Accounting Treatment for Upfront Payment Made Towards Hooking-Up Charges for Using a Facility

A company has entered into a hooking-up agreement with the transporter to distribute the gas throughout the city. The agreement is valid for 10 years and requires the company to make an upfront payment at the time of inception of the agreement. Further, under the hooking-up agreement, transporters have required the contractor to construct, install, test, calibrate, and commission the metering facility, gas monitoring equipment, pressure regulators, filters, telemetry, and all hooking-up facilities in accordance with the requirement of operating conditions of the Company at the cost of an upfront payment.

Further, the transporter does not hold any substantive substitution right as, such assets were created for the exclusive use of the company, which also possesses the right to control and direct use of identified assets.

Under the old GAAP framework, the accountant of the company has classified these hooking-up payments as ‘Prepaid Expenses’ under the heading of ‘Other Non-Current Assets’ and amortizes the same in the Statement of Profit and Loss based on the life of the Agreement.

The accountant faces the dilemma of classifying this hook-up consideration while adopting the Ind AS framework whether as a “Lease” under Ind AS 116 or an “Intangible Asset” under Ind AS 38. Click to read the correct classification of the hook-up agreement in the extant case.

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