Sir
The above expenses are in the nature of start up costs. Start up costs are normally capitalised only when they increase the production capacity of the relevant PPE or useful life of the PPE. Only the interest cost on the borrowings made for the construction of qualifying asset should be capitalised until the asset is ready for use.
All the following expenses should be expensed off in the income statement as they do not increase the earning capacity or result in benefit of enduring nature. Example:
- Technical and Know How Fees - Expensed off
- Employee Costs - Direct labour cost can be capitalised.
- Feasibility Study - Expensed off
- Interest Cost directly allocable to Fixed Assets - Can be capitalised till the asset is ready for use.
- Interest Cost not directly allocable to Fixed Assets- Can be capitalised till the asset is ready for use.
- Raw Material Consumed for Trial Runs - Expensed off and in case of any earnings made from the sale of scrap finished product produced during the trial run phase should also be booked in income statement.
- Power and Fuel - Should be expensed off
- Travelling and Conveyance Costs- Only cost incurred in bringing the asset to its present location and condition can be capitalised else all other cost needs to be expensed off.
- Miscellaneous Expenses- Expensed off.
- Share Issue Expenses - Expensed off.
- Audit Fees - Expensed off.
- Professional Expenses - Expensed off.
- Depreciation - Chargeable only when the asset is ready for use and not when the asset is under construction stage. Depreciation on other assets which are used in the construcion of the PPE should also be expensed off in income statement.
- Expenses of Administrative nature - Expensed off
Hope u will understand the logic of capitalisation of expensed to PPE
Thanks
CAclubindia
