Capitalization of Expense

Dear Anoop,

1) Following is the detailed explanation for your first question whether extended warranty can be capitalised

According to IAS 16 Property Plant and Equipment para 16 only the following cost can be included:

1. cost of purchase adjusted for duty, discounts, taxes and rebates etc
2. directly attributable cost necessary to bring the asset into its intended use
3. estimated cost of dismantling and removing the asset

Extended warranty cost qualifies for none of the above three criteria and thus cannot be added as cost of the asset. Therefore it will be treated as expense in the relevant period and will be presented in the profit and loss account.

For example if the warranty cost is paid upfront for next three years then it is deferred and recongized as an expense on straight line basis over three years period.

The reason for treating warranty cost as expense is that warranty cost are not necessary to bring the asset into its intended use as asset can still be used even if. warrant is not given or taken.

2) Input Tax credit on extended warranty can be claimed for credit, because it is a revenue Expenditure and not a capital expenditure.

Please Correct me if any wrong statement is notified