01-24-2011, 08:04 PM
This issue has nothing to do with IAS-23 from any angle of discussion.
The capitalization criteria/logic asks for the future economic benefits that will presumably flow to the enterprise on incurring a cost with reference to PPE item (See Paragraph 7 of IAS-16). These future benefits have to be analyzed with reference to how vital/crucial the cost is for an asset to get ready for operations. Is it enhancing its life or capacity or quality etc? In case of such penalties, these have no crucial bearing on the asset to get ready. These donât even have any bearing to capacity, quality or life of the asset. Here I must mention that Penalties cannot be misconstrued / mixed up with non-refundable taxes. Non-refundable taxes are unavoidable and have to be borne in all cases so these have a direct bearing with capital expenditure. The penalties are always avoidable and these also donât give rise to anything which at its own ensures flowing of economic benefits to the enterprise. This drives the basic logic that such penalty cannot be capitalized.
Paragraph 17 of IAS-16 provides examples of costs that can be directly attributed with PPE assets. This does not include any sort of Penalties in its list. Further, paragraph 19 of IAS-16 states that the Administration and General Overheads cannot be capitalized. The penalty imposed is more of an Administration/General Overhead in its nature than a Capital nature expense since it is imposed due to failure at administration part of the project.
If by all means other comments are not accepted then there is a factor which can also create the difference. The poster of the question has not given the reason of delay in start of operations. There can be two scenarios; either the project was under completion; or, the project was complete in all respects but operations were not started due to some administrative or other issues. The succeeding explanation relates to the scenario where the project was complete in all respects but operations were not started.
Paragraph 20 of IAS-16 interalia statesâ¦â¦â¦â¦.â¦.âRecognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by managementââ¦â¦â¦â¦â¦â¦
Now if the plant of IPP was completed and only the startup was pending due to any reason; the costs incurred for whatever purpose cannot be capitalized. If this is the scenario then there is altogether no reason to going into deeper details.
On the basis of information provided by the poster of the query; I believe penalties cannot be included in the carrying value of PPE item constructed/acquired.
Regards,
The capitalization criteria/logic asks for the future economic benefits that will presumably flow to the enterprise on incurring a cost with reference to PPE item (See Paragraph 7 of IAS-16). These future benefits have to be analyzed with reference to how vital/crucial the cost is for an asset to get ready for operations. Is it enhancing its life or capacity or quality etc? In case of such penalties, these have no crucial bearing on the asset to get ready. These donât even have any bearing to capacity, quality or life of the asset. Here I must mention that Penalties cannot be misconstrued / mixed up with non-refundable taxes. Non-refundable taxes are unavoidable and have to be borne in all cases so these have a direct bearing with capital expenditure. The penalties are always avoidable and these also donât give rise to anything which at its own ensures flowing of economic benefits to the enterprise. This drives the basic logic that such penalty cannot be capitalized.
Paragraph 17 of IAS-16 provides examples of costs that can be directly attributed with PPE assets. This does not include any sort of Penalties in its list. Further, paragraph 19 of IAS-16 states that the Administration and General Overheads cannot be capitalized. The penalty imposed is more of an Administration/General Overhead in its nature than a Capital nature expense since it is imposed due to failure at administration part of the project.
If by all means other comments are not accepted then there is a factor which can also create the difference. The poster of the question has not given the reason of delay in start of operations. There can be two scenarios; either the project was under completion; or, the project was complete in all respects but operations were not started due to some administrative or other issues. The succeeding explanation relates to the scenario where the project was complete in all respects but operations were not started.
Paragraph 20 of IAS-16 interalia statesâ¦â¦â¦â¦.â¦.âRecognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by managementââ¦â¦â¦â¦â¦â¦
Now if the plant of IPP was completed and only the startup was pending due to any reason; the costs incurred for whatever purpose cannot be capitalized. If this is the scenario then there is altogether no reason to going into deeper details.
On the basis of information provided by the poster of the query; I believe penalties cannot be included in the carrying value of PPE item constructed/acquired.
Regards,
