19.1.11 Capitalization of Assets

Enquiry:

Initially, we are foreseeing the following circumstances;

  1. First Gas Production (FGP) has started.
  2. Title has not been transferred in the name of Company
  3. Provisional or Final Acceptance Certificate (PAC/FAC) is yet to be given to Contractor

But over the period of two months the whole scenario has been changed. As of December 31, 2013 year ending it is now clear that we shall not transfer the cost from CWIP to Plant and Machinery. Reason being the trial production is scheduled in January 2014 and acceptance certificate will be issued in mid of 2014.

We would really appreciate if you can give your opinion whether we have to decide whether to transfer cost from CWIP to P&M or not.

Opinion:

The Committee considered your enquiry and would like to refer following paragraphs of IAS 16 Property, Plant and Equipment:

20.    Recognition 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 management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment:

(a) costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity;
(b) initial operating losses, such as those incurred while demand for the item’s output builds up; and
(c) costs of relocating or reorganising part or all of an entity’s operations.

55.    Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

The Committee is of the view that an item will be capitalized once it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Recognised asset will be depreciated according to paragraph 43-49 of IAS 16.

(March 19, 2014)