Vide Circular no. 35/2014, Ministry of Corporate Affairs has clarified the following issues with respect to the capitalisation of borrowing costs in power projects:
1) Borrowing costs incurred during extended delay in commencement of commercial production after the plant is otherwise ready, can not be capitalised by virtue of AS-10 & AS-16 issued by ICAI.
2) Other capitalisations should be made unit-wise, instead of projectwise, therefore, in case one of the units of the project is ready for commercial production, capitalisation for such unit should be made, irrespective of the fact that construction of other units still continues.
3) AS-10 & AS-16 deals with all types of power projects. It doesn't differentiate treatment for cost plus projects or competitive bid projects.
For the sake of convenience, the said circular has been given as under for reference.
- Accounting Standards AS-10 and AS-16 prescribe the principles of capitalization of various costs based on the underlying concept that only such expenditure should be capitalized as form a part of the cost of fixed assets which increase the worth of the assets. Cost incurred during the extended delay in commencement of commercial production after the plant is otherwise ready does not increase the worth of fixed assets. Such costs cannot, therefore, be capitalized.
- Accounting Standard AS 16, inter alia provides guidance with regard to part capitalization where some units of a project are complete. In case one of the units of the project is ready for commercial production and is capable of being used while construction continues for the other units, costs should be capitalized in relation to that part once the part is ready for commercial production.
- It is further clarified that AS 10 and AS 16 are applicable irrespective of whether the power projects are ‘Cost Plus projects’ or ‘Competitive Bid projects’.