India's GAPP allows for later adjustments against tariff and fuel prices, foreign currency fluctuations, among other things. But under IFRS, these components are charged to the profit and loss (P&L) account.
India's state electricity boards with so-called regulatory assets face massive cumulative losses once Indian accounting standards converge with international financial reporting standards (IFRS) in April due to a crucial accounting difference. These losses, as calculated by the utilities, could be as high as Rs. 17,457 crore for Tamil Nadu Electricity Board (TNEB), '3,257 crore for Maharashtra State Electricity Distribution Co. Ltd and Rs. 1,445 crore for Uttar and Dakshin Haryana Bijli Vitran Nigam Ltd. Experts said the loss could be averted if the International Accounting Standards Board (IASB) agrees to change IFRS to bring it in line with generally accepted accounting principles (GAPP) used in India and some other countries. Regulatory assets or liabilities are components of electricity prices set by the regulator for future adjustments. India's GAPP allows for later adjustments against tariff and fuel prices, foreign currency fluctuations, among other things. But under IFRS, these components are charged to the profit and loss (P&L) account. There are serious anomalies relating to regulatory assets in India's power sector, the Association of Power Producers- whose members include Tata Power Co. Ltd, Adani Power Ltd and Reliance Power Ltd-has told the government in a letter, reviewed by Mint. "All regulatory assets presently directed to be recognized by licensees in power distribution such as electricity boards will have to be de-recognized. Thus, for example, TNEB has created regulatory assets...of Rs. 17,457 crore.
Under IFRS, this will have to be written off and a loss of this magnitude recorded," Prasad Menon, managing director of Tata Power and chairman of the association, said in the letter to the corporate affairs ministry, copies of which have been sent to the Prime Minister's Office (PMO) and the finance ministry. The letter adds the Haryana board has recognized regulatory assets of Rs. 1,445 crore and potential regulatory assets of Rs. 3,716 crore, aggregating to Rs. 5,161 crore; while the regulatory assets of the Maharashtra board amount to Rs. 3,257 crore. "All of these regulatory assets of electricity boards will under IFRS be converted into losses," Menon said in the letter. Tata Power did not respond to emails and phone calls for comment. Typically, regulatory assets add up because the power sector regulator does not allow distribution companies to raise tariff in public interest. It, instead, offers them sops such as reducing depreciation rates and writing off losses due to foreign exchange fluctuations, and allows them to defer the adjustment of these costs to the future.
India's apex power sector regulator said it is not aware of the problem. "We are not aware that IFRS will have such an implication. The forum of regulators will examine the issue and consider further action," said Pramod Deo, chairman of Central Electricity Regulatory Commission. Experts working with the power sector on IFRS convergence said there could be a way out for distribution companies. In 2009, the IASB issued a proposal, known as exposure draft (ED), to consider regulatory assets and liabilities under the IFRS framework, as happens in the Indian GAPP. But the body is yet to decide. Dolphy D'Souza, partner, assurance and national leader, IFRS Services at the consulting firm Ernst and Young, said the corporate affairs ministry should talk to the IASB about this. "If the IASB is hopeful that the ED will become a standard and that, eventually, regulatory assets will be treated as revenue/assets within the IFRS framework, there is no harm in taking that view right away under Indian standards. This could solve the problem," D'Souza said. The US, which is also planning to converge to IFRS, was estimated to have regulatory assets and liabilities of $675 billion ('30.57 trillion) and $450 billion, respectively, in 2007. Canada is facing a similar problem, D'Souza said.
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