account and thereafter capitalised on commissioning of the plant. The expenses incurred in respect of approved projects should be accounted for as CWIP and subsequently the closing balance in the CWIP account should be allocated to the various systems on a pro-rata basis In case a project is abandoned, the expenditure should be written off in the year in which the project is abandoned.

Manual on Asset Accounting

Technical consultancy The common costs as incurred on technical consultancy should be allocated on the systems falling within these categories on the basis of the technical norms as provided by the concerned EIC.

Financial expenses The financing costs relating to deferred credits or to borrowed funds attributable to construction or acquisition of fixed assets for the period up to the completion of construction or acquisition of fixed assets are to be capitalised along with the asset to which they relate. The total interest cost incurred during a year (in the construction phase) should be apportioned to the CWIP on the basis of the average balance of CWIP for the year.

Commissioning expenses The expenditure incurred on start-up and commissioning of the project, including the expenditure on trial runs should be capitalised. The sales revenue during the period should be deducted from the commissioning expenses and the net expenses should be capitalised. The costs identifiable to an asset should be capitalised with that asset and the common costs should be allocated on a pro-rata basis to the various systems.

Training and Recruitment and R&D expenses Expenses incurred in respect of training and recruitment and R&D should be charged off to revenue

Administration and other general overhead expenses during construction phase Expenditure incurred during the construction period should be capitalised on a pro-rata basis to the various systems in the ratio of accretion to the CWIP. In case of projects which are both under operation and construction phases, these expenses should be allocated between capital and revenue in the ratio of accretion to CWIP and sales (including electricity duty).

Capitalisation of assets An asset is to be capitalised when it is ready to be put to use. Capitalisation of an asset should be done on the basis of an asset-commissioning certificate issued by the competent authority. All capital expenditure (in respect of assets constructed) should be accounted for through CWIP accounts. On commissioning of the assets the expenditure should be transferred to 4

Manual on Asset Accounting

the appropriate fixed assets account. However, bought out assets should be capitalised directly i.e. without routing through the CWIP account. Capitalisation of common assets/systems In respect of the systems that are common to more than one generating unit (e.g. chimney, cooling towers, etc) the same should be capitalised on the basis of the engineering estimates/ assessments. The common systems are to be commissioned with the first unit. in case of any capital expenditure incurred subsequent to the commissioning (as required for the subsequent units), these expenditures are to be treated as capital additions in the year in which they are commissioned. the total cost incurred on these systems during the different phases is to be identified to the units on the basis of the technical estimates there are a few systems which are commissioned during the construction period itself such as township, temporary water supply, power supply, office buildings. These can be capitalised as and when such systems are put to use.

Treatment for mandatory spares Machinery spares which are used only in connection with an item of fixed asset and whose use is expected to be irregular should be capitalised with the main equipment irrespective of the fact whether such spares have been procured initially with the main equipment or subsequently and whether they have actually been put to use or not. In case these spare items are procured initially the same are to be capitalised with effect from the date of capitalisation of the concerned main equipment. In case where the spare items are procured subsequently these should be capitalised and amortised over the balance useful life of the main equipment concerned. Materials used for construction The cost incurred for materials procured for construction should be treated as Construction stores. After commissioning of the concerned asset the material in hand should be transferred from the Construction Stores account to the Inventory account.

Depreciation Depreciation should be provided for in the books at the rates as prescribed. In addition to the above, depreciation should also be computed at the rates prescribed in the Companies Act, 1956 for the purposes of disclosure in the financial statements and as per the Income-tax Act, 1961for the purposes of taxation.

Manual on Asset Accounting

Other policies Depreciation on assets acquired during the year is to be provided on a proportionate basis No depreciation is to be provided on the assets sold/ scrapped/ declared obsolete during the year Depreciation on the additions to fixed assets in the nature of effect of foreign exchange fluctuations and rotational/ capital spares/ unit assemblies is to be provided prospectively over the residual life determined on the basis of the rate of depreciation Depreciation on the fixed assets during the construction phase is to be capitalised.

Retirement and disposal of assets Items of fixed assets that have been retired from active use and are held for disposal should be stated in the financial statements at the lower of their net book value and net realisable value. Any expected loss should be recognised immediately in the profit and loss statement. Fixed assets disposed off should be removed from the financial statements. The gains or losses arising on the disposal are to be recognised in the profit and loss account.

Government Grants Any grants received from the government should be initially treated as Capital Reserve and subsequently adjusted as income in the same proportion as the depreciation written off on the assets acquired out of the grants Physical verification and maintenance of Fixed Asset Register (FAR) All fixed assets procured/ constructed should be recorded in the FAR maintained for this purpose. The FAR should be periodically reconciled with the books of account. The FAR should contain the particulars of the asset, location, rate of depreciation, and the accumulated depreciation. Fixed assets should be verified at regular intervals and the discrepancies observed on such verification should be adjusted in the books of account.

Disclosure requirements The following disclosures are to be made in respect of fixed assets in the financial statements: Gross and net book value of fixed assets at the beginning and end of the accounting period showing additions, deletions and other movements of assets Expenditure incurred on account of fixed assets in the course of construction or acquisition The amount of exchange differences adjusted in the carrying amount of fixed assets during the accounting period The accounting policy adopted for government grants 6

Manual on Asset Accounting

The nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost The total depreciation for each class of assets and the related accumulated depreciation The depreciation methods used and the depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the statute governing the enterprise Any change in the method of depreciation adopted

Manual on Asset Accounting

Process: Establishment of Asset Control authorities

Process No.: 01

For exercising control over the assets an asset control authority is to be established for each category of assets. The asset control authorities for the various categories of assets are as follows: Land and Buildings- HR department Furniture and fixtures, office equipment, etc- HR department Plant and machinery - Technical departments concerned Laboratory & Workshop equipment- Departments concerned Vehicles- Autobase Construction equipment- Autobase/ Technical department concerned. Communication equipment- EDP Computers- EDP/ HR department. Hospital equipment- CMO Township/ guest house/ community centre/ canteen/ school equipment HR department Discarded assets- Stores

Movement of any asset should be effected with the approvals of the asset control authorities concerned. The asset control authorities should ensure the following: the asset identification number is painted/ indicated on all assets. Any movement, obsolescence, damage, loss due to theft, fire or any other reason, sale or disposal of an asset (within and outside the premises of the Unit), are on the basis of duly approved orders. The movement, obsolescence, damage, sale or disposal of an assets is intimated to the F&A Deptt to update the FAR The differences observed, if any, on physical verification of assets are reconciled with the user department concerned.

Manual on Asset Accounting

Process: Allotting Asset Identification Number

Process No.: 02

This process outlines the procedure to be followed for allotting an asset identification number (AIN) to moveable assets/ MBOA items. The AIN should be recorded in the FAR. AIN structure The AIN should be a seventeen digit alpha-numeric code representing the following: Accounting Unit Type of assets Main Category XX (alpha) Sub Category XXX (alpha) Asst Control Authority XX (alpha) Year of Acquisition Serial Number

XX (alpha)

XXXX (numeric)

XXXX (numeric)

On receipt of MBOA items, the asset control authorities (ACAs) should ensure that AIN is allotted to all the invoiced items and the same is indicated on the SRV. Finance should release payments for such items only after ensuring that AIN has been allotted. The asset control authorities should ensure the following: The AIN is painted/ indicated on all assets. A departmental asset control register is maintained and the details of each asset are entered in the register indicating the location and the name of the person to whom the asset has been issued. In case of any movement of an asset, the department asset register is updated for change in location or any other change.

Procedure: Allocation of AIN S. No 1 2 Activity Receive the asset along with the delivery documents from the supplier. Enter the details of the asset in the system. Intimate the ACA concerned of the receipt of the asset. Inspect the asset and confirm acceptance of the same to Stores. Update the Asset Control Register. AIN will be generated by the system. Arrange to paint/indicate the AIN on the Manual on Asset Accounting 9 Person Responsible Stores Stores Frequency As and when Same day Remarks

ACA

Same day

S. No 4

Activity asset. Generate SRV and forward the SRV to the F&A Department Ensure that the AIN is indicated on the SRV Receive the SRV and update the FAR Ensure that the AIN is indicated on the SRV before release of payment as per the manual on Procurement and Stores Accounting Prepare SIV for issue of an asset. Update the asset control register with the details of the person to whom issued and the location thereof.

Person Responsible Stores

Frequency Same day

Remarks

F&A Deptt

As and when

Asset Control Authority

As & When

Document - Records Document Title Asset Control Registerdepartmental FAR-Land FAR-Plant & Machinery FAR-MBOA ATN Document Type R R R R O Format Ref. FA/01 FA/02 FA/03 FA/04 Frequency As & When As & when As & when As & when As & when Distribution ACA Book section, Transferee Unit

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Process: Capitalisation of assets

Process No.: 03

This process lays down the procedure to be followed for capitalisation of assets (other than for bought out assets which has been covered in process No: 05) Capitalisation Township and other infrastructural facilities are to be capitalised as and when completed and put into service. The assets associated with generating units are to be capitalised as and when the generating units become commercially operative. The criteria for determination of date of Commercial Operation are brought out at Appendix I. The fixed asset heads against which capitalisations are to be effected have a corresponding Capital Work-in-Progress Account code as detailed in the Chart of accounts. The modus operandi and sequence for capitalisation are set out below:Step-I: Identify asset/package cost For constructed assets all direct costs associated with a particular package/ job should be identified with specific asset and accounted for as CWIP during construction stage. As the classification of CWIP in the Chart of Accounts is identical to the classification of fixed assets there would be no difficulty in transferring the cost from CWIP to fixed assets at the time of capitalisation. The amount to be booked to CWIP shall consist of the following: 1. 2. 3. 4. Value of supplies received and accepted at site. Freight insurance, custom duty, rates and taxes. Value of physical progress of civil construction and erection. Material issued on free of cost basis, to the extent it has been consumed duly adjusted for return of scrap. 5. Consultancy fee etc. In case bills for materials/services rendered by contractors have not been received, the booking to CWIP account should be made provisionally on the basis of engineering estimates/ assessments. In respect of turnkey contracts i.e. where a number of packages are envisaged to be executed for a lumpsum consideration, the total contract value should be segregated asset-wise to facilitate capitalisation. For this purpose, a detailed system wise breakup of the total cost, if not readily available in the contract documents should be obtained from the contractor. In circumstances where the system-wise break up is not available from the contractor, the total cost should be broken up system wise based on the project estimates and/or Engineering estimates/assessments. The procedure to be adopted for obtaining the breakup in such a case should be as follows:

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1. Identification of each item of bill of quantity with different systems/subsystems to the extent possible on actuals/ technical assessments and further linked to various account codes as per chart of accounts. 2. In case entire structural steel/civil works/erection works are awarded on a lumpsum basis, allocation between buildings and foundations should be done on technical assessment. The foundation cost should be further allocated to plant and machinery heads on engineering estimates. 3. The taxes & duties and price adjustment should be allocated on actual basis. 4. Freight and insurance should be allocated as per the proportion of freight to the contract cost. Step-II: Complete the work-in-progress accounts The package-wise WIP accounts should be completed by allocation/apportionment of the following:A. Site leveling expenditure: Site leveling expenditure (other than cost of landscaping) should be allocated to the cost of buildings and structures constructed on the land and not added to the cost of the land. The expenditure on leveling, grading should be directly related with and added to the cost of particular buildings or other structure which stand on each particular piece of land. In case the above is not practical, the cost of leveling may be apportioned among the different buildings and structures standing on the land in the ratio of the areas of the buildings/structures. B. IEDC allocation to work-in-progress. Allocation of IEDC has been discussed in Process no. 4. C. Technical consultancy-unallocated charges Technical consultancy charges are being allocated to packages to the extent such charges directly relate to a particular package. It is considered appropriate to classify the unallocated charges i.e. charges which remain to be allocated after direct identification of expenses to different packages, into the following broad categories and to allocate the same to individual systems falling within each category on the basis of technical norms to be furnished by Engineers-in-charge :Categories: Civil works Electrical Works Mechanical Works General Items

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D. Survey and investigation expenses S&I expenditure of unapproved projects shall be accounted for and retained by the unit (RHQ, T&CC offices, project, stations) incurring the expenditure and should be accounted for as S&I of new projects. On approval of the project the cumulative expenditure incurred on this account should be transferred by the units concerned to the approved project through inter unit advices. In case the project is not taken up then the total expenditure should be transferred to CC through IUA by the unit concerned and the same should be written off by CC after obtaining approval of the competent authority. These expenses together with further expenditure on this account during project execution have to be allocated to various systems pro-rata to closing balance in CWIP Accounts. E. Commissioning expenses Commissioning expenses (net of income from sales) are to be shown in the accounts as a separate item in the CWIP schedule. However, it is necessary to identify these expenses as far as possible with the systems and units to which they relate so as to ensure maximum accuracy in classification of expenditure. For example, expenses directly incurred for commissioning Coal Handling systems should be capitalised with coal handling plant and similarly expenses directly incurred for commissioning of boiler such as hydraulic testing, initial firing of boiler etc. should be classified with the boiler cost. An analysis of the commissioning expenses should, therefore, be effected to classify the expenses with the individual package/units and accordingly costs should be transferred to individual package and units. Any balance expenditure that is not susceptible to identification should be allocated to various systems, packages and units pro-rata to directly identified commissioning expenses. It should, however, be ensured that commissioning costs recoverable from contractors, such as initial fill of chemicals, spares etc.as per contract, are not included in commissioning expenses. Where commissioning expenses for systems other than SG and TG are considered negligible, such expenses may be allocated to SG and TG prorata to the capital cost. F. Interest during construction (IDC) Allocation of IDC has been discussed in Process no. 4 G. Reallocation of costs of common systems such as piling and foundation, station piping, control and power cables to main systems to which they relate. There are also common systems, which are either in the nature of Associated civil works or equipment, which form an integral part of systems for purpose of Manual on Asset Accounting 13

classification of assets and depreciation. The obvious examples are piling and foundation, which are partly in the nature of associated civil works for SG, TG etc.and partly in the nature of foundation for superstructure of buildings. Similarly, station piping, control and power cables are also to be identified with other operating units or systems for the purpose of classification of cost in fixed assets account. It is necessary to effect direct identification of costs with individual units or systems wherever possible and in other cases cost should be allocated on the basis of technical estimate to be certified by Engineer-in-charge. Plant and machinery superstructure should be capitalized as plant along with boiler or TG or other equipment with which such structure is associated. Other structures, which contain or house plant and machinery, should be added to the cost of plant buildings. Step-III: Once the package-wise costs are finalised then the same should be allocated to the generating units. Analyse the actual cost of the package as reflected in CWIP account to identify actual cost of: 1. 2. 3. Individual generating units. Systems associated/commissioned exclusively with a specific generating unit. Common systems initially commissioned with the first generating unit, which, later on, cater to more than one generating unit. In these cases, there may be capital additions effected from time to time to take care of additional requirements of generating units commissioned subsequently.

If data are not available for unit-wise identification of cost, it may be appropriate to adopt the following steps for unit-wise analysis of various elements of costs: A. Main Equipment a) Equipment cost excluding escalation (Basic Cost) Capitalistion is to be effected unit-wise prorata on tonnage basis. b) Erection charges excluding escalation The payments for erection work are effected in many cases on tonnage basis and in a few cases by means of stge payments. In this case also, it is felt that unit-wise analysis may be effected preferably on the basis of actuals. However, if this course is not practicable, Capitalistion should be done on the basis of erection price (basic price) per tonne unit as specified in thecontract. c) Freight, Insurance and Handling Charges:

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Since the quantum of cost may not be substantial, it may not be practicable to identify the same unit-wise withing the package, this cost should be allocated prorata on tonnage basis d) Escalation costs and taxes and duties: These costs as recorded in the capital work-in-porogress account/job cost cards and are to be allocated on acutal basis. B. Common systems/Equipments In the case of common equipment included in individual package (i.e. equipments common to more than one generating unit, for example off-line system included in DAS), capitalisation is to be effected with individual units to the extent the common equipment is commissioned with such unit. The balance of equipments which are linked with other generating units should be treated as a capital additions and dealt with as such in the accounting year in which the individual units concerned are commissioned. Costs have to be allocated on the basis of technical norms keeping in view value of work done and commissioned as included in the work-in-progress account. Though technical norms may be the basis for ascertaining the cost of the part system commissioned with individual units, the ultimate cost of the system on completion of project has to necessarily reflect the actual cost as per books of accounts. C. Associated Civil Work Cost (e.g. piling& foundation) The cost should be allocated unit-wise preferably on the basis of actual quantitites (actual no. of piles) wherever available or on the basis of technical norms to be certified by Engineer-in-Charge.

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Process: IEDC and IDC

Process No.: 04

This process lays down the procedure to be followed for identification of IEDC, IDC and their allocation to various projects. IEDC (identification & Allocation) At CC The expenditure/income of Regional HQs, T&CC Offices, inspection offices and service units like CSES Muradnagar should be absorbed and merged in Corporate Centre expenses. As far as possible, the total expenditure/income at Corporate Centre should be directly identified with construction or revenue activities. For example, generation incentive expenditure and R&D expenditure are not at all related to any construction activity and should be directly identified with revenue. Similarly construction incentive is directly related to construction of projects and should in its entirety form part of IEDC. The expenses/income, which cannot be directly identified, should be treated as common expenses/income and allocated between revenue and capital in the ratio of sales including electricity duty and annual capital outlay as per the accounting policy. The sum of directly identified and common expenses would be the CC IEDC for the year, which should be allocated to approved projects which are not fully under operation, prorata to their annual capital outlay. At projects In case of all approved projects, which are not fully under operation, all site expenditure/income should be identified with construction/ revenue activities on the same lines as detailed above, except for the fact that common expenses should be allocated between revenue and capital in the ratio of sales including electricity duty, and accretions to CWIP. The total expenditure which is identified for capitalization from the sites as well as expenditure allocated from CC should be allocated to various CWIP packages prorata to positive accretions to the CWIP during the year. No portion of expenditure/ income should be capitalized in the year in which all the units at a project are commercial as at the beginning of the year. It may be mentioned that segregation of expenses, which cannot be directly identified with construction or revenue activities, upto the date of capitalization would be a very difficult exercise which may not be very practical also in view of the fact that several units may be getting capitalized in a year at different points of time. Moreover the method of allocation based on accretion to CWIP and sales itself gives weightage to the period element both in respect of commissioned units and CWIP items while dealing with common expenses. In view of these considerations, allocation of common expenses should be dealt with only on annual basis. Expansion of Projects When a station undergoes expansion, only the expenditure directly identified with construction of new units/ expansion activities should be capitalized. In such units care should be taken that no part of incidental expenditure which would have been incurred even if the expansion had not taken place gets identified as IEDC. Manual on Asset Accounting 16

Accounting of IEDC The portion of expenditure income identified for capitalisation should be debited to account head for IEDC for the year by credit/debit to account codes for expenditure/ income during construction. Care should be taken that the gross expenditure for the year appearing in the natural heads is not disturbed so that the same can be shown in its entirety in the P&L account. The credit/ debit to expenditure/income during construction should be shown as a deduction from the gross expenditure/income for the portion identified for capitalization. The allocation to various CWIP packages should be routed through IEDC allocated to CWIP account. Borrowing costs Borrowing costs are interest and other costs incurred in connection with the borrowing and include the following: Interest Commitment charges, managers fee, arrangers fee, upfront charges etc. Where a loan has been taken for construction/ acquisition of a specific project/asset, the borrowing cost relating to the period till the asset is ready for use should be capitalised as a part of the cost of the asset. Where borrowings have been made which are not related to any specific project/asset, the borrowing cost eligible for capitalization should be determined by applying a capitalisation rate equal to the weighted average rate of borrowings to the capital expenditure on those projects/assets. An illustration of calculation of interest/borrowing cost to be capitalized is given in Appendix II. The borrowing cost identified for capitalisation should be allocated to various CWIP packages on a yearly basis prorata to average balance appearing in the packages during the year. Exchange Rate Variation (ERV) Exchange rate variation (ERV) arises as a result of settlement during the year/ translation at the end of the year at closing rates of the receivables/ payables in foreign currencies. The exchange rate variation relating to acquisition of capital assets should be adjusted in the historical cost of such assets while that relating to current assets is to be recognized as an income/expenditure in the Profit & Loss account. At projects, debits for ERV on borrowings are being received from CC in addition to that arising in their own books as a result of payment/translation of liabilities. The entire ERV whether transferred from CC or resulting from settlement/translation at year-end, in stations books, should be initially accounted for in the Exchange rate variation control account. The portion of ERV identified for capitalization should be debited to the related asset/CWIP account by credit to ERV adjustment (Capital) account while the portion relating to P&L account should be debited/ credited to respective revenue heads by credit/ debit to ERV adjustment (Revenue) account. The balance appearing at the year-end in Manual on Asset Accounting 17

the ERV adjustment accounts should be used for disclosure purposes as per the requirement of AS 11. Accounting Entries: For portion identified for capitalization Expenses/income chargeable to IEDC Income during construction Expenditure during construction For allocation of IEDC to CWIP Identified CWIP packages IEDC allocated to CWIP Dr Cr Dr Dr Cr

Note: The codes for income during construction in 09 series correspond to the codes for income in 0 series while the codes for expenditure during construction in 9 series corresponds to the expenditure series in 1 series. However, as the expenditure to be capitalized is reduced from the gross expenditure, the expenditure during construction will be a credit balance. The income during construction will be debit balance on the same lines.

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Process: Capitalisation of bought out assets

Process No.: 05

This process lays down the procedure to be followed for capitalisation of bought out fixed assets. Components of cost The assets should be capitalised based on the acquisition price and the other costs incurred for bringing the asset in a position that it is ready to use. It should be ensured that all the relevant costs have been included in the cost of the asset as per the accounting policy. For instance, (1) The cost for land includes the following elements: Purchase price of land. Compensation for acquisition of land including structure, crop and tree. Legal charges, stamp duty, etc., incurred for securing title. Cost of measuring land, investigating its titles, land surveys, land acquisition unit expenses, etc. Costs of demolition of unwanted structures. Any deposit/advance for land in respect of which either physical possession or legal ownership has been obtained. Resettlement & Re-habilitation and Community development expenses directly related to acquisition of land.

(2)

Cost for building purchased includes the following elements:

Purchase price Legal charges, stamp duty, etc. incurred for securing a title. Any payments to tenants (to cancel the tenancy rights) at the time of acquisition. Repairs, alterations and improvements to put the building in usable condition. Architects fees for re-modeling, alterations, and improvements before the building is first put to use.

In case a building is purchased along with the land at consolidated price, the purchase cost should be bifurcated between the land and building. In case the breakup value is not readily available the cost should be allocated to land and buildings based upon technical and commercial appraisal. As the rate of depreciation on internal electrification of buildings is different from the rate of depreciation on buildings, the cost of internal electrification of buildings should be accounted for segregated and accounted for separately as furniture & fixtures inline with the companys accounting policy. (3) Cost for other moveable assets acquired includes the purchase price and all other costs incurred for making the asset ready for use (e.g. transportation costs, installation, etc.)

Provisional capitalisation Manual on Asset Accounting 19

At the year-end, in case assets have been received but the suppliers bills have not been received then the asset should be provisionally capitalised on the basis of the purchase order raised for the item, and other incidental expenditure on estimated basis. After receipt and processing of the suppliers bills the necessary adjustments should be made to the capitalised value of the asset.

Procedure : Capitalisation of bought out assets S. No 1 Activity Receive the SRV. Ensure that the AIN is indicated on the SRV. Process the SRV - as per the manuals on Procurement & Stores Accounting. Generate a JV to account for the assets received. Person Responsible F&A Deptt Frequency As and when Remarks

F&A Deptt

Same day

Accounting Entries: Fixed Assets Suppliers payable A/c Freight payable A/c Other charges A/c(s) Income Tax payable, if applicable Dr Cr Cr Cr Cr

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Process: Depreciation Accounting

Process No.: 06

This process lays down the procedure to be followed in respect of depreciation. Depreciation should be computed as per the following: Electricity (Supply) Act, 1948 - for providing depreciation in the books of account Companies Act, 1956 for disclosure in the books Income tax Act, 1961 - for income tax purposes

Any change in the rates/ method of computing depreciation is to be intimated by Corporate Centre to all the units. Depreciation is to be provided in the books of account at quarter ends. The depreciation as provided in the quarter-end is to be reversed at the beginning of the next quarter. The depreciation for the year shall be calculated at the year-end and provided for in the books of account. The basis for computing depreciation under the various Acts is provided below: Electricity (Supply) Act, 1948 Depreciation is charged on the straight-line method to write off 90% of the cost of the asset as per the rates prescribed under the Act. In respect of the assets where the rates have not been prescribed, depreciation is to be provided on straight line method at the corresponding rates as provided in the Income Tax Act, 1961.

Companies Act, 1956 Depreciation under the Companies Act is provided on straight-line method to write off 95% of the cost of the asset at the rates as prescribed in the Act In respect of the extra shift allowance, calculations are to be made for double/triple shift working in the proportion in which the number of days in the year for which the concerned asset actually works double/triple shift, bears to the number of days for which the station actually worked during the year or 240 days whichever is greater

Income tax Act, 1961 Depreciation is calculated on the diminishing balance method as per the rates prescribed in the Act.

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Depreciation on specific items Renovated and modernized assets In case of expenditure incurred on Renovation and Modernisation (R&M) the following treatment should be followed: In case the R&M is likely to result in an increase in the life of the asset, the useful residual life of the asset should be technically assessed and depreciation should be charged prospectively at a rate so that 90% of the revised gross block is depreciated over its revised useful life. However, it must be ensured that the rate so derived is not less than the statutory rate under the ES Act/ rate derived from the IT Act, as may be applicable. In case the R&M expenditure results in an increase in the efficiency of the asset without affecting the useful life of the asset, then the depreciation should be charged on a prospective basis on the revised gross block over the remaining life.

Capital spares Machinery spares which can be used only in connection with an item of fixed assets and whose use is expected to be regular should be capitalised with the fixed asset concerned. Where the capital spares have been procured subsequent to the capitalisation of the main equipment, the cost of such spares should be amortised over the useful residual life of the related main equipment.

Construction equipment Depreciation on the construction equipment during the construction phase should be capitalised as a part of incidental expenditure during construction. After the commencement of commercial operations of the first unit of the project the gross block of such equipment should be brought down to its written down value i.e. after adjusting the depreciation amount provided during the period of construction. However, depreciation on such assets should be provided on the historical value of the asset till 90 percent of the original historical cost is written off.

Depreciable Assets whose historical cost undergoes changes Where the historical cost of a depreciable asset has undergone a change due to exchange fluctuations, capitalisation of borrowing costs, price adjustments, changes in duties or similar factors, the un-amortised depreciable value should be amortised over the residual useful life of the asset.

Items of small value Items of plant and machinery with a written down value of Rs 5,000/- or less at the beginning of the year or items of plant of machinery costing Rs. 5,000/- or less acquired during the year are to be fully depreciated.

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Assets used during construction period Depreciation should be charged in respect of assets used during the construction period (including construction equipment) at the prescribed rates. the depreciation charged during the construction period would also be capitalised as a part of incidental expenditure during construction

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Process: Transfer of Assets Process brief

Process No.: 07

This process lays down the procedure to be followed for transfer of assets. Assets of a unit may be transferred within the unit or may be transferred to other units. Where an asset is transferred within the unit, the ACA should update the Asset Control Register with the details of change in location/ person to whom the asset is issued. On receipt of the repaired asset, F&A department should be intimated of the receipt for updation of the FAR. Transfer of an asset outside the unit may take place on account of despatch to the works of manufacturer for repairs/rectification/replacement or on account of inter unit transfer on loan or permanent basis. Transfer of an asset for repair purposes is recorded in the Asset Control Register by way of recording the change in location and intimation to F&A department. Inter unit transfer of an asset is effected through Asset Transfer Note (ATN) and it should be ensured that: the transfer of the asset is approved by the competent authority. all asset transfers are supported by an Asset Transfer Note (ATN). the ATN is forwarded to the transferee unit along with an extract of the FAR of the asset transferred. copy of the ATN is forwarded to F&A department for updating the FAR. depreciation for the year is provided in the books of the transferee unit. the assets transferred are disclosed by the transferor/ transferee units in a separate column (i.e. Transfer in/out) in the Fixed Asset schedule annexed to the Final accounts of the concerned unit to facilitate reconciliation.

Expenses incurred on the dismantling and transfer of asset The dismantling charges, as well as cost of civil works and erection charge for the initial erection on the asset transferred should be written off to the revenue account by the transferor unit The erection and transportation charge incurred by the transferee unit should be capitalised along with the cost of the asset

Depreciation Depreciation on the transferred asset should be provided for the whole year (in which the asset has been transferred) by the transferee unit irrespective of the period for which such asset was actually used by it.

Departments/ sections involved in the process Finance and Accounts department Book section Asset control authorities 24

Manual on Asset Accounting

Procedure : Transfer of Assets to other units S.No Activity Person Responsible Transferor Unit Concerned Frequency As and when . Remarks

Transferor Unit 1 Receive a request for transfer of assets. Review the request and ensure that it is duly approved Generate an ATN and forward the request and ATN for approvals to the competent authority. Review and approve the request and ATN and forward the same to the F&A Department Ensure that the request is duly approved and generate a JV/IUA. Update the FAR with the details of the IUA and the ATN. Follow the procedure as outlined in the manual on Book section for preparation and authorisation of JV/IUA Transferee Unit 4 Receive the asset from C&M department along with the copies of the ATN. Check that the assets received are as per the ATN. Forward a copy of the receipted ATN to the F&A department Receive the following: receipted copy of the ATN from the asset controlling authority a copy of the ATN with JV/IUA and the extract of the FAR from the F & A Deptt of the transferor unit.

2 3

Concerned official as per IWA Book Section, F&A Deptt

As and when Same day

Asset control authority concerned Asset control authority concerned F&A Department Book Section

As & when

5 6

After necessary inspection As & when

Same day

Check that the ATN is duly approved. Account for the IUA and update the FAR with the relevant details. Generate a report on assets transferred out on repairs not yet received back for follow up with the ACA concerned.

F&A Department Books Section

Quarterly

Document - Records Manual on Asset Accounting

25

Document Title FAR IUA ATN Report on assets transferred out on repairs not yet received back.

Document Type R I/O O MIR

Format Ref.

Frequency As & when As & when As & when

Distribution Book Section, Transferee Unit Book section, Transferee Unit Book section, Transferee Unit

FA/MIR

As & when

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Process: Disposal of Assets

Process No.: 08

Assets should be disposed off only after the necessary approvals have been obtained from the competent authority. The manner of disposal of an asset should be as per the guidelines prescribed in this respect. Where material items have retired from active use and are held for disposal then such items should be stated at the lower of their net book value and net realizable value and shown separately in the financial statements. Assets may be disposed off through auction/tendering, draw of lots among employees, sale to retired employees, replacements through buy back schemes etc. Prevalent guidelines as applicable for each such method of disposal should be followed. On disposal of an asset FAR should be updated. Accounting Entries: On Disposal for cash Cash/Bank Accumulated depreciation Loss on disposal of fixed assets Profit on disposal of fixed assets Gross Block On disposal through buy back schemes Gross Block (new asset) Accumulated depreciation (disposed asset) Loss on disposal of fixed assets Profit on disposal of fixed assets Gross Block(disposed asset) Cash/Bank(net difference to be paid) Dr Dr Dr Cr Cr Cr Dr Dr Dr Cr Cr

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Process: Maintenance of Fixed Asset Register (FAR)

Process No.: 09

The FAR is to be maintained and updated by the Book Section, F&A Department. The FAR should be maintained in a format to contain the information as required under the Companies Act, 1956. The FAR should be maintained asset category-wise and item wise. The balances (gross block and depreciation) as appearing in the FAR should be reconciled on a quarterly basis with the balances in the General Ledger. The FAR should be updated on: acquisition/ commissioning of new asset transfer of an asset based on Asset Transfer Note (ATN) on retirement from active use disposal of the asset receipt of the physical verification report

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Process: Physical verification of fixed assets

Process No.: 10

The fixed assets should be physically verified periodically and the discrepancies noticed therein should be adjusted in the books of account. The FAR should be accordingly updated. It should be ensured that the fixed assets at all the locations are verified at least once every three years. A programme for carrying out the physical verification should be drawn specifying the category of fixed asset, the dates and the team for carrying out the verification, etc. It should be ensured that an official, independent of the asset control authorities concerned should also form a part of the physical verification team. Appendix I prescribes the programme and the authority prescribed for supervision of the physical verification for various asset categories. On conclusion of the physical verification of the fixed asset a report should be prepared on the discrepancies observed on the physical verification. The report should be submitted to the asset control authority concerned for investigation and action. In respect of the assets located at the residential offices, a certificate should be obtained from the official concerned that the assets are located at his residential office and are in good working condition. Procedure: Physical verification of fixed assets S.No 1 Activity Issue a circular to all the asset control authorities for carrying out the physical verification as per the schedule. The circular should provide the following particulars for the verification: Location Persons responsible for carrying out the verification The format for preparation of the report on physical verification Dates and authorities for submission of the reports Other documents that also need to be verified i.e. title deeds for land, registration books of vehicles etc.

Person Responsible Book Section

Frequency Annually

Remarks

Carry out the physical verification and prepare the report as per the format provided. Consolidate all the physical verification

Verification team ACA

Annually

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S.No

Activity reports and verify with respect to the Asset Control Register. Prepare a report on the discrepancies observed. Forward the physical verification report and discrepancy report duly completed to the Books Section. Receive physical verification report and discrepancy report from ACAs. Prepare a consolidated statement of the discrepancies on physical verification. Forward the report to the competent authority for approvals for adjusting the discrepancies in fixed assets. Generate a JV for providing for the discrepancies on physical verification after obtaining approvals of the competent authority. Update the FAR with the adjustments made to the fixed assets.

Person Responsible concerned

Frequency

Remarks

Books Section

Within a week of receipt of reports

Books Section

Within 2 days

Document - Records Document Title Circular on Physical verification Report on physical verification Discrepancy Reports Document Type I R R Format Ref. FA/MIR/01 Frequency Annually Annually Annually Distribution All asset control authorities Books Section Books Section

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Appendix I
CRITERIA FOR DECLARING COMMERCIAL OPERATION The criteria for declaring commercial operation of a plant for coal and gas based units is provided below: Coal based units All main equipment and auxiliary systems including fuel oil plant, coal handling plant, water treatment plant, ash disposal system, MGR has been commissioned to give adequate capacity to operate the unit. All safety measures including segregating units in operation from units in construction and fire protection system have been put in to service. All permanent electrical supply systems including emergency supplies and instrumentation, control and protection systems for operating the unit have been put into service. Trial operation of the unit has been performed with the contractor and the trial operation report has been jointly prepared with the contractor and signed without absolving the contractor of his obligations under the contract. Trial operation of the unit shall be considered successful if a unit has operated continuously for 14 days out of which at least 72 hours should be at full load. The unit has been in operation for a period of at least 1000 hours giving generation of not less than 2500 KWH/KW/Year and shall cover the whole range of operation including full load for a minimum period of 72 hours. In case some major shortcomings have been noticed because of which it had not been possible to carry out the trial operations of the unit as given above or to run the unit on stable load in view of force majeure conditions such as non-availability of coal, non-completion of MGR or other sub-systems, lack of system demand and reduction in generation imposed by REBs, etc. the period of six months from the date of synchronising or four months from the date of synchronizing after bearing inspection whichever is earlier could be extended. Extension shall be granted by the CMD on initiation of proposal by the GM (Project) before six months after unit synchronisation. Gas based units Initial operation wherein the complete equipment has operated together with sub-systems and supporting equipment as a complete plant has been carried out. All permanent electric supply including emergency supplies and instrumentation, control and protection systems for operating the unit has been put into service. All safety measures including segregating units in operation from units under construction and fire protection system have been put in to service. Manual on Asset Accounting 31

Trial operation of the unit has been performed with the contractor and trial operation report has been jointly prepared with the contractor and signed without absolving the contractor of his obligations under the contract. Trial operation of the unit shall be considered successful if a unit has operated for 14 days continuously out of which 72 hours shall be continuous operation in full load. After successful operation of trial operation, a time period not more than 30 days for gas turbine shall be granted to complete the minor left over jobs and to permit adequate debugging of teething problems and unit shall be declared commercial immediately after the problems are attended to. Even if it had not been possible to fulfill the conditions as mentioned above, the unit shall be deemed to have been placed under commercial operation after a period not exceeding 2 months from the date of synchronization. In case some major shortcomings have been noticed because of which it has not been possible to carry out the trial operation of the unit as given above to run the unit on a sustained basis in view of force majeure conditions such as non-availability of gas, lack of system demand and reduction in generation as imposed by REBs, etc. the period as mentioned above could be extended. Extension shall be granted by the CMD on initiation of the proposal by the GM (Project) before 2 months after unit synchronisation. For steam turbines of combined cycle, the procedures for declaring commercial operation shall be same as mentioned above for coal stations, to the extent applicable.

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Appendix III
S. No 1. Category Land Program for verification Verify land title deeds every year. Carry out a survey to identify the physical boundaries of the land with reference to survey numbers and map plans and verify the approximate area of land.

2.

Building

Ensure that physical possession of the land is with NTPC. In case of adverse possession, quantify such land. Verify the Physical existence Title deeds Ensure that the plant & machinery are in use and in working order Ensure the physical existence of the assets assets are in use and in good working condition Ensure the physical existence of the assets assets are in use and in good working condition Ensure the physical existence of the vehicles Check the registration books of all the vehicles for clean title. Ensure the physical existence spares are in good working condition Ensure the physical existence assets are in use and in good working condition Ensure the physical existence assets are in use and in good working condition Ensure the physical existence assets are in use and in good working condition Ensure the physical existence assets are in use and in good working condition Ensure the physical existence assets are in use and in good working condition

3. 4.

Plant & machinery Furniture & fixtures

5.

Office equipment

6.

Vehicles

7. 8. 9. 10. 11. 12.

Capitalised spares Construction Equipment Communication Equipment Computers Hospital equipment Township/ guest house/ community centre/ canteen/ school equipment

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List of Formats
Format Asset Control Register-Departmental Fixed Asset Register-Land Fixed Asset Register-Plant & Machinery Fixed Asset Register-MBOA MIR FORMATS Report on Physical Verification

Format No
FA/01 FA/02 FA/03 FA/04 FA/MIR/01

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FA/01

ASSET CONTROL REGISTER-ACA WISE

Category/Sub-category Asset Details Location Person to whom issued Asset return details

Sl. No

AIN

SIV Reference

No.

Date

Descripti on

Supplie r

Emplo Name yee No.

Note: The details of the make/serial nos. / chassis no. etc., wherever available are to be entered in the Description column

FA/02
FIXED ASSET REGISTER LAND

Folio No :
Remarks WDV (Rs) Legal fees Cost (Rs) Survey Fees Others Total No of years of lease Additions to value Year Amount (Rs) Amortisation Year Amount (Rs)

Particu lars

Year

Survey No

Date of Acquisition

Initial Deposit/ additional payment

FA/03 FIXED ASSET REGISTER PLANT & MACHINERY Account Code

Category/Sub-category

Shift : Single/Double/ Triple Shift Depreciation Rate Electricity Act Companies Act Gross Block I.Tax Act

Sl. No

AI N

Voucher Referenc e

Asset Details

Depreciation ESA/IT/Cos Act

No .

Dat e

Descripti on

Supplie Openin Additio Adjustmen Closin Openin Additio Adjustmen ts during ns g g ts during ns r g the year balanc balanc during the year Balanc during (Rs) e (Rs) e (Rs) the year (Rs) the year e (Rs) (Rs) (Rs)

Closing balance (Rs)

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FA/04

FIXED ASSET REGISTER MBOA Account Code

Category/Sub-category

Shift : Single/Double/ Triple Shift Depreciation Rate Electricity Act Companies Act Asset Details Gross Block (Rs) I.Tax Act

Sl . N o Descri ption Supplie r Ope ning Bala nce Additio Adjustmen Closin g ts during ns balanc during the year e the year Openi ng balanc e

AIN

Quantit SRV y (total) Referenc e

Depreciation ESA/IT/Cos Act (Rs)

Fro m

T o

No .

Dat e

Additio ns during the year

Adjustme nts during the year

Closi ng balan ce

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FA/MIR/01

REPORT ON PHYSICAL VERIFICATION

ACA Date Details of asset Description AIN Quantity as per Discrepancy FAR Physical verification FAR reference Loaction As per As FAR per P.V. Remarks

Officials carrying out the verification (Name and signature)

Date of verification

Approved by :

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