A Ltd. herein referred to as “the company” is engaged in the business of crude oil. The company is subsidiary of Oil Industry Development Board (OIDB). To enhance its storage capacity, company plans to construct strategic crude oil storages. The construction cost were provided by parent company. The company has estimated that construction expense would amount to Rs. 20 crore. However, on execution of project the cost of construction got escalated to Rs. 25 crore and company could disburse only Rs. 20 crore as the parent company has only released the payment of 20 crore.
The fund received from parent is accounted as grant income in the Statement of Profit and Loss on a systematic basis over the periods in which the company recognises the expense incurred. However, the company failed to understand the accounting of balance 5 crore as there no certainty regarding source of funds and receipt of funds. Thus, the company did not account the liability for the unpaid invoices of Rs. 5 crore. To correctly account the aforesaid transaction company sought the opinion of Expert Advisory Committee of ICAI.
To understand the accounting treatment suggested by EAC on pre-construction expense for which fund approval is pending from parent company.
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