Accounting treatment of indirect administrative overheads incurred during construction phase of power plant

Expert Advisory Committee (EAC) of The ICAI has issued an opinion on whether the indirect administrative overheads (i.e., salary and sitting fees of the directors, audit fees, statutory and other levies related to the company etc.) incurred during the construction phase of the power plant are to be capitalized along with the cost of the project even though there is no income generated by the company during its construction phase.

The key highlights of the EAC opinion are:

  1. the basic principle to be applied while capitalising an item of cost to a property, plant and equipment (PPE) is that it is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  2. The Committee is of the view that ‘directly attributable’ costs directly related to the construction activity and without the incurrence of which the asset cannot be brought to the location and condition necessary for it to be capable of operating in the manner intended by management.
  3. Employee benefit expenses arising directly from the construction of the plant/project should only be capitalised and rest should be charged to the statement of profit and loss as and when incurred.
  4. Employee benefit expenses relating to directors, directors’ sitting fee are not directly attributable to the construction of project as activities undertaken by BoD and/or KMPs involve planning, supervision and other related activities which are not directly related to construction as such and are of the nature of administration and general overheads and therefore, should be recognised as expense in the statement of profit and loss
  5. As regards to audit fees, it is an administrative expense, and cannot be considered as directly attributable cost of construction and therefore cannot be capitalised.
  6. Statutory and other levies, to the extent, these are directly attributable to construction e.g. fees/charges paid for obtaining license or seeking mandatory approvals/clearances for construction etc., should be capitalised.

-Sambhav Jain
Audit Associate
ShineWing India