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Treatment of Compensation to Contractor post Capitalization of Project

Rahul Kumar (ARTICLE ASSISTENT) (147 Points)

15 October 2020

Good Morning to All,

My Query is w.r.t Ind AS 16 PPE,

My company has capitalized the Project cost 2 year back and depreciation is being charged. Contractor has filed the case demanding additional cost incurred by them and the matter has been decided in favor of contractor. Now,

Query:

1- Treatment of Legal Expense incurred by my company.

2- Treatment of additional amount paid as Compensation to contractor towards project cost.

Please help me with this.

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4 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 15 October 2020

If your following IndAS 16,

you can create a provision

Legal fee expense Dr.- this is not directly attributable to PPE.

To bank a/c

and create a provision

Fixed asset- additional costs paid

To provision liability

then when you made the payment duly:

Provision liability a/c

To Bank a/c

this can be created as per IndAS 37.10(appendix) as you have a legal obligation.

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Rahul Kumar (ARTICLE ASSISTENT) (147 Points)
Replied 16 October 2020

Thank you for your reply,

One more thing, what if we had not made any provision in the books regarding this. Plz guide in this also

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 16 October 2020

Your correct because sometimes creating more provisions is restricted. So,

Fixed Asset-> new costs

Legel expenses a/c

To bank a/c

no provision is required and also, how you treat the new carrying amount of the PPE depends upon your decision. You can make retrospective=changes and change all the balances or start depreciating the costs from current year. This treatment is ok because I don’t remember reading anything about this in PPE standard and if I do, I’ll reply back, Txs

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