Capitalization of Trial Run Operations-IAS 16

[malikzshan]

Here is a situation
Net losses from trail run amounting to over two hundred millions during current accounting year have been capitalized.
Aggregate net losses of over six hundred millions in total capitalized over a period of over eight years (4 months each during current and previous financial year)
These capitalized costs have been allocated to “Buildings, plant & machinery”.

Please note that paragraph 17 (e) of International Accounting Standard -16 (IAS-16) deals with capitalization of cost of testing whether the asset is functioning property, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment).
Whereas in case of the Company sales volume of over a billion rupees have been generated from expansion plant during the four months of current financial year.

In my view it does not qualify for capitalization of net loss from operations merely on the grounds that there were intermittent shut downs of the plant. Although the Company has produced vendors certificate which states that the Company can start commercial production w.e.f. 01.11.09 which is the same date till which the net loss has been capitalized, treating it as a trial run loss.

I would request expert opinion in this regard.

thanks in advance.

best

malik

[kamranACA]

Dear,

Please visit the following thread and go through my first post (overall second) on it

http//www.accountancy.com.pk/forum/topic.asp?topic_id=5233

Of course trial run should mean trial run and for capitalization of losses, a logic must be established as to how such losses could be treated as such.

Auditors should take care in such cases and regulators should take appropriate measures.

If some one has a proper logic and keeping in view the capacity scale of the project this figure of millions could be justified then there may not be an issue. However, we know that people at large tend to take undue benefits (of their own meaning) from such constitutive provisions and standards.

Regards,


KAMRAN.

[malikzshan]

Thanks for the response. Many companies take benefit of flexibility provodied by IAS-16, which relates capitalization of costs criteria with commissioning of plant to a condition intended by the management. I guess, primarily auditors are responsible to substantiate and verfiy such instances because they have ready access to the relevant records.
Regulators, may not always be in a position to take action unless auditors make some observations in their report.
Cement Companies capitalize huge costs of trial run losses, in some cases upto 20% of the invoice price of the pant and machinery being commissioned.