Case Study -1
Entity A is constructing an asset and is capitalizing labour costs that are directly attributable to bringing the asset to its working condition. Do such costs include social security contribution and pension costs of the staff whose labour costs are being capitalised in accordance with IAS 16 ?
IAS 16 states that costs that are directly attributable to bringing the asset into the location and condition necessary for it to be capable of operating in the manner intended by management should be included in its measurement.
Where an item of PPE is being constructed by the entity, attributable costs include the labour cost of own employees arising directly from the construction of the specific asset. Employers; social security contributions and pension costs are part of staff costs and so fall within the meaning of labour cost. Therefore, they should be included in the amount capitalised under IAS 16.
Pension costs are governed by IAS 19 “Employees benefits”. This standard clearly says that any post – employment costs included in the cost of assets under IAS 2 or IAS 16 included the appropriate proportion of the components of pension cost that are charged to income under IAS 19
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