Depreciation of BOT assets

Ernst amp Young | Updated on March 03, 2013



In a recent case, the Supreme Court held that a non-listed company can issue bonus shares out of revaluation reserve.

The Ministry of Corporate Affairs amended Schedule XIV in April 2012 to prescribe the amortisation rate and method for intangible assets (such as toll roads) created under BOT (build-operate-transfer), BOOT (build-own-operate-transfer), or any other PPP (public-private partnership) route. Accordingly, such intangible assets will be amortised using the rate arrived at by dividing actual revenue for the year with total estimated revenue.

However, the Companies Bill does not contain any such requirement; rather, it is stated that depreciation of intangible assets will be governed by notified AS-26. In the context of International Financial Reporting Standards (IFRS), the IFRIC (IFRS Interpretations Committee) and IASB (International Accounting Standards Board) have already concluded that revenue-based amortisation is not appropriate. However, there is no such clarification in the context of notified AS. Consequently, it seems unclear at this stage whether infrastructure companies will be entitled to use revenue-based amortisation after the enactment of the Bill. The Institute of Chartered Accountants of India should clarify this.

Clarity needed on registered valuers

The Companies Bill introduces the concept of a registered valuer. It states that if valuation is required for any property, stocks, shares, debentures, securities, goodwill or any other asset, or net worth of a company or its liabilities under the Bill, a registered valuer with the requisite qualification and experience will do it. The valuation will be as prescribed. As notified accounting standards too will be a part of the Companies Bill, one may argue that this requirement also applies to valuations under notified AS. However, the Ministry of Corporate Affairs should clarify.

Risk disclosures for unlisted firms

Currently, under the listing agreement, a listed company should lay down procedures to inform board members about the risk assessment and minimisation procedures. These procedures should be reviewed periodically to ensure that the executive management controls risk through a properly defined framework. However, there is no such requirement for non-listed companies. In contrast, the Companies Bill requires all companies, including non-listed, to highlight their risk management policy in the board report. To comply, all companies have to develop and document their risk management policies, and the senior management may need to review their implementation.

New paradigm on bonus shares

In the case of listed entities, the Securities and Exchange Board of India’s DIP (disclosure and investor protection) guidelines earlier, and ICDR (issue of capital and disclosure requirements) regulations currently, prohibit bonus issue by capitalising revaluation reserves. The question is whether non-listed entities can do so. The guidance note on ‘Availability of Revaluation Reserve for Issue of Bonus Shares’, issued by the Institute of Chartered Accountants of India, states that a company cannot issue bonus shares out of reserves created by revaluation of assets.

However, in the Bhagwati Developers vs. Peerless General Finance & Investment Co case, the Supreme Court held that a non-listed company can issue bonus shares out of revaluation reserve. The enactment of the Companies Bill will address this conflict — the Bill states that a company, including non-listed, cannot issue bonus shares by capitalising revaluation reserve.

Published on March 03, 2013

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