Can we capitalize material relocation expenses incurred on non-current asset?

First of all we must be clear about subsequent expenditures, criteria for capitalizing subsequent expenditures in carrying amount of non-current/fixed assets and relocation costs or expenses.

Subsequent expenditures refers to such costs which are incurred after the asset is recognized in the financial statement and brought to the location and condition intended. Examples of such expenditures include repair and maintenance, overhauling, upgradation, replacement costs etc

Criteria for capitalizing subsequent expenditures is the same as it is for initial costs incurred on the non-current asset i.e.:

  • it is probable that future benefits associated with the item will flow to the entity
  • cost of the item can be measured reliably

However, day-to-day servicing costs are not recognized in the cost of the asset rather they are recognized in the profit or loss as they are incurred.

Relocation costs are such costs that are incurred to move the asset from one location to the other and then bringing back to operational state as intended by the management.

According to International Accounting Standard – IAS 16 Property, Plant and equipment, relocation expenses are not recognized in the cost of the asset and should be treated as period’s expense.

IAS 16 para 20 uses even more appropriate word i.e. costs incurred on redeploying asset. According to IAS 16 para 20:

Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item (asset) are not included in the carrying amount of that item.

Therefore, it is clear that once the non-current asset is brought into intended condition then relocation expenses, even if they are material, they are not included in the cost of the asset and should be treated as an expense in profit and loss.

IAS 16 even explains further that not just non-current asset’s relocation costs are treated as expense but even the expenditure on relocating or reorganising part or all of an entity’s operation are also not form part of the carrying amount of the asset.

Similarly in IAS 38 Intangible Assets para 68(d) it is stated that expenditure on relocating or reorganising part or all of an entity are treated as expense in the period they are incurred.

3 COMMENTS

  1. Jonathan Barber Jonathan Barber

    Hi Hasaan – thank you for this article; this was very helpful. Would you happen to know the US GAAP equivalent treatment for relocation expenses?

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  3. it is allowed under IFRS to capitalise costs associated with moving assets to another site to pave way for a major installation of plant & machinery? these costs include hire of a premise to relocate some assets and return them to the current site after the project is complete

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