Capitalization of legal fees

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Garry
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Capitalization of legal fees

Post by Garry »

Hi All,

I am looking for some guidance on the following question.
We are currently incurring legal fees while going through court with a contractor who didn’t satisfy the construction requirements as stated in the contract. Another contractor is completing the last few steps of the construction. Our lawyer advised that we will be reimbursed for legal fees and are also not required to pay any payments withheld from that contractor.
Could I capitalize legal expenses, reimbursements of legal costs and any retention payments?

Many thanks in advance for any comments, thoughts and guidance on that topic :)!
JRSB
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Re: Capitalization of legal fees

Post by JRSB »

Doesn't really feel like a direct cost of the construction, otherwise you could capitalise everything (if those legal costs, then why not all the salaries of time spent on it etc, the rent for the office those people work in...)....
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Marek Muc
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Re: Capitalization of legal fees

Post by Marek Muc »

Garry wrote: 22 Apr 2022, 06:18 Could I capitalize legal expenses, reimbursements of legal costs and any retention payments?
whoa, capitalise payments that are withheld, i.e. not spent? how do you imagine debits and credits relating to these payments?

as for the legal/litigation claims, they do not contribute in any way to the asset being constructed, so I wouldn't capitalise them. But you can recognise these costs as a separate asset by following this approach:
https://ifrscommunity.com/knowledge-bas ... roceedings
pub_acco
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Re: Capitalization of legal fees

Post by pub_acco »

Perhaps covered by IAS 37 that states a contingent asset isn't recognized unless the reimbursement is virtually certain?
pub_acco
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Re: Capitalization of legal fees

Post by pub_acco »

Wow interesting AD!
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Marek Muc
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Re: Capitalization of legal fees

Post by Marek Muc »

Yep, before that I used to think that the virtually certain threshold applies to reimbursements as well
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exIFRS
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Re: Capitalization of legal fees

Post by exIFRS »

I would be very careful extrapolating the Agenda Decision.

The key fact in the Agenda Decision is (emphasis added)
"The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability. The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity."
In the circumstances described in the original post (not the AD) I presume the "assets" only exist if the judge rules in favour of the company and it wins the case. This is what makes everything contingent. So no capitalisation, (you would be a very brave person to argue a favourable ruling is "virtually certain" [any one want to suggest a threshold by the way for what this means?]).
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Re: Capitalization of legal fees

Post by JRSB »

original post says 'lawyer advises' - all turns on whether that is a prediction or if he/she is advising what the decision was..
pub_acco
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Re: Capitalization of legal fees

Post by pub_acco »

I agree the AD is very narrowly scoped and is not directly applicable to the OP's case. This case reminds me of a very similar case I came across before. At that time I felt legal fees were like an investment to obtain a favorable judge at court, and the "virtually certain" criteria was too harsh to assess an investment because the outcome of every investment is uncertain and contingent by nature.
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Marek Muc
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Re: Capitalization of legal fees

Post by Marek Muc »

exIFRS wrote: 23 Apr 2022, 11:02 I would be very careful extrapolating the Agenda Decision.
you're right, in the AD the deposit paid can be used to settle the tax liability, whereas legal costs will be of no use if the case is lost
pub_acco wrote: 23 Apr 2022, 15:04 This case reminds me of a very similar case I came across before. At that time I felt legal fees were like an investment to obtain a favorable judge at court, and the "virtually certain" criteria was too harsh to assess an investment because the outcome of every investment is uncertain and contingent by nature.
But you could say that about (nearly) all legal costs. I guess it's key to determine which IFRS covers these costs and I guess you weren't in the IFRS 9 scope as the asset you were fighting for wasn't contractual. So are you really able to avoid IAS 37 and the virtually certain criterion?
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Re: Capitalization of legal fees

Post by pub_acco »

By investment I meant more general activities rather than just financial ones. I see some similarities between the legal costs and many non-financial assets like PP&E, intangibles, inventories, and contract costs. The recovery of such non-financial items may sometimes be as contingent and uncertain as the legal costs but they are never tested by the virtually certain criteria. That's kind of unfair, I felt.
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Marek Muc
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Re: Capitalization of legal fees

Post by Marek Muc »

Ok I see your point
pub_acco
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Re: Capitalization of legal fees

Post by pub_acco »

;)

But still I'm not sure either if the legal fees can be capitalized in the OP's case....
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Marek Muc
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Re: Capitalization of legal fees

Post by Marek Muc »

I now think that the virtually certain criterion applies
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