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Home › Gist of Opinions

Gist of Opinions

June 2026

Archived Gist of Opinions Download PDF

A. Facts of the Case
  • ‘A Ltd.’ is a public company, mainly engaged in the dredging activities for major ports and other maritime organisations covering both maintenance and capital dredging requirements.
  • The Company’s primary assets are dredgers with an estimated useful life of 25 years.
  • The residual value is estimated at 2% of original cost and the remaining 98% depreciable value is depreciated over 25 years on straight line method.
  • Though the useful life of the dredgers is fixed at 25 years, out of 14 dredgers, 4 dredgers have completed 25 years and yet are under operation for gainful dredging activities.
  • The Company is mandatorily required to have registration under Indian Register of Shipping (IRS) for all its dredgers to operate and to carry out dredging activities. Further, every dredger goes through a rigorous test to check the sea worthiness of the dredger and the dredger can be operated only when a certificate of fitness is provided by IRS.
  • To obtain this certificate, the Company incurs substantial repair costs/overhaul costs, known as ‘Dry Dock Expenditure’.
  • Once the inspection of a dredger is done, the IRS provides fitness certificate for the dredgers, which also mentions the due date for the next inspection, which is generally after duration of 3-5 years.
  • The Company has been treating these dry dock expenditures as major inspection costs and capitalising them in line with paragraph 14 of Ind AS 16.
  • As per the Company, since its economic benefits will flow to the Company until next inspection’s due date and costs can be measured reliably, it also satisfies the recognition criteria specified in paragraph 7 on Ind AS 16.
  • Comptroller and Auditor General of India’s (CAG) view :
  • CAG has commented that capitalisation of dry dock expenditure on these Dredgers is in contravention to the Accounting Policy of the Company. As these assets have exceeded their useful lives, dry dock repairs incurred on above four Dredgers should have been charged as Repairs and Maintenance (Vessels) cost under Other Expenses.
  • Company’s response to the comments of CAG:
  • The Company is of the opinion that as per paragraph 7 of Ind AS 16, capitalisation of the subsequent costs can be done and the same can be depreciated over the period for which economic benefits are expected to be derived by the Company, which is the period up to the next dry-docking due date.
  • Further, in case of dredgers whose useful lives have expired, the Company has reviewed the useful lives and extended the same.
  • In accordance with paragraph 51 of Ind AS 16, the Company had estimated the remaining useful life of the dredgers based on the dry dock surveys during the year, extending it up to the next scheduled date of dry dock.
  • In accordance with paragraph 51 of Ind AS 16, the Company had estimated the remaining useful life of the dredgers based on the dry dock surveys during the year, extending it up to the next scheduled date of dry dock.
  • The Company has complied with the provisions of Ind AS in capitalising dry dock expenditure on the above 4 dredgers.
    • B.Query
    • Whether the Company’s accounting treatment of capitalising dry dock expenditure of 4 of its dredgers whose useful lives have expired, is in compliance with the Ind AS Accounting Framework.
    • Whether subsequent expense can be capitalised as separate component even after expiry of useful life of main dredger, i.e., 25 years for dredgers as per accounting policy of the Company.
    C.Points considered by the Committee and Opinion
    • The Committee notes that the basic issue raised by the querist relates to the appropriateness of the Company’s accounting treatment of capitalising the dry dock expenditure incurred as a separate component of the 4 dredgers, after the expiry of the useful life of these dredgers.
    • The Committee notes that as per the requirements of Ind AS 16, following types of costs/expenditure can be capitalised as part of the cost of an item of property, plant and equipment:
      • Replacement at regular intervals: The Committee notes from paragraph 13 of Ind AS 16 that these costs are normally recognised as a separate part or component of carrying amount of PPE and depreciated separately over the useful life of the part itself (as useful life of part/component is different from the useful life of the main asset).
      • Non-recurring replacements: Paragraph 13 of Ind AS 16 also deals with the situations where items of PPE may require nonrecurring or less frequent replacements. In such situations also, if the conditions of recognition as per paragraph 7 of Ind AS 16 are met, an entity recognises in the carrying amount of an item of PPE, the cost of replacing part of such an item when that cost is incurred and the carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of Ind AS 16. These costs may also be recognised as separate part or component of carrying amount of PPE and depreciated separately over the useful life of the part itself (if they have different useful life from that of the main asset).
      • Inspection costs: Paragraph 14 of Ind AS 16 states that costs of major inspections can be recognised in the carrying amount of PPE as a replacement, if the recognition criteria are satisfied. However, in this regard, it may be noted that not all costs incurred during inspection or before inspection, for example, to make the asset ready for inspection can be capitalised as inspection costs; rather only those costs pertaining to performance of inspection activity e.g. fees paid to inspection authority to carry out inspection, costs of performing tests such as stress test to determine the strength of critical parts etc., can be capitalised. These costs are recognised as separate component of carrying amount of PPE and depreciated until the next inspection cycle. Other costs incurred before or during inspection should be separately analysed for capitalisation under requirements of Ind AS 16.
      • Cost of spare parts, stand-by equipment and servicing equipment: Paragraph 8 of Ind AS 16 requires that items, such as, spare parts are recognised as an item of PPE only if they meet the definition of property, plant and equipment and further for recognition as PPE, the conditions under paragraph 7 of Ind AS 16 are required to be fulfilled. Thus, if the definition of PPE and these conditions are fulfilled, the spare parts are recognised as a separate item of PPE and depreciated as per the requirements of Ind AS 16.
    • The Committee notes that as per recognition criteria under paragraph 7 of Ind AS 16 an item of expenditure shall be recognised as an asset if, and only if (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.
    • The Committee further notes that paragraph 12 of Ind AS 16 requires that expenditure on repairs and maintenance, including replacement costs of small parts, consumables, etc. and cost of day-to-day servicing is charged to profit or loss as and when incurred.
    • The Committee notes from the facts supplied that various types of costs/expenditures are being incurred by the Company in the context of ‘dry dock expenditure’ including repairs, replacements, inspection costs, and other costs in order to make dredgers ready for inspection, etc.
    • The Committee wishes to mention that not all expenses incurred during the dry-docking activity may necessarily meet the criteria for capitalisation under Ind AS 16
    • Ind AS 16 requires each item of cost or expenditure to be analysed so as to determine whether it can be capitalised as per the requirements of the Standard and does not stipulate that all expenditure incurred during a process or stage can be capitalised (for example, not all expenditure during construction stage can be capitalised).
    • Therefore, the Company needs to analyse each expenditure individually to determine its nature and whether the same can be capitalised as part of the cost of PPE.
    • If any expenditure does not meet the criteria for capitalisation, such as the expenditure on repairs and maintenance covered in paragraph 12 of Ind AS 16 (including replacement costs of small parts, consumables, etc. and cost of day-to-day servicing), the same should be charged to the Statement of Profit or Loss as and when incurred.
    • The Committee notes that Ind AS 16 does not prohibit the capitalisation of subsequent expenditure in the carrying amount of PPE after the expiry of the useful life of the PPE.
    • Accordingly, if costs or expenditure incurred during dry-docking activity result into increase in expected utility of dredger, the useful life of dredger should also be reviewed.
    • Further, since increase in useful life will lead to flow of future economic benefits to the Company, the recognition criteria as per paragraph 7 of Ind AS 16 can also be considered to be met and therefore, the expenditure incurred which leads to increase in the useful life in the extant case can be capitalised to the carrying amount of the dredgers, as per the requirements of Ind AS 16.
    • Furthermore, the Committee notes that as per the requirements of Ind AS 16 (paragraph 56(b)), useful life of an asset is determined considering the repair and maintenance programme for the asset.
    • However, since, the useful life of each of the 4 dredgers has expired despite presumably taking into account such repair and maintenance programme due to regular inspection activity (viz., dry-docking), the Company should consider reviewing its manner of determining the useful life of dredgers.
    • As regards depreciation of the expenditures incurred during dry-docking activity, which are recognised as part of an item of PPE/dredger as per the above-mentioned principles and requirements of Ind AS 16, the Committee notes that if a part or component of PPE has a useful life which is different from the useful life of the remainder of the PPE, it should be depreciated separately as per the above-reproduced requirements of Ind AS 16.
    • Thus, the replacement costs and inspection costs that are capitalised as part of the cost of the dredger in the extant case, will be depreciated separately if those parts or costs have a different useful life than that of the dredger itself.

A. Facts of the Case
  • A company is a listed company and manufactures Newsprint & Printing and Writing Paper (PWP) using bagasse (a sugar cane waste) as primary raw material.
  • The Tamil Nadu Government (GoTN) announced various “Structured Package of incentives” in 2015, for setting up Company’s Board Plant (with an investment obligation of Rs. 1600 crore and employment creation of 600 persons during investment period of 5 years between 12.2.2014 to 11.2.2019), offering Fiscal Incentive for reimbursement of Net Output VAT + CST paid as Investment Promotion Subsidy over a period of 12 years from the date of Commercial Production.
  • The incentive was subsequently converted into a Capital subsidy upon introduction of GST w.e.f. 01.04.2017 for the residual period. After implementation of GST Regime, the Government offered two options for companies with VAT based incentive packages: reimbursement of SGST or capital subsidy.
  • For the ease of calculation and claim every year, the Company opted for getting capital subsidy every year without quantifying the SGST paid every year.
  • Under the “Capital Subsidy option”, the Company became eligible to receive incentive of Rs. 16 crore per annum, being 1% of eligible capital investment of Rs. 1600 crore.
  • The incentive is annual in nature and can be claimed only after establishing that the Company has manufactured and sold the eligible product, during the relevant year. Further, the Company is required to maintain committed employment levels as specified.
  • The purpose of the incentive is to compensate for the SGST amount contributed by the Company to the GoTN. Therefore, though the incentive is computed as a percentage of capital investment in fixed assets, it is linked to Company’s operational performance, sales contribution, and compliance with conditions during each financial year.
  • Accounting treatment followed by the Company:
  • The Company has accounted for the grant under Ind AS 20 by recognising the Government Grant in the Statement of Profit and Loss on a systematic basis over the periods in which related costs are incurred.
  • Since the incentive can be claimed annually only after operational conditions are fulfilled, the Company has been accruing the incentive every year and recognising it under “Other Income.”
  • Subsequently, the capital subsidy in lieu of SGST based reimbursement has been amended to 10 % of the investment, not exceeding Rs.110 crore, which shall be released by the GoTN over a period of 15 years as equal annual installments every year from the F.Y. 2023-24, subject to fulfilment of additional investment commitment of Rs.1100 crore and additional employment generation of 156 persons by the Company.
  • As part of conditions of incentives, during each of the incentive period following the incentive period, the expansion unit shall be fully operational and shall manufacture the products as per the MoU with GoTN and the committed employment figures must be maintained, and the failure to do so will result in ineligibility for claiming capital subsidy in that particular year, which, as per the querist, indicates that incentive is for supporting working capital requirements of the Company and not a grant against capital investment.
  • Auditor’s observation:
  • Audit observed that the Company considered the above subsidy as revenue grant/subsidy instead of a capital subsidy in contravention of the provisions under Ind AS 20.
  • The CAG auditors raised a query only on the accounting treatment followed by the Company on the incentive granted for the setting up of the Hardwood Pulp Plant.
  • Company’s response to AG Audit Query:
  • In both the options (namely, reimbursement of SGST or capital subsidy), the intention of the Government is to reimburse the SGST paid periodically and it is not an assistance/subsidy for procurement of capital assets.
  • The new investment of the Company shall be provided a “Capital Subsidy in lieu of State Goods and Services Tax (SGST) based reimbursement” which will be payable over a period of 15 years as equal annual instalments subject to conditions mentioned above.
  • The Company is concurrently receiving similar incentives for both Board Plant and for the new investment; both are similar in nature of ‘Revenue Grant’ and the Company is giving similar accounting treatment for both the incentives in compliance with Ind AS 20.
  • The Company has to file a separate claim for such incentive, confirming the operation of the Plant with committed employees during the preceding financial year and incentives are annually sanctioned based on its claim; the failure to maintain production and employment will result in ineligibility to claim subsidy in that particular year. Hence, it is absolutely clear that the above incentive, though the nomenclature is ‘Capital Subsidy’, falls into the ambit of a revenue grant, which is the ‘substance over form’
B. Query
  • Whether the Company’s accounting treatment of capitalising dry dock expenditure of 4 of its dredgers whose useful lives have expired, is in compliance with the Ind AS Accounting Framework.
  • Whether subsequent expense can be capitalised as separate component even after expiry of useful life of main dredger, i.e., 25 years for dredgers as per accounting policy of the Company.
C. Points Considered by the Committee and Opinion
  • The Committee notes that the basic issue raised by the querist relates to nature of capital subsidy in lieu of SGST reimbursement under Structured Package of Assistance received from the State Government for setting up a Hardwood Pulp Plant (Expansion Project II) as to whether the same is ‘grant related to asset’ or ‘grant related to income’ under Ind AS 20, ‘Accounting of Government Grants and Disclosure of Government Assistance’, considering difference in views of the CAG and the Company.
  • At the outset, the Committee wishes to mention that the accounting treatment of a grant is determined by its nature (i.e. grant related to income or grant related to assets) rather than the nomenclature used, for example, capital subsidy used in the extant case.
  • The Committee notes that from these facts, it appears that continued operation of the plant and committed employment have to be necessarily maintained by the Company in each year of the incentive period of 15 years, for which the subsidy is to be claimed in addition to the initial investment in the plant and creation of employment in the investment period, to be eligible for the subsidy. Therefore, it can be said that these conditions are also primary conditions for eligibility for a subsidy.
  • In this context, the Committee notes the definition of ‘government grants’ as provided in Ind AS 20, which states that grants related to assets are those grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire a long-term asset.
  • Although there may be secondary conditions to the grants related to assets, these would relate to the type or location of the assets or the period during which these are to be acquired or held.
  • The Committee also notes that it is mentioned in the facts that the pulp plant is a modern one and highly automated, requiring almost no additional manpower, implying that in the absence of employment conditions as one of the primary conditions, the Company might not have created and maintained the employment of 156 persons in the plant, and thus, making employment-related conditions also a primary condition.
  • Thus, in the extant case, the primary condition for being eligible to grant is not only the acquisition of a long-term asset, i.e., a hardwood pulp plant, but there are other primary conditions as well related to employment conditions in the investment period, and continued operation and committed employment for 15 years after the investment period.
  • Therefore, the Committee is of the view that the said ‘capital subsidy’ in the extant case is not a grant related to assets. The Committee also notes from above that Ind AS 20 defines ‘grants related to income’ as grants that are not related to assets. Since, in the extant case, the grant is not a grant related to assets as discussed hereinbefore, the same is a grant related to income. Accordingly, the accounting treatment made by the Company in this regard to consider the subsidy/grant in lieu of SGST reimbursement as ‘grant related to income’ is appropriate.
  • Incidentally, the Committee also wishes to point out that the frequency of the grant – whether onetime assistance or regular disbursement – is not relevant for determining the nature of the grant. Further, although the capital subsidy is defined in terms of a certain percentage of investment in the plant, it only represents the basis of determining the amount of the grant and therefore cannot determine the nature of the grant.

A. Facts of the Case
  • A company is a public sector undertaking, incorporated as a Special Purpose Vehicle (SPV) for the implementation and development of Exhibition-cum-Convention Centre (ECC).
  • The project scope includes the development of external road connectivity to the ECC through the National Highways Authority of India (NHAI) at a sanctioned cost of ₹442.39 crore.
  • Out of the approved amount, a sum of ₹354.89 crore has already been paid to NHAI towards the cost of land and 3 instalment payments for road development.
  • The Company initially recognised the expenditure under Capital Work-in-Progress (CWIP) up to financial year (F.Y.) 2022-23, pending completion and commissioning of the ECC Project.
  • Upon commencement of commercial operations from 1st October 2023, the project was capitalised during F.Y. 2023-24 under the head ‘Property, Plant and Equipment (PPE)’, in accordance with Ind AS 16, which requires capitalisation of costs directly attributable to bringing the asset to the location and condition necessary for it to operate in the manner intended by management. The Company treated the payment made to NHAI as a directly attributable cost related to the ECC’s development.
  • Auditor’s observation:
  • The Auditor raised an observation that the payment to NHAI should have been charged to the Statement of Profit and Loss for F.Y. 2023-24.
  • Management’s Position
  • The road infrastructure developed by NHAI is critical and integral to the operational readiness of the ECC project and was incurred specifically during the construction phase. Without this infrastructure, the ECC would not be able to function in the manner intended by management and expenditure is directly attributable to making the main project asset usable and accessible.
  • Accordingly, the Company capitalised the expenditure in accordance with paragraph 16 of Ind AS 16..
  • The expenditure is being recognised on the basis of utilisation by NHAI, and the unreleased 4th installment will also be capitalised once utilisation is confirmed.
    • B.Query
    • Whether the accounting treatment adopted by the Company, i.e., capitalisation of the amount paid to NHAI for development of road connectivity as part of the cost of the ECC project under the head, ‘Property, Plant and Equipment’, is in accordance with the provisions of Indian Accounting Standard (Ind AS) 16?
    • In case capitalisation is not considered appropriate, what are the alternative options available to the Company for accounting for the payment made to NHAI towards development of external infrastructure that is functionally linked to the ECC project’s operations?
    C.Points considered by the Committee and Opinion
    • The Committee notes that the basic issue raised in the query relates to accounting treatment of amount paid for development of road connectivity to Exhibition-cum-Convention Centre (ECC Centre)/ Project.
    • The Committee notes that Ind AS 16 does not prescribe the unit of measure for recognition and states that judgement is required in applying the recognition criteria to an entity’s specific circumstances.
    • The Committee, however, notes that the expenditure incurred is for providing ‘connectivity’ to the road rather than the ‘road’, wholly dedicated for the ECC Centre/Project. Therefore, if such expenditure is to be capitalised, the unit of account of PPE shall be the underlying asset i.e. ECC Centre and not the road.
    • The Committee now examines whether the expenditure incurred on development of road connectivity by the Company can be included as a part of cost of the ECC Centre/ Project.
    • In this regard, the Committee notes the requirements of Ind AS 16 that these requirements do not mean that all expenditure incurred for making the asset operational as per the intentions of the management should be capitalised as cost of PPE, rather only costs which are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating should be considered for capitalisation as part of the cost of the PPE.
    • The costs that are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating are the costs or expenditure without the incurrence of which, the construction of project/asset could not have taken place and the project/asset could not be brought to the location and condition necessary for it to be capable of operating in the manner intended by management.
    • Further, the Committee is of the view that the ‘manner intended by management’ should be understood with reference to the asset itself and not with reference to the related additional infrastructures or other facilities that will be used simultaneously with the other currently existing infrastructures related to the asset and which are developed as per the decision of the management to increase its current revenues.
    • The Committee notes from the project details shared that the development of road and the project development were taking place simultaneously and thus, the road was not necessary for construction of the project.
    • Further, from various other documents and approvals, it is noted that in the context of road development, NHAI has demanded a sum of Rs. 350 crores as cost of additional structures for dedicated entry/exit points from Urban Extension Road (UER) and the nearby Expressway.
    • Thus, it appears that the objective of incurring the expenditure on road connectivity was to create separate additional access to the ECC Centre from the main roads and expressways so as to enable easy accessibility to the visitors to the centre and for overall development of the area to increase its attractiveness.
    • Therefore, although such road connectivity to ECC Centre may increase the future economic benefits flowing from the overall ECC Project, the same does not appear to be necessary for making the ECC Centre operational/capable of operating in the manner intended.
    • Accordingly, as per the requirements of Ind AS 16, the expenditure incurred on road connectivity should not be considered as directly attributable to bringing the ECC Centre to the location and condition necessary for it to be capable of operating in the manner intended by management. Hence, it cannot be capitalised as part of cost of any PPE; rather should be recognised as an expense in the Statement of Profit and Loss when incurred.