)
Power companies’ earnings before interest, taxes, depreciation and amortisation (Ebitda) is likely to be impacted under the Indian Accounting Standards (Ind-AS) 115 notified by the government recently.
According to Ind-AS, if a state hands over a power plant to a company with a power-purchase agreement (PPA) with an assurance that all electricity would be purchased by the government; such power plant would be considered a ‘financial asset’ in the company’s balance sheet. If there are no assured returns in such cases, then the power plant would be considered ‘intangible asset’ in the company’s balance sheet.
Till now, power companies have been considering such power plants as ‘fixed asset’ on their balance sheet. Under the new norms, the accounting will significantly change resulting in lower Ebitda for power companies. However, the profits will not be significantly affected.
Consider a case where a power company has done an agreement where Rs 100 crore is the amount given for the construction of the power plant and Rs 75 crore is the amount, which the company considers as revenue earnings over a period of time. The Rs 75 crore includes the amount from PPA, service revenue etc.
Such plants become the power companies’ financial assets, according to the service-concession arrangements defined in the new accounting norms. So, a large share of Rs 75 crore will be considered in the ‘interest income’.
Consequently, while the company’s profits will fluctuate a little, its operating earnings will slip down significantly as ‘interest income’ is not a part of it.
“Whenever accounting guidance for service-concession arrangements are applied, the company’s Ebitda will be affected,” said Ashish Gupta, partner, Walker Chandiok & Co LLP. Most of the current PPAs (solar or otherwise) and agreements for ultra mega power projects will fall under this criterion. “The new accounting norms consider such power companies as contractors and not owners for power plants,” said Gupta.
According to him, whenever an investor thinks of investing in a power company, there are three things he looks at — quality of power plants; long-term contracts (as it assures a fixed income for a long time period); and its ability to generate Ebitda.
