Capitalization of penalties in CWIP

[fazhar]

Hello all.
I'm reviewing some transactions incurred at my organization relating to capitalization of expenses and assets relating to a Capital Work-In-Progress.

There is an interesting case scenario here. The organization had acquired a property on which there were capital developments happening. The capital developments had started a year ago. After one year the developer had asked the organization to make the full payment of property and take ownership and possession. The organization delayed in making the payment by several months. The developer in return served them with a legal notice and charged occupational rent for the months the organization did not take possession of the property.

This 'penal charge' imposed by the developed on the CWIP has been capitalized by the organization, calling it finance cost incurred to acquire the asset. I've gone through the IAS16 many times by now.. yes directly attributable finance costs may be capitalized. But this particular penalty was a negligence on part of the organization, an abnormal cost that was not necessary to bring the asset into use. Should this cost be capitalized? And if not, can anyone share the IAS16 provisions under which it states that such costs should not be capitalized.

Thanks folks!

 

[kirby]

IAS 16 tells you to only capitalize costs necessary to bring the asset into use. That also logically serves as guidance telling you to NOT capitalize costs that do not bring the asset into use, such as penalties.
Proceed carefully as this may not be welcomed by your management.

 

[fazhar]

IAS 16 tells you to only capitalize costs necessary to bring the asset into use. That also logically serves as guidance telling you to NOT capitalize costs that do not bring the asset into use, such as penalties.
Proceed carefully as this may not be welcomed by your management.

Yes that's what I thought. Thanks for confirming this. I'll have to speak with the management to write off this amount.. tough conversation.