IAS 16 for a New Hydro Power Plant (IPP)

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kondanak
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Joined: 17 Nov 2021, 15:12

IAS 16 for a New Hydro Power Plant (IPP)

Post by kondanak »

Hello

Need some guidance as we are having a spirited debate. Sem-Long read but please assist.

BACKGROUND

A new company was set up with the aim of building then consequently running a new powerplant. This is their ONLY line of business and this is their FIRST hydro plant. This therefore an internally generated asset.

IAS 16 allows for the capitalization of
'any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management'.


In the first year and for four months of the second all the company was doing was building the assets. All the staff costs incurred are in relation to the power plant building e.g their food and staff benefits such as medical for them and their staff is being incurred because these people are working on the construction.

In order to save costs, the company purchased motor vehicles to use for transporting staff and materials to and from the construction site during the construction phase and because they are owned by the company, all repairs and maintenance is paid for by the company.

Throughout the first year and in the second year up until the date of commissioning, ALL the costs incurred were considered as part WIP and allocated to various inventory codes for the forming of this internally generated asset. This include motor vehicle purchases, repairs and maintained, office equipment, staff costs and benefits (note no idle staff are maintained, when a section is complete any specialist staff are released and general workers are re-allocated, specialist staff are also not engaged until work in their section is ready to commence). For the whole first year there were no P&L items all expenditure was considered part of
'any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management'.
and forms part of the asset. Likewise in the second year until the date of commissioning. At this date, fair value of motor vehicles, office equipment, plant equipment and other such separable items which will be used in the operations will be backed out asset amount and form their own fixed assets in the company's fixed asset register.

THE DEBATE:
This treatment is not appropriate you cannot capitalize medical costs and vehicle repairs. These should be expensed.

Or

This treatment is correct because all expenses were incurred to bring the asset to the condition necessary for use and would not have been incurred if not that the company was constructing. In addition the company's only activity currently is the construction of the asset. The motor vehicles are part of WIP, how can you recognize repairs and maintenance for a WIP item as expenses in P&L?
JRSB
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Re: IAS 16 for a New Hydro Power Plant (IPP)

Post by JRSB »

There were no costs of managing that company? You capitalised the audit fee?
kondanak
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Re: IAS 16 for a New Hydro Power Plant (IPP)

Post by kondanak »

Yes. Everything.
-Audit fees
-Insurance

No income was projected until second year because of the construction period required.
JRSB
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Re: IAS 16 for a New Hydro Power Plant (IPP)

Post by JRSB »

ok well in my view you're including costs that are not directly attributable to the construction of that power plant.
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Marek Muc
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Re: IAS 16 for a New Hydro Power Plant (IPP)

Post by Marek Muc »

I agree with JRSB, you've gone too far if you capitalised literally all expenses, such as audit of financial statements of the legal entity

but the examples in your original post are legitimate directly attributable costs (i.e. depreciation and repairs of vehicles used for transportation to and from construction site or medical costs of staff involved in the construction)
kondanak
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Joined: 17 Nov 2021, 15:12

Re: IAS 16 for a New Hydro Power Plant (IPP)

Post by kondanak »

Thank you both for your responses.
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