Power sector companies unable to commence commercial production due to reasons beyond the developer’s control are in for some disappointment.

The Corporate Affairs Ministry has decided not to allow such companies to capitalise the borrowing costs incurred during the extended delay in commencement of commercial production, even if the plant was otherwise ready.

Also, in cases of phased operationalisation of projects, the costs attributable to the completed phases – which were previously being capitalised till the entire project was complete – would have to be now charged to the profit and loss account.

For instance, if Company A is a power producer who has a plant ready, but yet not got the desired fuel linkages. Then the borrowing costs incurred during the extended delay for commercial production have to be charged in the profit and loss account.

Such an accounting treatment will adversely impact the bottomline of the company A, say accounting experts.

A clarificatory circular to this effect has now been issued by the Corporate Affairs Ministry (MCA).

Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, said that the MCA clarification has been issued to address the divergence in accounting practices followed by companies implementing power projects.

While the clarification only reiterates the existing principles in the accounting standards, it is expected to bring in consistency in the application of these principles and also align the practices with those followed internationally, he said.

“This clarification will have significant adverse impact on the profitability of several power companies,” he said.

This is because costs which were being capitalised pending commencement of commercial production for reasons beyond the company’s control – like sorting out coal procurement issues, resolution of last mile connectivity – would now be required to be charged to the statement on profit and loss account.

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