Expert Advisory Committee of ICAI has recently issued an opinion on the accounting treatment of interest on deposit made out of equity share capital and interest-free subordinated debt funded by Government, the summary of which is as below:
Facts of the case:
A company, which is a joint venture between the Government of India (GOI) and the Government of Tamilnadu (GOTN), has been set up for implementation of the Chennai metro rail project. Both Governments released funds toward equity and interest-free subordinate debt by way of budgetary allocation. Moreover, the querist has stated that the company has borrowed money from Japan International Cooperation Agency (JICA). The equity and subordinate debts received from the Governments including the pass-through assistance of loan received from JICA, which are pending to be utilized for the project, are temporarily parked in short-term deposits with banks.
Query on which the opinion was sought:
The querist has sought the opinion of the EAC that whether the accounting treatment in respect of the interest income earned on short-term deposits is in compliance with Accounting Standards?
Opinion of the Expert Advisory Committee:
The EAC noted that source of investment consists of three categories, i.e., equity capital, interest-free subordinate loan and JICA loan. Therefore, the EAC has examined the treatment of interest income from these three sources separately. The Committee is of the view that interest earned on short-term deposits made out of equity portion is an income arising out of the company’s ancillary activities, which are not necessary to bring the project/asset to its working condition for its intended use. Therefore, these cannot be considered as directly attributable to the rail project and should be recognized in the statement of profit and loss. In respect of an interest free subordinate loan, where no borrowing costs according to AS 16 would arise, the interest income out of investment of such borrowed funds cannot be adjusted against the borrowing costs to be capitalized in the cost of the asset and the same will have to be recognized in the statement of profit and loss. With regard to income earned from the temporary investment of funds out of JICA loan during the period of construction, the EAC was of view that the said income should be adjusted against the borrowing costs to be capitalized according to the principles of AS 16 in the cost of the asset/project concerned.
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