Preoperative Expense accounting

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sherin

sherin (Querist)
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09 February 2024 What is the treatment of preoperative expense under IFRS

Asha Kanta Sharma

Asha Kanta Sharma

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10 July 2024 Under International Financial Reporting Standards (IFRS), preoperative expenses are generally treated as follows:

1. **Recognition as Expenses:**
- Preoperative expenses are typically recognized as expenses in the period in which they are incurred, regardless of whether the related project or activity has commenced or not.
- These expenses are recognized in the income statement under operating expenses or in the relevant expense category.

2. **Nature of Expenses:**
- Preoperative expenses include costs incurred before the commencement of commercial operations of a new project or before an asset is ready for its intended use.
- Examples of preoperative expenses include feasibility studies, preliminary design costs, legal fees, administrative expenses, and other costs directly attributable to the preparation and setup of a new operation or project.

3. **Capitalization Consideration:**
- Unlike some local accounting standards that may allow capitalization of certain preoperative expenses into the cost of tangible or intangible assets, IFRS generally requires preoperative expenses to be expensed as incurred.
- Capitalization is typically allowed under IFRS only when specific criteria for capitalization of costs are met, such as those outlined in IAS 16 (Property, Plant and Equipment) or IAS 38 (Intangible Assets).

4. **Disclosure:**
- IFRS requires transparent and adequate disclosure of significant preoperative expenses in the financial statements.
- This includes disclosing the nature of the expenses, the amount incurred, and their impact on the financial position and performance of the entity.

5. **Impairment Consideration:**
- If preoperative expenses are related to an asset that is subsequently impaired or abandoned, IFRS requires consideration of impairment losses or write-offs as per the relevant standards (e.g., IAS 36 for impairment of assets).

In summary, under IFRS, preoperative expenses are expensed as they are incurred, reflecting the matching principle where expenses are recognized in the period in which they contribute to earning revenues or creating assets. Capitalization is generally not permitted unless specific criteria are met, ensuring transparency and consistency in financial reporting across entities following IFRS.