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	ELECTRICITY ACCOUNTING
LAWS	Relevant laws prevalent now are “The Electricity Act 2003” and Central Electricity Regulations Commission 2009 i.e. CERC 2009
Financial Statement	The Electricity Act 2003, does not provide a separate format for preparing the financial statements of electricity company. So, the format provided in Schedule III of the companies act 2013 can be put to use in preparing the Financial Statement of Electricity Company. In cases where the provisions of the companies act 2013 are inconsistent with the provisions of the Electricity Act 2003,The Companies Act 2013 shall not apply .
Licence raj to liberalization	Earlier there was a complete Licence raj in the field of electricity generation, transmission, distribution by the SEB (State Electricity Board). 1990 witnessed liberalization by permitting private participation in generation and transmission.
Electricity Act 2003	The Electricity Act, 2003: The Act has been enacted to replace Indian Electricity Act, 1910, The Electricity Supply Act, 1948, The Electricity Rules 1956 and the Electricity Regulatory commissions Act, 1998.
Electricity Act 2003	The main purpose of the Act is to: i) To distance state Electricity Boards from tariff determination. ii) To reduce / remove government subsidies & to make electricity companies self sustainable. iii) To bring private participation in this area. iv) To bring in competition Licensing: No licence required for power generation except for hydro power projects over a certain size but licence is required to (a) transmit electricity, or (b) distribute electricity or (c) to do trading in electricity.
Authorities	The authorities under the Act are (a) Central Electricity Authority (CEA) (b) Central Electricity Regulatory Commission & (c) State Electricity Regulatory Commission.
Tariff	Tariffs: Tariffs are fixed by the appropriate ERC’s i.e. Electricity Regulation Commission considering various factors including safeguarding interest of consumer and at the same time recovery of cost of electricity and providing a reasonable return on investment. For tariff determination under the Act two regulations have been issued Regulation 2004 & Regulation 2009.
	Accounting treatment typical to electricity company.
SD and INT	1. Security Deposit and Interest thereof treatment
	Security Deposit is created in favor of The Electricity Supply company by customers. The deposit figure is based on the unit requirements of customer.
	Interest is paid based on the RBI bank rate prevailing on 1st April of each year payable ones every year.
	The Interest accrued during the year is adjusted in the consumers bill for the first quarter of the following financial year.
	Treatment in the Books of Electricity company
	When a Security Deposit is created
	Bank A/c Dr To Security Deposit (SD will appear in Non Current Liabilities)
	When Interest is charged at the end of the financial period
	Interest A/c Dr To Interest Accrued on Security Deposit( IASD will appear in Non Current liability as the same in substance is not repayable within 12 months from the reporting date — based on ICAI manual).
	Adjustment in first quarter
	Interest Accrued on Security Deposit DR To Sales Turnover (overall entry Cash Dr, IASD Dr To Sales turnover i.e. entry is not routed via debtors ledger) (Refer Electricity Q1)
Service Line + Development Charges	Capital Service line contribution (Customers contribution for service line) An Electricity company can collect such charges for providing electricity connection and/or transformers at new areas as per rules framed by State Electricity Regulatory Commission.
Service Line + Development Charges	Entry: Cash / Bank a/c Dr. — To Customers Contribution for service line — This will be shown under capital reserve in Reserves & Surplus in the balance sheet. As this amount is not refundable, it will be amortised in profit and loss account in proportion to the depreciation provided on the concerned asset. Entry: Customers Contribution for service line a/c Dr. — To Profit & Loss a/c
Accelerated Power Development and Reforms Program (APDRP) 2003	APDRP_ Central government introduced this program to improve distribution network, reduce/avoid transmission & distribution losses, theft etc. Aim was to initiate a financial turnaround in the performance of companies.
	APDRP has two components:
	Investment Components: That is for capital expenditure purposes. It has grant & loan component. In special category states, 100% of the project cost is provided, 90% in grant form and 10% in loan form. In other states, 50% of the project cost is provided of which half (i.e. 25%) is grant and other half (25%) in loan form.
	Incentive component: This is provided to motivate states to reduce their cash losses (calculated with reference to base year of 2000-01). Up to 50% of cash loss reduction is provided and is in the form of grant.
	Accounting for loan component: Loan component will be accounted as usually and will be treated as long term borrowings. Interest will be recognized at the applicable rates and will be treated as revenue expense
	Accounting for Grant Component: Grant under APDRP received as incentive component for reduction in cash loss should be recognized in profit & loss account.
	Entry: Bank a/c Dr. —
	To Profit & Loss a/c (grant as incentive for reduction in cash losses) —
	Grant received for capital expenditure shall be treated as capital receipt and should be shown under Capital Reserve in Reserves & Surplus in Balance sheet.
	Entry Bank a/c Dr. —
	To Capital Grant under APDRP a/c
	This grant should be amortised to profit & loss account in proportion to the depreciation charged on respective assets
	Entry Capital Grant under APDRP a/c Dr. —
	To Profit & Loss a/c —
	Note: In cash flow statement such grant & customers contribution for service line (as discussed earlier) shall be shown under financing activity. REFER ELECTRICITY Q2
Depreciation	Schedule II of the companies act 2013 need not be followed as the Central Electricity Regulation Commission 2009 provides for the rate of dep for electricity company and the following:
	(i) Rates shall be determined by Central Electricity Regulatory Commission. (CERC)
	(ii) This rates shall be followed for tariff as well as for accounting.
	(iii) Depreciation will be by SLM (Straight Line Method)
	(iv) Salvage Value of at least 10% will be considered i.e. maximum 90% of the cost will be written off over the useful life of the asset.
	(v) Depreciation will be charged on Historical Cost & not on Revalued value.
	(vi) Depreciation will be charged on time proportion basis & will start when the asset is put to use
	(vii) If allows optimized Depreciated Replacement Cost (ODRC) i.e. if asset is financed by loan component then depreciation equal to the principle loan repayment in each year will be provided until the repayment of loan, remaining depreciable balance thereafter will be written off over remaining useful life on SLM basis.
	(viii) Commission has considered 12 years repayment period of loan& accordingly has given rates.
	After repayment of loan the balance depreciable value shall be divided over remaining useful life.
	Dep rate per Appendix III of CERC 2009 (Refer ELECTRICITY Q3)
1	Land Owned 0%
2	Land Leased 3.34%
3	Building & Civil Engineering works 3.34%
4	Plant & Machinery in generating stations, Cooling tower & circulating water systems, Hydraulic works, Transformers, substation equipments, switchgear including Cable connections, Lightning arrestor, Batteries, overhead lines, Meters, AC plant-static, Street Light fittings, asset not covered anywhere else. 5.28%
5	Office furniture, office Equipment, Internal wiring, Motors given on hire, Communication equipment 6.33%
6	Self propelled vehicles, AC plant-portable, Apparatus on hire other than motors 9.5%
7	I.T. equipments 15%
8	Temporary erections such as wooden structures 100%
9	Any other asset including vehicles not covered above 5.28%
	Depreciation rate for different assets have been so assigned to give a approximate weighted average rate of 5.28%
Debt Equity Ratio	Debt Equity Ratio (For Tariff calculation)
	AS per Regulations Debt equity Ratio of 70:30 i.e. 70% Debt & 30% Equity Should be considered for financing Capital Expenditure
	Debt higher than 70% will be allowed. Higher equity can be allowed by Commission in certain cases.
	In other cases equity above 30% shall be considered as notional loan & interest on that portion will be considered.
	Return on Equity will be allowed at 14%

AS and applicability	As mandated by the Companies Act 2013, the management of the company has to declare compliance to the Accounting Standards prescribed under the Act. This would also be applicable to Electricity companies. Some specific issues related to electricity company:
	a. AS 2- Valuation of Inventories
	Electricity cannot be stored hence no WIP or Cl stock
	Inventory would comprise of material, stores, supplies and fuel. This should be valued at cost or NRV whichever is lower.
	Cost would include landed cost+ cost of conversion i.e. cost incurred in bringing the inventory to its present position
	b. AS 6 Depreciation
	Salvage Value of at least 10% will be considered i.e. maximum 90% of the cost will be written off over the useful life of the asset.
	c. AS9 Revenue Recognition
	Revenue from units generated is recognised from 00.00 hours as on 1st April
	Power generation business is highly capital intensive therefore due care should be taken to differentiate between capital and revenue expenses.
	New Terms
	Contingent Reserve Investment: Contingent Reserves is created out of Free Reserves by setting aside of profits to meet contingent liabilities. This fund may be invested in outside securities, therefore called the Contingent Reserve Investment.

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