How would I respond to this?

[vestalandwiler]

One of the partners of my firm got the following email from a client today, and since it's slow season, they are asking me what I would respond to this inquiry with and why. Any help would be greatly appreciated.

Here's the inquiry:


We are incurring legal, due diligence, travel, lodging, and other miscellaneous costs related to new projects (new converting site in Oklahoma, search of new site in the NE, etc...).
Is it ok to post these expenses to a transitory asset account in order to depreciate them when the projects is put in service? Let me know.

 

[ICAEW]

This seems something like capitalising the decommissioning costs, etc, in accordance with IAS 16 Property, Plant and Equipment, which form part of the cost of the asset. However, the criteria is that there must be an obligation to incur such costs at the end of the project (not the case here).

IAS 16 defines cost as all the directly attributable expenses incurred in order to bring the asset to its current location and condition necessary in order for it to operate as intended by the management, including any legal and brokerage costs, and testing expenses. However, staff training costs, travelling expenses, etc. should be expensed.

If in the construction industry, you will be accounting for the revenue and expenses in accordance with IAS 11 Construction Contracts, using the stage of completion method.

Ideally, and except for the legal expenses, the above expenses should be recognised in the profit or loss.