CAPITALISATION

[SHARMA NARAYAN]

Dear all,

pls share some info on

How to make capitalisation in NEW projects

[DR.MARIAPPAN GOVINDARAJAN]

Your input is not specific.

[YAGAY andSUN]

Project do take certain time to get completed. Depending on the nature of project you may capitalise it at its get its milestone or you may show such project in WIP and once you get completion certificate, then you can capitalised it.

[Ganeshan Kalyani]

An account is created called Asset under construction or work in progress account. In this account all project related purchases are accounted. As an when the project is completed stage wise, the project engineer approves that contractor has completed that part of work and the inspection of chartered engineer is conducted who after that issues certificate. Based on these aspects the purchases booked in above mentioned account are transferred to respective asset account which is called the asset is capitalised. Thanks.

[Ganeshan Kalyani]

The amount of capitalisation need to done carefully. If the cenvat credit on the purchases are availed then that tax part on the purchases should not be capitalised. That is either Cenvat credit benefit or depreciation benefit is allowed but not both.

[Ganeshan Kalyani]

The accounts department in an organisation works closely with the project Manager to carry out capitalisation accounting.

[Ganeshan Kalyani]

Capitalisation task is crucial because various income tax benefit is attached to capital investment .

[YAGAY andSUN]

Capitalization of project costs affects the balance sheet, while expensing the costs affects the income statement. The route you assign determines whether your asset base increases or your profits decrease. Use accounting rules as a road map for choosing the proper treatment of the costs and keeping your financial statements consistent.

Accounting Standards

Applicable standards include generally accepted accounting principles for private companies, International Accounting Standards (IAS 16) and International Financial Reporting Standards. The standard that applies to your business depends on the type and size of the business and the standards it has used in the past. The standards are generally the same for fixed assets, and all leave room for interpretation for individual transactions. Most organizations have policies to clarify the types of expenditures that qualify for capitalization. If yours does not, it’s time to write one. Examples can be found online, such as on the Washington State Office of Financial Management website.

Recognition Principles

Two criteria must be met for a completed project to be recognized as a capital asset: It must be used for the production or supply of goods and services, for rental to others or for administrative purposes, and it is expected to be used for more than one fiscal period. IAS 16.7 states that the cost of an asset shall only be recognized as an asset “if it is probable that future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably.” Once an item is recognized as an asset, eligible costs fall into two categories: initial costs and subsequent expenditures.

Initial Costs

Costs that make up the initial value of the asset include acquisition, relocation or transport, installation and commissioning, borrowing and asset retirement costs. Include only those costs that are considered a normal part of readying the equipment for use. If the asset had been damaged before installation, the repairs would be expensed because they aren't a normal cost of readying it for use. For self-constructed assets, an accurate estimate of the true cost can be made by allocating direct wages and business overhead costs as well as the items listed above. Initial costs end when the asset became ready for use. It may not have actually been in use, but only the costs up to that point are considered capital costs.

Subsequent Costs

Once the asset is complete, subsequent costs are generally operating expenses unless they meet the criteria described above. For example, employee training costs, losses on starting up and optimization of the equipment, routine maintenance, repair and operation costs for the equipment are all expensed. Sometimes a project involves the overhaul or improvement of an existing asset during its lifetime. The nature of the work determines whether the costs qualify for capitalization. Costs of upgrading or improving an asset can be capitalized so long as the improvement extends its useful life, improves efficiency or provides some other improvement in economic benefits to the company. If a major component of the asset must be replaced, the cost can be capitalized. In contrast, replacement costs for small components such as wear parts go to expenses. Costs of repair and maintenance of an asset to its original condition are considered an expense.

[CAGOPALJI AGRAWAL]

Please refer Accounting Standard 7 -Construction contracts and AS 16 for borrowing cost as notified under Companies Act 2013 as well issued by ICAI,

AI Summary

Project Capitalization Hinges on Completion Milestones, Excludes Tax Parts with Cenvat Credit, Follows IAS 16 Standards A forum participant inquired about capitalizing new projects. Responses highlighted that project capitalization depends on completion milestones and involves creating an 'Asset under Construction' account. Capitalization should exclude tax parts if Cenvat credit is availed. The process is crucial for tax benefits and involves collaboration between accounting and project management. Capitalization affects financial statements, governed by accounting standards like IAS 16. Recognition requires the asset to provide future economic benefits and be measurable. Initial costs include acquisition and installation, while subsequent costs are expensed unless they improve the asset's lifespan or efficiency. Relevant accounting standards were also mentioned.