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Infrastructure companies with interests in toll road projects may have cause for cheer.
This is because the Corporate Affairs Ministry has now allowed them to adopt revenue-based amortisation against time-based approach followed by several companies.
This revenue-based amortisation facility will be available only for toll roads (considered as intangible assets) created through the public-private partnership route.
This method could reduce the burden of amortisation on the infrastructure company in the initial period of concession, and accelerate its ability to pay dividend, said Mr N. Venkatram, Partner, Deloitte, Haskins & Sells.
Simply put, companies can now amortise the costs of development based on the revenues earned during a year as a proportion of the total estimated revenues of the project.
New method
The Corporate Affairs Ministry has now altered the Schedule XIV in the Companies Act to specify this new revenue-based amortisation method.
Before this change, there was significant diversity in practice and several companies amortised the costs on a straight-line basis. This latest move is likely to have a positive impact for several infrastructure companies, said Mr Jamil Khatri, Global Head of Accounting Advisory Services, KPMG.
Mr Khatri said that revenue-based amortisation would enable more appropriate matching of costs and revenues in cases where traffic is expected to increase during the later part of the project period.
He highlighted that this revenue-based amortisation method relates to public-private partnerships for toll roads, and does not specifically cover other public private arrangements such as airports and utilities. There is a logical case for using the same approach for such projects as well, Mr Khatri said.
Accounting standards
Given that accounting standards are also notified under the Companies Act, Mr Khatri felt that it may be useful for regulators to clarify that the Schedule XIV alteration is intended to override the provisions of the accounting standard in relation to toll road intangibles.
He pointed out that Accounting Standard 26, which deals with intangible assets, indicates that the amortisation for a year cannot generally be lower than the amortisation based on the straight-line method. The latest Schedule XIV alteration seeks to change that for toll road intangibles.
Mr Venkatram said that the timing of the Corporate Affairs Ministry move comes as a surprise.
This is because in March 2012, the International Accounting Standards Board had considered an amendment to prohibit the use of a depreciation and/or amortisation method that is based on the pattern of generation of economic benefits from operating the business.
The committee has recommended an amortisation method that is based on the pattern of consumption of expected future economic benefits of the intangible asset, he said.
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