29 September 2011
Company Profile: Manufacturing Concern. Issue related to: Investment in New Project/ Expansion of existing units.
As per different contracts placed by the company, LD has been levied and collected from the payable bill amount to the contractors/ suppliers on account of delay in supplies and delay in work completion.
My concern is as what treatment should be done with the LD so collected.
Op.1: To deduct same from the Project Cost
If it can be established that the LD is in fact received in mitigation of the extra project costs incurred and capitalised by the company on account of the same specific events which gave rise to liquidated damages and that the said damages can be identified with the project, the Committee is of the opinion that the liquidated damages can be adjusted in the cost of the project.
Op.2: Show the equipment with full Cost and LD in P&L A/c as Other Income.
ICAI Expert Opinion: LD is not directly attributable to the acquisition of capital equipment like trade discount and rebates. They are also not adjustments in the price of the equipment. The damages results from inefficiency on the part of the supplier/ contractor. In view of this LD received form the supplier cannot be adjusted in the cost of purchase.
My stand is that in a project we are having hundreds of contract for different supplies and works. The delay can not be neck to neck match with the mitigation of extra cost of project or loss of production hence LD should be shown in P&L as "other income" however it also cannot be said that due to this delay extra finance is not spent (because there is financial loss towards project team's salary and salary of the contractor's expert for supervision).
30 September 2011
In my opinion, the expert's opinion is absolutely right, the l.d. charges are really not related to the acquisition of the asset and shpuld be credited to P/L A/c
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