Capitalization of exps

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 June 2010 Dear Sir
Should we need to capitalize the following expenditure? or treat them as revenue cost?
a) land survey cost
b) cost of cutting raw jungle (useless vegetations) on land, before starting any construction.
c) amount paid to architect/structural consultant for preparing plans.
Pl. guide.

Aditya Maheshwari

Aditya Maheshwari (Expert)
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18 June 2010 As per AS - 10 cost includes the following:

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:

site preparation;

initial delivery and handling costs;

installation cost, such as special foundations for plant; and

professional fees, for example fees of architects and engineers.

The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.

9.2 Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset.

9.3 The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalised and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period.

9.4 If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production.

a) capitalise
b) capitalise
c) capitalise