Brief Facts
A company started a project 3 years back say in 2010. The company took forex loan from bank for the said project. During the last two years the company incurred substantial capital expenditure for the purpose of the said project. The expenses can be classified as follows:
- Directly related expenses for project like cost of construction, material, labour, steel, cement, machinery etc.
- Interest cost on the loan taken for the purpose of the project.
- Indirect cost incurred exclusively for the project like lease rentals, professional fees paid to consultants, legal fees for the loan, loan processing fees, salary paid to admin staff deputed at site etc.
- Loss on Forex exchange fluctuation on the forex loan.
During the first two years all the above listed were capitalized and transferred to Capital WIP as the project was not completed. This position was as per the audited books at the end of the second year.
However in the mid of third year the project was halted due to concerns of its viability and could not move ahead. All the expenses incurred for the project viz indirect expenses, interest costs and foxes losses were debited to profit and loss account (rightly so) from the date it was decided that the project was not viable (Obviously no further direct cost were incurred). Further the auditor is of the opinion that the company is not a going concern and wish to qualify the accounts (this is also right). However the management is of the view that the project will be revived.
Now the question is
A) what should be the treatment for the already capitalized costs during the first two year. i.e should the Capital WIP be transferred to P & L A/c or the carried forward given that the management is hopeful for revival of the project.
B) Will the treatment defer for cost at 1,2,3,4 above. i.e will there be different treatment for direct cost (1) or indirect cost (2,3,4). Only direct cost be carried forward and indirect cost will be transferred to profit and loss account.
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