Capitalisation of interest costs keeps Spic in black

Our Corporate Bureau

Mumbai, Aug 3: Southern Petrochemical Industries Corporation’s (Spic) net profits the year ended March 2001 may have been completely eroded had it not capitalised interest cost of Rs 57.26 crore.

“Consequent to the accounting standard 16 - borrowing costs, which has been made mandatory with effect from April 1, 2000, such borrowing cost cannot be capitalised,” the auditors’ report observation stated.

During the year, interest of Rs 57.26 crore has been capitalised as part of the carrying amount of such advances. Had the accounting standard been followed and such interest not been capitalised, but charged to profit and loss account, the interest and financial charges for the year would have been higher and the bottomline for the year being lower, the report added.

On the observations made by the auditors, the board of directors stated that the company has been consistently following the policy of capitalising borrowing costs incurred on funds used for investments and advances made to companies promoted by it for long term mega projects.

The board stated that the borrowing cost capitalised up to March 31 2001 amounts to Rs 222.03 crore and this accounting treatment is in accordance with US GAAP norms.

The company is involved in promoting mega projects, which may be larger than itself, involving substantial capital investment. Depending upon the logistics, such mega projects are promoted as a separate entity or as part of a division of the company.

As the company capitalises borrowing costs on funds utilised for investment on its own fixed assets/projects, the same principle is also followed in respect of funds invested in the investee company, as representing the acquisition cost of such investments, the directors’ report clarified.

For the year ended March 2001, Spic posted a decline in net profit to Rs 15.87 crore from Rs 28.37 crore last year while the turnover too declined to Rs 2,293.49 crore from Rs 2,711.78 crore in the previous year.