When you acquire a long-term asset, you lot tin include directly attributable costs to the initial measurement of its cost.

Although IFRS define directly attributable expenses quite conspicuously and provide a few examples, there are many different items nosotros are not sure most.

In this article, I decided to expect 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 avails under IAS sixteen Property, Plant and Equipment, but the same principles utilize for intangibles and other avails, as well.

What practise the rules say?

IAS sixteen says that we can capitalize any costs directly owing 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)).

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In the paragraph 17 of IAS 16 there are the examples of what expenses are considered to be straight attributable and therefore, tin can be capitalized (or included in the cost of an nugget):

  • Costs of employee benefits (IAS 19 Employee benefits) arising direct from the construction or the acquisition of the item of PPE,
  • Costs of site preparation,
  • Initial delivery and handling costs,
  • Installation and associates costs,
  • Costs of testing whether the nugget is functioning properly, afterward deducting the internet gain from selling any items produced while bringing the asset to that location and status, and
  • Professional fees.

Equally opposed to that, the paragraph 19 of IAS 16 lists examples of costs that are not costs of an detail of PPE and therefore, cannot exist 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 grade of client, and
  • Administration and other general overhead costs.

On top of that, IAS 16 clarifies in the paragraph twenty that costs of operation below full capacity, initial operating losses and relocating or reorganizing entity'due south operations are not to exist capitalized.

Clear enough.

Yet in practice, in that location are many items that require our careful judgment and we are not sure whether to include them in the price of an nugget or not. These doubts arise especially when your visitor constructs a large asset, such as a plant or a mine.

Let'due south break it down.

Cost of employee benefits

Every bit written above, you lot can capitalize only those employee benefits that arise from the construction or the acquisition of the asset .

Hither, ii principal questions arise:

  1. Which employee categories arise from the construction or the acquisition of the nugget?

    The answer is no admin, no general functions, no research activities, no marketing & advertising, no training employees.

    Information technology means that:

    • Y'all tin can capitalize the employee benefits provided to site workers, in-house architects and surveyors or product supervisors. To some extent, you tin can also capitalize quality controls and testing (if these activities are inevitable in gild to put an asset into use).
    • You lot cannot capitalize any portion of employees benefits paid to general managers, accountants taking care solely about ship's bookkeeping, etc.
  2. Which expenses related to these employees tin exist 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 post-obit types of expenses are Non employee benefits under IAS xix and therefore, they shall be considered separately:

    • Travel expenses of your employees,
    • Preparation of your employees,

How should you lot include the expenses for the employee benefits into the cost of your nugget?

The reply is based on some reasonable allocation method .

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

  • i 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 holiday (in line with law): CU i 000
  • Expense for contribution into a alimony fund (divers contribution program): CU 2 000

How much of these benefits can you include into a cost of a ship?

Y'all tin include all of these expenses for employee benefits allocated on a reasonable basis.

In this case, we tin can allocate it based on time spent on a ship structure (ane 500 hours) and total time worked (i 500+300=1 800 hours).

Here, we practice not accept the paid holiday fourth dimension into business relationship for resource allotment purposes. It means that a compensation for paid vacation will exist allocated to the cost of a send. 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:

  • Allocation of salary: CU 18 000*1 500/1 800 = CU 15 000
  • Compensation for paid vacation: CU 1 000*one 500/ane 800 = CU 833
  • Contribution to a alimony fund: CU ii 000*1 500/ one 800 = CU 1 667
  • TOTAL: CU 17 500

Note: yous include simply current year's expenses; or the expenses incurred during ship's construction.

Cost of relocating the asset to the new location

Allow's say you construct a new establish and you decided to relocate some machines from an older establish to the new bounds. As machines are quite heavy, you paid CU ane 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 every bit incurred.

Insurance of an nugget

Insurance premiums paid to the insurance companies cannot be capitalized, but expensed in turn a 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 nugget confronting some risks during some period and therefore, it would not exist correct to take these costs to the cost of an nugget and put them in profit or loss via depreciation over asset'southward useful life.

Some time ago, one CFO raised a point to this matter. He said:

"Nosotros accept a loan to finance the acquisition of a found, but our bank insists on insurance policy for this plant. Otherwise we won't get a loan. Without an insurance policy we cannot learn a constitute, therefore I think the insurance price can be capitalized as information technology'due south inevitable".

Hmmm, a practiced statement, only the truth is that the CFO needed an insurance policy to go a loan and non to larn an nugget. In other words, that visitor could take acquired a institute without a loan, with a cash payment and in such a example, no insurance policy would be necessary.

Operating lease expenses for state

You can incur some charter expenses during construction of your asset. For example, you can pay rentals for the land you build your found on.

Tin can you capitalize these expenses?

This question is quite controversial and really, an respond 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 hither:

Yep, capitalize:

Operating lease charges can be considered direct owing 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 state nether operating charter on which you build a edifice can be capitalized into a cost of a building during a construction phase.

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 turn a profit or loss. If you lot include merely rentals during the construction catamenia into the cost of PPE and you lot expense the subsequent rentals equally they incur, then the beginning rentals will exist 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 ever see a land every bit a split up nugget, because its useful life is dissimilar from the life of a edifice on it. The rental payments relate to the "acquisition of a state", non to a building itself.

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Anyhow, this is 1 of the reasons why I like the new IFRS sixteen Leases. Under the new standard, yous will have to recognize a right-to-use asset instead of dealing with operating charter payments and therefore, this dilemma will not exist anymore.

Travel expenditures

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

Or, can you lot capitalize travel expenses of a consultant who came to your site to perform professional person piece of work related to PPE?

Unless you lot 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 nugget to the desired location and condition. At least, that'due south what I experienced in the practice.

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

If you rent a consultant and you agree to pay travel toll for him, yous should attempt to negotiate the higher cost 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 yous Can capitalize

  • Fees for ecology permits, certifications whether an asset works properly
  • Expenses for necessary repairs during the construction stage
  • Expenses for removing hurdles on the site (e.k. sabotage of one-time building)

Practice not capitalize:

  • Preparation expenses (never!)
  • Expenses for searching an advisable site, evaluation of a site, feasibility study
  • Ad and marketing expenses
  • Expenses to rent employees

OK, guys, I've only tried to bring more lite to the most common types of expenses and feel free to inquire in the comments if you lot need help with something else. I might update this article and add together some more explanations!