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Editorial Board on Accounts and Audit
  • Capitalization of cost incurre

    by vinod on Friday, June 28, 2019 at 04:36 PM

    The Company had purchased certain building and has been using it for business for last three year. During the year the Company came to know that certain permits critical have not been obtained. The permits are so critical that their absence will render the construction illegal and the building can be demolished. The Company consulted the relevant regulatory authorities and determined that the fees payable for the permit is Rs. 1 crores. Whether this cost can be capitalized as PPE ?

    Replied byEditorial Board Monday, July 01, 2019 at 08:14 PM

    There are two aspects to the query. Firstly, the stated costs can be capitalized for Rs. 1 crore under building. Secondly, when the building was initially capitalized, an estimated amount of fees should have been capitalized along with the cost of building. It is presumed that regulation for which permit is to be obtained existed the day the building was initially capitalized. Hence, not capitalizing an initial known amount tantamounts to an error. Rectifying an error should be done in accordance with Ind AS 8 Accounting Policies, Changes in Accounting Estimates and errors.

    However, if the permit is against a regulation which has recently come into place then such amount should not be considered as an error.

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