Question
Raha Limited, a joint venture company (hereinafter referred as ‘the company”) is established for setting up a gas-based Ammonia-Urea plant. Under a long-term gas sales agreement with G Ltd., which includes late payment charges at SBI MCLR + 6.25% for overdue payments, Raha Limited delayed payments for 6-9 months during 2022-23, incurring late payment charges of Rs. 79.88 crore in 2023-24.
This amount was classified under “Finance Cost” in the financial statements but the auditor raised concerns, stating that such interest should be classified as “Other Expenses” as per the “Guidance Note on Division II – Ind AS Schedule III to the Companies Act, 2013. The auditor also suggested that the significant increase in late payment interest compared to the previous year should be disclosed separately as an exceptional item under Ind AS 1.
In response, the company justified its classification under “Finance Cost”, arguing that the interest represents a working capital financing cost consistent with the principle of substance over form. It also emphasized that classifying it as “Other Expenses” might mislead stakeholders and violate Ind AS 1, which prohibits exceptional item disclosures. The auditor advised the company to seek expert guidance to confirm the appropriate classification of such expenses.
State, what shall be the appropriate presentation of these interest charges in the financial statements?
Relevant provisions
Ind AS 1: Presentation of Financial Statements
Para 82: In addition to items required by other Ind ASs, the profit or loss section of the statement of profit and loss shall include line items that present the following amounts for the period:
a)revenue, presenting separately interest revenue calculated using the effective interest method;
(aa) gains and losses arising from the derecognition of financial assets measured at amortised cost;
(b) Finance costs;
Para 97: When items of income or expense are material, an entity shall disclose their nature and amount separately.
Para 99: An entity shall present an analysis of expenses recognised in profit or loss using a classification based on the nature of expense method.
Material: Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. Materiality depends on the nature or magnitude of information, or both. An entity assesses whether information, either individually or in combination with other information, is material in the context of its financial statements taken as a whole.
Expert Advisory Committee Opinion
The Committee observed that the company has overdue payments to G Ltd. for raw material purchases since October 1, 2022, accruing late payment interest as per the gas sale agreement. This interest has been recorded under ‘finance costs‘ as ‘Other Interest.
As per Ind AS 32, interest on financial liabilities measured at amortised cost using the effective interest method must be presented as an interest expense under finance costs. Since the amount owed to G Ltd. represents a contractual obligation to deliver cash, it qualifies as a financial liability. Therefore, under Ind AS 109, it should be initially measured at fair value less transaction costs and subsequently at amortised cost, including the interest on delayed payments. Consequently, this interest is part of finance costs and should be presented as such in the Statement of Profit and Loss.
Regarding classification as an exceptional item, the Committee noted that Ind AS Schedule III requires separate presentation of exceptional items but does not define the term. Since the interest expense is a routine business cost under finance costs, it does not qualify as an exceptional item. However, due to its materiality, it should be presented separately under “Finance Costs,” with appropriate disclosures in the financial statement notes to enhance clarity and understanding of the company’s financial performance.
Conclusion
Based on the provisions and the EAC opinion, the interest payable in the present case should be presented separately under the ‘Finance costs’ heading in the Statement of Profit and Loss, with appropriate disclosures included in the notes to the financial statements. It should not be classified as an exceptional item.
