What are directly attributable costs?
When you acquire a long-term asset, you can include directly attributable costs to the initial measurement of its cost.
Although IFRS define directly attributable expenses quite clearly and provide a few examples, there are many different items we are not sure about.
In this article, I decided to look at directly attributable expenses with a magnifier and to give you some guidance for your future use.
I’d like to focus on acquisition of tangible assets under IAS 16 Property, Plant and Equipment, but the same principles apply for intangibles and other assets, too.
What do the rules say?
IAS 16 says that we can capitalize any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management (IAS 16.16(b)).
In the paragraph 17 of IAS 16 there are the examples of what expenses are considered to be directly attributable and therefore, can be capitalized (or included in the cost of an asset):
- Costs of employee benefits (IAS 19 Employee benefits) arising directly from the construction or the acquisition of the item of PPE,
- Costs of site preparation,
- Initial delivery and handling costs,
- Installation and assembly costs,
- Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition, and
- Professional fees.
As opposed to that, the paragraph 19 of IAS 16 lists examples of costs that are not costs of an item of PPE and therefore, cannot be capitalized:
- Costs of opening a new facility
- Costs of introducing a new product or service
- Costs of conducting a business in a new location or with a new class of customer, and
- Administration and other general overhead costs.
On top of that, IAS 16 clarifies in the paragraph 20 that costs of operation below full capacity, initial operating losses and relocating or reorganizing entity’s operations are not to be capitalized.
Clear enough.
Yet in practice, there are many items that require our careful judgment and we are not sure whether to include them in the cost of an asset or not. These doubts arise especially when your company constructs a big asset, such as a plant or a mine.
Let’s break it down.
Cost of employee benefits
As written above, you can capitalize only those employee benefits that arise from the construction or the acquisition of the asset.
Here, two principal questions arise:
- Which employee categories arise from the construction or the acquisition of the asset?
The answer is no admin, no general functions, no research activities, no marketing & advertising, no training employees.
It means that:
- You can capitalize the employee benefits provided to site workers, in-house architects and surveyors or production supervisors. To some extent, you can also capitalize quality controls and testing (if these activities are inevitable in order to put an asset into use).
- You cannot capitalize any portion of employees benefits paid to general managers, accountants taking care solely about ship’s accounting, etc.
- Which expenses related to these employees can be capitalized?
The answer is all employee benefits under IAS 19 and that is:
- Short-term employee benefits (salaries, wages, paid vacation…)
- Post-employment benefits
- Other long-term benefits and
- Termination benefits.
The following types of expenses are NOT employee benefits under IAS 19 and therefore, they shall be considered separately:
- Travel expenses of your employees,
- Training of your employees,
How should you include the expenses for the employee benefits into the cost of your asset?
The answer is based on some reasonable allocation method.
For example, you build a ship. Based on timesheet reports you find out that in 20X1 John worked:
- 1 500 hours on the ship construction,
- 300 hours on other projects or work, and
- he took 100 hours of paid vacation.
Your company incurred the following expenses for employee benefits in relation to John’s work:
- Salary: CU 18 000
- Compensation for paid vacation (in line with law): CU 1 000
- Expense for contribution into a pension fund (defined contribution plan): CU 2 000
How much of these benefits can you include into a cost of a ship?
You can include all of these expenses for employee benefits allocated on a reasonable basis.
In this case, we can allocate it based on time spent on a ship construction (1 500 hours) and total time worked (1 500+300=1 800 hours).
Here, we do not take the paid vacation time into account for allocation purposes. It means that a compensation for paid vacation will be allocated to the cost of a ship. The reason is that a company is obliged to provide this vacation to its employees and a vacation is simply another cost of worked hours.
The calculation:
- Allocation of salary: CU 18 000*1 500/1 800 = CU 15 000
- Compensation for paid vacation: CU 1 000*1 500/1 800 = CU 833
- Contribution to a pension fund: CU 2 000*1 500/ 1 800 = CU 1 667
- TOTAL: CU 17 500
Note: you include only current year’s expenses; or the expenses incurred during ship’s construction.
Cost of relocating the asset to the new location
Let’s say you construct a new plant and you decided to relocate some machines from an older plant to the new premises. As machines are quite heavy, you paid CU 1 000 to relocate them.
Can you capitalize these expenses to the cost of a machine?
In short, no – this is a relocation cost and IAS 16 specifically says it cannot be capitalized, but expensed as incurred.
Insurance of an asset
Insurance premiums paid to the insurance companies cannot be capitalized, but expensed in profit or loss in line with an insurance policy terms.
The reason is that these costs are not inevitable to bring the assets to the condition and location to operate as desired by the management.
In fact, these costs are incurred to protect an asset against some risks during some period and therefore, it would not be correct to take these costs to the cost of an asset and put them in profit or loss via depreciation over asset’s useful life.
Some time ago, one CFO raised a point to this matter. He said:
“We take a loan to finance the acquisition of a plant, but our bank insists on insurance policy for this plant. Otherwise we won’t get a loan. Without an insurance policy we cannot acquire a plant, therefore I think the insurance cost can be capitalized as it’s inevitable”.
Hmmm, a good argument, but the truth is that the CFO needed an insurance policy to get a loan and not to acquire an asset. In other words, that company could have acquired a plant without a loan, with a cash payment and in such a case, no insurance policy would be necessary.
Operating lease expenses for land
You can incur some lease expenses during construction of your asset. For example, you can pay rentals for the land you build your plant on.
Can you capitalize these expenses?
This question is quite controversial and really, an answer depends on how well you can justify your own view in front of your auditors.
I’d like to give you arguments for YES and NO here:
YES, capitalize:
Operating lease charges can be considered directly attributable costs and included into cost of an item of PPE, if these lease costs are necessary to bring the asset to the desired condition and location. Therefore, rentals paid for land under operating lease on which you build a building can be capitalized into a cost of a building during a construction stage.
NO, don’t capitalize:
I am more in favor of no capitalization, but recognizing these expenses in profit or loss.
The reason is that it produces quite inconsistent impact on profit or loss. If you include just rentals during the construction period into the cost of PPE and you expense the subsequent rentals as they incur, then the first rentals will be expensed via depreciation over asset’s useful life, and the remaining rentals will be expensed immediately. This means that matching principle is shattered.
Also, I always see a land as a separate asset, because its useful life is different from the life of a building on it. The rental payments relate to the “acquisition of a land”, not to a building itself.
Anyway, this is one of the reasons why I like the new IFRS 16 Leases. Under the new standard, you will have to recognize a right-to-use asset instead of dealing with operating lease payments and therefore, this dilemma will not exist anymore.
Travel expenditures
Can you capitalize travel expenses (hotel, transport) when a trip happened to acquire an item of PPE?
Or, can you capitalize travel expenses of a consultant who came to your site to perform professional work related to PPE?
Unless you have a great argumentation ready for your auditor, then no, you should not do it.
The reason is that these expenses relate more to personal services than to bring an asset to the desired location and condition. At least, that’s what I experienced in the practice.
However, this area is quite unclear and you might be successful to provide good arguments to your auditor for capitalizing.
If you hire a consultant and you agree to pay travel cost for him, you should try to negotiate the higher price for his services with inclusion of all his expenses (to hide his travel expenses into the cost of service) – just to be on a safe side.
Other expenses you CAN capitalize
- Fees for environmental permits, certifications whether an asset works properly
- Expenses for necessary repairs during the construction phase
- Expenses for removing hurdles on the site (e.g. demolition of old building)
Do not capitalize:
- Training expenses (never!)
- Expenses for searching an appropriate site, evaluation of a site, feasibility study
- Advertising and marketing expenses
- Expenses to hire employees
OK, guys, I’ve just tried to bring more light to the most common types of expenses and feel free to ask in the comments if you need help with something else. I might update this article and add some more explanations!
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Hello,
Thank you for your lesson
I would like you to give us some knowledge about Discontinued operation.
Thanks
Mam, Thank you very much. Hello! Mam, Are you fine? I would ask some question. What is the 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.
NRV = Fair value less cost to sell. The difference is cost to sell – simply and quickly speaking.
Thanks mam, I understand that
Thanks for the clarity.
I would like you to give us some detail knowledge about consolidation of account .
Thanks & Regards,
Shikha Gupta
Great article, is there also some article on ifrs5?
Thanks for simplifying IAS16
Never seen such detailed but straight to the point write up on Directly Attributable Costs. God bless you.
I was wondering whether under IFRS 16, the amortization charge on right of use of land during construction can be capitalized as part of the building costs.
Similarly as with rental expense described above 😉
Really very useful article
Informative article which can easily be understood.
Hi Sylvia,
I really enjoyed your article. This article will go a long way in aiding me.
Thank you
Thank you, glad to help 🙂
Thanks for giving such a valuable article on “Directly Attributable Costs”. Long a go I heard that first insurance should be capitalized. Please clarity this
Hi Syed,
see, there are different approaches to this and maybe you would be able to justify it – it also depends on your own legislation and your auditors. IFRS standards do NOT say anything about capitalizing insurance. S.
why feasibility study cost should not be capitalised bcz it is critical for the selection of and site to operate there on?or to build up?
Zeeshan, the reason is that it is considered “research activity” and research activities cannot be capitalized, in most cases.
Can we capitalize the LC charges incurred on a loan which is taken to finance a asset?
Dear Rasan, what are LC charges? Anyway, if it’s a qualifying asset under IAS 23, then you can capitalize borrowing cost and any charges on loans (including the initial fees) should be treated using effective interest method, therefore are capitalized as an interest cost.
Hi Silvia,
can we capitalyse costs for or converting the use of an asset from one to another use? Like changing the caffeteria to offices?
Thanks
Yes 🙂
WONDERFUL EFFORT BY YOU TO GIVE IDEAS ABOUT CAPITALIZATION OF COST REGARDING ACQUIRING ASSETS.WAITING FOR IAS 15
Dear Noman, IAS 15 does not apply anymore. I wrote several articles about IFRS 15, for example here and here. S.
What is the adavantage of capitalizing travel expenses in an account, especially Tax account? Thanks…
Ikem, it depends on the situation of a particular company. E.g. some company might operate at loss and in this case, they try to capitalize as much as possible (not to increase loss and postpone the expenses to the future periods when they have profits). S.
Appreciate the examples used to simplified the topic.
Wonderfully written Silvia….Thank you
Thanks Silvia- this article has cleared doubts i had and a bit confusion. Thanks. Rich
Thanks for the examples. Are you able to capitalise the Buyer Agent Fees, ie the cost of paying an Agent to help you purchase a new Building?
Yes.
Hi Silvia,
i am a bit confused here. How can we capitalise the buyer agent fees as it is not a directly attributable cost to bring the asset to the location and condition necessary. This instance the company needed an agent to get the building. In other words, that company could have acquired a building without an agent, and in such a case buyer’s agent fee would not have been necessary. It is the same thing that you mentioned in the article regarding the insurance to get a loan(CFO case).
Please clarify.
Can we capitalize subsequent legal fees costs or claims for an arbitration process directly attributable to a construction or building that is capable of operating in the manner intended by management?
Great lesson that is to the point! Can i also ask, for instances when a property is undergoing the construction stage, can the loan interest incurred prior to completion be capitalised? This refers to properties acquired under the progress billing method in my country. Thanks!
Hey Silvia,
Could you please tell me if we can capitalise the hotel cost of the consultant who has come to develop a software. Can we classify this expense as directly attributable to the cost of the asset?
Nalini, please look above to the article, I think I explained this issue. S.
Hi Silvia, thank you for your clear and very complete summary. I however still have a question about a specific issue.
What I have in mind is a school considering a major reconstruction and extension of its self-owned building. During the course of the work, all teaching activities will need to be relocated in on or several rented buildings.
Could we imagine the possibility of capitalising rental costs during the work period, as directly attributable costs ? (it is necessary to completely empty the building to perform its transformation) I guess this is a rather aggressive approach 😉
Michel, I think you answered the question yourself 🙂 You cannot capitalize these rental costs because you incur them to continue your business (generate revenues) and NOT to complete the reconstruction of the building.
We have a couple of engineers directing and coordinating the building of a new facility. Are the salaries considered as general overhead or van they be capitalized under IFRS (IAS16)
Hi Frank,
they can be capitalized – well, as apportioned on some reasonable basis, because they are not general admin overheads. You would not incur these costs without building a facility 😉
hi, i am an internal auditor for a year at state owned company. for a long period, my company include travel expense as cost of ppe and external auditor never correct it, and always give unqualified opinion. what should i do? if i recommend to correct it, then all previous audited financial statement should be restated?
Dear Yulias,
as I wrote in the above article, you might find a good argument for capitalizing travel expenses – in some cases, they can be seen as the cost of service, but it needs to be assessed case by case.
Anyway – it happens a lot that the financial statements contain errors and auditors issue unqualified opinion. Maybe the reason was that the errors were not material and the financial statements still present the true and fair view. Also, auditors can make mistakes, too.
I would recommend to investigate why travel expenses were capitalized (and have good arguments for that) in the first instance. S.
Hi Silvia
Thanks for your clear and simple explanations. I have one question.
Consider an entity is constructing a building and it has several contracts (for Mechanical and Electrical Engineering, Interior Decoration, supply of furniture, construction, etc).
Say the entity terminates the Interior Decoration contract and pays the Interior Decoration Company compensation for termination of contract and not work done.
Should the compensation for termination of contract be capitalized in the building?
Thanks for your answer.
Dear Gopaul,
I don’t think so, because the compensation is usually not a directly attributable cost to bringing the asset to its intended location and use. S.
my question is why we add penalty in calculation of lease liability in lessee accounting under IFRS 16?
Dear Silvia,
My question is also regarding Letter of Credit charges. My company imports a significant amount of inventory and fixed assets from abroad. Many of our suppliers require us to open a Letter of Credit which incurs LC charges from the bank. Can we capitalize those LC charges, both in the initial recognition of fixed assets (IAS 16) and inventory (IAS 2). Will highly appreciate reasons for why either treatment is correct. Thanks and much appreciated
Hi Silvia
Lets say that we have signed a contract for a new software for CU 10,000.
CU 8,000 for the software and CU 2,000 for implementation, training and 6-month support.
How, in your opinion, to treat this CU 2,000?
Regards
Hi Mostafa,
you can capitalize implementation, but not the training (it is excluded) and not 6-month support (it is not necessary to bring the software to use). Therefore, you should split CU 2 000. S.
Thanks Silvia for giving your opinion.
I thought the same way as you did. The question is how to split this cost since the provider of the software did not split the cost in the invoice.
All of theses ( Implementation, Training and 6-month support)came under a single item that costs CU 2,000.
Dear Mostafa,
maybe you could ask your supplier to help you. I think it’s a big project, so your supplier might be willing to give you all the data you need. Alternatively, you can try to estimate how much it would cost you if bought separately and try to split based on proportions. S.
From you to Mr. Mostafa,
Sir, All this cost shall be capitalized. As this cost CU 2000 is unavoidable to bring the software into present condition. Regards
My question is. Insurance expenses paid during the project period against the loss of fire, theft, and etc., can be capitalized as part of the cost of asset. As these are necessary to protect the asset with out which we can not complete the project. the base for my view to capitalise this cost is 1) Even I outsource to the contractor for lumsum price. contractor will include the cost of insurance in the contract price. 2) If we import any material on CIF basis all cost including insurance will be capitalized.3) If I dont undertake this project I will not take any insurance policy.
I kindly request you please clarify me
Thanks
Suresh sambu
Hi Silvia, my question is regarding IAS 38. Employees of the entity are engaged in development of software. Can the rent of the premise and laptop depreciation which can be allocated to these employees be considered directly attributable and hence capitalise?
Hi Neha,
did you rent the premises especially for this project? If not, then it’s general admin and cannot be capitalised. Laptops – if they are used solely for software development, you could probably justify that they are production overheads and could be allocated. S.
If cost such as legal costs, employee salaries incurred to rezone a property and the value subsequently have risen as a result, should we be able to capitalise rezoning costs or expense?
Thank you
Hi Alex, no, relocation expenditures must be expensed in profit or loss, that’s specifically said in IAS 16.
Thank you Silvia, however I was not able to find anything on rezoning in IAS16.
Alex, IAS 16 par. 20 (c) – it speaks about relocating the operations or their part and IASB team once answered the question similar to yours that this paragraph covers also relocating the asset (as it’s a part of business’ operations).
Oh, but now I noted that you asked about “rezoning property” – so in fact, you are asking not about physical relocation of an asset (not possible in this case), but about mere change of property’s classification.
In this case yes, you can capitalize because all these expenses will definitely increase the future economic benefits from that asset. Sorry for the confusion.
Thank you
Consultancy service expenses for customer service enhancement can be capitalized ? as it has future benefit and the amount is material.
Hi Nasar,
unless you can attribute these expenses to specific asset (tangible or intangible), or you are able to attribute these expenses to the specific contract with your customer, then in general no.
Hi Silvia!
Thanks for such a valuable article.
With regards to relocation costs, if for instance we are constructing a pipeline and in order for the pipeline to merely have the most efficient path, a community will be required to be relocated. this relocation only takes place two months into the project and takes one month to complete.
would this relocation cost still be an expense?
Hi Sanam,
this is not a relocation of an asset itself. This is a removal of obstacles and the related expenditures can be capitalized. S.
Hi
i would like to know that if you are expected to relocate a school that is on the property you have purchased and will allow for the PPE item that you will construct after demolishing the school to have the most effecient path should it be capitalised or expensed ?
Hi Silvia,
Just want to ask if you can capitalize consultancy fees in relation to a project?
For example: We are currently developing a billing system and we hired outside consultants to provide insight on the best practices, validate gaps,provide solution options, and provide recommendations on the process model to use which will become basis of the development of the billing system which will be created.
Hi Riel, as soon as you are creating a PPE or an intangible asset, then yes, you can capitalize consultancy fees. If the billing system meets the definition of PPE, then yes, you can capitalize these fees. S.
I’m thinking more on huge legal costs resulting from compensation to a company that was contracted to construct investment properties but did not do a good job but the court was in favour of that company and we paid compensation. The case was for a capital project. Should the cost be capitalised?
Hi Silvia,
Can profit bonuses paid out for prior year company or employee performance be capitalised if those employees are working 100% on developing the new software?
Thanks
David
Hi Silvia
We have hired consultant for installation of machines. Can we capitalise his travelling cost i.e. air tickets, conveyance from hotel to factory and his daily allowance?
Regards
why are Expenses for searching an appropriate site, evaluation of a site, feasibility study cannot be capitalised ?
Because they do not relate to bringing the asset in the desired condition and location. These expenses are like research activities.
Thank you silvia,
well , but is it possible to bring the asset in a desired location without consider selection of an appropriate site ? if so those costs are inevitable to bring the asset into condition and location intended by management. so why we cannot capitalised those cost?
This is a very common argument, but it is not generally accepted. As I told you – the selection of the site cannot be attached to the specific asset. S.
Hi Silvia, could you advise on the following. Should we capitalize to the cost of assets dedicated general and administration ( salary of site supervisors, engineers) which are not directly by hand doing construction works but supervising/managing on site these construction works on field or from the office. Construction works mainly done by Contractors. Also should we capitalize Service ( running ) costs, which include for example spent hours of helicopters flying to the sites/fields that support Operation of the company. thank you
how about transportation costs?
Hi Sella, if they are initial transportation costs (from the supplier to the place of operation), then yes, you can capitalize. S.
Hi Silvia,
we are moving a machine from one plant we closed to another plant which still operates. I am unsure if some of the cost can be capitalized:
– dismantling and transportation cost at the closed plant
– dismantling cost of old machine at the new site where the transdered machine has to be set-up
– some repairs to make the machine work properly
Thanks for your advise.
Andrea
Hi,
We have acquired an asset in the beginning of year through a mortgage bond, later in the year we decided to move the bond from one bank to another, therefore we incurred legal fees. Should I expense or capitalise these legal fees?
Expense, because they are not the initial transaction cost.
Hi Silvia thanks for your very informative article. Would you be able to clarify a couple of queries?
1. If an employee is 100% funded from a capital grant and he is only working on one capital scheme, does this mean that 100% of his salary can be capitalised or just the non-admin costs?
2. Internal staff time taken on negotiating funding for a specific scheme – is this capital or revenue?
Thanks
Hi Silvia, our company just bought a land to build an expansion of our offices. We have paid Land survey fees and land clearing and landfill deposits, I am wondering if under IFRS can we include those fees as part of the land cost?
raw and packaging materials used during test run can be capitalised?
Hi Silvia,
I am wondering if it is possible to capitalize recruitment and training cost as part of the mobilization cost under a contract (i.e. all activities and associated costs related to contractors organization, who is responsible for the operation of the asset).
More specifically, the asset in question may only operate by granted approval by the authorities – this approval is dependent on the contractor’s ability to provide a “safety organization” in accordance with local regulation.. the contract specifies that “at Hand over, the providers organization shall be fully employed, trained and approved by the authorities..”.
Does the recruitment and training of this safety organization qualify as a directly attributable cost, since the asset may not operate otherwise?
Hi Simon, no, sorry. The training cost is never capitalized, because it is tied to employee rather than asset itself and you have no control of the employee (he/she can leave anytime basically and you will have to train the new one). S.
Dear Silvia,
I appreciate your articles and very useful .
could please mention more details about the professional fees or examples.
Many thanks
Thanks , it is very informative and helpful 🙂
Hi Silva,
Great job you are doing.
Please how do I treat an expense incurred on a building acquired under a finance lease e.g An expense of CU1million incurred on tiling, electricity and others on a building under Finance lease.
Thanks
Hi Silvia,
Thanks for very informative explanation. When constructing a power plan, can we capitalise depreciation of equipment used in the construction of the plant? Is it directly attributable cost?
Can we capitalize a provisión related to claim during the construction process ? The amount is not yet final since we aré still in the court.
Hi Silvia,
Many thanks for the above useful information, but I have one more question in regards finance cost. As we have already got a loan to finance our plant and we are capitalizing the interest. But during the construction period, we got another loan from different bank with lower rate. So, we decided to settle the first loan using the new facilities and complete the plant with remaining balance of the new facilities. So, Can we capitalize the total interest on the new facilities including the interest arising from the settlement of the first loan (Specially the construction of the plant not finished yet.)
Thanks
Hi Silvia, Thank you for the article, Can you please let me know if we can capitalise the cost of compensation paid to outsiders for their assets (old building) where we are going to construct a new building. Thank you
Hi Tashi, it seems that without the compensation, you can’t acquire the land, so yes, these would classify for capitalizing. However, be careful about the old assets – it depends whether you are going to demolish them right away, or wait for some time… please see more in the podcast Q&A n.3 here. S.
Dear Silvia.
Today at my work I have received question if we can capitalize material used to adjust/set newly acquired bending machine (PPE). We are producing fuel fillers for automotive industry. Our direct material are tubes which need to be bend into requested shape. Before our new bending machine will produce exact parts, we have to make lot of trials and use material which will not be sold but scrapped. Sometimes these costs of material carry significant values. What kind of view do you hold in this case? As I feel that the management in my company tend to postpone costs I would like to hear your objective opinion. Many thanks.
Sona
Hi Sona,
as I understand, the material is used to produce the parts to make sure that the bending machine works properly, is that right? So can we say that this material is used to set the machine for the proper production? And, without this setting, the machine cannot be put into use?
See, the standard IAS 16 permits capitalizing testing costs, but prohibits capitalizing abnormal waste. However, from what I understand, I would say that these tubes are just testing cost, not an abnormal waste, because it is necessary to test the machine and properly set it before the full production can be launched. If this is true, then capitalize. (Hmmm, as I see your name, I think we are from the same country 🙂 )
Hi Silvia,
Can the cost of leasing a vehicle to access a construction site be capitalized? The lease period will only be during the construction season, which is from May to September 2018. Thank you.
Hi Silvia,
Could you please explain with IFRS Standards, how to allocate the Rental Expenses to Direct Attributable cost and General Admin expenses, in manufacturing industry, specifically in Readymix Concrete Industry.
Regards
Aejaz
Wondering if IFRS will have to address the dramatic increase in enviro-fees that are collected on manufactured products for the sole purpose of end-of-life recycling either of the whole component or parts of. These fees are becoming pervasive and increasing a larger % of the cost of the asset.
Will firms acquiring assets with substantial enviro-fees as part of the invoiced amount be able to capitalize these costs?
This is somewhat similar to mining firms (extraction) capitalizing the costs of returning a mine site back to it’s original state.
“An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]”
Request re: Conditions under which Property assets can avoid Depreciation being charged under IFRS ? Any guidance available on this treatment for properties that are likely, to have a high residual value over time and would result in immaterial depreciation charges – is this acceptable subject to an annual impairment review ?
Hi Silvia
What a great article. I wonder if you could advise whether you think legal fees could be capitalised – relating to a dispute over broker fees for finding a site to build a vessel ?
Hi Lyndsey, I believe that no because these fees are not directly attributable to bringing the vessel into its intended location and condition… I would say they are attributable to the dispute itself. And you don’t need any dispute to acquire a vessel. S.
Hi,
in our company we do a lot of mega projects like building power stations so sometime we are required to make strategic donations to the community or area that we building the power station in, without this donations, the project will not proceed. I would like to know if this donations can be capitalized and currently we are expensing them, the amounts are huge. we believe the donations are costs directly attributable to bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management.
Hi Silvia,
Thank you for the above summary.
Could you kindly advise on the below situation i have:
My company has spent a good amount on interior design consultancy for a rented space for opening a cafe. Can this consultancy fees be capitalised?
I’d be interested to know the answer to this question as well. Any authoritative guidance on the subject would also be appreciated, if you can find any. I haven’t been able to find any such guidance.
OK OK – I have not responded it because I would be always repeating the same stuff that I have already mentioned in many places here in this website. If consultancy fees are directly attributable to improvements of rented office then yes you can capitalize them. You can capitalize leasehold improvements and depreciate them over the rental period or their useful life, whatever is shorter. I hope it helps!
Hi Silvia,
A company is in establishing phase (Agriculture & marketing). They have Packaging and designing conceptual cost’s (Concept design). This first time cost will be capital expenditure or Period expense?
Unless they meet the definition of an intangible asset (development stage, to be more precise) or can be directly attributed to some PPE under IAS 16, then they are expense.
Hi Silvia, I recently got a question about whether or not we can capitalize well insurance costs. I am at a loss when trying to find any specific guidance on the subject. The previous practice was to capitalize these costs as a part of the well investment along with sole cost. Can you advise on where I can find more literature on the subject or provide your professional opinion?
Hi Giva,
I described my opinion up in the article and well, I have nothing else to say. Insurance is a service related to the specific year and NOT directly attributable to bringing the asset to the desired condition and location. S.
Hello Silvia, thank you for the article. We have many projects where internally generated tangible and intangible assets are created. Can we capitalize depreciation of PPE e.g PCs, furniture etc of people partially working on these projects? Would there be a difference if the PPE would be used fully (100%) on the project in terms of capitalization of depreciation? thank you very much
Security agencies Fee will be Capitalized or not when it is related to new Plant and provide Safety for construction Material
Hello Silvia, thanks for your article, please I want to know whether construction labour can be capitalized.
Hi Stephen, yes, if it is the labor of the employees involved in the construction itself (not administrative employees). S.
HI,
Can you capitalized depreciation of a vehicle used during construction? like a service vehicle for the employees involved with the construction?
Hi Mayer, yes, if the vehicle is used in the construction process, yes. S.
is interest incurred in the acquisition of land or property also capitalizable?
Hi Silvia,
we are constructing a building for sale for the past 5 years and we have been capitalising the (annual) property tax that we have to pay for this. We haven’t seen any guidance in IFRS related to property tax in IAS 2 for instance. We classified the building as inventory. We also capitalise interest expense during the period in accordance with IAS 23. Do you see any issue with each of these 2 items? Thanks
Hi Silvia,
what about the following:
1- legal fees for reviewing buy and sale contract in order to acquire investment property.
2- consultancy fees paid to an engineer to recheck the quality of the building.
3- fees paid to an expert company to re-evaluate the cost or price of the building.
Hi Sylivia,
Where there is an ongoing contract for improvement of a highways network, which of the following roles carried out by the contract management team could you capitalise?
– contract performance and compliance monitoring
– business process review
– instruction and agreement of target price for individual works
– cost controllers
– commercial managers
Hi Sylvia,
What about bonus costs paid for completing a refurbishment on time? For me, these are directly attributable costs and should be capitalised as they affect the condition of the asset.
best wishes,
Colin
Hi Colin, if it was a part of original contract, then yes, capitalize.
Hi, Silvia, your article is very helpful to understand IFRS more clearly. I have one question. How can we measure fixed time deposit deposited to one Micro Finance Institution for a period of 10 years. There is no market rate with similar term/period. So how can we measure this fixed time deposit based on amortized cost?
Hello Silvia.
Thank so much. I would like to clarify on Traveling and Training expense. It shall be not capitalized.
– So this apply to Company’s employee only?
– My company contract with one supplier on one project. Then in contract there are these expenses.
But do we still capitalize (the expense is already stated in contract)?
If a Company installed a new Machinery and provide initial training to Staff to get ready to use the asset properly as intended by management. So, in this case can a Company Capitalize Staff Training Cost as it is necessary to use the asset as intended by management?
No.
Hi Silvia,
Thanks for your lesson and it very much useful to me as a student.
Hi, we are public sector company. We purchased a building and paidbrokerage commission for acquiring the building. The commission has to added to cost of building and land proportionately or has to be expensed ?
You need to add such commission and allocate such cost using appropriate ratio.
Dear Silvia,
Our company signed a purchase agreement with a supplier. In the agreement there is a penalty clause for not delivering the item within the agreed upon date. Since the supplier could only deliver the item after the agreed upon delivery date we make the payment net of the penalty. My question is should we measure and recognize the item net of the penalty charge or at the gross amount?
Hi Sylvia,
How about contract management type activities such as performance monitoring in relation to capital works, or finalising capital accounts for call off contract?
Thanks
Sue
Is banks fees classified as asset cost when doing the payment for the purchase of item internationally
No
can one capitalize a laptop bag or include the cost of a laptop bag on the laptop itself to capitalize it
Hi Paul, I don’t think that the bag is directly attributable to some specific laptop – usually you can use it independently from laptop itself (e.g. for a different laptop or as a bag for papers… ).
Hi Silvia,
We had a car which was insured. One month back it got ACCIDENTED and totaled. Insurance company asked us to pay 30% of the value of car and gave us a new car. Kindly tell what accounting treatment is required. now?
What is the amount you get from insurance?
Hi Silvia,
On Capitalization, I did not see any mention of commissioning and validation costs for machinery or production equipment. Example is an equipment or entire production line that is ether bought new or transferred from a site to another and requires equipment and/or process qualification and validation – are the related costs allowed to be capitalized?
Silvia, hi. Could you advise me, please. We acquired the asset under finance lease and except for lease debt amount lessor asked us to pay lease fee. But this we will be paid by equal parts during the term of finance lease. Our finance team consider this fee as transaction costs. Should we capitalize it or we just need to decrease our finance lease liability and then till the end of the lease incur monthly interest expense till the end of the lease? Or we should recognise a LT prepayment, discount it and then decrease each year till the end of the lease proportionally by year interest expense? Thank you. Mikhail.
Hi,
Can we capitalise an asset which we buy and use but don’t own?
We buy an asset, recharge the cost of an asset to the client. We would physically use the asset over the life of an asset, but ownership of an asset remains with the client because we have sold that asset in the form of recharging the cost to the client.
So in effect, we are spreading the cost of an asset of e.g. 3 years (the life of an asset) and took revenue on day 1. Is it allowed practice?
Hi James, as soon as it meets the definition of an asset / PPE, then yes. An asset definition refers to the resource being controlled by the entity (not necessarily owned by the entity). However, in this case – you need to account for this asset within the context of the contract with the customer. More specifically, if the charge for the asset is within some contract for the customer, it might be necessary to treat this charge as a part of total consideration within the contract under IFRS 15 and allocate it to the performance obligations – the reason is that the asset that you are recharging is NOT a performance obligation promised to the client.
Very helpful article, thanks!
Can you capitalise meals for construction workers?
Hi Sylvia,
Can we capitalize finance testing staff cost for a GL replacement?
Thanks,
Raje
What is a finance testing staff cost for a GL replacement? Sorry, I don’t understand.
Hi Silvia
The current GL system is being replaced , finance users will be the end users of the GL system, they are testing the data mapping to the COFA is correct between old GL system to the new GL.
Under IFRS can the end user testing cost be capitalized?
Thanks,
Raje, I still have no clue what your abbreviations mean. COFA, GL (general ledger maybe?)…
Hi Silvia,
Stamp duty is incurred to acquire the ownership rights of a property. Hence, is stamp duty is a directly attributable cost and can it be capitalized?
Hi Silvia,
Can we capitalised pre-delivery crew cost of a vessels? eg. if crew is sign on on board to prepare for the takeover and operate the vessel on delivery perhaps 15 days to 1 month before vessel is delivered from shipyard or seller to buyer.
Hi Silvia – how should we treat a 3 year IT maintenance fee to the supplier who supplied us with IT equipment + installation.
Well, the ongoing maintenance fees do not relate to acquisition itself, so expense them in profit or loss. Installation part can be capitalized.
Hi Silvia – thank you for your article and your clarifications, they are very useful.
We are upgrading our ERP software and we are using an external Project Manager who is scooping the project, advising the Steering Committee, etc. For UK GAAP, are his costs “necessary to bring the asset to working condition”, should they be capitalised? Many Thanks.
This is a great explanation. Its on point
Hello Sylvia,
The best thing a friend of mine has done this year is to introduce me to your website and articles, she will always be appreciated. 🙂
In the event of taking a heavy machine, such as a key component of a gas turbine for maintenance in a foreign country… premium payment for the transit insurance (road and sea, quite significant cost) can they be capitalized to the cost of the asset.
The key argument here by my manager is that it is necessary to improve the life and performance of the asset.
I hope you see and reply to this.
How would you treat this nature of transaction?
Hi Odili, IFRS says nothing specific about capitalizing an insurance, but as I wrote here – it is mostly seen as a service related to the specific period. However, this is a case when the insurance covers safe transport of an asset, thus I would agree with capitalizing.
Dear Silvia,
My employer signed an agreement for purchase of fixed asset. The agreement includes a penalty clause if the fixed asset is delivered beyond the agreed date. Since the supplier delivered the item after the agreed delivery date we make the payment by reducing the invoice amount for the penalty. My question is should we measure and recognize the item net of the penalty charge or at the gross amount?
Dear Silvia,
one quesiton from an renewable energy project developer:
The development phase of a renewable energy power plant might be severeal years before construction begins. To get to the ready to build phase, normally all development costs (wind assessment, consultancy costs, grid studies, etc.). One of the first steps is the site security via a land lease contract between the developer and the landowner. As said above, it takes several years until the power plant will be build, so unitl then the lease contract is more like a lease option if development will be successfull. Now also via this contracts significant lease payments might occur. And here’s now the quesiton: can this costs be capitalised? We argue vs. our auditor, that this costs are necessary to bring the asset to working condition for its intended use (even if capitalisation occurs under IAS 2 and is shown under work in progess, inventories).
What is your opinion, capitalise or expense this costs?
Hi Silvia
Thanks for the article.
We have recently purchased new machinery. To install the new machinery, we had to remove/ dismantle the old machinery to replace with the new one. Also, we had to rebuild the space for the new machinery to setup.
My question is can we capitalise the dismantle costs for the old machinery and setup costs for the new machinery? It costs us around £200k.
Appreciate your help.
I think this article can help. S.
Hi SIlvia,
Great article. We have started a project but after detailed engineering (before commissioning) the project seemed to be too expensive to execute. We have redesigned the project too fall within budget. Can we capitalize the engineering cost spent or should we expense these as they should be considered feasability study costs?? Or are they part of the detailed engineering of the final solution and hence should be capitalized?
Thanks!
The Insurance Premium Paid for Assets in Transit, Should this cost to be capitalized or not?
Hi Silvia,
Thanks very much for all your articles. They have really helped me a lot and clarified so many doubts I had.
Please i wish to ask if we should or should not capitalise estimated dismantling costs at the beginning of an operation, like the case of a mining company which is obliged by the local legislation to repair the destroyed environment at the end of its operations or dismantling a heavy machine at the end of an operation?
Hi Silvia,
Your article is very helpful. I have a question for intercompany margin on labor costs directly attributable to construction project, the construction employees’ labor costs are paid and back charged by an inter-company with mark-up (margin), There is an intercompany service agreement between the project company and the inter-company in place and the intercompany magin is recorded as income in the inter-company, can the intercompany margin be capitalized in the project company which is under construction?
Thanks!
Yes, but this margin needs to be eliminated for consolidation purposes (i.e. PPE on the consolidated level will have lower cost than in the separate financial statements).
Hi Silvia,
Thank you for your article. Can you please help me to get clarification on the below point.
Recently our company leased some industrial land from the government for a long period with the agreement that we will build our factory there. As per terms of the authority, we have to pay fixed charges until we complete the factory and start production which is additional than the annual rent. For the last year, we are paying this penalty and it will take another one year to complete the factory in running condition. Hence can we capitalize on this penalty with Building assets?
Hi Liju, I don’t think that any penalties are directly attributable costs of acquisition.
Hi, my company just incurred takeover cost for the fixed assets inside office on Feb 2020 (to be rent on Mar 2020), can i capitalized the takeover cost?
Well put thanks
Hi
Can you capitalise procurement costs e.g. tendering for a plant item through an OJEU or similar process. The asset will be used once procured so could the costs of the running the procurement exercise be capitalised?
Hi, i just opened a new branch and took a place on rent for leasehold improvements, the initial operations started 2 years later then the site is rented and i have to pay rent for 2 years which approx 1,4 million. Can i capitalize these expenses once the branch is fully functional.
Hi Silvia,
Can you give some example of “initial operating losses, such as those incurred while demand for the item’s output builds up” as given in Para 20.
Hi Sylvia,
Need your guidance on these 3 costs if they can capitalized in relation to the construction of a building:
1. Legal fees- for the review of the construction contracts
2. Documentary stamp tax- for the loan from parent company to finance the construction of the building
3. Documentary stamp tax – for the bank loan for the construction of the building
Hi
In case of a new project under CWIP, the company purchased some vehicles for the same. Is the depreciation for the vehicle to be transferred to CWIP or should be expended in the current year itself.
Hi Silvia,
I have an inquiry about the demobilization (decommissioning) cost which already added to assets (Rigs)I have asked CFO to share the base of calculations, shall I get the third party opinion to assess the calculation or accept the technical engineers and maintenance manger in the company?
Well, I can’t really say. Of course, the third-party opinion and valuation is a great input, better than just internal valuation, but if your auditor accepts your own technical expertise, then it is fine.
Can you give few examples of overheads allocated by a business in respect of Plant installation but can not be capitalised as per IAS 16
Salaries of workers who work both on installation of the plant and repairs/maintenance of other facilities.
Thanks for your important topic as IAS-16
Hi Silvia
Thanks for your article.
Considering that, there is a new entity established specially to construct the new facility for manufacturing.
it is allowable that every cost incurred in that entity during the construction to be capitalized (salary, traveling cost, even bank administration cost like as issuance LC cost and interest cost)?
let say, this entity has not started their operation until the facility is ready to produce their product on the 5th year.
No, only those that can be directly attributed to the specific item of PPE.
Hi Silvia,
I would like to know the capitalization criteria for biological assets particularly employee benefits. To what extent are we allowed to capitalise admin costs when the biological asset is still undergoing development?
Hello,
I want to ask about capitalizing VAT for constructed projects. when I sign a contract with a company to perform some construction activity for me amounting to 105000 USD including vat 5%. at the end of the work when I want to capitalize the assets should I capitalize the full amount included in the contract 105000 or should I exclude the VAT 5% amounting 5000 and capitalize 100,000 only and record the 5000 as expense. if you can mention the reference, please
Hi Slyvia, what about unusual costs incurred because of the COVID-19 pandemic, because of restrictions we had to change the approach in constructing a plant and in this way incurred much more cost because at that time this was the only options available. Could we capitalise these even though this is not the normal way that these plants would have been constructed?
Good Morning,
Please can you advise,
In regards to the development/ establishment costs in a farm which can be capitalized are you allowed to capitalize the depreciation of the equipment being tractors, ploughing equipment etc to get the farm set up?
Many thanks
Hi Silvia, thanks for an informative article on PPE
need your help please regarding survey costs incurred in later years, are they capitalized? or only when a survey cost is incurred in preparation for selling land? say if they were to be capitalized separately from land, would they (survey costs) be subject to depreciation? (I might be lost in my own understanding lol) help plse
A company employs another construction company to build its building. During the construction period there is a legal dispute which ends up in paying substantial arbitration and legal costs to defend the suit by the builder. Is this part of the building cost to be capitalized ?
J Abraham Cherian June 9, 2020 at 3:08 pm
Hi Silvia
In case of a new project under CWIP, the company purchased some vehicles for the same. Is the depreciation for the vehicle to be transferred to CWIP or should be expended in the current year itself
Dear Silvia,
thanks for the excellent article. It answered all my questions and gave me insight in matter of labor costs capitalisation.
Keep up the good work!
Dear Silvia,
i received one question from our IT department and it is how to threat project manager hours spent on project. Project manager work tasks are coordinating the project, defining work procedures, processes, rules, documentation, leading meetings, following up on due dates. Under which stage in development process can we categorize project manager working hours and can we capitalize it?
Thank you!
Hi Ivana,
as soon as your project meets 6 criteria (PIRATE) to capitalize, you can capitalize directly attributable costs along with “major” IT developers’ costs. Please read that article I linked here for more info. S.
Thank you Silvia for your valuable article. My question related to
Commettees meeting costs of LNG project construction. Huge amounts paid to several Commettees of the project ,dutring construction of LNG trains and pipeline, such as finance committee costs, Audit commettee costs, custom’s and clearance commettee costs etc.
Can such commrttees expenditures be capitalized as part of project PPE?
Anouther question, The construction of this LNG project financed 99% by loans which generates loan intrest, Can such loan intrest be capitalized as part of project PPE?