prep. of P & L account during development phase

[raromeo2002]

hello!!!!
i have question for your to ask. do we have to prepare the profit and loss account if business has not yes started its operations and no fixed asset is recognized except land?
however, different expense are occurring like pre-operating expenses, research and development and admin expenses including other expenses directly attributable to qualifying assets. do we create deferred costs head in assets side to write off these expenses when operation is started?? or do we create profit and loss account and charge the expenses to same year when these expenses are occurred.

please give the answer with references of related IFRS and companies ordinance.

[Ali Akbar]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by awaisaftab</i>
<br />IAS-23 lays down some guidelines about the booking of borrowing cost in books of accounts.



"An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the commencement date. The commencement date for capitalization is the date when the entity first meets all of the following conditions
It incurs expenditures for the asset;
It incurs borrowing costs; and
It undertakes activities that are necessary to prepare the asset for its intended use or sale."


So if a company starts construction of a Qualifying Asset then it will capitalize the borrowing cost simultaneously.
In my opinion the phrase " Commencement Date" is not used here in the meaning of commencement of business.

As far as Companies Ordinance 1984 is concerned under section 157 of Companies Ordinance,1984 every company limited by shares is liable to arrange statutory meeting. Sub section 3 of section 157 lays down the particulars of statutory report that shall be presented in the statutory meeting. Clause (C)of sub section 3 of section 157 of Companies ordinance lays down

"an abstract of the receipts of the company and of the payments made
thereout up to a date within seven days of the date of the report,
exhibiting under distinctive headings the receipts of the company from
shares and debentures and other sources, the payments made thereout,
and particulars concerning the balance remaining in hand, and an account
or estimate of the preliminary expenses of the company showing
separately any commission or discount paid or to be paid on the issue or
sale of shares or debentures"

So if we read clause C of Section 157(3)with IAS-23, we reach at the conclusion that a company before commencement of business shall record all payments & recipts and capitalize borrowing costs.
Only receipts and payment shall be recorded before commencement of business.

Regards,


Awais Aftab

<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

I think IAS 23 is not relevant to the question asked, as IAS 23 only deals with 'borrowing cost' and not in generality the 'pre commencement expenditure'.

Previously, 4th and 5th schedule of Companies Ordinance, 1984 had required to capitalize pre commencement expenditure. Later on the schedules were revised to bring them more in line with IFRSs, more scpecifically IAS 38. Since pre commencement is 'intangible' in kind hence pre commencement expenditure, in generality, cannot be capitalized in the light of IAS 38. However, you should look for each individual cost included there in and see if it can be capitalized in accordance with IAS 16 (if cost is incurred in bringing the asset initially intended by management etc) and IAS 38's specific requirement for capitalizing development cost. Further, paragraphs 19 & 20 of IAS 16 gives specific exclusion for the costs not to be capitalized and some of the costs are those which you mentioned.

So in nutshell, pre commencement expenditure cannot be capitalized in generality and you have to draw up P&L account to charge them off.

[Ali Akbar]

Paragraph 69 of IAS 38 is also relevant to read for this case.