Accounting Treatment of Abandonment Fund Under Ind AS Framework

1. Question

A wholly owned subsidiary (hereinafter referred as “the company”) of a listed public sector enterprise, engaged in overseas oil and gas exploration, held a 20% participating interest in an unincorporated joint venture (Project X). Following international sanctions imposed on the host country, the government transferred all rights and obligations of the consortium to a newly formed entity named X-1 LLC, and directed the foreign partners to transfer their accumulated share of the abandonment fund to this entity.

In April 2023, the company received its share of the abandonment fund into a special bank account approved by the RBI, with the obligation to remit the same to X-1 LLC. However, due to the sanctions, the transfer could not be completed. The company accordingly recognised a liability towards X-1 LLC, netting it off against the funds held in the special account, and disclosed the matter in the notes to its financial statements.

During the course of audit, it was observed that the fund should have been presented as cash/bank balance with a corresponding liability, rather than offsetting. Concerns were also raised on the disclosure of the amount on the face of the balance sheet and on the measurement of liability including the treatment of TDS on interest. The company, however, argued that net presentation better reflects the substance of the transaction, since it merely acts as a custodian of the funds until they are transferred to X-1 LLC.

State the appropriate accounting treatment in light with the relevant provisions under Ind AS Framework.

2. Relevant Provisions

Ind AS 32- Financial Instruments: Presentation

Paragraph 42- A financial asset and a financial liability shall be offset and the net amount presented in the balance sheet when, and only when, an entity:

(a) currently has a legally enforceable right to set off the recognised amounts; and

(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see Ind AS 109, paragraph 3.2.22).

Ind AS 1- Presentation of Financial Statements

Paragraph 117– An entity shall disclose material accounting policy information (see paragraph 7). Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

Paragraph 29- An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial except when required by law.

Paragraph 7- Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.

Expert Advisory Committee Opinion

The Expert Advisory Committee(hereinafter referred as “the committee”) first evaluated the nature of the abandonment fund held in a special purpose bank account and the obligation to transfer the balance to X-1 LLC. Under the Production Sharing Agreement (PSA), each consortium member was responsible for accumulating its share of abandonment costs, which were managed by a foreign party administrator. With the transition to the new joint venture, X-1 LLC, transfer of the accumulated balance was made a precondition for allotment of shares.

In this case, the company had opened a special purpose account with RBI approval, received interest on the balance, and had the ability to direct its use (though subject to restrictions).

As per the Conceptual Framework for Financial Reporting, an asset is defined as a present economic resource controlled by the entity as a result of past events, where the entity has the right to obtain future economic benefits. In this case, the company:

• • •  holds the balance in its own bank account,
    • has the power to direct its use (subject to conditions), and
    • earns interest income, with TDS deducted in its name.

Therefore, even though the company has an obligation to transfer the balance to X-1 LLC, it currently controls the resource. Accordingly, the abandonment fund, along with the accrued interest, qualifies as an asset of the company under the Conceptual Framework.

(a) Appropriateness of Offsetting

The company had presented the abandonment fund net of its liability to X-1 LLC. However, under Ind AS 32, Financial Instruments: Presentation, offsetting a financial asset and financial liability is permitted only when:

• • •  the entity has a legally enforceable right of set-off, and
    • it intends to settle the amounts on a net basis or simultaneously.

In this case, the asset i.e. funds receivable from the bank or foreign administrator and the liability i.e. obligation to X-1 LLC are not with the same counterparty. Moreover, RBI approval for opening the account does not confer a legally enforceable right of set-off. Hence, offsetting is not appropriate.

The abandonment fund should be shown as a financial asset, while the obligation towards X-1 LLC should be presented separately as a financial liability.

(b) Presentation in Financial Statements

For financial statement presentation and disclosure, Ind AS 1, Presentation of Financial Statements requires that material items be shown separately, either on the face of the balance sheet or in the notes, depending on their significance. Ind AS 7,Statement of Cash Flows further requires that earmarked balances, which are not freely available for use, be disclosed separately with an explicit mention as restricted funds. In addition, Schedule III of the Companies Act, 2013mandates specific disclosure of such earmarked balances.

In line with these requirements, the abandonment fund should be presented as a separate financial asset, clearly disclosed as a restricted balance, while the obligation towards X-1 LLC must be shown distinctly as a financial liability.

3. Conclusion

Based on the above relevant provisions and the committee opinion, it can be concluded that the abandonment fund and the corresponding liability must be presented separately and not netted off. The fund, along with accrued interest, is the company’s asset until transfer, while the liability to X-1 LLC is to be shown distinctly. Interest income and TDS should be recognised in the company’s financial statements. Proper disclosure is required to ensure transparency and compliance with Ind AS and Schedule III.

• • •  Opinion finalised by the Committee on 8.2.2025
    • Volume: Recent Opinions
    • Query No.: 35

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