Expenditure on installation of electricity facilities.

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mithilesh dashora (Querist)
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20 September 2012 A Pvt Ltd company has spend 25 lakhs to installed electricity facilities in his factory shed. Out of 25 Lacs , 20 Lacs is spend for installation of poll on a land which is not belongs to company. As this is first year of operation what should company do regarding to accounting of this expenditure?

Company has no control over poll. As per agreement with MPKKVCL ( electricity provider) ownership of poll will remain with MPPKVCL.

As we are not owner hence can't be treat as an separate assets.

I don't want to classified as Miscellaneous expenditure as it will reduce net worth of company.

I have alternative but i dont think it will be correct way please comment on this:

As per AS 10 :
The cost of an item of fixed asset comprises its purchase price, including
import duties and other non-refundable taxes or levies and any directly
attributable cost of bringing the ASSETS TO ITS WORKING CONDITION for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price.

If we consider above definition then we can add this cost to the cost of machinery. As without power machinery will not be able to work.

What you think ????

Guest

Guest (Expert)

21 September 2012 Kindly clarify me as to why the company is paying for the POLL when the ownership is with Electricity board. If the poll is to be used for sole purpose of the company without the company being the owner, then it will tantamount to a Long term finance lease. The cost incurred to install the same will be treated as a one time lumpsum lease and will be amortised over the life of the poll. Kindly confirm the reason why the company is paying for poll.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 In your situation, where a Pvt Ltd company has incurred ₹25 lakhs for installing electricity facilities, with a significant portion (₹20 lakhs) spent on installing poles on land that does not belong to the company, here’s how you could approach the accounting treatment:

### Accounting Treatment Options:

1. **Treatment as Leasehold Improvements**:
- Since the company does not own the land where the poles are installed, and per the agreement with MPPKVCL, the ownership of the poles remains with MPPKVCL, you could treat this expenditure as leasehold improvements.
- Leasehold improvements are improvements made to leased property and are capitalized. These improvements are amortized over the shorter of their useful life or the remaining lease term.
- In your case, the expenditure could be amortized over the period of the agreement with MPPKVCL or over the expected useful life of the improvements.

2. **Addition to Cost of Machinery (Alternative Approach)**:
- As per AS 10 (Accounting Standard on Property, Plant and Equipment), costs incurred to bring an asset to its working condition for its intended use can be capitalized as part of the cost of machinery.
- You mentioned that without power, machinery cannot operate effectively, implying that the electricity facilities (including poles) are necessary for the machinery to function.
- Therefore, you could consider adding a portion of the expenditure (related to the electricity facilities directly supporting machinery operation) to the cost of machinery. This approach links the expenditure directly to the productive capacity of the machinery.

### Considerations:

- **Prudence in Accounting**: The choice between treating the expenditure as leasehold improvements or adding it to the cost of machinery should align with the company's accounting policies and the substance of the transaction.

- **Impact on Financial Statements**: Regardless of the chosen approach, ensure consistency and transparency in financial reporting. The decision should reflect the economic substance of the transaction and comply with accounting standards.

### Consultation:

Given the complexities involved, especially regarding leasehold improvements and the ownership of assets, it’s advisable to consult with a qualified accountant or financial advisor. They can provide tailored guidance based on the specific details of your agreement with MPPKVCL and ensure compliance with accounting standards (such as AS 10) and regulatory requirements.

By seeking professional advice, you can make informed decisions that accurately reflect the company's financial position and ensure proper disclosure in the financial statements.

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