Accounting Treatment Of Expenditure Incurred On Development Of A Pilot / Model Factory Under Ind As 16

The accounting treatment of expenditure incurred on pilot or model factories hinges on whether such costs are "directly attributable" under Ind AS 16 or constitute revenue expenditure. Unlike commercial facilities, pilot plants are often essential for technical validation, testing machinery configuration, and ensuring safety prior to full-scale production. Ind AS 16 (Paragraphs 16(b) and 17(e)) supports capitalising costs necessary to bring an asset to its intended condition, specifically including costs for testing whether the asset is functioning properly. While ICAI EAC opinions vary based on specific facts—rejecting capitalization if assets are already operable—global IFRS guidance clarifies that "functioning properly" denotes technical readiness rather than commercial optimization. Consequently, pilot-phase costs required to resolve technical uncertainties and establish operability should be capitalised, while subsequent costs for fine-tuning or scaling must be expensed once the asset is technically ready.

INTRODUCTION – THE CONCEPT OF A PILOT / MODEL FACILITY

In several capital-intensive and process-driven industries, entities often establish a pilot plant or model factory prior to commissioning a full-scale commercial production facility. Suc