03-06-2007, 05:57 PM
Dear,
There is no concept of DEFERRED COST for listed companies either in Fourth Schedule to the Companies Ordinance, 1984 or in the IFRSs. Before the recent change in Fourth Scehdule to the Companies Ordinance, 1984, Companies were used to recognise various expenses as deferred cost including the pre-operating expenses. The provisions of the said schedule regarding Deferred Cost were contrary to the requirements laid down by the IFRSs, therefore the SECP has revised this schedule to create hormony between two legislations/guidelines.
IAS 38 deals with the recognition of Intangible Assets and has laid down a primary ciriteria in paragraphs 21, 22, 24 and then in paragraph 57 thereof. However, deferred cost has nothing to do with the concept of intangible asset and none of these paragraphs of IAS 38 render us to account for the Pre-operating Expenses as intangible asset.
Therefore, no listed company can defer the Pre-operating Expenses. These have to be charged to Profit and Loss account.
Care must be taken to conclude that such pre-operating expenses are not the costs qualifying for capitalization in Property, Plant and Equipment under paragraphs 16 and 17 of IAS 16. Pre-operating expenses are not the capital expenditure and as such do not qualify for capitalization under IAS-16 as well.
However, for your appropriate guidance I must quote Paragraph 17 (e) of IAS-16 which deals with capitalization of TRIAL RUN PRODUCTION EXPENSES or COST OF TESTING. These costs are incurred while checking that the asset capitalized is functioning properly and are recognized after dedcuting the net proceeds from selling any items produced such as samples produced while testing such asset.
Normally such TESTING COSTS or TRIAL RUN COSTS can arise only if some revenue is also arising therefrom against the production made during such testing or trial run. However, in some cases, although very rare, there are testing costs without any revenue. In these cases such costs will also be capitalized.
Companies must not take benefit of paragraph 17 (e) of IAS 16 to capitalize the operational losses form first year's operation caused by excessive depreciation and financial costs arising from newly capitalized assets declaring them the TRIAL RUN COSTS or TESTING COSTS. Auditors must be vigilant enough to stop or report such malpractices. I have seen an annual report of a textile company for the year 2005 where huge amounts have been capitalized under this provision as TESTING COST/TRIAL RUN COST to show the profits and auditors have failed to point out this matter in their report. I cannot quote its name here due to legal reasons. Authorities must see and check such cases. IAS 16 clearly mentions that such TESTING would produce samples only and in my view it is the essence of testing or trial run.
Still, if pre-operating expenses include some cost of testing or trial run expenses, these could be capitalized as a component of the cost of the related assets under IAS 16.
In all other cases, PRE-OPERATING EXPENSES have to be charged to profit and loss account.
Status of Unlisted companies is still not clear. Section 234 of the Companies Ordinance,1984 requires all companies to follow IFRSs but Fifth Schedule to the Companies Ordinance, 1984 (applicable to unlisted companies) provides the disclosure requirements that are quite different from IFRSs. Further, section 234 itself exempts the companies other than listed or the subsidiaries of listed companies to attach CASH FLOW STATEMENT and STATEMENT OF CHANGES IN EQUITY as a component of financial statements. This is not understandable as these both are the basic components of the financial statements as per IAS 1. However, the Institute of Charterd Accountants of Pakistan and Securities and Exchnage Commission both are working on this area an we hope that Fifth Schedule to the Companies Ordinance, 1984 would be shortly amended to bring it in line with IFRSs. ICAP has also currently issued Accounting Standard for Medium and Small enterprises that also provides the requirements similar to IFRSs in many areas.
Until then, as per my views, Unlisted Companies should also endevour to follow the IFRSs in true spirit.
Hope your querry has ben adequately replied.
Thanks.
Kamran.
There is no concept of DEFERRED COST for listed companies either in Fourth Schedule to the Companies Ordinance, 1984 or in the IFRSs. Before the recent change in Fourth Scehdule to the Companies Ordinance, 1984, Companies were used to recognise various expenses as deferred cost including the pre-operating expenses. The provisions of the said schedule regarding Deferred Cost were contrary to the requirements laid down by the IFRSs, therefore the SECP has revised this schedule to create hormony between two legislations/guidelines.
IAS 38 deals with the recognition of Intangible Assets and has laid down a primary ciriteria in paragraphs 21, 22, 24 and then in paragraph 57 thereof. However, deferred cost has nothing to do with the concept of intangible asset and none of these paragraphs of IAS 38 render us to account for the Pre-operating Expenses as intangible asset.
Therefore, no listed company can defer the Pre-operating Expenses. These have to be charged to Profit and Loss account.
Care must be taken to conclude that such pre-operating expenses are not the costs qualifying for capitalization in Property, Plant and Equipment under paragraphs 16 and 17 of IAS 16. Pre-operating expenses are not the capital expenditure and as such do not qualify for capitalization under IAS-16 as well.
However, for your appropriate guidance I must quote Paragraph 17 (e) of IAS-16 which deals with capitalization of TRIAL RUN PRODUCTION EXPENSES or COST OF TESTING. These costs are incurred while checking that the asset capitalized is functioning properly and are recognized after dedcuting the net proceeds from selling any items produced such as samples produced while testing such asset.
Normally such TESTING COSTS or TRIAL RUN COSTS can arise only if some revenue is also arising therefrom against the production made during such testing or trial run. However, in some cases, although very rare, there are testing costs without any revenue. In these cases such costs will also be capitalized.
Companies must not take benefit of paragraph 17 (e) of IAS 16 to capitalize the operational losses form first year's operation caused by excessive depreciation and financial costs arising from newly capitalized assets declaring them the TRIAL RUN COSTS or TESTING COSTS. Auditors must be vigilant enough to stop or report such malpractices. I have seen an annual report of a textile company for the year 2005 where huge amounts have been capitalized under this provision as TESTING COST/TRIAL RUN COST to show the profits and auditors have failed to point out this matter in their report. I cannot quote its name here due to legal reasons. Authorities must see and check such cases. IAS 16 clearly mentions that such TESTING would produce samples only and in my view it is the essence of testing or trial run.
Still, if pre-operating expenses include some cost of testing or trial run expenses, these could be capitalized as a component of the cost of the related assets under IAS 16.
In all other cases, PRE-OPERATING EXPENSES have to be charged to profit and loss account.
Status of Unlisted companies is still not clear. Section 234 of the Companies Ordinance,1984 requires all companies to follow IFRSs but Fifth Schedule to the Companies Ordinance, 1984 (applicable to unlisted companies) provides the disclosure requirements that are quite different from IFRSs. Further, section 234 itself exempts the companies other than listed or the subsidiaries of listed companies to attach CASH FLOW STATEMENT and STATEMENT OF CHANGES IN EQUITY as a component of financial statements. This is not understandable as these both are the basic components of the financial statements as per IAS 1. However, the Institute of Charterd Accountants of Pakistan and Securities and Exchnage Commission both are working on this area an we hope that Fifth Schedule to the Companies Ordinance, 1984 would be shortly amended to bring it in line with IFRSs. ICAP has also currently issued Accounting Standard for Medium and Small enterprises that also provides the requirements similar to IFRSs in many areas.
Until then, as per my views, Unlisted Companies should also endevour to follow the IFRSs in true spirit.
Hope your querry has ben adequately replied.
Thanks.
Kamran.
