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Treatment of indirect cost of plant construction

Treatment of indirect cost of plant construction

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Dear Members

We have a client who has acquired a plant for circa. £20m that cannot be used in its current form for its intended purpose. The client is developing the plant spending many more millions on this so that it is capable of operating as intended. Directly attributable costs are capitalised without an issue.

However there are number of indirect costs that are being paid annually and I shall appreciate an opinion of what other members think on its treatment. As an example: annual rent of £1.2m is paid for the site on which plant is located as well as £200k per annum is paid to security personnel for the site etc. There are many other costs that are being incurred on an annual basis. Shall we capitalise these or they need to be taken to P&L thus creating a taxable loss?

I am aware in most cases rent payable is an overhead and not a directly attributable cost that can be capitalised. However isn't this scenario an exceptional case since the plant is under construction and it would be impossible to use the plant for its intended purpose until it is complete which is still expected to take few years.

If these costs are taken to P&L then I assume these will be relievable against future profits generated once the plant becomes operational. Are there capital allowances available if these costs qualifies to be capitalised? 

PS: I am posting this as anonymous user due to the significance of numbers involved and I hope AW members will not feel offended by this.

 

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By paul.benny
18th Aug 2020 17:18

The test in both FRS102 and IAS16 is "any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management".

In the OP, the rent and security costs are described as indirect. I think that answers the question: certainly the rent is not a direct cost of the plant redevelopment. I'm a little more sympathetic to security as being part of the cost of redevelopment if this is over and above what a normally operating site would require.

OP - If you want to follow up and retain your anonymity, you can edit the original post (but please clearly mark your edits)

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