The following is a reproduction of the article titled "Accounting treatment of expenditure towards Special Development Plan (SDP) by the Company, under Ind AS framework," which presents the opinion of the Expert Advisory Committee (EAC) of the ICAI.
The opinion addresses the divergence in views between the statutory auditors and the Comptroller and Auditor General of India (C&AG) regarding how a Government of Karnataka (GoK) undertaking should account for expenditure incurred under the Special Development Plan (SDP).
Facts of the Case (Context)
The Company is a wholly-owned undertaking of the Government of Karnataka (GoK), established as a Special Purpose Vehicle to cater to drinking water and irrigation needs. The Company executes its projects, including SDP works, primarily using budgetary support from the GoK.
- SDP Works: The expenditure under the SDP majorly comprises the construction of civil infrastructure, such as barrages, check dams, roads, bridges, and community halls.
- Funding: The funds received from the Government of Karnataka towards SDP are in the form of ‘Advances against Equity’, and subsequently, shares are allotted toward the same.
- Company’s Accounting Treatment: Since the Company does not exercise control over the assets created under SDP and hands over the same to the Government, the Company charges the expenditure (e.g., Rs. 7977.93 lakhs on barrages during F.Y. 2022-23) to the Statement of Profit and Loss as revenue expenditure. This treatment is based on the rationale that there is no future economic benefit from such assets to the Company.
Divergent Views
- Statutory Auditors’ View: They qualified the accounts, stating that expenditure incurred on construction of barrages under SDP is capital in nature. Treating capital expenditure as revenue expenditure deviates the principles of fundamental accounting assumptions, and consequently, the Loss is overstated. They also noted that treating corresponding grants as share capital deviated from matching principles.
- C&AG View: The C&AG observed that the Company was not creating its own asset but was acting only as an executing agency for the Government. Therefore, the expenditure incurred was not capital in nature, and the accounting treatment of booking the expenditure through the profit and loss account was appropriate.
Query to the Expert Advisory Committee (EAC)
The Company sought the EAC's opinion on whether the accounting treatment of classifying the expenditure on construction of civil infrastructures not owned by the Company as revenue expenditure by debit to the Statement of Profit and Loss is appropriate and compliant with generally accepted accounting principles.
Points Considered by the Committee (Rationale)
The Committee focused on whether the expenditure met the definition and recognition criteria of an 'asset' under the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS).
- Asset Definition: An asset is defined as a present economic resource controlled by the entity as a result of past events. Control is critical, meaning the entity must have the present ability to direct the use of the resource and obtain the economic benefits that may flow from it, and prevent other parties from obtaining those benefits.
- Control and Benefit Assessment: The Committee noted that the Company does not own or exercise control over the assets created under SDP and hands them over to the Government after execution of works.
- Conclusion on Recognition: Since the Company lacked the right and control over the resources created, and since there was no potential of future economic benefits from the expenditure incurred, the expenditure incurred toward SDP does not result into the creation of any asset for the Company.
- Expense Recognition: When expenditure is incurred but no asset is recognized, an expense is recognized. The Committee emphasized that the matching of costs with income is not an objective of the Conceptual Framework; recognition depends solely on meeting the definition of an asset or expense.
Opinion
Based on its analysis, the Committee provided the following opinion:
The accounting treatment followed by the Company of treating the expenditure on construction of barrages and other civil infrastructures, not owned by the Company, as revenue expenditure by debit to the Statement of Profit and Loss is appropriate.
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