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Power companies with new projects in their kitty will start showing profits from the construction period itself under the new Indian Accounting Standards (Ind-AS).
According to Ind-AS, if a state hands over a power plant to a company with a power-purchase agreement (PPA) and 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. Most of the current PPAs (solar or otherwise) and agreements for ultra mega power projects will fall under this criterion.
If there are no assured returns in the form of long-term PPAs, the power plant would be considered “intangible asset” in the company’s balance sheet.
“The new accounting norms in substance consider such power companies as contractors and not owners for power plants,” said Ashish Gupta, partner, Walker Chandiok & Co LLP.
However, in certain circumstances — such as when the time period of PPA is equal to the power plant’s life — company would be able to continue the plant as “fixed asset”. Till now, power companies have been considering all such power plants as “fixed asset” on their balance sheet.
As a result, there was no revenue or expenses considered during construction period.
This construction amount used to be just considered as the “asset value” in balance sheet and made no contribution in profit and loss (P&L) account.
“Now, in both the cases — when plants are financial assets or intangible assets — the amount used in the construction of assets would be considered in calculating revenues and profits,” said Gupta.
With this amount now moving into P&L account, companies with new projects in their kitty will begin showing profits during the plant construction period itself.
However, once the construction is over, the profits will stabilise and will be similar to other companies — which will consist of operational income and interest income.
The government has asked all companies, listed and unlisted, with a net worth of more than Rs 500 crore, to start following these accounting standards for the accounting period beginning April 2016.
