Capitalisation on Referred revenue expenditure and Leasehold premises?
This query is : Resolved
06 May 2016
Sir, we are in wellness industry . We paid almost 3 crore in branding . So we capitalized as deferred revenue exp. and amortise for last 5 years. We approach bankers for Finance , they told as per rules you can't amortise the same.. you have to book full exps.
Sir, we paid as a Renovation on our our new centre, it is on lease for 8 years , so we treated as leasehold premises and amortise for last 5 years.Banker told me that you can't amortise . Kindly explain so we could explain in better way.
06 May 2016
Kindly give your suggestions on above matter.
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18 July 2024
It seems there might be a misunderstanding or confusion regarding the capitalization and amortization of certain expenses, particularly related to branding costs treated as deferred revenue expenditure and leasehold premises renovation costs. Let me clarify the general principles based on accounting standards.
### Branding Costs as Deferred Revenue Expenditure
1. **IFRS Treatment**: According to International Financial Reporting Standards (IFRS), costs incurred for branding (like advertising and marketing costs) are generally treated as expenses when incurred, unless they meet specific criteria for capitalization.
2. **Deferred Revenue Expenditure**: If your company has initially treated branding costs as deferred revenue expenditure, this means you have capitalized them as an asset on the balance sheet and are amortizing (expensing) them over a specific period (in your case, over 5 years).
3. **Banker's Concern**: The bankers' concern may arise from the fact that under traditional accounting principles, advertising and branding expenses are usually considered as current expenses and not capitalized. Therefore, they might question the capitalization and amortization approach.
### Leasehold Premises Renovation Costs
1. **Capitalization**: Costs incurred for renovating leasehold premises are generally capitalized under IFRS. This means they are recognized as an asset on the balance sheet (leasehold improvements) and amortized over the shorter of the lease term or the useful life of the improvements.
2. **Amortization**: The amortization of leasehold improvements typically aligns with the lease term or the useful life of the asset, whichever is shorter. Amortization ensures that the costs are expensed gradually over the economic benefit period provided by the improvements.
### Addressing the Banker's Concerns
To address the concerns raised by your bankers regarding the treatment of these expenses, you can consider the following points:
- **IFRS Compliance**: Explain that your treatment of branding costs and leasehold premises renovation costs follows IFRS principles for capitalization and amortization. Provide documentation and accounting policies that demonstrate compliance with these standards.
- **Asset Recognition**: Emphasize that the costs in question meet the criteria for recognition as assets under IFRS. For branding costs, this would involve demonstrating that they provide future economic benefits to the company (e.g., increased brand recognition). For leasehold improvements, it would involve showing that the costs enhance the leased property and are expected to generate economic benefits over time.
- **Amortization Rationale**: Explain the rationale behind amortizing these costs over their respective useful lives. For branding costs, demonstrate how the amortization over 5 years reflects the expected period over which the benefits of branding will accrue. For leasehold improvements, clarify that amortization aligns with the period over which the improvements contribute to the company's operations within the leased premises.
### Conclusion
It's crucial to ensure that your company's accounting practices align with recognized accounting standards such as IFRS. By providing clear explanations backed by accounting policies and documentation, you can address your banker's concerns effectively and demonstrate the soundness of your financial reporting practices. If necessary, consult with a qualified accountant or financial advisor who can provide specific guidance tailored to your industry and regulatory requirements.
### Branding Costs as Deferred Revenue Expenditure
1. **IFRS Treatment**: According to International Financial Reporting Standards (IFRS), costs incurred for branding (like advertising and marketing costs) are generally treated as expenses when incurred, unless they meet specific criteria for capitalization.
2. **Deferred Revenue Expenditure**: If your company has initially treated branding costs as deferred revenue expenditure, this means you have capitalized them as an asset on the balance sheet and are amortizing (expensing) them over a specific period (in your case, over 5 years).
3. **Banker's Concern**: The bankers' concern may arise from the fact that under traditional accounting principles, advertising and branding expenses are usually considered as current expenses and not capitalized. Therefore, they might question the capitalization and amortization approach.
### Leasehold Premises Renovation Costs
1. **Capitalization**: Costs incurred for renovating leasehold premises are generally capitalized under IFRS. This means they are recognized as an asset on the balance sheet (leasehold improvements) and amortized over the shorter of the lease term or the useful life of the improvements.
2. **Amortization**: The amortization of leasehold improvements typically aligns with the lease term or the useful life of the asset, whichever is shorter. Amortization ensures that the costs are expensed gradually over the economic benefit period provided by the improvements.
### Addressing the Banker's Concerns
To address the concerns raised by your bankers regarding the treatment of these expenses, you can consider the following points:
- **IFRS Compliance**: Explain that your treatment of branding costs and leasehold premises renovation costs follows IFRS principles for capitalization and amortization. Provide documentation and accounting policies that demonstrate compliance with these standards.
- **Asset Recognition**: Emphasize that the costs in question meet the criteria for recognition as assets under IFRS. For branding costs, this would involve demonstrating that they provide future economic benefits to the company (e.g., increased brand recognition). For leasehold improvements, it would involve showing that the costs enhance the leased property and are expected to generate economic benefits over time.
- **Amortization Rationale**: Explain the rationale behind amortizing these costs over their respective useful lives. For branding costs, demonstrate how the amortization over 5 years reflects the expected period over which the benefits of branding will accrue. For leasehold improvements, clarify that amortization aligns with the period over which the improvements contribute to the company's operations within the leased premises.
### Conclusion
It's crucial to ensure that your company's accounting practices align with recognized accounting standards such as IFRS. By providing clear explanations backed by accounting policies and documentation, you can address your banker's concerns effectively and demonstrate the soundness of your financial reporting practices. If necessary, consult with a qualified accountant or financial advisor who can provide specific guidance tailored to your industry and regulatory requirements.
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