Can you capitalize it as PPE or not?
Is it an item of property, plant and equipment or a part of its cost?
Or is it a piece of inventories instead?
Or just an expense that goes straight in profit or loss?
Hmmm, what about an intangible asset?
In 90% of all cases, the answer to the above questions is clear – it’s obvious that buildings, machinery or other BIG pieces of tangible assets presumably used for more than 1 period are PPE.
But I’m convinced that you have come across at least 1 or 2 situations in which you were not so sure about the right conclusion.
I can confirm it based on a number of e-mail questions I receive in relation to this topic.
Let me give you my answers to the most common ones.
What does IAS 16 Property, Plant and Equipment prescribe?
Property, plant and equipment are tangible items that:
- Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
- Are expected to be used during more than 1 period.
That’s the definition taken right from IAS 16.
Also, IAS 16 answers our first and basic question: When should we recognize an item of PPE?
The answer in IAS 16 is taken directly from the Conceptual Framework: the cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
- It is probable that future economic benefits associated with the item will flow to the entity; and
- The cost of the item can be measured reliably.
Therefore, in general, when you’re assessing whether some item shall or shall NOT be treated as an item of PPE, you need to take the following factors into account:
- the purpose for which an item is acquired and / or held
- the useful life of an item (longer than 1 period)
- future economic benefits flowing to the entity and
- cost is reliably measurable.
OK. So we have just set up the fundamentals.
But while it’s easy to assess and categorize some assets, other assets are not so clear and we need to use judgment and often apply the concept of materiality in order to make a conclusion.
Now let’s take a look at several unclear or shady examples.
Should we capitalize spare parts?
There is no uniform opinion about capitalizing spare parts. Instead, spare parts require your own judgment of a specific situation.
In most cases, spare parts and servicing equipment are included in inventories and treated in line with IAS 2 Inventories.
However, major spare parts can qualify for PPE, especially when they can only be used in connection with an item of PPE. For example, some reserves engines for airplanes would rather be included in PPE than in inventories.
Let me give you an example of the opposite situation.
I received a question from my reader about treatment of a big amount of sand (or other construction material). He wrote me that it was a great opportunity to get this sand at a very good price, therefore the company piled up a big stock.
However, a company was not going to use the sand immediately in the construction process. The sand could have stayed in the warehouse for many years.
What to do in this case?
In my opinion, although the sand indeed did have “useful life” longer than 1 period, it’s NOT an item of PPE.
It was a raw material and its purpose was to be consumed in the production process – which perfectly meets the definition of inventories.
Instead of charging depreciation of the sand, I would rather check whether the cost of sand exceeds its net realizable value at the end of each reporting period and if not, then I would leave it in inventories until it’s consumed.
Should we capitalize small items acquired in large amounts?
Imagine you run a library.
There are thousands of books there, each has an acquisition cost of a few dollars (whatever currency) and it will definitely be used for more than 1 period.
Should you treat each book separately and as a result, recognize it in profit or loss when acquired? Or should you treat all books as 1 item of PPE?
Other similar examples are tool sets, furniture sets, pallets and returnable containers which are used in more than one accounting period, but the cost of 1 piece is low or even negligible.
What to do in this case? How to treat these small items in large amounts?
Again, there’s no uniform answer.
Standard IAS 16 (9) says that the unit of measurement for recognition of PPE is NOT prescribed.
In other words, sometimes it’s appropriate to aggregate individually insignificant items and to apply the criteria to the aggregate value. And sometimes, it’s not.
In our library example, it can be appropriate to treat books as 1 single asset (or a few assets) and depreciate these assets, especially if a running a library belongs to main revenue-producing activities.
Should we capitalize improvements on a leasehold property?
Imagine you rented an office space. The big one.
But, you need to adjust it to fit your needs and therefore, you decide to install glass partitions to divide the space and make it look more elegantly.
Glass partitions are damn expensive. They represent a significant investment.
However, they cannot be used separately without the office space and once your rental contract expires, glass partitions are useless for you. You can’t even take them out and install them in another place.
How to treat your investment in the improvement of leasehold property?
I repeat again: there’s no uniform answer and it depends on your contract and specific circumstances.
First of all – are future economic benefits from these improvements probable? Maybe yes, as glass partitions make the office space usable for you.
Another question – are you going to use these improvements for more than 1 period?
In most cases, you can estimate improvement’s useful life quite reliably and therefore, it’s appropriate to capitalize them as an item of PPE. The useful life will basically depend on the term of your lease, so you need to take that into account.
Should we capitalize pre-operating expenses?
You are establishing a business. Before you can actually start a production process, you need to obtain permits, hire employees and do a lot of things – and all of this costs money.
You need to pay salaries, rent, professional advisers and you might incur many other types of expenses in the pre-operating stage of your business.
Can you capitalize these pre-operating expenses?
In most cases – NO. You cannot capitalize them as a separate intangible asset.
Why?
Because they do not meet the definition of an intangible asset in line with IAS 38 as they are not identifiable, i.e.:
- They cannot be separated and sold/transferred, and
- They do not arise from contractual or other legal rights.
There is one exception when you actually can capitalize pre-operating expenses.
When you construct an item of PPE and your pre-operating expenses were incurred in relation to constructing that PPE, then you can capitalize them if they meet the IAS 16 criteria.
For example, when you build a production hall during the pre-operating stage, you can include salaries of direct production workers to the cost of that production hall.
These are 4 the most discussed and ambiguous examples of capitalizing/not capitalizing an item as PPE. Please help me share this article with your friends or colleagues and if you have some question or remark, just leave me a comment right below this article.
I’ll also welcome your answers and experiences – you’ll help to make Internet a better place!
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421 Comments
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SILVIA’S NOTE: Wow, thank you for all your comments and questions. I see that this is a HOT topic.
I’ll try to respond to everyone, but please give me some time for that – THANKS! 🙂
And by the way – please feel free to post your own response to questions of other readers, I think everyone will appreciate!
That brings me to another question: would you like me to launch an IFRSbox forum? In fact, I’ve been playing with that idea for some time. What do you think?
Thanks So Much Silvia for This very educating and extremely problem solving article.
Its a Great help.
And also as per the IFRS forum, i think its a wonderful idea. Pls carry on with it cos it Will help to share more ideas from différent ppl.
Thanks.
Hello Silvia,
Please am contemplating how to treat these expenses(material) in respect of start-up business under IFRS.
1. Extension of electricity to site(for the fact that owner is Electricity Company because anyone can connect power without our permission)
2. Road works to site
3. Extension of water to site(for the fact that owner is Water Company because anyone tap without our permission)
Thank you.
Hi Ameyedowo,
first of all, thank’s a lot for answering questions of Oxana and Samir.
Secondly – all 3 items you mentioned represent the inevitable expenditure to construct a building or whatever you plan to build on the site. Therefore, you should capitalize these costs into the cost of building. You would need to examine whether they represent the separate asset or not, but in general, if the building is not operational without these assets, then I would include them in the cost of building.
S.
When costs are necessary, but indirect, do we capitalize them or not?
Yes, depending on what they are, e.g. salaries of a production team apportioned on some reasonable basis. S.
Nice idea 🙂
Yes Silvia please open IFRSBox Forum.
Hi Silvia, in my case company is building a laboratory (lab equipment category for fixed assets). Bills from the vendors are coming through for professional fees plus the cost of them to travel + accomodation + food. Should I capitalize all of these charges or should I expense their travel+accom+food and only capitalize their profesional fees? Can you please refer to the policies under IFRS and equivalent US GAAP? Thank you. Martina 🙂
they should all be capitalised as part of cost of lab being necessarily incurred & entailed for that lab….
Hi Silvia,
I have a qns and hope to seek your advice.
If Company contracted a vendor to do some electrical wiring and cabling of network points, can this cost be capitalized as ppe? Purpose is to install new network points for newcomers and relocate existing workstations.
I am confused whether to capitalized or expensed it off.
Appreciate your advice on this. Thank you!
in my view you should capitalize them as they are part of necessary office installations and workspace and building and have useful life of many years and ensure future economic benefits and their cost sure can be reliably ascertained from their billings and price lists as negotiated….
yes that a great platform to relearn some of these hot issues
Dear Silvia
Thank you very much valuable information.
Now my company is under establishment process, but already made a lot payment for Office rent, Salary, Office Furniture, Office equipment, Consulting fee , Office stationery and others. This payment paid from Parent Company.
My Questions:
1. How can i recognize all these payments?
2. Can I recognized Office Equipment and furniture as Preliminary Expense or Fixed assets?
3. Can I recognized Salary expense as Preliminary Expense?
4. If i debited all these expense/payment as Preliminary expense, then what will be my credit accounts head? (Because these payment made from promoters).
I am waiting for your suggestion.
Thanks
I think the forum is a great idea. A good opportunity to ask questions and learn from others at the same time. Sylvia, do you deal with double entry questions as well? Also, other questions relating to a manual system of accounting?
Hi Alyson, yes, still thinking of forum. I deal with many different kinds of questions here publicly as soon as the response would be also useful for others 🙂 If the questions are too specific, then I think it is fair to ask our consultants https://www.cpdbox.com/my-helpline/
Thank you so much Silvia, please launch it. This is the best time.
Hi Silvia! Your knowledge of IFRS and the way you are able to explain & give examples is truly a gift! I think the IFRSbox Forum is a great idea, not sure if it was ever launched,
I have a question – Could you capitalize the foreign exchange loss incurred in acquiring currency to purchase the fixed asset?
Hello! Mam, Are you fine? I would ask some question. What is difference between fair value and net realizable value? I don’t understand that. when I asked my college teacher not exactly find answer. Please, Mam that question answer send to my email.
Silvia, thanks for your insight. it was really helpful as always! I have a question. In case of items like LPG Gas Cylinders or other reusable bottles for Cold Drinks, what is the correct classification for the seller? I have seen some sellers classify them as component of Inventory and some as Fixed Assets!
Thanks!
Hi Samir, what is the purpose of LPG Gas Cylinder or reusable bottle?
If they are used in the sales or the production process, but are not being sold themselves (in terms of “not traded”, I don’t mean occasional sale here), then they are PPE (provided everything else is met).
Of course, the producer of reusable bottles would classify them as inventories (if the producer sells them). S.
Please consider this example. XYZ is a company that sales LPG gas (a kind of natural gas)to retail customers. It purchases bulk amount of gases, refills them into small size cylinders and sales them to customers. (please note it does not extract gases itself. rather only acts an intermediary). the peculiar thing is that the cylinders are to be returned to XYZ by the customers each time in exchange for new refilled cylinder.
XYZ takes certain security deposit from customers for the cylinder. Each time cylinder is exchanged, a certain amount is billed to the customer by XYZ.
In this case, should XYZ recognize the cylinders as Inventories or PPE?
Could you please help me by clearing this confusion!
Samir.
I think that for the fact that the cylinders are XYZ property whose cost can be measured reliably, usable for more than an accounting year and have future economic benefits to XYZ; they are PPE. A
You see, Samir, that each case and situation needs to be carefully considered. In my opinion, it is still PPE, mainly when the useful life of cylinders is longer than 1 year. It does not matter that this cylinder is “borrowed” to a client. However, I understand that the practicalities of such a treatment are not that great, as it’s difficult to keep the register of all cylinders.
Thanks Ameyedowo and Silvia!
Helped me a lot!
Here’s to hoping that someday i too might help!
Thanks again! Cheers!
Dear Silvia M., i agreed with your answer. Can you please advice regarding depreciate those cylinders value.
Precisely:
1. how much depreciation rates to be charged on Cylinder?
2. What is the method of depreciating the cylinders?
Risvi, these should be your estimates, not mine 🙂
I’m glad I came across this forum because this has helped me clarify certain matters in relation to PPE. I am having a bit of a difficulty in classifying the fixed assets of a start-up business, which hasn’t commenced operations yet but have estimated amounts stated for their PPE (none has been purchased yet). Since this business plans on applying for a SNE loan, pro Forma financial statements are required. I’ve been told the estimated amounts of the assets cannot be recognised as an asset because it’s not yet purchased. So what is the correct treatment for the PPE costs estimated by this business and where on the balance sheet can this be recognised?
Dear Miriam – nowhere, because estimated assets do not meet the definition of an asset per IFRS.
From my opinion those empties can last more than one period, can be lend to someone,can be used to deliver the contents to the customer and weather or not they can be sold,meaning their cost can be reliably measured, therefore i think they can be classified under PPE IAS16
Hi Madam Silvia,
Thank you for these knowledge, we really appreciate.
The question of which items to capitalize, which one to treat as inventories or which ones fall under IAS 38 intangible assets, is a question that bothers many of us, and we end up doing wrong things for lack of knowledge or idea of their treatment. You’ve simplified everything for us by sharing this comprehensive knowledge. Thank You!
Thank you very much for the article. I also have a situation I hope you can help me. Let’s say 6 years ago our company bought an expensive equipment (a switch for a call center). This year some other company reinstalled the switch, a bit repaired, some new wire was used too, but in the invoice they wrote technical sevices of the equipement total amount 1000 USD let’s say. As it is a big amount compared to the value of the switch, I feel rather uneasy to book it as current expenses. Do the IFRS say for sure whether it is current expense or should it be capitalized and added to PPE to that particular switch?
Oxana,
I did face an akin situation in the past where I have to capitalise a desk handset of GHS 75 and expense iphone of GHS 1500. So the value may not necessary be the issue. If the switch was installed immediately the technical services would have been capitalised. Hope my response is useful. A
Hi Oxana, I would capitalize it into the carrying amount of the switch. It seems that these costs were not mere “day-to-day” servicing, but they prolonged the useful life of a switch. S.
For this situation i think if the equipment was userble before the subsequent is expended that cost can be classified as an expense or if it was not userble the cost is the cost that brought an asset to the condition where it can be used therefore is capitalised to the cost of an asset… correct me if im wrong Silvia
What about football player contract?
Please advise me!
OK without any knowledge about that contract, the basic rule is that it’s not an intangible asset as you don’t have a control over human (you never know about injuries, etc).
However, based on the terms stated in the contract, you might recognize it as some prepayment (if the payment was made in advance), and recognize it in P/L in line with the service of that football player. I would need to see the details. S.
thank you so much for this clarification about this point.
but i judge about it as a general question as an intangible asset according to this link:
https://www.facebook.com/ifrsplus/posts/609253445778633
and in my opinion for it according IAS 38 as the following
1- Identifiability: an intangible asset is identifiable when it:
A) is separable (we can separate it).
B) arises from contractual or other legal rights.
2- control according to FIFA rules.
3- future economic benefits from that contract.
but in our countries the clubs are social clubs, so it’s out of IFRS
in some other countries they treat it as you mentioned.
thanks a lot for your great website and your replying for your fans
Islam Sharaf
Hello,
this is very very interesting and thanks a lot for your link. Yes, I thought about this contract in the same way – it is identifiable, there are future economic benefits, but from the point of view of a control over that resource – I’m not really sure because we are talking about humans. You simply can’t control human’s actions – for the same reason, training of employees is never capitalized.
Therefore, I would rather recognize this contract among long-term prepayments (receivables) and “amortize it” – but of course, if that is generally applied practice, I do not object. I’m really happy to learn, too! Thanks a million times for posting it!
S.
Mrs Silvia,
i’m so honor to get a best negotiation with my IFRS leader.
thank you so much for your interesting.
and i’m going with your opinion in resources cases (Human).
but as well as an exclusive contract with FAMOUS singer for 5 years as monopoly contract.
my point of view as the same with football player contract.
but when i treat with Human, this is an issue to judge on our case.
Ooh, we treat with a stander has frivolous cases
so, could you post those topics for discussion?
best
Islam Sharaf
Dear Mr. Islam,
as I wrote previously – if that’s generally applied practice, then it’s probably OK to treat these contracts as intangible assets. However, for me as a long-term accountant, it seems very very odd. You know – what happens when a football player is hurt? I mean – there’s only 1 Ronaldo in the world 🙂 But of course, I accept what’s common in this world to do, but I just can’t get rid of the strange taste of doing so 🙂
Of course, a contract with famous singer for 5 years is an analogy and very similar 🙂
And in the future, I will issue an article about intangible assets, so I’ll make sure I include this extremely interesting (but very judgmental) case. More power!
Silvia
Hello Silvia, please do I still need to amortize on a monthly basis prepaid insurance expense for an outlet that has been shut down operationally? Can I write off the balance in the prepaid insurance after shutting down of the outlet to the P or L straightaway since the outlet in question is no longer in operation.
Regards
Rasaq, if there is no service in the future periods, then yes, of course – no reason for prepayment. However, in this case, don’t you have the right for the refund of unspent insurance premium? S.
This is really insightful Mada Silvia. Your aticle has clarified a lot of confusion in the eal indusry .Much appreciated. IL
THANK U
Silvia,
Thanks for this useful tip. My question is in line with Capitalizing Pre-operating Expenses-Some operations, like in the mining Industries, capitalize pre-operation expenses,,,eg: Pre-feasible studies, salaries etc until production when these items will be amortized over a specific period. Any thoughts on this?
Thanks
Hi Richmond,
mining industry is quite an exception, because you should follow IFRS 6. Under that standard, you can develop your own accounting policy which means that certain exploration and evaluation expenditures can be capitalized. S.
Thank you Silvia for enlightening me on this.
Hi,
Please in the case of spare parts(with huge cost implications) purchased for use in an oil transportation vessel(not as a replacement, but as an improvement to the vessel).. Do you prescribe that I capitalize the cost?. Its been an heated topic with my director. Thanks
Hi Ubong, it seems that you described the replacement of certain part of a vessel, am I right? For what reason? Was it planned replacement, or did the part just break?
In fact, IAS 16 says that you should treat major parts of an asset separately, e.g. if engine has a useful life of 5 years but remaining airplane 10 years, then you depreciate engine over 5 years and remaining airplane over 10 years. Analogically, when you replace that part on a vessel, you should derecognize carrying amount of the replaced part from the vessel and capitalize the cost of new part into the vessel.
I hope I understood you question well. S.
Beautifully written. Very helpful. Keep up the good work.
Thanks for the educative information pass out.
Much love.
Thanks for the educative information liberating on IFRS standard
God bless you
Today at 1:36 PM
Dear Silvia,
The article is very useful for the current business operation.
thank you so much for sharing these information.
I have small query on PPE.
Is it allowed to add a residual value to an asset after depreciating the assets for a two years.
Eg: A motor vehicle was capitalized on 1/1/2012 for the value of $ 100,000.
depreciation policy is 4 years on straight line basis i.e. $ 25,000 per annum (no residual value).
In 1/1/2014, a residual value is fixed for the Motor vehicle and depreciation value is changed.
Is it allowed as per PPE IAS 16.
Hi Siraj,
yes, the change in a depreciation is simply a change in the accounting estimate in line with IAS 8. You simply calculate new depreciation charge as asset’s carrying amount divided by the remaining useful life (probably revised). You account for that prospectively, so no restatement of previous periods.
Silvia, You are an excellent IFRS expertise resource by presenting questions & answers in a simple, convincing and short manner on this vast and complex global accounting field!
Thank you, I’m happy to know this! 🙂
Hello Silvia,
I trust you are well.
I have a question that is not really quite related to the topic above but it’s in respect of PPE held for sale.
In my company, we recently classified some non-current assets (PPE & prepayments) as held for sale in line with IFRS 5 after meeting the criteria. However, the sale will not crystallize until the end of this year. The standard says not to depreciate or amortise while the assets are in the category, but as a business, we are still using it to generate revenue until the time it is transferred to the buyer. The question right now is do we continue to charge depreciation/amortisation as we are still using it?
Hallo Madam Silvia,can you asist me,how can we eastimate depreciation of 2nd hand old machinery that we bought from the pawndshop without knowing when it was firstly used
Thank you, SilviaI don’t know how would accounting life be if were not there for us.
Hi Phisipho 🙂 The accounting life would be just as it is right now, I’m sure about that 🙂 But thank you for your appreciation, I’m only trying to bring some clarity and fun into such a damn boring thing! 🙂
I have a situation raised in my accounting class in which an entity wants to build a building above a man-made island. Hence that building is located at the sea just like the Burj Al Arab in Dubai. The problem is how will you account that man-made island or man-made land, is it part of the cost of the land or cost of the building?
I am just confused since LAND as an item of PPE is “natural” in the sense that it is made by God and always ready for acquisition or purchase and is not subject to depreciation. Since most land that we accounted for as part of PPE are natural land and not man-made, so what is the accounting treatment of the cost of filling the part of the sea by masses of soil/land in order to build a structure there?
I am also thinking that the man-made island may be subject to depreciation since it is artificial.
Thank you. I will be patiently waiting for your answer.
Dear Star,
that’s an interesting question. First of all, I know nothing about “man-made” land, but I would examine whether it has some definite useful life or not. Can this man-made land stay there forever? Or will it require some maintenance?
Also, I would definitely treat the land and building as 2 separate assets as they will probably have different useful lives. IFRS require you treating significant part of assets as a separate asset for depreciation purposes.
Hope it helps!
S.
Hi Silvia
1. Can we in any circumstances capitalize per-incorporation expenses.
2. For eg. my company has carried out feasibility studies for construction of hydro power projects. After the completion of studies and finding out the feasibility of the project, a separate company is formed who will then construct the project. The expenses incurred for pre-feasibility studies are adjusted in the form of equity investment in the books of company carrying out the pre-feasibility studies. If you could confirm as to how to account in such scenarios.
Hi Again
How do we account where Running and Maintenance expense is carried over beyond a one financial , for eg. lets assume we are carrying out running and maintenance of civil structures and work is completed after two years , and in the first year the expense incurred is CU 100 and in the second year the expense incurred is CU 50, the total expense being CU150, so this CU150 is expended of altogether in the second year after the completion of work or CU100 is expense off in the first year itself the expense is incurred.
Hi, match the expense with the service received. S.
Hi Silvia
You know the advances are normally treated as advance and also accounted as advance in the books , are there any exceptions for eg advance against capital expenditure and book advance as an capital work in progress or all kinds of advance whether capital or revenue in nature has to be shown as an advance only.
Hi Sonam,
in reality yes, there are differences between advances, according to their nature. Some advances are monetary asset (e.g. long-term advance given to owner of a rented property that will be returned back to you), some of them are non-monetary (e.g. advance for acquisition of PPE where is a small chance of receiving advance back instead of PPE).
And you treat monetary asset differently from non-monetary asset. S.
Hi Silvia
Thank you for your site. I have some experience in IFRS, but I prefer to read your articles one new things first as it is so easy to understand.
I would like to have your and the readers of your site’s opinion, on the following case:
Oil & gas company is drilling a well. It capitalises the related expenditures and one day after testing it is proved to be ready to operate as intended by Management and put in operation with the relative depreciation to be started. However, Company need to finalise activities around the well, build road to the well, site preparation, concreting, fencing etc (while well is already in operation). All these expenses are quite significant. We can not continue capitalisation of them in the cost of well since, since it is already in PPE. You mentioned in one of the comments below in the question (Ameyedowo) as I have that we should not capitalise them separately as the costs road works to site does not classify for capitalisation. As well those cost do not classify for capitalisation of the well since they neither improve capacity or life of the well. Is there only one option left just to expense? It looks odd. In my opinion those road construction costs, fencing to be capitalised as separate assets. Can you please share your ideas on the subject?
Dear Yulia,
OK, I need to revise my previous comment as it brings some confusion and as I see it, it’s very strongly written, I admit.
I would capitalize the expenses you mentioned, sure. You just need to assess whether it’s separate asset or not, for example – I would definitely say that fence around the well can be treated as a separate asset.
For other expenses, treat them as a subsequent expenditure if they cannot be treated as a separate asset. For example, concreting – what is it for? Is it improving something, like stability or useful life of the well? It is the first-time expense? Hope it helps! S.
Thank you Silvia… i was not going to appear in Fincancial Reporting paper of CA Final. It is you that brought confidence in me. Now i think that i can appear
Thank you Silvia for your reply…
“For example, concreting – what is it for? Is it improving something, like stability or useful life of the well? It is the first-time expense? Hope it helps! S.”
Silvia I think that an example with a new building would fit to this case as well. And hope it will be useful since more clear for the most people.
There is a new building, commissioned and already used…but there are some activities ongoing around… making access to the building, paving around it etc…I know may be is a strange in some developed countries to have commissioned a building without a final access to it and fencing, but it can happen in the different countries. Therefore, this access to the building neither improves capacity nor useful time of the building…therefore can not be capitalised to cost of the building. Our decision was to recognise this access and concreating (‘paving’) as a separate asset. But having meet the opposite opinion that we should not capitalise cost of roads to the site… I was wondering whether we have are doing something wrong. I think that this paving and road to the site meet definition of the asset, since it will bring the value to the Company (less problems with parking, car breakage, fuel consumption etc) and can be measured reliabely, it will be used during the period more than 12 months…Usually these expenditures are quite high and to expenses theme looks very strange.
I would be happy to hear a different opinion…may be I am missing something important and hope it will be useful for other readers…
Hi Silvia
Thanks for your great website. I have a question for you around pre-opening costs for a new hotel. There are often success fees or finders fees paid to securing a contract for a new hotel. The hotels then under go large refurbishments before they open. There would be 4 options in treatment I can see. 1) Its meets the definition of PPE (directly attribute costs) and is capitalised (the asset being the leasehold improvements) 2) The stages of finding and developing a new hotel are similar to to research and development under IAS 38 and these fees if meet the definition of development costs should be capitalised as an intangible asset (costs incurred finding an appropriate site are expensed like research) 3) The fees could be recognised as prepayment and written off over the life of the contract or 4) expensed as they incurred. I would really appreciate your thoughts on what you think is the best treatment under IFRS and what you have seen in practice.
Thanks!
Hi Sarah,
with regard to success fees (something like “commission to real estate agent for getting the contract”) and all the necessary refurbishments, I agree with option 1.
However, finder fees – for researching the market, evaluating the options to invest and selecting the best option – this is really like a research and for me, it does not meet the definition of “directly attributable cost”, because it is very questionable whether these fees were necessary to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Really, finder fees relate to assessment of other sites and properties. As a result, I would expense them in P/L.
But I tell you, I have seen various treatment in practice, some companies capitalized also finder fees, but then auditors examined their nature and had their say.
S.
Hi Silvia,
I just wonder how to treat a Zebra in the zoo. Will it be also treated as part of the PPE?
What is the purpose of zebra? How are you monetizing zebra?
Are you getting money from people who came to observe zebra? Then zebra would be classified as PPE under IAS 16.
Are you having this zebra for breeding an offspring (its children) and selling them? Then it’s a biological asset under IAS 41.
If zebra is used in both cases, then you should make a judgement what’s the main purpose of it and then classify accordingly.
S.
Hi Silvia
During the project construction phase are we required to prepare Profit or Loss Statement or all the expense and incomes are required to be capitalized and moreover as per BAS 21 The Effects of Changes in Foreign Exchange Rates , para 28 , exchange difference are required to be recognized in profit or loss , so during the project construction phase if there are any exchange differences where do we account them , as P&L item or as adjustment in BS.
Your clarification on this would be highly appreciated.
Thanking you
Sonam Choeden
Bhutan
Hi Sonam,
I’m a bit lost in your question.
During pre-operating / construction phase, you can capitalize all eligible items as per IAS 16 and all the rest is in P/L – so if it does not relate to acquisition of PPE, then I’m sorry, it needs to go in P/L. You simply cannot capitalize general pre-operating expenses as they would not meet the definition of an asset.
With regard to exchange rate differences – I think my article on how to account for prepayments in foreign currencies could answer to your question.
S.
Dear Silvia,
I am impressed that you have been diligently answering the queries, well done!
A quick question for on assets under construction. We are building a production factory and are capitalizing directly attributable costs.
We pay rent on that piece of land that the factory is being built.. I hope we can capitalize the rent expense during the construction period?
Cheers!
KS
I really would like to have the answer for this scenario.
Dear Ms Silvia,
I am really impressed and enlightened with all the information available here on property plant and equipment capitalization.
I have a question as well,
We have lease rentals and this building which is an operating lease was operational as a clinic till end of 2012 and from 01-jan-2013 the place plus is going for an overhaul to be made as a medical day surgery center.
could the period of 01-01-2013 till now and future until the building gets ready for its intended use, the lease rentals can be capitalized according to ias 16
thank you so much
Dear Shareej,
this looks like an operating lease of a building and it will be continued as an operating lease, am I right?
In this case, no, you should not capitalize operating lease rentals of the building itself.
However, you can capitalize leasehold improvements (overhaul).
S.
I need to ask about Incorporation Costs, shall we capitalize it or just expense it immediately ?
Gehad, I guess that incorporation costs are just associated with setting up a business and not with the acquisition of some particular asset – in such a case, you indeed need to expense them as they do not meet the definition of an asset. S.
Can The Clubs Can Recognized Players or their Contract in b/s??
Yes, especially long-term contracts. But it depends on the specific conditions of the contract. S.
Hi Silvia,
Can you send me any any IFRS quote which donot allow us to capitalize operating lease rentals (of the land where we are constructing the building) to the cost of the building.
Regards,
Usman
usman.haider066@gmail.com
Hi Usman,
I am not aware of such a quote.
In fact, the opposite can be true. Amounts charged under operating leases during construction period can be viewed as directly attributable cost – but you need to apply this approach consistently.
Hi Silvia, Greetings.
Please advise the proper classification for hotel assets owned by an entity & operated by a hotel operator (third party) via operating agreement.
is it IAS 16? or 40? why?
thanks..
Hi, Jasmin,
from the point of view of an entity owning the assets – the question is how the operating agreement is structured. Is it an operating lease? Or a finance lease? What are the specific provisions in the contract?
Let’s suppose it’s an operating lease – in such a case, an entity can classify the building under IAS 40 as well as IAS 16, again – based on the specific situation and the judgement, as both standards would fit.
Hi Silvia,
Wow, you really do seem like the most helpful person when it comes to helping out with capilisation queries.
I have what is probably a straight-forward answer, and just based on judgement. Our office recently purchased some blinds, which cost a total of £1,300. Our company is a fairly small one, and there is in fact no current capex policy in place, (I’m thinking of having it set at £1,000).
My question is whether the blinds would fall under being an asset, under the definition I’m stuck on whether it would provide economic benefits (maybe because the blinds would keep out sunlight which would prevent work being completed :P).
Also, £1,300 is a small amount of money for big businesses, however it’s a more sizeable sum for ours.
Any help in clearing this up would be much appreciated.
Thank you Silvia
Hi Jonathan,
thank you!
In my opinion – yes, blinds certainly do provide economic benefits, because they simply enhance your or leased asset. By installing new blinds, your office becomes more agreeable, personnel can work better etc. I would capitalize. S.
Hello Sylvia,
Thanks for your answers, I was interested in how you go about setting a capex threshold policy. I realise that it is not worth capitalising light bulbs and wate paper bins because they are so small, but do you have any guidance on what this threshold should be based on? I am happy for this to be relatively high so that it reduces management of the fixed asset register.
Many thanks,
Ian
Hi Ian,
I’m afraid I must disappoint you this time – there is no right or wrong answer with regard to “capitalization threshold”. It is judgemental and specific for every company. E.g. for a big production company, new set of chairs can be very immaterial, but for the small office, the same set can be significant in comparison with other PPE’s carrying amount.
However, I would agree that in almost 100%, the bulbs and waste paper bins would be expensed 🙂
S.
Hi Silivia,
Some great insight, but I’m still confused on an issue. My company is buying a spare motor for a piece of equipment. If we were replacing the motor today, we would capitalize it, but we don’t expect to replace the motor for several years. We are only purchasing it because if the active motor fails, production would be shut down without a replacement.
Expense or Capital? If capital, when do I start depreciating, now or when it actually gets put into service?
Hi J High,
I have seen the similar case in one private clinic – they invested in the 2nd back-up electricity generator. So in the case the electricity is shut down for some reason, the clinic can use the 1st back-up generator and when that generator stops working, only then the clinic would use the 2nd generator in order to keep all the machines going.
Now, is this 2nd generator bringing the future economic benefits?
Well, if you are a patient and you are making a choice where to go for surgery, which hospital would you chose? The one with no back-up generator, the one with 1 generator or the one with 2 generators (let’s say this is the only difference)?
So you see, even “back-up” assets as your motor can bring future economic benefits although they are not directly in use. Finally, their back-up function is exactly the reason why you make investment, isn’t it? Therefore, they should be capitalised as an item of PPE.
As for the depreciation – it’s up to you to estimate the useful life of a motor, but you should include the “back-up” period in it as well. Just let me remind you that the pattern of depreciation does not necessarily need to be straight line, so for example, if you assume not using motor in the first 2 years and then installing it somewhere else, you might adjust your depreciation charges accordingly.
Hope it helps 😉 S.
Hello Silvia,
I have a similar query as J High above. We have some tower cranes which require motors and gears (parts) which are quite expensive. Currently, we treat such replacement as maintenance exp and show as inventory while in stock. Going through your above posts, I think it can be capitalized, since it has separate useful life and can be used for other cranes as well. Can you please advise me on this. And, if we decide to capitalize hence forth, how the disclosure should be in the financials. Will it be treated as change in accounting policy and has to be disclosed with retrospective effect?
Thanks in advance.
Dear Abdul,
I fully agree with your thoughts. Motors represent significant part of cranes and as a result, they should probably be treated as PPE, but depreciated separately from the rest of a crane.
And yes, it is a change in accounting policy rather than change in accounting estimate (if not a correction of error).S.
Dear Silvia,
Thank you so much for your prompt response!
regards
Hi Silvia,
We have an operating lease of a building.
We recently received invoices for Competitive Bidding Admin, Bid Analysis, Permit Coordination. I understand that these costs can be capitalized if this was an acquisition of a new building, but can these costs be capitalized if we are only doing construction on a leased building?
Thank you in advance for your help!
Hi Taka,
in most cases yes, you can capitalise leasehold improvements. S.
I would like to confirm the date of depreciation start. We have purchsed car in May and it is available for use in may but it will not be use till July. I assume that depreciation should start in May.
Correct! 🙂
Hi Silvia,
First of all, congratulation for your site which is a good source of information. i will definitely share it with my team.
We are in the process of improvement power system for different locations. Which mean bringing almost 500 set of power system (Generator + Bateries+…) the project timing is over 6 months and the equipments will be received by batch. Therefore we will need to lease storage location just for this project with a limitation in time. Could the lease of the warehouse be capitalised under directly attributable costs ?
Is the result the same if we use our actual warehouse ? can we capitalize the part of the warehouse that we use for this specific project ?
Thanks for your valuable contribution.
Regards,
Frederic
Hi Silvia,
Again me but an additional point.
Today in our warehouse we have material (towers) that will be used in the future. as we do not know when we will use them (depending on customer order) we consider it as inventory and not WIP PPE.
1. Is it the correct allocation or can we consider them as WIP ?
2. also in the case of WIP, can we consider the cost of warehousing in the valuation of the tower?
From my point of view the biggest problem is to estimate the costs as we do not know for how long it will stay in the warehouse.
Thanks in advance,
Frederic
Hi Silvia. In the pharmaceutical sector would it be possible to capitalise uniform that is used in a production environment as PPE. These are garments that have to be worn on the production line by operators to ensure hygiene standards etc and would have a useful life of 2-3 years?
Hi Matt,
why not? If its useful life is more than 1 year and it meets the purpose of PPE (from what you wrote it does), then I don’t see any reason why not.However, think about its value and unit of account – it might be more practical to capitalise some set of garments rather than each individual garment. S.
Can the expenditure incurred during construction period of a new factory (Various Building & Plant & Machinery set up)be classified as “Expenditure during Construction Period” in IFRS under Assets since all expenditure can’t be directly allocated.
Hi Arun,
you should be able to allocate the expenditure either directly, or at least apportion it on a reasonable basis. If it’s not possible, then it’s a general expenditure that is recognised in P/L – but I believe this is not the case. S.
Dear Silvia, in Oil&Gas Upstream industry, the pre-operation (Development/Construction stage) General and Administrative Expenses could be very significant (Accounting, Contract & Procurement, Legal, HR etc.). If they could not be allocated to Assets (not directly attributable), putting them to Profit and Loss while no revenue available would result with significant losses until Operating is started and revenue is generated. This looks strange for me. Could you please share your thoughts? thank you in advance
Hi Serik,
well, but you should check out whether in this particular case, the standard IFRS 6 is applicable. This standard permits you to recognize certain expenditures as assets and you should be developing your own accounting policy for this purpose. Thus I believe you can capitalize directly attributable expenses to evaluation and extraction of mineral resources to some extent. Other than that – unless it meets the definition of intangible asset or it can be deemed as directly attributable cost to an item of PPE, you should expense it in profit or loss. S.
If a team requires to attend meetings and trvel aborad abroad for the project. where would the costs be adjusted. can they be capitalized under ppe?
We have a land (owned property) around which we have got fencing built for safety purposes. The land is vacant and had already been capitalized in the books. I have two questions:
(1) Is such fencing eligible for capitalization, or should it be expensed out?
(2) If capitalized, what is the most appropriate categorization to be made; land or land improvements?
Many thanks in advance for your valuable comments 🙂
(1) It’s eligible for capitalising.
(2) As the fence has its definite useful life (unlike land), you need to capitalise it separately and depreciate over estimated useful life.
S.
Silvia
If we build a stage for a show. however after the show the stage is dismantled. Only partitioning of woods are left is it ok to treat it as an item of PPE.can u tell me the accounting treatment please.
Again, if the stage is going to be used for more than 1 year, you can capitalise it.
Thanks but Silvia the stage does not exist. It was disassembled/dismounted after the show actually there are only small partitions of plywoods left. i dnt know if we can use them to construct another stage with it.can we still capitalise the whole cost of setting up the stage and depreciate it when the stage actually dnt exist. Please advise.
Anjoo,
in such a case, I guess the previous stage had some residual value as the partitions can be used further – therefore, there should have been something left. Sure, you can use these partitions again, why not? And then capitalise their cost+works into another stage. As I said – after depreciating the previous stage, the residual value equal to the value of partitions should have been left in the carrying amount and that could have been used as the new cost.
Hi can you answer my concern. thanks.
In most circumstances no, you cannot capitalize, but it depends.
Hi Silvia,
Can we capitalize costs for returning of pallets to vendor, which are carrying the purchased PPE?
We import the PPE which is on pallets, but we have obligation to return the pallets to the vendor, and additional costs for transportation and forwarding occurs.
Should these costs be capitalized as CAPEX or should be considered as OPEX?
Thanks
Bianka
Silvia, one more issue with the capex.
In our FAR we have printer, that is maintained by outsourcing company for a fee. The Co is offering us to replace the printer with new one for a reasonable surcharge. This option will probably decrease the maintenance fees, which are expensed in the PL. The old printer is still having net book value.
What should be the accounting treatment for this issue? Write off the old printer and capitalize new with the price paid? Or?
Thanks
Bianka
Hi Silvia,
Do we capitalize brokerage fees in the cost of the land. My view point is that it wouldn’t because it is not necessary to bring the asset to its location and use in the way as intended by the management. Can you please share your viewpoint on this.
regards
A machine has been purchased by our company and also we got the consult from the outside for the installation of machine. Same Hotel fee has been incurred for the consulates (when we got the consult). Can be capitalized the above mention Hotel fee for the consulates When Initial recognize of the machine?
Can an access road be capitalized?
Yes.
Thank you for clarifying the capitalization of PPE.
I have a very specific question. I am auditing a company which deals in Serviced offices. They are launching a new location. All costs from during the setup until the property is in operation is carried as pre-opening cost. Once the new property starts operation, they will capitalize the rent expense of the preopening period as leasehold improvement.
I feel they should expense it, but they dont. This has happened at every new location they have launched over the years. It is big group. My firm has not raised an objection in the past audits. Could I get a reference to the IAS where it allows rent expense to be capitalized. And what is the rationale behind capitalizing it? Is it because the Company earns from renting out serviced offices, so it will gain future benefits from the property over the life of the property. And without renting the property they would not be any future benefit.
Thanks. I really appreciate all your efforts.
Weldon Silvia. You’re such a very good fellow.
Dear Madam,
The Establishment Expenses brought forwarded continuously during last three years,and meet the criteria of IAS 16.Further i want to pay your attention”if the management has decided to capitalized over last three years and inform to accountant to revise the journal entries related to adjustment”
01.Limitations of capitalization of formation Expenses
02. Prior year adjustments
03.if seem to be massive classification errors regularly basis, you professional proficient with this regard.
Thanking You.
Loku
Sorry, Loku, I don’t get your point. S.
Dear Ms. Silvia,
Thank you for your website. I learned a lot in reading your articles. May I ask questions please?
There is a plan for building expansion, normally this would fall under leasehold improvement, but I’m wondering if it can be capitalized also as Building?
The lease contract is for a period of five years. The lessor is an affiliate/related party. there is no plan to leave the premise even after the contract expires, probably we will just renew it again. Estimated useful life of the improvement is 14 years, is it okay to use this as the basis of depreciation, instead of the shorter between the lease term and the useful life?
Also can you give me the general useful life of various assets (machineries, software, buildings, office equip/fixtures) if there is any general or industry based useful life, just for benchmarking.
Thank you very much,
Benj
Hi Benj, if you have the option for the renewal of the lease contract (so noone can stop you from doing so) and you intend to use it, then yes, you can set your useful life to 14 years.
For “benchmark” depreciation rates: please understand the difference between useful life and economic life. Useful life depends on your intentions to use the asset; economic life takes assets’ characteristics and limitations into account. E.g. while economic life of certain machine can be 4 years (because beyond that, it would be too obsolete), you can plan to use it only for 3 years and that’s your useful life.
So the useful life depends on the entity and therefore it’s not really possible to set some benchmark. S.
Hi Ms. Sylvia,
Thank you for your clearing this PPE recognition issue. It is really a vague area in Accounting.
We are a manufacturing company. Our capitalization policy is at more than $1,000 and can be used for more than one period. Our Maintenance personnel are buying spare parts for our machines which usually fall on our capitalization policy. This spare parts will not be used right away and will be used only when there a damaged parts in the machines. Currently we are classified it as inventory and will be expensed as Repairs & Maintenance during withdrawal to Warehouse. Are we doing it right?
Also, we have program modifications in the machines to accommodate new products or improvements. Can we capitalize this modifications? Is it additional cost of the machine?
Your reply will be very much appreciated.
Thank you.
Hi Silvia,
We have purchased new production machine and classified as AUC. The acceptance test did not commence yet, since it is agreed in the purchase contract that the acceptance test will commence when the maximum capacity will be reached. If acceptance test be negative, we have right to return the machine to the vendor. Also, it is mentioned in the contract that, the titles and the ownership of the machine will be transferred to the byer (us) when all payments are settled. We haven’t receive the last invoice as per the contract yet, because positive acceptance test is needed for the last invoice to be issued and paid.
Now, we started the production, we are selling produced products (the machine started to bringing economic benefits)but according to the contract we are not the owners of the machine yet. Should we reclassify the machine as final asset and start the depreciation or not yet?
If we should capitalize as final assets in this moment(prior to acceptance test), and start depreciation, should we provision the expected invoice and capitalize as provision, or the later received invoice should be posted as subsequent expenditure?
Thanks
Bianka
Dear Slyvia,
I don’t believe I read majority of the discussions that happened on this website. Its only that I could find clear and convincing answers from you for all the queries raised by different people. I am myself from a finance background and have a query w.r.t. capitalisation of land lease rentals during construction for a building. I read in one of your comments that we should not capitalize the land lease. However, IAS 23 states the following:
“Borrowing costs directly attributable to the acquisition, construction or production of a ‘qualifying asset’ (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognised as an expense.”
In the above query, land is required for construction of the building without which building cannot be constructed. hence, the land lease paid during the construction of the building should be capitalize. And after construction is complete, the economic benefits from the building will flow to the company. So, in a way, the land lease which was paid during construction of building qualifies all four conditions viz. PURPOSE, USEFUL LIFE (by giving space to construct building), ECONOMIC BENEFITS (by usage of building) and MEASURABLE. Also, even the salaries paid to employees engaged in construction of building could be capitalized on the same grounds. They in itself doesn’t have any separate identity, but they assist to add value to the ultimate asset which is under construction. In short, if all such costs wouldn’t have been incurred, the asset (BUILDING) could not be constructed.
Awaiting your response.
Many thanks in advance..!!
Sameer from Dubai
Hi Sameer,
thank you for your kind words. Let me just tell you that the rental expense is not a borrowing cost and therefore IAS 23 does not apply.
As for rental expenses, there’s a lot of debate going on. And you are right, amounts charged under operating lease during the construction period can be seen as directly attributable. S.
Hi Silvia,
I am looking at a particular case where an entity has constructed its own office building on a leashold land.
In this case, can we capitalise the leashold land and depreciate it ?
Dear Sivia,
Thank you for a great job of simplifying ifrs beyond belief.
Please if company A acquires an operating license but which it didn’t use before it sold it (i.e the license) to company B. In company B’s books, will it be correct to account for the cost of buying the license from company A as an Intangible assets? Also will be be correct for company B NOT to amortize the cost since it has an indefinite life span and it can only remain in business if the license is in place? i.e Company B operates in a regulatory sector
Thank you.
Olusegun
Olesegun, I would say yes, most licenses meet the definition of an intangible asset. If it’s genuinely an asset with indefinite useful life, then it’s not amortized. S.
Dear Silvia,
Good Informatics shared, First of all thanks for the same.
Secondly, I have a Question for CWIP and PPE.
What will be treatment of CWIP which is not available for use and not in actual possession of entity at the end of the year?
IAS 16 is clearly Includes for PPE which are “Available for use”
IAS 38 does not support inclusion in Intangible asset recognition criteria.
What can be the correct Classification of CWIP in FS?
Thanks in advance.
Dear Silvia
Thank you for your article. really cherishing.
I have a situation. I have a 70% subsidiary company overseas which is taking a new premise. I have agreed to pay 50% of the costs and the subsidiary will bear the rest of the costs.
The new premise is under an operating lease for 5 years. the new premise will have the following costs:-
1.Deposit
2.Space planning and project management
3.Moving furniture
4.reinstallation of server/IT/Telephone
5.Furniture – existing in the old premise and now moving to new premise.
6.New furniture
7.Installation costs of electricity/water and other, of which, the landlord will pay 50% as installation allowance.
All the above costs will be 50% borne by me and 50% by the subsidiary.
Can you please advise:-
1. How will I treat the 50% being paid by me in my books?
2. Which items can be capitalised and which are those which needs to be expensed?
3. All capital items will be booked in the subsidiary’s book to gain capital allowance, so do I expense the 50% costs I am bearing in my book?
Thank you for your help Silvia.
Regards
Ramesh
Dear Ramesh,
1) this is extremely difficult to reply as I don’t have enough information. Is there some contract between parent and subsidiary? What’s the ground of this transaction? Is the parent going to use the premise as well? If it’s just money going out without anything getting back (no use of premises, no return of money…), then it’s simply a “gift” or an expense in your books (unless you assume the recovery of some costs). As it’s a related party transaction, you should make an appropriate disclosure.
2) Deposit is a receivable in the books of a subsidiary. All other items can be capitalized.
3) See response 1).
S.
Dear Sylvia
Thank you for your response. The Parent will be benefiting in terms of Dividend payable by the subsidiary and also profit generated from the subsidiary will be consolidated at the parent’s level.
The subsidiary runs on its own and parent’s presence is merely a representative working there, using some furniture, chairs, etc. We want to keep track of all the fixed assets bought by the subsidiary as they are quite messy when handled by them.
So, we have decided to acquire (100% funding) all the assets, include all these assets in the parent’s FAR and make a recharge the subsidiary a fees for using the Assets.
My Question is, How to calculate the recharge to be made to the subsidiary and what will be the basis?
I am stuck here as I need to provide them something which will not create disagreement..
Wish you could help me out urgently as they are visiting us today..
I am conducting the audit of a textile mill. During the course of audit, i came to know that the stores and spares are kept in stores for more than one year and management view is that the stores and spares can be used even after three or four years. My question is that if these stores are not used in the year then whether the company should capitalize it or it should remain as stores and spares?
Hi Anwar, it indicates that you spares are a part of PPE as they can be used for more than 1 year. S.
Hi Silvia,
Our company intends to erect a fence (2 Km) and share costs with a neighbour, a farmer. Should the full value of both contributions be capitalised (our cash + donated asset from neighbour). Or, just the company costs.
Based on service potential and economic benefit, there is an argument for the full value or contribution but then increased depreciation need to be considered.
Any thoughts, please!
Thanks
Suresh
Hi Suresh,
it depends on the specific agreement with your neighbour. If both of you will take care about the fence, share the repair & maintenance expenses, etc., then I would suggest that each of you should recognize its share of the asset in the financial statements. S.
Hi Silvia,
Can security expenses incurred during the construction of a building be capitalized? And what if the security was hired specifically for the construction, meaning there were other security there for the rest of the property.
Hi Karen, I would say no. The reason is that the security service is not inevitable in order to bring the asset to its desired location and condition, is it? Maybe there is a situation when asset under construction can be damaged without security, but when it’s fully completed – no security service is needed anymore, in this case I would think about it. But you would really need to fight hard to justify it. S.
Hi Silvia,
Thanks so much for your response. It is my client that wants to capitalize the security costs on the basis that the company operates in a volatile area and that the contractors requested extra security. Now the premises already had security as there are other buildings on it, but it was thought that extra security was required and it is the cost of that additional service which he wants to capitalize. We agree that yes additional security would have reduced the pilferage on the site but argued that the building would have been erected whether or not there was this additional security so it was therefore an incidental cost per IAS 16 par. 21 and not a direct cost necessary to bring the building to its location and stage. We even referred him to the paragraphs that give guidance to the elements of cost which are allowed to be capitalized but he still insists on his claim to capitalize the security costs. I think he may have had a better argument if there were no other security on the premises. What do you think?
Karen,
when I think about it closely it seems I would NOT capitalize any security cost in most circumstances. It would have really been an exceptional situation when an entity would have justified that these costs are absolutely inevitable for bringing an asset to its location and condition. So I agree with you. S.
Dear Silvia,
our company reline the electrolysis pot shells (each pot shell every 5th year). Costs of relining are capitalized. But there is filling inside each shell which is tapped to another shell (or held as an inventory) before overhaul. First filling of shells (when production started) was capitalized. Filling after relining is not capitalized and is recorded as materials consumed costs. I would like to know, if the filling after relining should be capitalized or can be recognized as expense.
Thank you in advance,
Marta
Dear Silvia
I enjoy reading your replies, quite enlightening.
I have a question about when depreciation should start. If a new production company acquires production equipments but production will only start 1 year later.Should depreciation start when PPE recorded even if idle or only when put to use?
Yani,
ubelievable – currently I’m working on an article about starting the depreciation 🙂 But to give you a quick reply: you should start depreciation when an asset is available and ready for use, not when it is actually put into use. However, when there’s no production, you can still apply zero depreciation charge. S.
Hi Sylvia, I must admit, I am enjoying this discussions.
Thank you and the entire team.
We did some extension and renovations to our office premises which is owned by the organization. I am concerned about what to capitalize and what not to capitalized as everything is included in the invoices at each level of the project by the construction company. We also paid the quality surveyors huge amounts of money. Should the entire cost be capitalized?
A new stove was fitted into one part of the extension. Should the stove be capitalized or expensed?
PLease help.
Should an alarm system installed in the office be capitalized or expensed. The cost was quite significant. I am not an IT person but I believe the Alarm could be reinstalled if we happen to move it to another location.
And the cost of wiring the building for electricity? These are all cost incurred during the renovation of our office space.
Hello, these expenses can be capitalized, as they meet all the criteria for PPE. S.
Thanks for your comprehensive illustration!
I have a question on PPE capitalization:
According to IAS 16 para. 8:
“Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this HKFRS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.”
Does it mean that even if the amount of spare parts is insignificant (e.g. $1), as long as the spare parts meet the definition of property, plant and equipment (purpose + > 1 period), such spare parts should be recognised as PPE?
In fact, yes. But let me remind you that:
– there’s always a question of a materiality
– IAS 16 enables you to recognize some assets as a set, rather than by units. It’s a question of unit of account. In practice, if you have 1 000 000 spare parts at $1 each, and their useful life is longer than 1 year, maybe it’s better to recognize them as 1 piece of PPE. S.
Can I know how to record fixed assets (furniture) purchased infill the construction of a building is over.thanks
Priscilla,
furniture can be seen as a separate piece of PPE in most cases. Therefore, if it meets the PPE criteria, you can record it as PPE. S.
Ms Silvia,
How to recognize pre incorporation expenditures, i understood that there is no any specification in IFRS to capitalize those expenditure, but will assume that if it a significant amount, won’t it make any impact to the Company as if we directly recognized in PL? is there exception??
Dear Navaneethan,
the only exception for capitalizing incorporation expenditures is when they relate to the acquisition of some asset like PPE, inventories or intangibles. If not, then they must be expensed – for example, all salaries of employees working on incorporation, legal or consulting fees,etc. Even when they are significant. S.
Hi Silvia its really nice seeing your extremely good website and quality posts, discussions, q&ns…..in the context of this question while i know and agree that it is the practiced and prescribed treatment that you advised but cant we take the plea and reason out that such significant pre incorporation expenses also are in the nature of those costs that make the entity ready and fit for producing future economic benefits that span its entire life and many years to come? wont that justify their capitalization and depreciation/amortisation over the useful life of entity or those assets whichever is more relevant?..and i also feel that security costs in a prev question for construction of building also come in that category & there should be no problem in capitalising them too…..
Hi Imran, thank you!
No, that does not justify the capitalization of incorporation costs. The reason is that these costs do not meet one of the basic conditions for capitalizing intangible assets – they are NOT identifiable. And, they are not identifiable because they are not separable (you cannot detach this asset and sell it to someone else). Just as a quick comment. S.
Hi Silvia
Thanks for all useful information. Would you be able to help me with the below? I am in the frieght industry and we have renewed a contract with an existing client. Please can you advise if I can capitalise a once off ‘sign on bonus fee’ for a client that will be renewing a contract for 3 years. The bonus is payable on signature (November/December), and the effective date of the contract is 1 February 2016.
Thanks in advance for your help!
Kind Regards
Sylwia
Hi Silvia,
My company changed its name and will have to change the name on all their buildings. Should the cost of the new signs be capitalized?
Thank you for your assistance!
Hi Kevin,
are these signs a sort of advertising or just “labeling the building”? Are they located on the company’s buildings? If these signs are on your own buildings, then it’s possible to capitalize. S.
Hi there,
My client is building a wedding venue to rent out and is in the planning and construction phase. Not yet operational.
1. Can I capitalize the legal, feasibility study, and soil testing expenses prior to becoming operational, as part of the building and land costs?
2. The only other expenses other than the land and building materials purchase is the website development cost and branding. Can I book these to goodwill (intangible assets)? Or expense?
Urgent!
I am on audit of Oil Refinery. Company has installed SBM first time in Pakistan, and purchase extra high tension rope as a spare parts to be used in emergency.
Should I capitalize these ropes in PPE or classify it in Spare Parts and what will be the depreciation treatment in both cases?
Thanks in advance,
Hi
If I build a plant and I need to pay a lot of money for license agreements, lawyers and such, before I have the legal right to start the construction.
What should I do with all those costs ?
We purchased a large warehouse building that is to be torn down and replaced with a new building for our entity’s use. Can I capitalize the insurance premiums and property tax payments on this property while construction is in progress. I realize that it is expensed once the building is complete and ready for company use. From what I understand, I can capitalize both if the building was for resale but I’m unclear if we are going to keep the building for company business if they are capitalizable or not. Thanks for your help!
Thank you very much for the conversation real i got something special to me.
i have a question please assist me,how can we treat revaluation Surplus.
Dear Musira,
please could you read this article on summary of IAS 16 Property, plant and equipment? There’s a video at the end and it answers your question nicely.
Thank you and have a nice day!
S.
In case of preoperative expenses which are incurred with respect to transportation for shifting machinery from a closed out factory to a new factory can be capitalized ? If yes then whether as an intangible asset or as a tangible asset as an addition to the cost of the machinery which is being shifted.
Hi, i have a case for which the PPE (office renovation) had been completed 6 months back but the exact cost not provided by admin.
for PPE recognition: benefit is there but the cost provided by admin that will not exceed $220k….. What to do in this case?
How to capitalize in order to depreciate the 6 months back of an asset life being used before the year end ?
Dear Sylvia,
Praise God for your superb knowledge & wisdom…
I would like to seek your assistance as regards to specific ruling that applies to asset capitalization under rented land and/or facilities and would appreciate quoting the appropriate IFRS and/or IAS standards..
Thank you very much and God bless you..
Dear Sylvia,
i have a case, what is the treatment for preliminary expenses and unallocated revenue expenses and how can a company write of a preliminary expenses and unallocated revenue expenses, it will be too much helpful for me if you give any reference IAS Or IFRS
Thank you
Best Regards
Samar
When we should capitalize the Spare parts in PPE, at the time of purchase or at the time when the part installed in machine.
Thank you. Example we purchased in 2013 but installed in machine in Jan 2016.
Best regards
Pooran
Dear Sylvia,
Spare parts can capitalized at the time of when they purchased or at the time whey they installed in machine. For example purchased in 2013 and installed in machine in Jan 2016
Thanks and regards
Pooran
Hi Pooran, please check this article about spare parts for more info 🙂 S.
Hi Silvia,
If existing assets have to be relocated to accommodate a new construction project (and that is the only reason they are being relocated), can the relocation costs be capitalized to the project?
Thank you,
Brian
See, Brian, you can capitalize all expenditures necessary to bring the asset to the desired condition and location, so I would say yes.
Hi Silvia,
How about lost sales due to temporary shutdown of facility in order upgrade and install new machines that will in effect increase capacity and improve quality f products? Would you consider capitalizing them as well?
Thanks,
Jc
Hi Silvia,
Can we capitalize ISO certification cost in line with Intangible Assets standards?
Because some clients require ISO certificates before they sign contracts with us. So the economic benefits derives as a result of the certification. The cost is huge and one time cost.
Appreciate your reply.
Thanks & Regards
AG
ISO certification costs generally can’t be capitalised under IAS 38 because it would not meet the identification test for intangibles.
Normally the certification doesn’t give you any rights but only privilege. Right is something you own, where as privilege is something some else owns and they let you apply subject to certain conditions.
It would be bit of stretch to consider the certification costs as development costs.
Thanks.
But validity period of the certificate is 3 years. Shouldn’t we amortize this over 3 years (as prepaid) regardless of applying IAS 38?
Regards
Hi Good day!
I would just like to ask if rent expense incurred during the construction period of leasehold improvement be capitalized. Also, should the application fee and maintenance and security fees incurred for the construction of leasehold improvement, should they be capitalized also?
Thanks,
-Lene
Hi Cherry,
in general no, this type of rent should not be capitalized, but it depends. Application fee maybe yes – depending on what it is, but maintenance and security fees are hard to justify for capitalization. S.
We purchased a machine in September. It was capitalized in September. We have an invoice for concrete and slab work to install the machine. Can these installation costs still be added to the machine even though the machine was capitalized 6 months ago.
yes 🙂
hi, if i import a machinery on 31/1/2016 and make payment on 15/02/2016. My machinery should recognise at rate at date 31/1/2016 or 15.02.2016.
Hi Liang, at the date when you gained a control over that machinery. S.
Hi Silvia,
Can we capitalise legal fees for obtaining financing of a purchased land by a property developer?
Thanks
Huzaini, if you capitalize borrowing cost under IAS 23, then in general yes.
Hi Silvia,
just wandering if you can help me out in this scenario.
say a company is building new machinery for a new factory that produces computer tablets, from their own engineers and equipment.
Can this machinery be included as an asset, i immediately thought yes, but got confused by IAS 16, para 19 that states that costs that do not form part of the cost of an item PPE being costs of opening a new facility. what exactly does that mean?
and if the answer is yes it can be included as an asset, does expenses such as employee travelling interstate be attributable cost?
Thank you in advance for any insight.
Hi
Can you please in deciding whether following expense can be capitalized or not :
1. Cost incurred for obtaining Environmental permits before construction of plant?
2. Cost incurred for making Flood Risk Assessment of a plant before completion ?
Thanks
Under software, can you capitalise expenses of travelling, meal, leasing a car to contractors directly attributable to the project that is being capexed
Hi
We have a product that we needed to improve according new global specifications, because of that we are considering that as a new product and due that able to capitalize. There’re costs of material, tests, prototypes and Engineering hours. In this case can we also capitalize the Engineering hours?
Hi Dominique,
yes, you can, as soon as these engineering expenses are directly attributable to the product. S.
Hi Silvia M
I have a client who signed a lease agreement on a building. He has been paying rental on this property for almost two years without taking physical occupation of the property. My client’s intention is to secure a tenant and then purchase the property from the landlord, however he has not as yet secured a tenant, hence he has not taken ownership of the proeprty as yet. Kindly give guidance as to whether the rent paid can be claimed as an expense, if not how should I then deal with the rental income.
Dear Abdur,
it appears that the rent your client is paying does not meet a definition for capitalizing as an asset. It’s an expense in profit or loss.
S.
Hi,
I have few question about repair & maintenance vs renovation.
1) My company has changed the roof for the building, instead of renovation can i classified the expense as repair & maintenance to the P&L account?
2) How about if i am renting the building,the expense incurred for the changing of the roof ,should i recognised to renovation or repair & maintenance?
Hi,
I would capitalize the expenses for changing the roof (see paragraph 13 of IAS 16). If you change the roof on the leasehold property, you can still capitalize it and depreciate over the lease term. S.
Hi Silvia,
In “big amount of sand” example, I understand that the intention is for the sand to be used in construction of, let’s say, houses for sale. It’s not a company building an office building. Is my understanding correct?
Thanks for your time.
Best regards,
Hendrik L.
Dear Hendrik,
I don’t think it really matters here. The sand perfectly meets the definition of inventories (= to be consumed in the production process), whether it is to be used in the production of goods for resale (= houses for resale) or own PPE. S.
Hi Silvia,
Two question please:
1)During a project phase when using moving machinery in order to create the asset, should the machinery be depreciated (capitalised) during the project phase?
2) How should the depreciation (if capitalised) of the machinery be treated as you probably do not want to see depreciation in your books during a project phase?
Much appreciated
Ronald
Dear Silvia,
I have recently come across with your web site. First of all, I must congratulate you for spreading IFRS knowledge in such a simple manner.
I have one query.
we have one business division called Yard. This is located in some port zone. There has been a requirement where port authority has raised a one time compliance requirement to assess whole ship yard and their assets. Then whatever recommendation comes – all needs to be conducted to modify/replace assets etc.
the query is this assessment cost/survey cost can be capitalised OR considered as part of cost of assets whehn modified/replaced etc.? how should we treat initially when this money is spent ?
I appreciate your reply.
Thanks.
Dear Nirav, as I understand, you have to spend this money in order to continue the operation, right? In this case you can capitalize the expense for obligatory assessment to the cost of shipyard (alocate in proportion). S.
Hi,
I have a query – I am advertising to gather contractors for submission of tender on renovation of business outlet as it is a relatively large amount of business. I feel such costs should be in P/L instead of capitalizing as PPE, am I right?
Given the same scenario, what would be the counter arguments to capitalize as PPE instead?
Thanks
Dear Cheong, you are perfectly right, the advertising cost cannot be capitalized. This is specifically written in the standard. However, I have seen that some companies capitalized procurement costs (finding the cheapest and most suitable suppliers in line with the legislation) – if the procurement process is required by the law, you would be able to justify its capitalization. S.
I have a large machine that is fully depreciated. The machine broke down and requires a major part (not general maintenance) to continue to operate. Can I depreciate the new part. Similiar to an engine or an overhaul.
Dear Blanca,
if the new part exceeds the machine’s capacity (I guess it does as it extends its useful life), then yes, capitalize. S.
Hi Silvia,
My question relates to a hydropower developing company under license from government. The terms of PPA (purchase power agreement) states that the company shall construct hydro power project, sale the generated electricity to government owned electricity authority at rate as per ppa and after 25 years 50% ownership will be transferred to government free of cost. In this case what portion of PPE will be treated as Intangible asset (IAS 38) as per IFRIC 12? Whether land and general office equipment will also be treated intangible asset? Please give your clarification.
Thanks
Dear Silvia,
We are exploring new market/region for our products, we can capitalize the cost of new market development as per IFRS. At what stage should we start amortizing them
Dear Silvia,
Thank you for your great efforts ,
really your page helps me a lot
I have a question related to the conversion from the phase of projects under construction to Fixed Assets
the case is :
we have finished the construction of a factory and we have bulk material :
– Piping Bulk ( Pipes )
– Electrical Bulk ( Cables , …)
all these bulk material will be capitalized in the cost of the factory but how it will be recorded in the fixed assets register ??
as in the fixed assets register will record the equipment and the buildings
and this bulk is very expensive = 25 % of the total project and if I allocated the cost of this bulk to the related equipment this will increase the equipment cost by a very high percentage
For example :
there is unit for waste water treatment
contain some equipment like pumps and its cost = 300,000 $ and the bulk related to this unit = 800,000 $
how can we solve this issue ?
can I record the pipes and cables in the fixed assets registered separated from the main equipment or add the cost of the bulk material to the equipment regardless of the high cost that will be charged for the equipment which will cause a problem in the case of replacement
Thank you very much
Case Study: I open a Dental Clinic on a rental space, it took like 4 months to build and during this I paid for 4 months rent (Pre-commencement expenditure) can I capitalized this 4 months rent cost separately or club with Leasehold improvement or Construction Cost?
Dear Laiq,
I think this article will answer your question. S.
I need to ask about Incorporation Costs?
Yes, ask. But in general, as written in the article, you cannot capitalize them unless they can be attributed to an acquisition of a specific item of PPE or intangible asset or similar. S.
Dear Sylvia,
if our own workers are performing major inspection, should we capitalize labor costs?
Thanks!
Can we capitalize flower and flowerpot which has significant value?
Interesting question, but in general yes, based on its purpose. If it’s there to decorate your place, then yes, you can capitalize it (I guess it will stay there for more than 1 year). S.
Hello!
Can I ask a question regarding PPE capitalization? I wonder if we can capital thumb drive used for ATM machine in PPE? or we just record in repair – maintainance expense?
Thank you.
It’s a very informative article, so thank you for that.I do have one question though.
A bank purchased an ATM machine for $10,000.It is being depreciated on a reducing balance method at the rate of 20%.After a few years, a major part needed replacement and was hence replaced with a new one for $2,000.The disposed part had $0 disposal value and was dumped. Now, something that maintains the earning capacity of an asset qualifies as revenue expenditure and hence should be written off.So by this definition , should we book the new purchase as expense? Or if we book the amount as asset, what amount should be derecognitized for the part that was disposed?
Dear Student,
the recognition criteria in IAS 16 say that you should recognize a subsequent expenditure as an asset when the cost is reliable measurable and there are future economic benefits (IAS 16.7). So, “something that maintains the earning capacity of an asset qualifies as revenue expenditure” does not apply anymore (yes, something like that applied many years ago). Moreover, when a replacement of a certain part is required in regular intervals, then you should recognize it and depreciate separately. Long story short – you should recognize a new part and depreciate it over its useful life.
Dear Sir,
Thank you for your answer. I shall be grateful if you could kindly answer some of the questions that have popped up after reading your earlier response.
So, when you said “….and there are future economic benefits (IAS 16.7)” , I assume the above statement means future economic benefits flowing to the entity for more than one year and hence a capital expenditure and not a revenue expenditure? and another thing is , in my example above, what amount should be de-recognized , as the machine was booked as a whole machine and we don’t know the cost of the replaced part, since as per IAS 16.6.2 ,the carrying amount of replaced or renewed part must be derecognized.
Thanks in advance.
Dear Silvia,
Can I book the lease negotiation fee as the leasehold improvement? The useful life is same as the lease term, is that correct?
Thanks,
Dear Kayla, some of these fees can be considered as directly attributable costs of acquiring the asset, but not as leasehold improvement. It depends what the fee was paid for. S.
Thank you Silvia for all your help. Need a solution to a proble, in relation to capitalisation of expenses.
A company purchased 100 storage boxes for the office. The boxes cost $15 dollars each. And will last or 10 years. Can its cost be capitalised?
Hi Micheal,
there is no minimal value for capitalization. So yes, you can capitalize the cost as the purpose and duration is in line with IAS 16 and its definition of property, plant and equipment. However, think of materiality and aggregation – is 1500 USD material for your financial statements? If not, then even if you don’t capitalize, your financial statements would still present the true and fair view.
Dear Silvia,
I have an asset and some depreciation have charged in it. I want to transfer this asset to CWIP project for employees training. So that new CWIP Plant can be run smoothly.
In this case, What would be the treatment. Should I made disposal / write off or add Book value in CWIP.
Thanks,
Hi Raheel, maybe I don’t have enough information, but for me it seems that you should not trasnfer any asset. You can include this asset’s depreciation charges allocated on some reasonable basis into the cost of newly constructed asset (CWIP as you name it). S.
Dear Sylvia
We are in the process of a new project, the building of a new filling plant, and we have hire charges for construction machinery.
The hire period is no longer than 1 week overall – are these to be expensed?
Thanks
Dear Ashleigh,
you can capitalize these rental charges, because they were incurred directly in connection with acquisition of a new filling plant. Also, as machinery was rented only for this purpose and only during the building period, there’s no reason not to capitalize. S.
can you help me to iccured trelated cost of ppe? i got a problem to classify the ppe, whether it is land? land & building? equipment? plant?
Serene Plantation Bhd commenced plantation operations in Bukit Serendah. The operations, which start on 1 January 2011, are for the cultivation of oil palm. The following information summarizes the costs incurred in relation to the plantation areas:
1. land aqcuisition and incedental cost = $21 million
2. self-construct palm oil mill = $ 8 million
3. purchase & installing plant and machinery of palm oil mill = $ 4million
4. estate building = $ 15million
5. general infrastructure (telephone lines, water systems, generators, cables) = $ 10million
6. site preparation(land clearing, levelling, terrace) = $ 2million
7. utilities (road, railways, drains, canal) = $3 million
Hi Tyraa,
n. 1 is clearly land, n. 6 depends on why the preparation is performed (are you going to build something there? then it’s a part of the acquisition cost). The remainin items should be regular PPE items on their own, especially if their useful life is different from the life of a building/plant. S.
Hi Silvia,
The whole project for construction of solar farm ends within the same financial year end. The company has purchased an accounting software. Under the norm, this should be capitalized as Fixed Assets. However, the directors advised to expense it off since the project has completed and the item will not carry any economic future benefit. Is this practical? If yes, where should this classify in profit & loss? TIA. Omeldo
Hi Omeldo,
from what you wrote it seems that yes, it would be OK to expense the software in the financial statements, because no future economic benefits are expected. You can classify it as some project cost (based on whether you present expenses by nature or by function). But, let me warn you about the deferred tax, because in most cases, the tax rules do not permit you to expense the software in 1 year (if its cost is higher than certain amount), and therefore, deferred tax may arise. S.
Hi Silvia
During the course of the construction of a building, let say one of the contractors is fired. Should the amount paid as damages to the contractor for breach of contract be capitalized in the cost of the building?
Thanks.
Dear Shard,
is it a cost directly attributable to bringing the building to its desired condition/location? I think not. It’s an expense. S.
Hi Sylvia, I would like to know that how would you treat the cost of moving the assets from one place to another and where would you allocate the cost of moving, to the actual asset moved or what?
Dear Nompilo,
you cannot capitalize asset relocation costs – please refer to IAS 16.20. S.
Hi Sylvia,
What about royalty payment to the supplier? Can we capitalized it as cost of PPE?
Hi Kalani,
interesting question. Is this royalty payment just one-off? Or, is it for the continuing use of the asset? If it’s one-off and you cannot really start using the asset, then yes, you can capitalize. But, if you need to pay the royalty for asset’s usage as it is used (continuously), then no, because it’s not the directly attributable cost to bringing the asset to its desired condition/location – instead, it is the cost of operating the asset. S.
Hi Silvia,
If I pay compensation equivalents to 3-years rental,to the existing tenant before I take possession of the premise that I bought, can I capitalise the compensation made? Thank you!
Dear EveSim,
if you really cannot acquire the premise without that compensation, then yes, it’s directly attributable cost and you can capitalize. S.
Thank you for your wonderful and exciting effort.
Problem – 1:
We have a CAPEX vendor for telecommunication equipment and vendor use a warehouse run by himself that cost they included with equipment price. Currently we have decided to cancel the contract and vendor asking for the warehouse rent as they were used the warehouse for our equipment only. Can we do the warehouse rent as a capex as some of the procured equipment still in WIP stage?
Problem -2:
We have changed our equipment vendor. When we cancel the contract we found some order is on progress then we cancel the order. Now vendor ask plenty for PO cancelation. Can we do the plenty cost capitalization with new vendor provided equipment cost? If not what would be the accounting?
Dear Sylvia, how to account for networking and telemetry system introduction?
Best regards,
Dear Silvia,
IAS 16 state that you should recognise a PPE if and only if
1) it is probable that future economic benefits will flow to the entity.
Asset is resource that the entity have control over.
In these scenario:-
Co. enter into a contract with external vendors to construct a machinery/plant which will be used in their production. However this machinery/plant will take a long period to complete. Can they capitalise the amount paid at each milestone reached by the supplier of completion as PPE?
Dear Andy,
it all depends on terms of a contract. Who controls a machinery in progress? Is that supplier or customer? Who bears the risks of ownership? E.g. if there’s an earthquake and machine is broken, who would bear the loss?
If you assess that the control is with supplier, then you should account only for prepayments made. S.
If a company is engaged in housing development, is land recorded as inventory or PPE. Also, can expenses such as valuation , infrastructure be added to the value of the land?
Hi Silvia,
My company is going to undertake some consultancy work to advise on and make on assessment whether the office can be redesigned to turn it into an “Agile working space”. This would involve putting partitions up, rearranging the office layout and purchasing new furniture. I’m sure these latter costs can be capitalised but can the consultancy work also be?
Thanks,
Shaq
Hi Silvia!
Great to be at this forum.
Ragrding Shaq queston above, if it is substantial amount, if Agile working space going to be utilised for more than 1 period, it will meet IAS16 requirement if it becomes part of office space fixtures/partitions. Independently it should not be considered as fixed asset.
Thanks Randesh!
Randesh, thanks for answering your question. In general, I agree, you can capitalize consultancy work. However, be careful, because if it’s something as “feasibility study” – or decision making on whether to do or not to do – that might not be directly attributable expense, but research. It all depends on what the legal requirements are, why the study was done, etc. S.
Thanks for your response, Silvia.
Dear Ms Silvia,
Thanks a lot for your support on IFRS learning and clearing issues.
I have one issue with our software – accounting package. For a long time the asset (which is classified under intangible assets) is kept at zero NRV. How I should deal with this balance in future? Can I re-classify it to PPE or offset the cost with the accumulated amortization or revalue it. Anyway the asset has no much value since the license in not compatible with the new operating systems.
Dear Pricilla,
if you think that the asset has not much value and will not be used for a long time because of incompatibility, then if it’s not material, don’t do anything with it.
However, if the asset’s value is material, then you should correct the error, because you apparently did not revise the asset’s useful life. You can read more about it here. S.
If we capitalized raw materials purchased for the purpose of testing a new machine. How should we treat this raw materials if we sold the Finished Goods which consumed this raw materials?
This explanation of IAS 16 is very useful, Request you to throw some light on period as mentioned in Para 16.6 b) of IAS16, Want to know if that refers to reporting period only?
Thanks in advance
Shivraj Chavan
Dear Sylvia,
parent company issued an invoice to the related party for the use of trademark. The amount of the invoice is measured in relation the the revenues that related party achieves during the year.
How to account for this transaction?
Thank you!
Hi Jane,
it’s an expense. You don’t capitalize it, as you paid just for the right to use the trademark, not purchasing the trademark itself. S.
Dear Silvia,
Appreciate your support in providing useful insights.
I have a question. Can we capitalize the advertising expenses which have been incurred for a launch of new product in a new company? At the initial stage high cost will be incurred to promote the brand for a new product. Please advise how to account for this particular situation…
Hi Diani,
advertising costs are specifically listed as prohibited to capitalize, so no, you can’t capitalize, but recognize as an expense in profit or loss. S.
Thanks a lot for your speedy response….
Dear Sylvia,
a company has works under construction stated at cost which includes cost of materials and direct labour. These costs however relate to property, plant and equipment in use (already depreciated). Should the company leave these costs as works under construction or treat them as subsequent costs? The Company believes these are works under construction since subsequent costs need a while to be ready for use.
Thank you.
Kind regards!
Hi Silvia.
Thank you for always being there!
This is my question.
A Company constructed a sugar mill, after completion, they put the asset to test run the asset and in this process, they produced sugar and by-product Molasses. Should the proceeds from selling the produce credited to the cost of the asset or the cost of producing and the proceeds together?
Dear Olatayo,
good question. The standard says that you should include the cost of testing LESS net proceeds from selling of items produced when testing. However, all testing must happen before the asset is brought to the conditions and location for its intended use (if it’s done when the asset has already been capable of operations, then all income is recognized in profit or loss).
Now, what happens if the cost of testing is less than the net sales proceeds of items produced? Well, this is unclear and there’s no right answer to that. In my opinion, it would be OK to recognize the excess of the net proceeds over cost of testing in profit or loss (that is, no deduction from the asset). I think that there are still discussions about it and there’s the proposal that in the future, you will NOT be able to deduct the net proceeds from the cost of testing, but recognize them in profit or loss. S.
hi Silvia, could you please help to understand following issue. should we capitalize licenses with useful life less than one year which was purchased last year and which was purchased next year again with new contract, so total useful life more than 1 year. should we consider this as one asset, while were purchased under different contracts.
Hi Mira, you can capitalize if you believe you will renew the licenses after 1 year (and you will have the right to do so), but you still need to amortize the full amount paid for 1 year in profit or loss. S.
Dear Silvia,
We have a Recycling project for which expenses are being incurred for Land preparation, Machinery Purchase , Factory Building etc. Currently the expenses are being parked in Capital WIP account. Once the project is completed the CWIP would move into each respective heads of Fixed assets, Factory Building, Machinery etc. The project costs will be incurred for another
We have a project manager who is exclusively for this recycling project. He is involved in coordination with different vendors, purchase of machinery, overall management of project till its completed.
Can we book the payroll cost of the project manager to the Recycling project Capital WIP? If Yes, how do we eventually allocate this cost for capitalization to different assets like factory building, Machinery etc. once the project is completed?
Hi I would like to know whether we can classify softwares as tangible assets/ PPE integral to the business
Sana, normally, software is an intangible asset under IAS 38, not PPE.
Thanks But what about software that is vital to the operating profits of the company such as software used for Branchless Banking
Sana, software is software – an intangible asset. You can amortize it over few years if you plan to use it that way, but it’s still an intangible.
Do you know why UBS categorises all of its software as PPE not intangibles?
Does it? IFRS categorizes most of its software as intangibles, but when the software is integral and inevitable to operate hardware (like operating system), then it is a part of PPE.
Yes. UBS is unique amongst banks in this respect. It’s curious. Perhaps a leftover from US GAAP, which treats software as a fixed asset and is still used by the other big Swiss bank. This makes a difference, by the way, as banks have their intangibles but not their PPE deducted from regulatory capital
Hi,
Car used for director, can it be capitalized as a asset as it does not derive any direct economic benefit. However ownership lies with company.
Please reply in context of conceptual Framework for financial reporting by IASB.
Thanks in advance 🙂
Regards
Vinod
Hi Vinod, I don’t think that a director’s car does not derive any economic benefit. It is a remuneration of the director and a director brings an economic benefits 🙂
hi
land purchased in 1990 but for the purpose of ownership land mutation charges are paid in current financial year.
what shall be the treatment? capitalize/expene off
What are “land mutation charges”? Are these some enhancing works on the land? If yes, then they shall be capitalized when performed. It’s a subsequent expenditure.
Hi Silvia,
I like to get some advice on the Pre-Operating costs. In a scenario where we have pre – final investment decision costs include for service fees, feasibility studies, salaries of staff, should such costs be capitalized into an asset and amortized only down the road or we should expense the costs even there is a positive final investment decision? Thank you so much.
Best Regards
Rachel
Thanks for the advise here very helpful. I have a question I think is a gray area. Making Improvements to a building should I capitalize the advertising cost to secure a project manager?
Purchase of Hard disk 1,2,3,4 Tb can be capitalised if they are replaced in old ones with lower storage.
Hi Silvia,
Thanks for the wonderful guidance!
Need your opinion on the followings:-
1. My Company is currently built a building together with the air conditioning and electrical installation etc and we already started a soft operation before our year end on 31 December. My question is, we have yet to receive the original tax invoice from our contractor, can we capitalised the building cost to our accounts according to the agreed contract sum and make accruals over the balance of progress claims and the retention sum?
Many2 thanks!
I would say yes, because you already have control over the asset and I hope that its cost is reliably measurable (i.e. estimate of cost can be made based on the contract).
Hi Silvia,
My company acquired a building but it was not in a usable state so we had to demolish and re-build it again in the inside to suit our office set up. however, by the end of the financial year 30.06.17 it was still under construction. Should we capitalize it in our books as at 30.06.17?
Should first insurance payment made on a motor vehicle after its acquisition be capitalised?
Expensed – please read the article above.
SHOULD WE CAPITALIZE OR EXPENSES IT IF OUR EXISTING OFFICE GOT ENHANCED BY SOUND PROOF.
I would say capitalize.
Hi Sylvia,
We got a similar case as Karen’s above, but the place for construction used to be empty. The security service there now is only to secure the construction, then it’s inevitable, isn’t it? For sure, the security service will continue after the construction completed, maybe with another security company cause the contract for the moment is signed for the construction period only. In this case, do you think we should capitalize the security expenses during the construction period?
Hi Silvia,
As you stated, companies define capitalization threshold to enable it to distinguish revenue and capital expenditure. It is appreciated that such threshold enable to apply recognition principle in IAS 16 and based on materiality to the entity. However, if such capitalization threshold revised in subsequent period, how, such change be incorporated? Will it constitute change in accounting policy and accordingly IAS 8 applies or since materiality is period specific; hence prior period expenditure be not revisited and only prospective expenditures be evaluated for recognition if it crosses revised threshold?
Hi Muhammad,
I would not say that the change in the threshold is a change in accounting policy, because the mechanics of accounting is the same. For me, it is a change in the accounting estimate (materiality based on reassessment) and it should be accounted for prospectively (no restatement of previous periods). Hope this helps!
S.
hai madam.
the company provides airport terminal services. if the company decides to expand its business operation to include warehousing for bulk items and the company wishes to acquire a loan specifically to construct the warehouse. warehouse is new asset, so it is PPE right? And why the company wishes to construct its own assets instead of acquiring them through an outright purchase or acquiring loans as a means to obtain the warehouse.
Hi Silvia,
My company bought a Crane machine and use it fully to construct building. Can we capitalize depreciation of the the Crane machine to Building?
Yes, you can 🙂
How do you handle airport ground storage costs for imported ppe. can they be capitalised.
Maximize OPEX
given our current position we try to maximize OPEX and minimize CAPEX for a new industrial project.
Therefore we’re investigating if it’s possible to put following in OPEX:
– external construction management (not the builders, but the external party coordinating the different third party builders/equipment suppliers)
– scaffolding needed for the building process
what’s your view on this as IAS 16 is not fully clear for me?
Thx Mathijs!
Hello Silvia,
I have an issue where my mangaer wants to capitalise warehousing costs of network PPE yet to be installed on telecoms base station. His view is that, he is incurring the cost as a result of building several base stations i.e if the company is not buidling base stations, no warehouse cost will be incurred. I have argued that these costs should be expensed as they are not directly attributable to bringing the assets to the location and condition intended for management. They are in effect storage costs. Could you please shed further light on this. I have searched all over the internet and cannot find anywhere warehousing costs are capitalised. Even IAS 2 prohibits capitalising storage costs except it’s required for a further production process.
Dear Temilade,
you are right and there’s not much more I can say about it. Your manager can equally argue that without building several base stations, a few of admin expenses would not have been incurred – but you can’t capitalize them either because they are not attributable to “bringing the asset to its location and condition”. The same applies for warehouse – storage: they might have been incremental (i.e. incurred only as a result of building the asset), but you can’t capitalize them because they are not directly attributable to bringing the asset to its condition and location (note: directly attributable cost do not necessarily need to be directly attributable to the asset itself). Hope this helps, S.
Can I ask at which point should you stop capitalising development expenditure under IAS 38? Is it the same as under construction of an asset under IAS 16 – ie, when the asset is available for use regardless of whether it is brought into use at a later date, or is it when the asset actually comes into use? I can’t seem to find any answer to this.
Hi Joseph,
Research and development are revenue expenditure, this is as they will enable you (or not) to develop an asset at a later stage.
On the other point you capitalise when the asset is “ready for use”, whether you use it or not is a different thing.
Hope that helps,
Hi Gabriel, thanks for responding, but I do not fully agree. You never capitalize research and expense it, that’s true, but the development is sometimes capitalized after meeting certain criteria, so it’s not always “revenue expenditure” as you named it. S.
Dear Joseph, when you start capitalizing the development expenditure, then you always must check whether 6 criteria for capitalization are met (please revise IAS 38). And, these 6 criteria are hard to be met and really, subsequent “not meeting” is very rare. Then, when the asset comes into use or is available for use, it is assumed that the development has been completed, isn’t it? If further development is going on, then the capitalization criteria are the same as before – check 6 criteria in IAS 38. S.
Hi..i want to ask about this question, should be classified as PPE or not?
Expenditure paid for a major overhaul on a truck.
Hi Silvia Please i would like to know if road construction and land scapping can be capitalized? If yes can they be treated as land or as building? Thank you
Hi Chika, in general, both items can be capitalized. Road is a separate asset, but landscaping depends. In most cases, adjustments on the land are added to the cost of land, but they are depreciated separately (as land is not depreciated at all). S.
Hi Miss Silvia, I would like to ask if the books at the library is considered as a PPE of the school? Thanks 🙂
Dear Joshua, if you read this article, you should know the answer because I replied there. S.
sorry. but “sometimes it’s appropriate to aggregate individually insignificant items and to apply the criteria to the aggregate value. And sometimes, it’s not.” is not a useful answer. Might as well write “maybe, then again maybe not”.
Yes, it is useful answer. It wants to say that you should apply your judgement and there is no one single correct answer, because every situation is different. And I do not agree that “sometimes” can be replaced with “maybe”. “Sometimes” says “assess according to circumstances”, while “maybe” says “I don’t know”. I am sending you all the love and peace that is in my heart! 🙂 S.
How would we treat preoperative expenses that are general in nature e.g. salary of security staff, canteen expenses etc relating to the period when the project has NOT commenced commercial production? In such a situation, the company would not prepare any P&L Account and hence, such expenses cannot be w/o to this account.
These expenses cannot be capitalized as I mentioned a few times in this post and in the comments. May I ask a question – if the company is incorporated, why would it NOT prepare any P/L??? S.
Hi Silvia can you please assist in deciding whether professional supervision costs (i.e. payments made to an Engineer) incurred during construction of a room for collection of Company’s waste for disposal to a Municipal designated areas can be capitalized. I will appreciate quoting the appropriate IFRS or IAS
Hi, Can I know if one department of a company selling a machine to another department and the new department capitalise the machine with total amount including the profit margin charged by the first department.
Hi Udayakumar, I guess you are talking about 2 different companies within the same group. Yes, the buyer capitalizes the full cost including the profit margin, but if you consolidate, then you must remove the profit margin from group accounts on consolidation. If this is some transfer within the company, then it’s the same issue. S.
Can You please mention relevant IFRS standard applicable for this.
Hi Silvia,
can we capitalize penalty & fines as PPE. To be more specific, i recently found a problem. A machinery was imported and due to compliance issue custom authority charged a fine on the disposal of the same.And later the fine was capitalized. Did IFRS anywhere specifically refer capitalized or not to capitalized “”fines & penalties”?
Hi Silvia,
Should we capitalised or expense the cost incurred to refurbish large fuel storage tanks used to store fuel( various kind of) used for electricity generation? Basically for ‘sand blasting & painting of inner and outer surfaces’ , ‘welding works’ etc.
Hi Anoma,
it requires judgement as to whether it is significant cost, how often you need to do it, etc. If you plan to do this once in 3-5 years, then you should capitalize it and depreciate over those 3-5 years. S.
Hi Silvia,
Company A rent a store for 5 years, in the first year, company A did a leasehold improvement to the store. So company A record Leasehold Improvement as an asset and depreciate it with useful life of 5 years. At the end of year 2, company A stop the rent and sell all the fixed asset to company B. Can the leasehold improvement also be sold to company B according to IFRS? If yes, please tell me in which part that IFRS mention about that. Thanks!
Hi Lisa,
well, IFRS do not speak about what you can/cannot sell. If someone buys the leasehold improvement on something that he/she does not own, then it’s strange, but OK. Normally, when you terminate the lease earlier and there’s still some leasehold property to depreciate, you should think either about accelerated depreciation or impairment loss. S.
HI Silvia,
A new company created a management team to oversee the various construction projects necessary in the operation of a new cement plant. Are all pre-operating expenses incurred by the team such as food, travel, trainings, management fees be capitalized or be expensed outright. Thank you
A Power Utility company has drilled two water wells to pump water to its Power plants and Admin Bldg.
Can we capitalize these Water Wells? If yes, at what useful life?
Thank you in advance.
Hi, yes, of course, you can capitalize wells. And, it’s up to you to estimate their useful life. S.
HI Silvia,
Thanks for sharing your knowledge with us.
We have recently completed our office building. We have used metal emboss logo of the company at the gate and nameplate of the individual department at each floor and ground floor of the building. Could you please advice if we should capitalise or expense the metal logo and the name plates.
Thank you.
Hi Nalini,
yes, of course, you can capitalize these logos, as they are clearly used in your business for admin purposes and their useful life is longer than 1 year.
Thank you. Could you please let me know under what head I can keep them? Building or any other head.
Thank you
Hi Silvia,
Can you advise if 1)cost of land fill and clearing for construction and 2) temporary fences around construction side should be capitalised to cost of land or building? Many thanks
Hi Silvia
How do you treat Plates and Spoons for a restuarant?
You can treat them as a set – one PPE, especially if you use them for more than 1 year. S.
Hi Silvia
We have purchased a property and the transfer has not yet taken place. But the process requires that we pay the full purchase amount to the attorneys account.
How should I treat this payment in my books.
How would you treat ,Fire Protection clothing , which is purchased to comply with risk policy .
hi silvia
i have dillema of treatment of rental inventory( Equipment) as retail inventory i.e Current asset IAS 2 or Fixed asset IAS 16
since by nature client purchase those equipment (Scaffolds) basically for hiring purposes no to sell them completely. but gently speaking i can not ignore the fact that they qualify as fixed asset since they will be used for more that a year, Second they bring future economic
Hi Silvia,
How about software purchase needed to run the PPE. Let say a refrigeration equipment was purchase as the PPE of the Company however the Company also separately purchase a software for the equipment since it is needed to run the refrigeration equipment as this will control and program the temperature of the equipment. Will the software recognize as PPE or intangibles? kindly guide us on the proper recognition of the software.thank you.
Hi Silva,
if the company had $500 capitalization threshold and was bought by a new company with $ 10,000 capitalization threshold. My questions are:
1. Based on IFRS what will be the accounting treatment for the assets previously booked below the new capitalization threshold?
2. Does change in capitalization threshold fall under the change in accounting policy- IAS 8?
Hope to hear from you soon..
HI Silvia, could you please advise should capitalization of licenses depend on if full ownership is transferred to buyer? can we capitalize as intangible assets licenses that gives us right to use it for several years?
Hi Silvia, may you please assist we have bought the following items for our bathrooms in our offices
Paper towel dispensers,air freshner dispensers, sanitary bins and toilet paper holders.Should we classify them as capex or opex?
Good day Silvia,
I appreciate all your efforts and I really need your assistance on the classification of sanitary/hygien items bought for the office.We had a meeting with our auditors and i am of the view that dispensers, bins and toilet paper holders in the bathrooms should be expensed as opposed to their advice of capitalising those items.May you please assist.I have read your article on “Should we capitalize small items acquired in large amounts?”, but I am still confused.Each item cost from R500 to R3000 but in total they purchase price was R120 000.
Hi Kefentse,
this is very judgmental. If the aggregate amount of R120 000 is material for your company, then it is necessary and appropriate to capitalize. S.
Much appreciated.Thank you Silvia.
Hi,
I have a foreign Currency Loan for acquiring Fixed Asset.
Due to the exchange rate fluctuation i have foreign exchange loss.
Please confirm if the foreign exchange loss could be capitalized or not.
Hi Smita,
if you used that loan to purchase the asset, then no, because the asset itself is non-monetary and must be kept at historical cost. If you used that loan to finance the construction of the asset, then if you meet the conditions of IAS 23, you can capitalize the part of that loss within borrowing costs, to the extent it is a foreign exchange related to interest cost – more in this podcast. S.
Dear, Silvia, My Name is Deme Gebreyesus. i live in Ethiopia,East Africa. I am accountant at Horizon Plantation PLC. The company running agricultural business. The company using GAAP;but now,the company will have make its report as per IFRS.
So,
1. should i capitalize the cost incurred for Up-rooting coffee and infilling costs too,Please??
2. the company planting coffee and accumulating the costs incurred to young coffee till four years. After four years the young coffee begin bearing first coffee fruit. Then, the current practice of the the company will have capitalized the accumulated cost and treat as PPE. My main question is some times,some young coffee are died before four years and before bearing the first coffee fruit. So, How could i recognize the accumulated cost incurred till the coffee uprooted??? The current practice is no action taken rather than infilling. impairment cause is new to entity.
Thank you so much.
Warm greetings
Deme
tell:251937587044
Ethiopia East africa
Hello Madam,
I work for hospitality industry, Marriott Hotels. Recently we have purchased a water pump for our swimming pool as the old one completed its life. Should i capitalize it or not?
I think so 🙂
Hi Silvia,
I’m hoping you can help me.
We are a franchising company. We enter into property leases, construct the fit-out and hand over the site on completion to the franchisee to operate under a licence deed. The title of equipment is handed to the franchisee however the ownership of the leasehold improvement remain with us.
We currently expense the property lease payments and all construction costs. I’d appreciate your thoughts around the possibility of capitalising rental payments along with construction costs pre opening? If this is possible, what would be the accounting treatments pre and post handover.
Thank you,
Laila
Hi Laila, no, I am not in favor of capitalizing any rental expenditures – please see this Q&A session why (it relates to the land, but it can be applied to your situation, too). Also, you can capitalize construction costs if they meet the definition of an asset.
Hi Silvia.I wanted to ask why do we capitalize motor vehicles.I mean what are the economic benefits that will flow into the entity by acquiring motor vehicles. Why do we capitalize them and include them in PPE?
Hello,
I hope you can help me!!
we have purchased new equipments and management has put in a lot of time in making the premises ready to install the equipments. Can we capitalize the management salary?
Here my question is Park Ltd. is setting up a new refinery outside the city limits. In order to facilitate the construction of the refinery and its operations, Park Ltd. is required to incur expenditure on the construction/development of railway siding, road and bridge. Though Park Ltd. incurs (or contributes to) the expenditure on the construction/development, it will not have ownership rights on these items and they are also available for use to other entities and the public at large. Whether Park Ltd. can capitalise expenditure incurred on these items as property, plant and equipment (PPE)?
Same question. As per IAS 16, the road is necessary for production/supply and will have future benefits for Park Ltd., and cost of works is known. So on face of it should be capitalised. Only issue is lack of control or for e.g. if impairment assessment was to be done, how would you find out value in use specifically for the road? The road/bridge seemingly can’t be capitalised as stand alone asset, and you can’t club it with cost of the manufacturing plant or refinery, because the road/bridge cost by itself may not be deemed as necessary for the refinery to work (or would it be?)
If we are building a warehouse in a rented land (for 99 year) the land rent which we are paying monthly, Can we capitalist this rent until the work completion of building.If it so what is the requirement.
Hi Rajitha, I think this Q&A session gives you the answer. S.
Thanks. Pls what is difference between using PPE for rentals under IAS 16 and Using the same term assets to earn rent under IAS 40. Thank you
Can you capitalize a technical study that costs $5k?
Security Service before new plant establish will be capitalized or not ? why
How do we treat costs related to the installation of an ATM such as the cost of constructing the ATM house, AC in the ATM house, the door to the ATM house, e.t.c
Dear Silvia
Does the assets dismantling cost form a part of disposal cost, and should it be considered in calculating the profit/ loss on disposal?
Hi Anoma,
it depends. In some cases, you need to estimate the amount of dismantling costs and capitalize it to the cost of PPE.
Hi Silvia,
Thanks for your interesting issues which help us a lot every time. My question is can we treat a future crop costs as an asset in when we incurred costs and reverse up on harvesting time as per I AS 41 Agriculture.
Regards,
Hi Solvia, Hope you can help me. Our Client (A Ltd Company) purchased a house from the shareholder at market value. The house is intended to be used from the UBO of the Company for his personal use but in the future maybe is going to be rented. Can you assist on the classification?
Hi Silvia,
I have a question. I am Company manufacturing Bikes. During initial stage, I capitalise bikes used for Testing purpose and having life of 3yrs ( Company policy). After completion of 1 year Management wants to consider that Bike as a regular vehicle ( Lief 5 years – company policy ). Now question is How do I account the same.
2nd question I can not run the bike on road without registration ( Govt rule ) as a normal bike, But during Testing period it runs within the factory and does not require a registration. The registration charges incurred is capital or revenue in nature ? Asset is put to use or ready to use when i declared it as Test vehicle. But when I change the classification ( Test vehicle to Normal vehicle ) it is ready to use only when registration is completed. Please give your view.
Thank you for clarifying the capitalization of PPE.
I have a very specific question. I am auditing a company which deals in Serviced offices. They are launching a new location. All costs from during the setup until the property is in operation is carried as pre-opening cost. Once the new property starts operation, they will capitalize the rent expense of the preopening period as leasehold improvement.
I feel they should expense it, but they dont. This has happened at every new location they have launched over the years. It is big group. My firm has not raised an objection in the past audits. Could I get a reference to the IAS where it allows rent expense to be capitalized. And what is the rationale behind capitalizing it? Is it because the Company earns from renting out serviced offices, so it will gain future benefits from the property over the life of the property. And without renting the property they would not be any future benefit.
Thanks. I really appreciate all your efforts.
Hi Mubashir, I think this can help. It is the similar issue. S.
Hi Silvia,
I have a query in regard of capitalization. Actually we are looking for sale of company and there is no production. Our project or engineer department continue to working on installation and other work.
1. in this case can we capitalized the assets?
2. in that situation can we capitalized the cost of operation (e.g. Salary of project department.
Please revert.
Hi Vikram,
in general, if you are creating new assets by the installation/other work then yes, you can capitalize. S.
Dear Silvia,
i am a student of the Madina Institute of Science and Technology in Ghana, specializing in accounting.
I have a question of which i am to give a presentation on and it says:
“Roper Corporation Purchased 100 storage boxes for the office. The boxes cost $15 each and should last at least ten years. Should the cost be capitalized or not? Argue against
Thank you and i would very much grateful for your assistance.
Hi Silvia,
First of all, thanks for all the information you shared. I have a questions around IFRS16, the answer of which I could not find anywhere.
Let’s imagine a company wants to sign a lease agreement for a new plant (including the plot and the building). Nevertheless, the plant is not yet built (it will be a built-to-suit). The design will be done mostly by the lessee. To do so, the lessee hires a Project Manager (internally), who will be focused 100% in the design of the facility and, when the construction works start, he/she will supervise them to ensure the quality of the building.
If the PPE was owned (plot and plant) I understand that the Project Manager costs could be capitalized together with the asset but, in case of a lease, where the lessee will actually not own any asset, could the lessee capitalize the project manager costs? (the work would be exactly the same in both cases).
It is important to highlight that the lessee will own the equipment that will go into this plant.
Thank you very much for all your comments and support.
Kind regards,
Olga
How is this a lease for the plot of land and the building when the building has not been constructed? It appears that the lease is just for the land and the building costs will be capitalized separately?
Hi ,
wanted to check is building a football pitch considered as Opex or Capex ?
As soon as you are planning to use it for more than one year in order to provide some services, then it’s capex.
Suppose I’m constructing a PPE which is cuurently is used as of now for producing trial run production. And if satisfied with the outcome , it will be further used and an intermediary good for my final product . and I’m incurring few expenses such as Electricity, Watchman, etc. As this is necessary to bring my machine to present lolcation and condition I can Capitalise it
My question here is uptil what stage i can capitalise this expense til the trail run stage or till the FG stage?
Hi Silva
Company A agreed to reimburse all EPA cost to Company B for environmental protection assets (EPA) required by law for production. and so does the transaction happened.
But once the equipment installed in Company B, how does Company B treat this Asset in book ?
Zero value assets ? or should be Misc income ?
Thanks
Hi Vinnie, all similar situations must be assessed within the context of the agreement between the parties. Here, I don’t see the broader terms, just one piece of information. Why did A agree to reimburse B? Because they have some other agreement in place? Or was it the act of altruism? Maybe this article will shed some light.
Hi Sylvia,
For a new set up warehouse, new light holes and light fitting s installed eg. 16 light holes at a cost of 8000 dollars, can the light fixtures be capitalised? For example for the same new fire alarm with hosereel setup, do we capitalise this fire alarm system?
Thank you.
Hi Silvia, I have a question on capitalizing leasehold improvements. Can renovation works like electricity instalments, new toilet, road works, painting and renovating the canteen also be capitalized if it adapts the office/factory better to the company’s needs?
Hi, My company has constructed boat in China, so time to time my managers used to travel in Shipyard in china to get an update on boat construction & we paid fee to designer to design those customized boat, so should i capitalize all expense it off. I have booked all cost in CWIP under one project name. Now it is time to capitalize since boat is delivered to us.
Hi Silviya,
Thank you for the lovely article. I just want to check if we hire a consultant to advice on an expansion plan of a building, can we capitalize that cost.
It depends on what the consultant performs. In general, if he does sort of research/feasibility of the project, then no. If this is some engineering work, then yes.
Hi Silvia,
Should the costs of electronic control door access system be capitalized in both freehold and leasehold buildings? The buildings neither the lease are new. Thank you.
Hi Cher, yes, you can capitalize “leasehold improvement” (e.g. electronic control door) as a separate item of PPE and depreciate it over shorter of its useful life or lease term.
Hi Silvia
How do you treat consultation fees charged for advising on best ways of increasing production. Do you capitalise or expense .The amount is usd$240 000.00 and production is expected to increase after the study.
Regards
Well no, that’s is a feasibility study, similar to research. The reason is that this particular study is NOT directly attributable to the acquisition of that specific asset.
Hi Silvia
What should be the minimum threshold amount for capitalizing an asset.
Hi Naser, IAS 16 does not give you the precise value and it really depends on your materiality (significant amount). This is individual in each company.
Hi we are an digital company. We will soon be re-branding. Can we capitalize the labour hours for all those working on re-branding especially the ones working on the app. IAS 38 mentions internally created brands cannot be capitalised. However, we are changing our brand name to align it with our new parent entity.
No, Niki, you cannot capitalize these costs.
Hi , we are a manufacturing company , we are planning to enhancing some capability on one of our process , which require small material but heavy labor hours (say 20% Material & 80% Labor hours cost internally) can we capitalize this cost in our books as par of our PPE
Are these costs attributable to the specific piece of PPE?
Hi, thanks so much for this useful article! In relation to small items bought in large amounts e.g. chairs, laptops, should this go on the FAR as 1 asset, or individually listed and therefore individually depreciated?
Also, does it matter if they were not purchased on the same day? e.g. I bought 10 laptops in January (total below threshold), and another 10 in March (total below threshold), and another 10 in June, but the sum of those 3 purchases were above threshold and material to the company.
Thank you!!
Hi Silvia, Your work is well appreciated. As for the IFRSbox forum, It is well thought idea.
Hello Silvia thanks so much for this useful information. I have one question related to FDA Costs.
If we capex these, they should be written of over the useful life of our products. What is the definition of a useful life of a product . If you have 1000 products with completely different life cycle how would you handle this. can we use an average rate for all the products to amortize these costs? Thank you for your feedback. Kr Liliane
If the company owns a property and used it as hotel and beach resorts, in the property, they build a minibars and healthclub in this property and they earned extra income from these part of the property as in selling food and beverage and etc. My question is can I capitalized the renovation cost? Based on my understanding, we should capitalized the expenses, but I the information from the website (under the element of ancillary service ) I provide below mentioned that we should not capitalized the expenses as it is not necessary to bring the the item to the location and condition. for example, income may be earned through using a building site as a car park until construction starts.
Hi Silvia,
In my case there is an Heavy machinery(Wheel Excavator) which was received for the organization in january 2020 but i got the road worthiness certificate(Which is a legal requirement) on may 2020 when should i capitalize the machinery on january or may 2020?
Well, apparently you can capitalize it at the moment when you acquire it, but you cannot start depreciating the asset in January, because it is available for use only in May 2020.
Hi Silvia,
I have one question. This is related to a non-refundable deposit paid for fit-out fees.
This fit-out fees is to be used by the owner when we move out from property for the utility fees.
My question is when should I expense off this fit-out fees?
Is it now or the year we move out in the future?
Kindly advice.
Thanks.
Plus, what accounting standard should I refer to for this situation?
Thanks!
Hi Good day to you Silvia,
I need your opinion on development car and benchmark car. My company is an automotive company. During the development period, we developed a car for testing, should this car register as PPE? We also bought a competitor car for bench marking purpose where we do the testing, should this car also register as PPE?
Yes, both are PPE, because they both meet the definition of PPE. The question is whether you will use them for longer than one year.
I have a question and hope that someone can answer me? We bought a new truck trailer (PPE), but before we could use it, we had to repair and respray the whole trailer in order for it to be roadworthy etc. Must this repair cost be expensed to P/L or must this be capitalized as part of the acquisition cost of the trailer?
I guess that you had to repaid the car to bring it to the intended location and state, so yes, capitalize.
Hi, I have one question.
We bought a vehicle and one of the cost that was included on the Invoice as a sepearate line item was maintenance plan for 5 years. Do we need to capitalise the cost of maintenance plan with the vehicle? and which standard paragraph can it be applied in relation to the answer?
No. Maintenance is an ongoing cost, not directly attributable to the asset acquisition itself, but to maintaining the asset in its operating condition.
Hi Silvia,
We paid for a permit to the government in order to be allowed to construct a building. Can we capitalize the cost of the permit?
Also, for the same building, we had to incur expenses to remove an old structure from the land to clear the space. Can this cost be capitalized?
Thanks for your reply.
Hi Silvia,
I have a question here. There is AUC project on hold from long time and guessing this project is treated as dead. Now how do we treat this in our accounting books? like can we keep this in AUC? or where should be move this?Project related materials are still available and can be reusable for any other projects. Please advise
Hi Maddy, well, if something can be reused, I recommend reclassification of that part to inventories and then performing “lower of NRV and cost” test in order not to overstate the inventories. For the remaining part, just perform impairment test in line with IAS 36 if you think there is a slight chance of going forward. If the management decides it is done for good, then derecognize it (with loss in profit or loss).
Dear Silvia
Can you capitalize the occupational rent when you are in the process of purchasing the office building for staff prior to transfer taking place from the deeds office.
No, because it does not relate to acquisition of PPE – it relates to having a place for your employees in that specific period.
Or can you structure a deal to purchase office building in such a way that the occupational rent gets included to be part of the purchase price of the building e.g. if purchase price of the building is R20million and occupational rent for 3 months is going to be R1,2million. can you structure the purchase price to be R21.2m.
Hi Silvia – can a company capitalize assets which are being bought as a contingency due to Covid-19? See detailed example below …
A company operates 2 x factories and both use different equipment to manufacture different finished goods. Due to Covid-19 and to mitigate the risk of either factory having to close due to a Covid outbreak amongst the workforce, the company decides to purchases duplicate assets to be stored at the other location so that production would be able to continue (ie Factory A machinery stored at Factory B, and Factory B machinery stored at Factory A).
In this scenario, could the company capitalise these duplicate assets – whilst they would not immediately go into use, management consider that it is probable that they will be used at some point over the next 12 months.
Any thoughts appreciated
Yes, in my opinion, you can capitalize back-up assets even if they are not used in the business for the purpose other than serving as a back-up. I wrote more about it here. S.
Hi Silvia, please can you assist me with 2 questions: 1) lease improvements that are made by the lessee but paid for by the lessor, do they become part of your IFRS16 right of use asset value, for example carpeting in the office space? 2) a data set is purchased to market your product to individuals on the list. You have full use of the list which is valued at 100,000, but you are paying it off in installments over 3 years. Can you classify this as an intangible asset, and do you recognize the full right of use value immediately, or as you pay for it over the 3 years?
Hi Silvia,
My employer’s case is quite exceptional. Would it be possible to capitalise improvements for a leasehold if the plan is to sublet it?
Thank you, I find your website very helpful
Hi Estrella, yes, as soon as improvements meet the definition of PPE themselves. S.