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Recently, the Institute of Chartered Accountants of India (ICAI) issued a Guidance Note (GN) on accounting for rate-regulated activities. In certain regulated sectors such as power, the rates charged by companies to the end customers are determined/approved by regulators based on the estimated cost to be incurred plus a return (cost-of-service methodology).
In practice, there is a significant time gap between incurrence of costs and approval by regulators for changes in tariff to be charged, resulting in a significant accounting impact.
Till now, there was no prescribed accounting for such activities and hence diversity in practice exists on timing of revenue recognition, cost deferrals, presentation and disclosure of related matters.
Inconsistencies may prevail on account of following factors:
Continuing issue with the matching concept may prevail. The GN indicates that where the recovery of charges is at the discretion of the regulators, probable recovery cannot be assumed until the regulators formally approve the claim.
The GN applies when pricing mechanism is based on cost-of-service methodology. Other pricing mechanisms are out of scope.
No guidance on presentation in profit and loss account is provided i.e. reduction from costs vs recognition as revenue.
Implementation issues
This would result in several implementation issues such as:
Recognition of assets and corresponding income without the corresponding cash in-flows, may have impact on tax outflow and thereby an ongoing business impact;
Effective date of this GN is yet to be announced. This could create concerns on accounting followed during the interim period;
Entities need to put in place a process for initial and subsequent recognition and measurement as well as exhaustive disclosures; and
Suggested accounting in the exposure draft under IFRS differs from the GN, resulting in another potential difference from IFRS.
Helping airlines fly high
The Budget has provided welcome relief to the beleaguered aviation sector. External commercial borrowings up to $1 billion have been permitted for working capital requirements of airlines. Hitherto, ECBs were allowed only for long-term debt in certain specified sectors and, that too, for a lower limit of $200 million. Airlines are likely to save 150-300 basis points on their working capital interest through ECBs.
The removal of basic Customs duty on aircraft spares will help cut down maintenance costs of airlines and provide a fillip to the domestic maintenance, repair, and operations (MRO) industry. The proposal for 49 per cent FDI for foreign airlines is under active consideration and is expected to be approved soon.
Increase in baggage allowance from Rs 25,000 to Rs 35,000 may bring in additional income for duty free sales at Indian airports.
Though, overall, the Budget has been positive for the aviation sector, the proposal for retrospective taxation on equity transactions has been a bit of a dampener. Increase in service tax and making it ad-valorem for air tickets is likely to lead to an increase in airfares.
Greece to fade from front page
As the buyers and sellers met to make agree on the payout from the default by the Hellenic Republic earlier this week, the action was relatively muted, with the net result being a net payout of $2.5 billion to holders of Greek CDS protection.
The process on the whole went off relatively smoothly and, to some extent, restored faith in the functioning of the CDS market and in the minds of buyers of CDS protection.
The final value that was set was 21.5 per cent of par, implying a payout of 78.5 per cent of the value of protection written.
Prior to last week, there were fears expressed that the entire sovereign CDS market was flawed, but the smooth functioning of the auction has allayed these to some extent.
Greece will now fade away from the front page to some extent, as the market participants focus on Portugal and the other beleaguered EU nations.
However, the author remains convinced that we haven't heard the last of Greece bailouts.
This was the second bailout, and isn't the third time a charm?
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