Ad-Free CAclubindia and Daily Updates on your mobile. Subscribe Now!

Whether Capitalise or not

25 March 2009

During the audit of a company i found that they purchase 2 Batteries for invertor @ 7000 each. (So many cases i.e UPS Purchase, Printer Purchase etc.)

Now please tell me that whether these should be capitalised or not.

Thanx in advance

Reply
Follow
Share

12 Replies

kaustubh (CA, CS , CFM) (293 Points)
Replied 26 March 2009

yes u should

Upgrade to CAclubindia Pro. Subscribe Now!

(Guest)

It shud not be capitalized as it does not increase the capacity of the UPS(future economic benefits). It may be treated as deferred revenue expenditure if it is likely to yeild benefit for more than one accounting period . But practically speaking its better to charge it to P& L.

penchalaiah (audit) (27 Points)
Replied 26 March 2009

yes u can considered as capital exp

Arpit Gupta (Chartered Accountant ) (95 Points)
Replied 26 March 2009

it depends upon the life of batteries

if its life is for more than one a/cing period then it should be capitalised and accordingly the depreciation should be charged and if its life is not for more than one a/cing period then it should be charged in P&L (As per AS-10)

sudarshan (CA) (745 Points)
Replied 26 March 2009

These are machinery spares. As per ASI of AS-10, is spares usage is irregular and used for certain type of assets it should be capitalised. Capacity of asset etc. will be useful for income tax purpose and not for companies act accounting.

Upgrade to CAclubindia Pro. Subscribe Now!

(Guest)

The expense is capitalized only wen the productive capacity of the machine is increased as per AS 10. Batteries are expenses incurred in the normal runnin of the UPS and does not justify capitalization. Hence it has to be charged to P& L. However u can defer it if it is likely to yeild benefit for more than one accounting period.

Rahim (Businessperson) (460 Points)
Replied 26 March 2009

Thanks Sudarshan & Shrikanth for the explanation.

sudarshan (CA) (745 Points)
Replied 01 April 2009

There is no mention about productive capacity or usage of more than one accounting period in AS 10. Improvement to FA should be capitalised when expenditure increases future benefit from previously assessed performance it should be capitalised. Battery increases the performance. So it should be capitalised.

(Guest)

Sudarshan,

By increase in capacity i mean the same ( please go thru para 12.1 of AS 10 issued by ICAI it says eg : an increase in capacity).

Assume this .The "assessed standard performance" (ASP)of an UPS say is 2 hrs of back up. Over a period of use the battery gives only 1 hr back up. But changing the battery the back up time is again back to 2 hrs of back up.

As u see there is no real increase in ASP. Hence i suggested charging the same to P& L.

Any contradictions are welcome....

Sambu Suresh (CA Job) (564 Points)
Replied 15 June 2012

The quetion raised is very fundamental quetion. It is the crux of the capitalisatoin of the assets. We analyise the example of Helecaptor. where the life period of the body of the Helicaptor and its engine is different. then we depreciate them separately.

Therefore the where the life time of the assets are different and the components of the assets are significant to the assets, the both should be capitalised separtely. As in the given case the inventory will not run wiht out the batteroies. however the batteries cost are significant. Therefore the cost of the batteries have to be capitalised assume they will run for more than one year.