Asset Developed Under ‘Service Concession Agreement’ is Classified as Intangible As Per Ind AS 115

A Ltd. herein referred to as “the company” formed as a Special Purpose Vehicle (SPV) for developing the railway network within the state. The company entered into a “Service Concession Agreement” with Indian Railways that provided the company an “exclusive right, license, and authority” to construct, operate and maintain the railway system for a period of 30 years. The company then incurred the capital expenditure on construction of the railway network and classified them as “Capital Work in Progress” (CWIP) till the commencement of commercial operation. After the commencement of the commercial operations, the assets under CWIP were classified as “Rail Corridor” under “Property, Plant and Equipment”.

The statutory auditor of the company observed the creation of “Rail Corridor” assets, its classification, and the method of depreciation. The company used to depreciate the asset on the basis of revenue without considering its useful life. However, the auditor was of opinion that company should specifically depreciate the asset based on its useful life and not on a revenue basis resulting in short charging of depreciation.

Further, the auditor analyses the company’s “Concession Agreement” and identifies it as a “Service Concession Agreement” defined under Appendix D of Ind AS 115. This appendix prescribes that the right to construct, operate and maintain rail infrastructure should be recognized as an “Intangible Asset” instead of “Property, Plant, and Equipment”.

The management of the company was not in consensus with auditor’s opinion and hence sought the opinion of the Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India regarding the classification of the “Rail Corridor” assets as “Right to Use Asset” under “Intangible Asset” and its method of depreciation.

To understand the application of Appendix D of Ind AS 15 in case of service concession agreement and EAC opinion on the given case.

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