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January 2023

Enabling Assets

By Dolphy D’souza, Chartered Accountant
Reading Time 8 mins
INTRODUCTION 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 m
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