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Merits of adopting global accounting system in core sector
Merits of adopting global accounting system in core sector
25 Sep, 2007, 0303 hrs IST,P Rama Krishna,
Earlier, in most countries, while public sector operators were responsible for construction, operation and maintenance of infrastructure, including toll highways, toll bridges, power plants, water supply plants, airports, sea ports, etc, such infrastructure was financed through public budget appropriation.
Of late, in today’s expanding global economy, governments of several countries use a build-operate-transfer (BOT) model for the purpose. The BOT model allows private, foreign and national investors to finance, design, construct, upgrade and operate large-scale infrastructure and development projects.
In return, the operator (a private sector company) is granted the right to generate revenues from the infrastructure facilities for a specified term or concession period. These revenues enable the company to recover its invested capital and also earn a fair return on investment during the concession period, which may range typically from 10 years to 40 years. At the end of this period, assets of the BOT project are transferred, in good condition, to the government or to the local authority which granted the concession (i.e., grantor). This arrangement is articulated in a contract which delineates performance standards, mechanisms for adjusting prices and provisions for arbitrating disputes.
In India, successful public-private participation arrangements are emerging and it is estimated that to sustain economic growth, investments of $350-500 billion would be required in the next five years. While these service arrangements may assume any variety of forms, participation by both the grantor and operator, accompanied by an initial large investment, raises questions over the assets and liabilities to be recognised by the operator.
To facilitate this scenario, a reasonable framework of concessionaire agreements and specialised considerations for accounting and preparation of financial statements of these private sector entities should be prescribed.
Currently, from an Indian perspective, BOT assets are recognised as fixed assets and depreciated over the course of the BOT contract. This treatment does not fully exhibit the risks and rewards associated with the arrangement and also does not reflect the substance of the underlying arrangement rather than in form.
For example, the operator neither holds a leasehold right to nor owns the asset; he constructs the asset in accordance to the grantor’s specifications and he also complies with the grantor’s operation and maintenance requirements for the asset. In addition, he should also comply with the terms for transfer of the assets at the end of the concessionaire period as specified by the grantor. In such a situation, how would the operator be justified in recognising these assets as his own?
Further, in most of the cases, the initial development takes place over a time frame of 3-7 years. At this stage, the operator continues to provide services by building the infrastructure; therefore what is the justification for not recognising the revenues during this period? One can observe that there are more risks and efforts involved during the development phase rather than the operations phase. But the present Indian Accounting Standards permit revenue recognition only during the operation phase, but not during the development phase.
Infrastructure, within this context, is not recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has the right to operate the infrastructure to provide service to the public, on behalf of the grantor, in accordance with the terms specified in the contract.
Internationally, the context for accounting for BOT projects has changed to one where the asset is recognised as a financial or intangible asset.
On November 30, 2006, the International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC Interpretation 12-Service Concession Arrangements. This Interpretation provides guidance on accounting by private sector operators involved in the provision of public sector infrastructure assets and services. With effect from January 1, 2008, the standard is to internationally recognise the BOT asset as a financial asset or an intangible asset.
Various factors, including globalisation, encourage the migration of accounting to a more singular and common platform in terms of rules and standards. In this context, it would be prudent for infrastructure companies based in India to recognise BOT assets as intangibles, on par with their international peers.
To do this, Indian companies need to be educated about the benefits of recognising the service concession as a financial or intangible asset, which include greater synthesis and congruence with international standards. A more accurate and insightful view into how the BOT asset is recognised on the books.
Accounting for service concession arrangements commences from the time of bidding for a service concession. Research indicates that accounting issues are present across each stage of the value chain; these issues include, and are not limited to n Prior costs — bid costs, security deposits, consultant fees, etc.
n Construction and procurement of assets — recognition of intangible assets, recognition of financial assets, borrowing costs, special purpose entities, etc.
n Operations and maintenance — revenue recognition, exchange fluctuations, taxation, current and deferred income taxes, impact on credit rating by bank creditors, etc.
It is not only Indian companies who will have to be educated on the benefits of recognising service concessions as financial or intangible assets. Retail and institutional investors, financial services providers and the market as a whole must become aware of this new practice. Accounting firms will need to articulate to its clients and to financial services providers extending financing for such projects the merits of adopting the international system of accounting. Initially, there may be a certain amount of resistance to adopting the global standard, but accounting firms can address this by facilitating their clients and other parties to view the issue in a more holistic and accurate manner.
(The author is partner, Price Waterhouse)
The art of keeping cool, 300,000 & 10 cents goal and taxi taxi where are you?
I am happy this evening. There are several reasons behind. First one is the fact that I was able to complete a topic which was supposed to be published a few days before. Although the idea was there in my mind for this long, the flow of thoughts was not there. I was able to post it and email you that yesterday.
The second one was the fighting performance of the Indian Team in the 6th One Day International match at Oval stadium in England. Indian Team played excellent cricket and kept their cool till the last over. Sachin Tendulkar and Saurav Ganguly played well to give India a good start and took India into to a comfort zone. It was sad to see Tendulkar getting out in the 90s for the second time in this series. Those who play cricket, competitive cricket knows the feeling and hard work required to make those many runs. However, it was Robin Uthappa, who was the hero of the game for India. Not many times, we see players showing the guts to attack at times of crisis and he showed that he has tremendous determination in him. Each of his shots were examples of it. Power, placement and guts. This is what we lacked in the games before and which was there in this game through Uthappa today. Not even for a second, he showed panic in his eyes and throughout it was glowing with optimism and focus. Well done Uthappa. You set the series to a thriller and we all look forward now to the final match of the series at the Lords stadium. I am sure that there is one person who is waiting patiently to play in that game. It is none other than Sreesanth. I feel he will get the opportunity to play in that crucial game. It is also my wish to see many active people within the team than docile ones. It is my gut feeling and I am waiting to see that happen. It’s a place where the ball seems and I am sure he will be able to utilise the situation, keeps his cool and do establish a permanent position in the team if given this opportunity. Saurav Ganguly also deserves extra praise in his determination and fighting spirit. What a come back he has made from his time of elimination to now! With the bat and the ball, he is showing leading examples to all youngsters. In one of the matches, his bowling average at one stage were looking like 7 overs 4 maiden 3 runs and 2 wickets or something like that. Well done, you set the right example to all those who get sidelined at times due to various reasons and remind them that if you stay focussed, victory will be yours. If not today, definitely tomorrow.
300,000 and 10 cents goal
I was writing about the status of Indian Football team members in comparison with the cricketers in my write up of yesterday. Just read that the Kerala government has awarded Rs.300,000 and 10 cents of lands for the striker of Indian team N. Pradeep for his Nehru Cup winning goal in the tournament final. That is a good sign. But it should not remain there. We should promote all other games so that more and more youth get interested to come out and participate in competitive sports.
Taxi, taxi where are you?
The taxi problems and my pursuit to find a solution for Abu Dhabi road users continues…. If you wish to support me in this, log on to Gulf News (http://www.gulfnews.com/opinion/letters/letters.html) page and express your own comments. Pass it on to any of your colleagues or friends who is experiencing this situation these days while coming and going to office. If we don’t express our problems, no one will realise it.
God Bless and have a great day,
Ramesh Menon
06092007
Happy Onam
It’s a hot hot sunny day here in Abu Dhabi. Onam 2007 is here and it is being celebrated all over by Keralites today. I take this opportunity to wish all my readers on this special day.
O – Orumayode (with Unity)
N – Nanmayude (with lots of Good will)
A – Agoshangalode (with lots of festivities)
M – Manusharellam (all mankind)
an Onam of joy, peace, happiness, prosperity to all of you.
Wish it rained here in the coming days as the month of Ramadan is nearby and the temperature has to come down a bit to favour all those who religiously follow the holy month.
Team 1 news letter – Onam Special
On behalf of Team 1, I wish all my readers a very happy and prosperous Onam. Please write to us at team1dubai@gmail.com for your special copy of Team 1 Onam special.
Team 1 news – 479 dt 15082007 – 60th Independence Day Special
Dear members,
A warm welcome to all of you to sit, relax and read through the 60th Independence Day Special edition of Team 1 news.
India is a land of tradition and 60th Birthday is one which all family members take pride and care to celebrate in the best way and pay tribute to those whom we love and lived with. On such occasions we all tend to give a gift of our choice. As a truly patriotic Indian, it is my simple and humble gift to my mother country and fellow Indians. If I am able to generate a Positive and Quality feeling in you to contribute and build our nation to a greater height, I will be more than satisfied. Making an effort is something which is always better than doing nothing. I believe totally in it.
Do not hold on to your thoughts and ideas. If you would like to contribute to Team 1 with your own articles, photos or any thing which is of Quality Value to our readers, please email them at team1dubai@gmail.com .
For a pdf version of the newsletter in full, please email your request to team1dubai@gmail.com.
God Bless,
Ramesh Menon
15082007
Team 1 news – 23 Jun 07 – Pg 1
Saturday, 23 June 2007
Dear Members,
I am very happy to post you Team 1 news Saturday Special for the week # 26 of 2007. This week we are touching an interesting topic “Disaster Management”. As the name denotes, and as it happens, the contents of the week are slightly heavy despite of trying my effort to keep it short. However, it will be worth to brush up your Disaster Management knowledge, keeping in mind the heavier monsoon already on its way in many parts of India.
Continuous improvement along with change, i.e. one aspect, I have tried to maintain while preparng and disseminating the Team 1 news. This week, you will be receiving only selected pages through this mail. If you are happy to read on further, you can straightaway visit our webpage http://www.team1dubai.blogspot.com. You may also forward this link to your friends and colleagues to whom you have been forwarding the same as email. In case you have any restrictions to visit or download the same from there, you are always welcome to email me with your request.
For your information, Google is coming with several new features to be included on its blogspots including addition of video files. I am already testing some of them on a beta version and will be able to utilise it for our news as soon as it is officially available. Utilise these opportunities to the maximum as otherwise, we all will get outdated by the technology.
Continue to write to me with your thoughts and comments. Do not hold on to them. It has the greatest value, when it reaches Team 1 mail box which is team1dubai@gmail.com.
Have a great week-end and great week ahead,
Ramesh Menon
23062007
*~*”All great achievements and success in life, and all changes for the better have one powerful characteristic in common: The First Step.Take the first step, and the journey has a way of taking care of itself.” *~* Team 1 Dubai – Committed to Continuous Improvement. *~*
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