Capitalization of fixed asset

This query is : Resolved

Sasikumar (Querist)
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07 February 2013 Dear sir,

An amount of Rs.46 crores has been spent for constructing 220KV sub station and subsequently transferred to Govt Electricity board because our company is not eligible to maintain that sub station as per Govt rules. Our company is the only consumer of power from the above sub station.

Now what is the treatment to be given for this Rs.46 crores in financial accounts?

Sanjay Chauhan (IFRS)

Sanjay Chauhan (IFRS) (Expert)
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13 February 2013 The expenditiure is capital expenditure.

If the Company receives the benefit of the 220KV line, then it can still capitalise the expenditire over the expected contract for using the transmission line.

It is fair common in many industries that Corporates incur capital cost but may not be allowed to register in its own name. Example would be laying down of approach roads in plant and vicinity.

A suitable disclosure will have to be given in notes.

Sasikumar

Sasikumar (Querist)
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15 February 2013 Thanks sir.

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Sasikumar

Sasikumar (Querist)
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15 February 2013 Dear sir,

Can u give me some example cases?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 Certainly! Here are a few examples that illustrate capital expenditures where the benefit is received but the asset cannot be registered in the company's name:

1. **Power Transmission Lines**: A company constructs power transmission lines to supply electricity to its manufacturing plant. While the company benefits from the transmission lines, they are typically owned and operated by the local electricity utility or a separate transmission company. The company can capitalize the expenditure incurred on constructing these transmission lines as part of its fixed assets, even though the lines are not registered in its name.

2. **Approach Roads and Infrastructure**: In many cases, companies undertake the construction of approach roads, bridges, or other infrastructure that facilitates access to their manufacturing plants or facilities. These assets may be constructed on land owned by the government or leased from third parties, and thus cannot be registered in the company's name. Despite not holding ownership, the company can capitalize the expenditure on these infrastructure projects as part of their fixed assets.

3. **Railway Siding or Port Facilities**: Companies operating in sectors like mining, heavy manufacturing, or logistics often require dedicated railway sidings or port facilities for transportation of raw materials or finished goods. These facilities may be constructed on railway or port authority land and are essential for the company's operations. The company can capitalize the costs associated with constructing these facilities as part of their fixed assets.

4. **Water Supply or Pipeline Infrastructure**: Companies may invest in constructing water supply pipelines or other utility infrastructure to support their operations. If these utilities are laid on public or third-party land or easements, the company may not hold legal ownership of the infrastructure. Nevertheless, they can capitalize the costs incurred in constructing these utilities as part of their fixed assets.

In each of these cases, the key point is that although the company may not hold legal ownership or registration of the constructed assets, they are essential for the company's operations and provide economic benefits over multiple accounting periods. Therefore, the expenditures can be capitalized and treated as part of the company's fixed assets, with appropriate disclosure in the financial statements regarding the nature of the assets and any restrictions on ownership or registration. This ensures transparency and compliance with accounting standards.