Dolphy D’souza, Chartered Accountant

In many cases, companies must incur expenditures on items they will not own. A company may incur costs on electricity transmission lines, railway sidings and roads, referred to as ‘enabling assets’, to build a new factory. Though the company incurs costs on construction/development of these items, it will not have ownership rights on the same, i.e., the enabling assets will also be available for use to the general public.  However, the company will significantly benefit from the same.  Without incurring these costs, the company would not have been able to construct the new factory. The question addressed in this article is whether the company should capitalise enabling assets or charge the costs incurred as expenses in the Statement of Profit and Loss.

QUERY

Company X is constructing a new refinery outside the city limits. To facilitate the refinery’s construction and subsequent operations, it needs to incur costs on construction/development of items, such as, electricity transmission lines, railway sidings and roads.  X will not have ownership rights over the enabling assets that will also be available for use to the general public.

Whether X should capitalise such costs or charge them to the profit and loss account?  

If X determines that the cost needs to be capitalised, what would be the classification of such costs, e.g., factory building, plant and machinery, intangible assets, electrical fittings, etc.?

TECHNICAL REFERENCES

Ind AS 16 Property, Plant & Equipment

Paragraph 7
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:  

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

Paragraph 9
This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value.

Paragraph 11
Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an

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