Capitalization

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Narayan Mahadevan (Querist)

27 December 2016 As per IAS 16, when incurring costs towards safety equipment at the stage of initial purchase, the said equipment is eligible to be capitalized. Extrapolating the same situation to an asset already in the books, and an investment made in improving safety standards of the asset due to a safety regulatory requirement, whether to be capitalized or treated as revenue in nature?

CA Anuj Agrawal

CA Anuj Agrawal (Expert)

27 December 2016 As per para 7 of IND_AS 16 states that asset can be recognised when it is probable future economic benefits will flow to the entity and the cost of item can be estimated reliably. Now , there are some situations where an expense needs to be incurred to comply regulatory requirements and it sometimes do not fulfill asset defination as the expense will not generate any future economic benefits, however such items can also be qualify for asset defination becuase they enable the entity to drive future economic benefits from related assets in excess of what could be derived had those items not acquired.

Hence specific to your question, if the same is required as per the regulator, and the amount is material in nature then it will qualify for capitalisation as an asset.

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