Pre-operating expense

[kamranACA]

Dears,

The unermentioned is a portion of my first post on this thread. You may find it helpful so I am copying it here


QUOTE


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.


UNQUOTE

Rule is to expense out the pre-operating expenses in profit and loss account unless they qualify to make a part of some intangible or tangible asset under specific provisions of any IFRS/IAS.


Regards,


KAMRAN.