When y'all acquire a long-term nugget, you tin include straight attributable costs to the initial measurement of its cost.

Although IFRS ascertain directly attributable expenses quite clearly and provide a few examples, there are many dissimilar items we are not sure about.

In this article, I decided to look at directly owing expenses with a magnifier and to requite you some guidance for your future utilize.

I'd like to focus on acquisition of tangible assets under IAS 16 Holding, Plant and Equipment, only the same principles apply for intangibles and other assets, too.

What practice the rules say?

IAS 16 says that we tin capitalize any costs directly attributable to bringing the asset to the location and condition necessary for information technology to be capable of operating in the way intended by management (IAS xvi.16(b)).

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In the paragraph 17 of IAS 16 at that place are the examples of what expenses are considered to be directly attributable and therefore, can be capitalized (or included in the toll of an asset):

  • Costs of employee benefits (IAS nineteen Employee benefits) arising direct from the construction or the acquisition of the item of PPE,
  • Costs of site preparation,
  • Initial commitment and handling costs,
  • Installation and assembly costs,
  • Costs of testing whether the asset is functioning properly, afterwards deducting the net gain from selling any items produced while bringing the asset to that location and condition, and
  • Professional person fees.

Every bit opposed to that, the paragraph xix of IAS 16 lists examples of costs that are non costs of an detail of PPE and therefore, cannot be capitalized :

  • Costs of opening a new facility
  • Costs of introducing a new production 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 pinnacle of that, IAS 16 clarifies in the paragraph 20 that costs of functioning beneath full chapters, initial operating losses and relocating or reorganizing entity'due south operations are not to be capitalized.

Articulate enough.

Yet in exercise, there are many items that require our conscientious judgment and we are non sure whether to include them in the price of an asset or not. These doubts arise particularly when your company constructs a large nugget, such as a constitute or a mine.

Let's pause it down.

Cost of employee benefits

As written above, you lot tin capitalize just those employee benefits that ascend from the construction or the conquering of the asset .

Hither, two principal questions arise:

  1. Which employee categories arise from the construction or the conquering of the asset?

    The respond is no admin, no full general functions, no research activities, no marketing & advertizing, no training employees.

    It ways that:

    • You can capitalize the employee benefits provided to site workers, in-business firm architects and surveyors or production supervisors. To some extent, you lot can as well capitalize quality controls and testing (if these activities are inevitable in gild to put an asset into employ).
    • You cannot capitalize any portion of employees benefits paid to full general managers, accountants taking care solely nearly ship's accounting, etc.
  2. Which expenses related to these employees tin be capitalized?

    The answer is all employee benefits under IAS 19 and that is:

    • Short-term employee benefits (salaries, wages, paid vacation…)
    • Postal service-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 yous include the expenses for the employee benefits into the cost of your asset?

The respond is based on some reasonable allocation method .

For example, you lot build a send. Based on timesheet reports you observe out that in 20X1 John worked:

  • 1 500 hours on the send 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'south piece of 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 programme): 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 footing.

In this case, we can classify information technology based on fourth dimension spent on a ship construction (ane 500 hours) and total fourth dimension worked (1 500+300=1 800 hours).

Here, nosotros do not take the paid vacation time into account for allocation purposes. Information technology ways that a bounty for paid vacation will be allocated to the cost of a transport. The reason is that a company is obliged to provide this vacation to its employees and a holiday is simply another cost of worked hours.

The calculation:

  • Resource allotment of salary: CU 18 000*one 500/one 800 = CU xv 000
  • Bounty for paid vacation: CU i 000*1 500/one 800 = CU 833
  • Contribution to a pension fund: CU 2 000*1 500/ ane 800 = CU 1 667
  • TOTAL: CU 17 500

Note: you lot include just electric 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 found and you decided to relocate some machines from an older constitute to the new premises. Every bit machines are quite heavy, you lot paid CU 1 000 to relocate them.

Tin can you capitalize these expenses to the cost of a auto?

In brusk, no – this is a relocation cost and IAS sixteen specifically says information technology cannot exist capitalized, only expensed every bit 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 status and location to operate every bit desired by the management.

In fact, these costs are incurred to protect an nugget against some risks during some period and therefore, it would non be correct to have these costs to the toll of an asset and put them in profit or loss via depreciation over asset's useful life.

Some fourth dimension agone, 1 CFO raised a point to this matter. He said:

"We accept a loan to finance the acquisition of a institute, merely our bank insists on insurance policy for this plant. Otherwise nosotros won't become a loan. Without an insurance policy nosotros cannot larn a constitute, therefore I think the insurance cost can be capitalized as it's inevitable".

Hmmm, a skilful argument, but the truth is that the CFO needed an insurance policy to become a loan and not to acquire an asset. In other words, that visitor could have caused a establish without a loan, with a cash payment and in such a case, no insurance policy would be necessary.

Operating lease expenses for land

You lot can incur some charter expenses during structure of your asset. For instance, yous can pay rentals for the state you build your plant on.

Can you capitalize these expenses?

This question is quite controversial and actually, an answer depends on how well you lot tin justify your own view in front of your auditors.

I'd like to give y'all arguments for YES and NO here:

YES, capitalize:

Operating lease charges can be considered directly attributable costs and included into toll of an item of PPE, if these lease costs are necessary to bring the nugget to the desired condition and location. Therefore, rentals paid for land under operating lease on which you lot build a building tin be capitalized into a cost of a building during a construction stage.

NO, don't capitalize:

I am more in favor of no capitalization, only recognizing these expenses in profit or loss.

The reason is that it produces quite inconsistent bear on on turn a profit or loss. If yous include just rentals during the construction period into the toll of PPE and you expense the subsequent rentals as they incur, and then the first rentals volition be expensed via depreciation over nugget's useful life, and the remaining rentals will be expensed immediately. This means that matching principle is shattered.

Likewise, I always come across a land as a separate asset, because its useful life is dissimilar from the life of a building on it. The rental payments chronicle to the "acquisition of a land", non to a building itself.

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Anyway, this is i of the reasons why I like the new IFRS 16 Leases. Nether the new standard, you will accept to recognize a correct-to-use asset instead of dealing with operating lease payments and therefore, this dilemma will not be anymore.

Travel expenditures

Tin you lot capitalize travel expenses (hotel, transport) when a trip happened to acquire an particular of PPE?

Or, tin yous capitalize travel expenses of a consultant who came to your site to perform professional work related to PPE?

Unless you take a bang-up argumentation gear up 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 status. At least, that'due south what I experienced in the practise.

However, this expanse is quite unclear and you might be successful to provide good arguments to your accountant for capitalizing.

If you lot hire a consultant and you concur to pay travel cost for him, yous should try to negotiate the higher toll for his services with inclusion of all his expenses (to hide his travel expenses into the toll of service) – just to be on a condom side.

Other expenses you CAN capitalize

  • Fees for environmental permits, certifications whether an nugget works properly
  • Expenses for necessary repairs during the construction phase
  • Expenses for removing hurdles on the site (eastward.one thousand. demolition of old edifice)

Do not capitalize:

  • Training expenses (never!)
  • Expenses for searching an appropriate site, evaluation of a site, feasibility study
  • Advertizement and marketing expenses
  • Expenses to hire employees

OK, guys, I've merely tried to bring more than low-cal to the most common types of expenses and experience free to ask in the comments if you lot need assist with something else. I might update this article and add some more explanations!