What are directly attributable costs When you acquire a long term asset, you can include directly attributable costs to the initial measurement of its cost.Although IFRS define directly attributable expenses quite clearly and provide a few examples, there are many different items we are not sure about.In this article, I decided to look at directly attributable expenses with a magnifier and to give you some guidance for your future use.Id like to focus on acquisition of tangible assets under IAS 1.Property, Plant and Equipment, but the same principles apply for intangibles and other assets, too.What do the rules say IAS 1.IAS 1. Special For You Have you already checked out the IFRS Kit Its a full IFRS learning package with more than 3.IFRS case studies solved in Excel, more than 1.If you take action today and subscribe to the IFRS Kit, youll get it at discount Click here to check it outIn the paragraph 1.IAS 1. 6 there are the examples of what expenses are considered to be directly attributable and therefore, can be capitalized or included in the cost of an asset Costs of employee benefits IAS 1.Employee benefits arising directly from the construction or the acquisition of the item of PPE, Costs of site preparation, Initial delivery and handling costs, Installation and assembly costs, Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition, and.Professional fees.As opposed to that, the paragraph 1.Technical Line How the new revenue standard may affect a companys income tax accounting As companies prepare to adopt the new revenue recognition standard, they.Through this post I discuss about capitalization and amortization of software cost.This discussion assumes that the reader has some familiarity with computers.Investopedia is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from.IAS 1. 6 lists examples of costs that are not costs of an item of PPE and therefore, cannot be capitalized Costs of opening a new facility.Costs of introducing a new product or service Costs of conducting a business in a new location or with a new class of customer, and.Administration and other general overhead costs.On top of that, IAS 1.Clear enough. Yet in practice, there are many items that require our careful judgment and we are not sure whether to include them in the cost of an asset or not.These doubts arise especially when your company constructs a big asset, such as a plant or a mine.Lets break it down.Cost of employee benefits.As written above, you can capitalize only those employee benefits that arise from the construction or the acquisition of the asset.Here, two principal questions arise Which employee categories arise from the construction or the acquisition of the asset The answer is no admin, no general functions, no research activities, no marketing advertising, no training employees.It means that You can capitalize the employee benefits provided to site workers, in house architects and surveyors or production supervisors.To some extent, you can also capitalize quality controls and testing if these activities are inevitable in order to put an asset into use.You cannot capitalize any portion of employees benefits paid to general managers, accountants taking care solely about ships accounting, etc.Which expenses related to these employees can be capitalizedThe answer is all employee benefits under IAS 1.Short term employee benefits salaries, wages, paid vacationPost employment benefits.Other long term benefits and.Termination benefits.The following types of expenses are NOT employee benefits under IAS 1.Travel expenses of your employees, Training of your employees, How should you include the expenses for the employee benefits into the cost of your asset The answer is based on some reasonable allocation method.For example, you build a ship.Based on timesheet reports you find out that in 2.X1 John worked 1 5.Your company incurred the following expenses for employee benefits in relation to Johns work Salary CU 1.Compensation for paid vacation in line with law CU 1 0.Expense for contribution into a pension fund defined contribution plan CU 2 0.How much of these benefits can you include into a cost of a ship You can include all of these expenses for employee benefits allocated on a reasonable basis.In this case, we can allocate it based on time spent on a ship construction 1 5.Here, we do not take the paid vacation time into account for allocation purposes.It means that a compensation for paid vacation will be allocated to the cost of a ship.The reason is that a company is obliged to provide this vacation to its employees and a vacation is simply another cost of worked hours.The calculation Allocation of salary CU 1.CU 1. 5 0. 00. Compensation for paid vacation CU 1 0.CU 8. 33. Contribution to a pension fund CU 2 0.CU 1 6. 67. TOTAL CU 1.Note you include only current years expenses or the expenses incurred during ships construction.Cost of relocating the asset to the new location.Lets say you construct a new plant and you decided to relocate some machines from an older plant to the new premises.As machines are quite heavy, you paid CU 1 0.Can you capitalize these expenses to the cost of a machine In short, no this is a relocation cost and IAS 1.Insurance of an asset.Insurance premiums paid to the insurance companies cannot be capitalized, but expensed in profit or loss in line with an insurance policy terms.The reason is that these costs are not inevitable to bring the assets to the condition and location to operate as desired by the management.In fact, these costs are incurred to protect an asset against some risks during some period and therefore, it would not be correct to take these costs to the cost of an asset and put them in profit or loss via depreciation over assets useful life.Some time ago, one CFO raised a point to this matter. 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He said We take a loan to finance the acquisition of a plant, but our bank insists on insurance policy for this plant.Otherwise we wont get a loan.Without an insurance policy we cannot acquire a plant, therefore I think the insurance cost can be capitalized as its inevitable.Hmmm, a good argument, but the truth is that the CFO needed an insurance policy to get a loan and not to acquire an asset.In other words, that company could have acquired a plant without a loan, with a cash payment and in such a case, no insurance policy would be necessary.Operating lease expenses for land.You can incur some lease expenses during construction of your asset.For example, you can pay rentals for the land you build your plant on.Can you capitalize these expenses This question is quite controversial and really, an answer depends on how well you can justify your own view in front of your auditors.Id like to give you arguments for YES and NO here YES, capitalize Operating lease charges can be considered directly attributable costs and included into cost of an item of PPE, if these lease costs are necessary to bring the asset to the desired condition and location.Therefore, rentals paid for land under operating lease on which you build a building can be capitalized into a cost of a building during a construction stage.NO, dont capitalize I am more in favor of no capitalization, but recognizing these expenses in profit or loss.The reason is that it produces quite inconsistent impact on profit or loss.If you include just rentals during the construction period into the cost of PPE and you expense the subsequent rentals as they incur, then the first rentals will be expensed via depreciation over assets useful life, and the remaining rentals will be expensed immediately.This means that matching principle is shattered.Also, I always see a land as a separate asset, because its useful life is different from the life of a building on it.The rental payments relate to the acquisition of a land, not to a building itself.Special For You Have you already checked out the IFRS Kit Its a full IFRS learning package with more than 3.IFRS case studies solved in Excel, more than 1.If you take action today and subscribe to the IFRS Kit, youll get it at discount Click here to check it outAnyway, this is one of the reasons why I like the new IFRS 1.Leases. Under the new standard, you will have to recognize a right to use asset instead of dealing with operating lease payments and therefore, this dilemma will not exist anymore.