11 February 2021
Company has incurred below pre-operative expenses which is lying in respective CWIP recently so after commercial production start how it should be treated in books of accounts as per IND AS for capitalisation and in how many years it should be amortised/depreciated.
A) Trial Run Expenses B) Travelling & Hotel Expenses of professional/Technical Consultant For Production C) Technical consulting Expenses for Machinery D) Training Expenses for Mass production E) ECB Interest capitalization F) Pre-Operative Salary G) Consumable items purchase for Machinery Production
06 July 2024
In IND AS (Indian Accounting Standards), the treatment of pre-operative expenses and their capitalization and amortization/depreciation depends on their nature and the specific guidelines provided under IND AS 116 and other relevant standards. Here's how each category of expense typically would be treated:
1. **Trial Run Expenses (A):** - These expenses are generally treated as part of start-up activities. - According to IND AS 116, start-up costs (including trial run expenses) are expensed as incurred and not capitalized. They are recognized as an expense in the period in which they are incurred.
2. **Travelling & Hotel Expenses for Professional/Technical Consultants (B):** - These expenses are incurred to bring in expertise for the production process. - Typically, such expenses are capitalized as part of the cost of the asset (e.g., machinery or plant) if they meet the criteria for capitalization under IND AS 16 (Property, Plant, and Equipment). This includes being directly attributable to the acquisition, construction, or production of the asset and leading to future economic benefits. - If capitalized, they are amortized or depreciated over the useful life of the related asset.
3. **Technical Consulting Expenses for Machinery (C):** - Similar to (B), these expenses are capitalized if they enhance the future economic benefits of the asset (machinery). - Capitalization criteria under IND AS 16 apply, and if capitalized, these expenses are amortized or depreciated over the useful life of the machinery.
4. **Training Expenses for Mass Production (D):** - Training expenses incurred to prepare for mass production are generally expensed as incurred. - According to IND AS 16, training costs are expensed unless they can be directly attributed to the cost of an asset and enhance the future economic benefits of the asset.
5. **ECB Interest Capitalization (E):** - Interest on ECB (External Commercial Borrowings) related to qualifying assets under construction is capitalized as part of the cost of those assets. - Capitalization criteria are defined under IND AS 23 (Borrowing Costs). - Capitalized interest forms part of the cost of the asset and is amortized over the useful life of the asset.
6. **Pre-Operative Salary (F):** - Salaries incurred before the commencement of commercial production are expensed as incurred. - They are not capitalized under IND AS, as they do not meet the criteria for inclusion in the cost of an asset.
7. **Consumable Items Purchase for Machinery Production (G):** - Consumable items used directly in production, such as raw materials, are typically expensed as incurred. - They are not capitalized as part of the cost of machinery unless they form an integral part of the asset and meet the capitalization criteria under IND AS 16.
**Amortization/Depreciation:** - Capitalized expenses (like (B), (C), (E)) are amortized or depreciated over the useful life of the related asset, as per the depreciation policy of the company. - Amortization is applied to intangible assets or deferred expenses, whereas depreciation applies to tangible assets like machinery and equipment.
It's essential to apply IND AS principles consistently and seek guidance from a qualified accounting professional or auditor to ensure compliance with specific standards and proper financial reporting.
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