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Fixed Asset Capilization

28 December 2009 307 views 9 Comments

Dear all

Seasons greetings!!

We have purchased a fixed asset with value of USD 100,00/- specifically at the request of our client. We had the same equipment, but the client need two instead of one and the client agreed to reimburse the cost of additional one, once we install the same on site.

I just want to know whether I can capitalise the equipment as fixed asset in my books of account and claim depreciation on the asset.

The asset will be in our name and we are the owners of the asset. After completion of the contract with our client, the asset will be in our custody and client doesnt have any right on the same. They are reimbursing the cost because they want to complete the project as early as possible

Thank you

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9 Comments »

  • ifrslist said:

    Message from Haresh

    Dear Shan,

    you can capitalize the asset in this case, however, in the billing to client you cannot show charge for the asset specifically for audit / tax reasons.

    Regards

    # 28 December 2009 at 9:31 am
  • ifrslist said:

    Message from Antonysamy

    Dear Shan,

    this appears to be an arrangement containing a lease (IFRIC 4) as the right to use the asset is transferred and the MLP even it is a single payment is equal to the fair value of the asset and hence would be a financial lease under IAS 17.

    under finance lease you being the lessor can record only the receivable and not the asset even though it stands in your name

    Antonysamy

    # 28 December 2009 at 9:33 am
  • ifrslist said:

    Message from Anoop

    Dear Shan

    Please refer IFRIC 18, which is applicable from 1st July 2009 .

    There are some examples given along with IFRIC 18 which is almost similar to your case.

    Regards

    Anoop

    # 28 December 2009 at 9:33 am
  • ifrslist said:

    Message from Vatsla

    IFRIC 18 provides the right treatment for the asset in question. The credit side would be revenue with the only issue being whether the reimbursement is recognised immediately or deferrred over the project tenure.

    # 28 December 2009 at 6:46 pm
  • ifrslist said:

    Message from Jeroen

    Dear all,

    I think the lease classification is not correct as the lease payment being equal to the fair value of the asset is only one factor (IAS 17.10.d) influencing that decision. More important is whether the risks and rewards related to that asset have been transferred to a lessee (IAS 17.8). If Shan’s company retains all rights and obligations related to the asset (e.g maintenance) there is no financial lease, especially since ownership is retained with the company. It would be interesting to know what rights the other party has during the contract (e.g. is the other party entitled to be repaid if the contract has not been fulfilled? or can it claim the asset in case of a contract breach?)

    I would definitely capitalize the asset (based on current information) and depreciate it over the lifetime of the asset. The payment by the other party should be classified as an additional one-off service fee instead of a reimbursement (to make things easier) and the fee should be recorded either as revenue (if the other party has no rights to the asset) or it should be booked as deferred income and released to P&L over the duration of the contract (if the other party has claim rights in case of contract breach).

    Hope this helps,

    Jeroen

    # 28 December 2009 at 6:53 pm
  • purudate said:

    Shan,

    Jeroen has provided convincing explanation. However, we need additional information asked by Jeroen to reinforce our understanding and confirmation that the asset in this case can be capitalized.

    So, it is important to know (1)terms of use of this asset (2) who bears maintenance costs (3) What happens in the event of breach of contract

    Regards,
    Puru

    # 29 December 2009 at 12:54 pm
  • Radhika1308 said:

    Hi,

    IFRIC 18 states that the entity receiving the item of PPE recognizes it in its financial statement only if

    1) the item transferred satisfies the definition of an asset from the perspective of the recipient and
    2) the entity has control over the asset. That is the entity should be able to decide how the asset is to be operated, maintained and replaced.

    Initial recognition at fair value:
    The item of PPE needs to be recognized at its fair value on initial recognition.

    For cash transfers from customer, recognize cash received if it satisfies the asset criteria and the receiving entity has control over the asset.

    The credit will be recognised as revenue. Revenue will be recognised on performance of the contract. Hence, revenue can be deferred or immediate depending on the terms of the contract.

    In the case mentioned by you, you are receiving cash for the asset purchased. Hence, credit needs to be recognized as revenue on performance of the contract.

    Please contact for any further clarifications in this regard.

    # 30 December 2009 at 10:17 am
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    # 25 January 2010 at 6:34 pm
  • ifrslist
    ifrslist said:

    [New Post] Fixed Asset Capilization – http://www.ifrslist.com/2009/12/fixed-as...
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    # 29 January 2010 at 9:47 am

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