FINANCIAL

ACCOUNTING
Case Study
Shyam Steel

Submitted by:
Ajit Singh Shekhawat
Prateek Bhargava
Rohit Agarwal
Rohit Shah
Sharanjit Singh
Analysis
Shyam Steel Project in West Bengal
(34.25 Billion project and covers 1265 acres)
Project consists of
Ø 1.7 Million tonne Steel plant
Ø 1 Million tonne Cement plant
Ø150 MW Power Plant

Employees 2110 people directly (11,000

indirectly)
FINANCIAL TRANSCATION
ANALYSIS
Registration Fees
Ø The company directly purchases part of the land for Rs. 158 crores.
A registration charges of Rs. 15 lacs was paid.

Ø INDIAN GAAP
AS 10: the cost of the asset includes purchase price and any
tax or levies

Ø IFRS
IAS16: Same as the Indian GAAP
Ø US GAAP
Same as the Indian GAAP

Ø CASE ANALYSIS and CONCLUSION

• The cost of land includes charges on registration fees
• Total cost recorded in balance sheet is 158.15
Government Grant
The other part of the land for the factory is allotted by the West Bengal
Government for Re. 1/- from its proposed steel park. The conditional
allotment of the land was that an approach road had to be constructed
belonging to the government leading to the factory. The company spent Rs.
35 lacs on the same.

Ø INDIAN GAAP
AS12: Recognize only when compliance with the condition
Non-monetary grant; land at concessional rate
Account at the acquisition rate
Ø IFRS
IAS20: Same as the Indian GAAP
Ø US GAAP
FAS116: Same as the Indian GAAP

Ø CASE ANALYSIS and CONCLUSION

Acquisition cost includes cost in fulfillment of condition
Demolition Cost
Existing structures on the land was razed down and the company spent
an amount of Rs. 50 lacs on the same. However a small temple on
the land was left intact.

Ø INDIAN GAAP
AS 10: the cost of bringing the asset to its working
condition for its intended use; definition of fixed asset

Ø IFRS and US GAAP

Ø Similar to Indian GAAP

Ø CASE ANALYSIS and CONCLUSION

 The demolition cost is capitalized in the land cost
 No entry of temple in books of account; not an fixed asset
New Machinery
ØThe cost of new machines imported was Rs. 435 crores with a custom duty on the
same Rs. 50 crores. The new machines came along with initial spares (parts) of Rs.
100 lacs. No customs duty was leviable on spares.

ØIFRS
IAS 16 Property, Plant and Equipment
Cost comprises of the purchase price, including import duties. If spare parts
can be used only in connection with a fixed asset, they are accounted for as property,
plant and equipment.

ØINDIAN GAAP
Accounting Standard (AS) 10: Accounting for Fixed Assets
Similar to IFRS
If spares can be used only in connection with a fixed asset and their use is
expected to be irregular, it may be appropriate to allocate the total cost on a
systematic basis over a period not exceeding the useful life of the principal item.

ØCASE ANALYSIS and CONCLUSION

Gross Book Value of the new machines = Purchase Price + Custom Duty = Rs 435
crores + Rs 50 crore
= Rs 485 crore
Since the spare parts came along with the new machines and can be used only
along with the machines, they will be capitalized under property, plant and
Relocating Old Machinery
ØThe existing machine from Durgapur had to be transported to the factory and the
company incurred Rs. 20 lacs on transportation. During the transportation the
machinery got damaged due to poor handling and storing. The company spent Rs. 10
lacs on repairing the same.

ØINDIAN GAAP
Accounting Standard (AS) 26: Intangible Assets
Expenditure on relocating or re-organizing part or all of an enterprise is recognized as
expense as and when it is incurred
Accounting Standard (AS) 10: Accounting for Fixed Assets
Expenses that do not increase the future benefits from the existing asset
beyond its previously assessed standard of performance are charged to the profit and
loss statement.

ØCASE ANALYSIS and CONCLUSION

The amount spent on relocation of the old machinery will be recognized as an expense
in the profit and loss statement.

The amount spent on the repairs due to damage and poor handling during
transportation will also be recognized as expense in the profit and loss statement.
Government Grant
ØIFRS
 should be recognized as income.

ØINDIAN GAAP
 depreciable fixed assets may be treated as
deferred income which should be recognized in the
profit and loss statement

ØCASE ANALYSIS and CONCLUSION

 Since machinery is a depreciable fixed
asset, both Indian AS and IFRS standards point at
recognizing the government grant as expense.
Trial Run, Construction Cost,
Supervision Cost
Ø IFRS
 capitalization of pre-operative or trial run expenses is not permitted any costs
directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.

Ø INDIAN GAAP
 test runs and experimental production, is usually capitalized as an indirect
element of the construction cost.
 costs of construction that relate directly to the specific asset and costs
that are attributable to the construction activity in general and can be allocated to
the specific asset.

Ø CASE ANALYSIS and CONCLUSION

 As per Indian AS and IFRS, it’s clear that the supervision expenses
are to be capitalized. But there is a difference in Indian AS and IFRS as far as the
trial expenses are concerned. In one case, we need to capitalize the trial expense
while in the other case we need to treat it as an expense. Since the plant is still
not into production, capitalizing trial expense appears as a good option.
Strike
 8. The president of the company was all set to inaugurate
the facility on the 1st of February. Meanwhile the workers in
the area were very unhappy and decided to call a strike on
the same day. After a month of negotiations and political
intervention the problem was amicably resolved. The plant
finally started its production on 1/3/10. During this period
the company spent Rs. 25 lacs on administrative expenses.
 
 US GAAP under I.R.C. § 613(a): Any strike expenses, must be taken
into account in determining the taxable income from the property.
 
 Conclusion:
 This amount should be expensed as it is used to maintain the
continuity of business. Also this expense is only for the period of
strike and its utility does not extend beyond the period of strike,
hence it cannot be capitalized. These expenses will be part of SG&A
expenses in the Profit and Loss statement and will affect the bottom
line of the company.
9. An amount of Rs 60 lacs was incurred as administrative expenses until 1st
February

Additionally the following expenses were incurred until February 1st

(Rs. Cr)
Interest on loans taken for the project 111.00
Advertisement expenses for promoting the product 40.00
Sale of products arising from trial production -1.00
Preliminary expenses 128

 60 lacs is expensed as Administrative expense.

 Cost of Borrowed
Capital
Interest on loans taken for the project
Ø As per Indian Accounting Standard AS -16
Borrowing costs that are attributable to the acquisition or construction of qualifying assets are
capitalized as part of the cost of such assets.

Ø According to US GAAP:
Interest paid for the loan taking for all activities during construction of plant (Capital work in
progress) till its becoming operational is capitalized.

Ø Conclusion:
Interest on loans taken for the project should be capitalized if the loan was used on assets that
necessarily take more than 12 months to get ready and operational.
Advertisement Expenditure
Advertisement expenses for promoting the product
 
Ø As per Indian Account Standard AS 26 para 56:
Expenditure incurred to provide future economic benefits to an
enterprise, but no intangible asset or other asset is acquired or
created that can be recognized, in such cases the expenditure is
recognized as an expense when it is incurred.
Ø As per US GAAP
Advertising and promotional costs are either expensed as
incurred or expensed when the advertising takes place for the
first time (policy choice).
Ø  As per IFRS
Advertising and promotional costs are expensed as incurred
Ø  Interpretation: Rs 40 crore spent for advertising has to be
marked as advertising expense and charged to Profit and loss.
 Sale of product from Trial run
and Preliminary Expenses
Sale of products arising from trial production
Ø As per AS 26 (Paragraph 56)
Revenue earned from the sale of products arising from trial run is abated to the
cost of capital.
Ø US GAAP does not account for pre operative expenses and hence all pre
operative expenses should be expensed.
 
Preliminary expenses
Ø As per Indian Accounting Standard AS 26 (Paragraph 56 (a))
Preliminary costs are expensed as incurred
Ø As per IAS 38: Preliminary costs are expensed as incurred.
Ø Solution: The preliminary expenditure will be expensed.
Research & Development
Cost
Ø IFRS
 Research costs are expensed as incurred. Development costs are
capitalised and amortised only when specific criteria are met.

Ø US GAAP
 Research and development costs are expensed as incurred. Some
software and website development costs are capitalised.

Ø INDIAN GAAP
 Similar to IFRS

Ø CASE ANALYSIS and CONCLUSION

 50 Lakh will incurred as an expense since nothing can be
substantiated about the progress of research.

 The US GAAP has clear and less ambiguous rule in R&D cost matter
RELOCATING PLANT
 Assuming the plant to be geographically and financially independent unit

Ø INDIAN GAAPAS 24: Discontinuing Operations

 Discontinuance plan .Follow recognition and measurements as in other standard :AS 4
contingency & AS 5 Impairment of assets

Ø US GAAP Accounting for Costs Associated with Exit or Disposal Activities (FAS 146)
 Incur as it occurs ( Accrual based). Restructuring liability

Ø IFRS IAS 37
 Firms recognize restructuring costs when the firms has committed to and
approved a restructuring plan that management will control. it is not accrual but a
provision is booked. They term it as a restructuring provision

Ø CASE ANALYSIS and CONCLUSION

 The machines would be transported back. The remaining charges of
relocation would be charged as expense.

 IFRS allows the company to have a restructuring provision and thus equip them to deal
with situation in a better way
QUESTIONS
THANK YOU