Interest Income Earned on Fixed Deposits Made Out of Unutilised QIP Funds Should Be Recognised in P&L

Para 21 of Ind AS 16, Property, Plant and Equipment, states that some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

Following the above para, the accountant of the company has classified the interest earned on fixed deposits from balance QIP proceeds remaining utilisation as ‘other income’ in the Statement of Profit and Loss and has capitalised the QIP issue expenses to the cost of the project for which the funds from QIP were raised.

The auditor of the company confronted the above accounting treatment. As per auditor, expenses incurred in connection with QIP process were treated as capital expenditure while the revenue earned was treated as other income; this mismatch was violating the basic principle of matching concept. Therefore, the expenditure incurred in connection with issue of QIP is required to be adjusted with the interest income and balance amount should be transferred to specific reserve. This accounting treatment by the company has resulted overstatement of income, overstatement of Capital Work-in-Progress and understatement of specific reserve under the head ‘other equity’.

The company approached the Expert Advisory Committee for its opinion on the above accounting treatment provided by the auditor.

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