IAS 16 - Assets under construction - when to account for capital projects

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ermo
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IAS 16 - Assets under construction - when to account for capital projects

Post by ermo »

Hi!
(Rookie IFRS question following)

I've been looking to find some guidance in IAS 16 as to when it is appropriate to recognize assets under construction when these assets are under construction by a third party. Say for example that a third party contractor is manufacturing a big and complex machine at their workshop. The payment plan is not linked to the construction, but has a 20-80 split between commencement and delivery.

Transfer of risk and control has not yet taken place, but the machine is a custom build and I as the customer is contractually obligated to take delivery of the asset once it is ready.

My gut feeling is that it somehow should be recognized over the construction period based on degree of completion, but as i said, i cant seem to find the solution here on my own :)

Thanks for any replies!
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Marek Muc
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

I would say that you are on the other side of this:
https://ifrscommunity.com/knowledge-bas ... to-payment

so if the two conditions mentioned above are satisfied, I would recognise the asset as it is being constructed
However there are no specific requirements in IAS 16 that would correspond to those in IFRS 15 that I linked to above, so this is judgemental.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by ermo »

HI Marek,

Thanks for your input- that makes sense to look at the performance obligation of the contractor.

So as often i guess the answer will be "it depends" ;)
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Dear Marek + Members,

I have a similar scenario on hand with the only difference being that the payment plan is milestone based. Is it necessitated to draw a reference to the two criteria’s mentioned under IFRS 15 (performance satisfied over time) as mentioned by Marek in his post for capitalization purposes or the general recognition criteria of IAS 16.7 would suffice. I would have used the general recognition criteria of IAS 16.7 so my question is that what is the basis to draw a reference to IFRS 15 in the scenario of asset under construction.

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Anjeet
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Anjeet »

Assets under construction should be recognized as Asset when it is available for use ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.
As Depreciation of an asset also begins when it is available for use
Generally asset will be available for use when its construction is complete and handed over for intended use.
During construction period it should be classified as Assets under construction.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Hello Anjeet,

Thanks for your response, I would disagree with it though. Let's say had it been self-constructed assets where IAS 2 comes useful as it is more focused on assets produced internally (IAS 16.22), there it would not have been prudent to hold back the capitalization until the asset was finally available for use. So while I am convinced that the asset under construction has to be capitalized while getting constructed but my doubt is that whether an inverse reference to IFRS 15 is necessary in this situation (being on the opposite side as the customer) or the general recognition criteria under IAS 16.7 should form the basis for capitalization. Secondly, whether the payment terms (delivery based versus milestone based) makes any difference to the situation.

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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Strangely our companies accounting policy says that it is okay to capitalize as long as the construction period exceeds one year. I wonder if that could be the “only” criteria enabling capitalization. While it is clear that the purpose of the accounting policies is not to regurgitate the standards, but rather clarify accounting choices and provide explanations on how things should be interpreted but I am not sure if the policies could be drafted so generally either.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

Anjeet wrote: 10 May 2023, 16:28 Assets under construction should be recognized as Asset when it is available for use ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.
I think you mixed up recognition as assets and determining useful life/commencing depreciation
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Hello Marek,

Agree on your response to Anjeet. Would be grateful if you may also look into my query :roll: . Sorry if you wanted to get to it later but flagging a reminder out of the fear of being missed out.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

Not sure what you mean when you reference IAS 16.7. If your payment plan corresponds to the work done, then it's perfectly fine to add these payments to the carrying amount of the asset under construction.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Hi Marek,

Thanks for your response. When I am paying for the construction then the payment is made on the backdrop of the probability that the economic benefits will flow to me when the asset will be ready and I can of course track the payment being the cost of the item. I would therefore go along capitalizing my payments following the general recognition criteria's under IAS 16.7. Since you drew a reference to IFRS 15 in one of your previous posts therefore I was curious to understand the basis of using that reference. Did you use the reference because the payment term was delivery based and not construction linked?
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

I made a reference to IFRS 15 as this allowed developing an accounting policy for that specific scenario.
Relying on IAS 16.7 is insufficient in this case - how do you distinguish between prepayments and items of PP&E relying solely on IAS 16.7?
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Hi Marek, Yes you have a valid point that by following general recognition criteria mentioned under IAS 16.7, it would be difficult to distinguish between prepayments and items of PP&E. By the way our accounting policy says the following about Assets under construction stressing upon the construction period > 1 year forming the basis of capitalization. I guess the accounting policy requires a tweak also on the basis of the same question i.e. how should we distinguish between prepayments and PPE. Do you also confirm?

Assets under construction
Assets with construction periods that cross one or more reporting periods, should be separately recognized as assets under construction. These assets are not depreciated until they are available for use. Abnormal costs such as wasted material, labor, etc. incurred during the construction of an asset are expended in the income statement when it is realized that the work was wasted, even if the asset is not in use.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

yes, it would be useful to add this if you company pays advances
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Thanks a lot Marek.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by JRSB »

Marek Muc wrote: 11 May 2023, 13:02 and BTW prepayments are intangible assets :)
https://ifrscommunity.com/knowledge-bas ... d-expenses
And therefore sit in non-current even if benefit is current?
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

are you able to find an IFRS paragraph to support this? 8-)
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by fr.perezca »

Hello,
Although it is about inventories, I leave the following paragraph that shows that for the purposes of lack of detailed guidance on the recognition of an asset, refer to IFRS 15 as a guide to determine obtaining control of the asset, and therefore, its recognition is the correct thing practically and conceptually:

“The inventories standard does not include specific quidance on the timing of recognition of purchased inventories. In our experience, entities generally refer to the revenue recognition requirements -I.e. Inventory is recognised on the date on which the entity obtains control on it.” (KPMG, 178)
https://assets.kpmg.com/content/dam/kpm ... p-2022.pdf
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

thanks fr.perezca!
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Marek Muc wrote: 11 May 2023, 13:02 and BTW prepayments are intangible assets :)
https://ifrscommunity.com/knowledge-bas ... d-expenses
Hi Marek,

Thanks and quite convinced on the classification of prepayments as Intangible Asset. If possible then can you or any other member help me with a balance sheet of a public company reporting as per IFRS wherein prepayment of construction in progress is shown under Intangibles? I hope I am not being over-demanding in my humble request :? .
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by JRSB »

Not sure I have seen it but will be happy to see an example!
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

I wouldn't expect anyone to present it like this. Prepayments, if significant, are usually presented separately or subsumed to other assets.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

Ketan Marwah wrote: 16 May 2023, 18:48 I hope I am not being over-demanding in my humble request :? .
PS. If your intention was to ask someone to do a research for you, then yes - you were being grossly over-demanding :lol:
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Hi Marek, how about the cash flow impacts then for the usage of prepayments? Would it be CFFO or CFFI for an asset under construction? I expect the latter.
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Marek Muc »

The cash flow takes place when you make the prepayment, not when you utilise it. And yes, it's shown within investing activities
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Of course. Thanks. Sometimes the mind complicates easy stuff…
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Re: IAS 16 - Assets under construction - when to account for capital projects

Post by Ketan Marwah »

Marek Muc wrote: 17 May 2023, 18:00 I wouldn't expect anyone to present it like this. Prepayments, if significant, are usually presented separately or subsumed to other assets.
Ok but has anyone seen a balance sheet wherein prepayments are shown separately under Intangibles? I did my research but couldn’t find a big4 publication or a Balance sheet corroborating the stance..
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