When training costs can be capitalized?

It is correct that International Accounting Standards and especially IAS 16 Property, Plant and Equipment has specifically ruled out the capitalization of any expenditure incurred on training costs. You can read in more detail that why training costs are not allowed for capitalization as an asset or as part of the cost of other asset in this QnA.

However, there is one case in the history of business that relates to this matter in which capitalization of training cost has been discussed at full stretch and the remarks given in the decision are not just interesting but far reaching. The case was INDOPCO v. Commissioner, 503 U.S. 79 (1992). Although the case was not specifically related to training cost capitalization but this is where the debate about future benefit started. In short, in this case it was decided that all such expenditure that promise future benefits that extends over number of periods shall be capitalized rather than allowed as a deduction from business income under profit and loss or in simple words treating it as expense.

In this it was explained that:

  1. Expenditures are categorized as capital or revenue expenditures is a question of degree and not of kind i.e. it is a case to case debate.
  2. In order to consider a cost incurred as a capital expenditure it does not necessarily has to pave a way to a separate and distinct asset.
  3. Not all the expenditures that provide future benefits over a longer period of time can be treated as capital expenditure and require careful examination of the situation.
  4. But such training costs must be capitalized where the training is intended primarily to obtain future benefits significantly beyond those traditionally associated with training provided in the ordinary course of a taxpayer’s trade or business as it was the case in Cleveland Electric Illuminating Co. v United States.

In Cleveland Electric Illuminating Co. v United states, it was stated that training costs form part of start-up costs as training of employees was required before company was awarded with licence to load reactor with nuclear fuel thus such training cost shall be capitalized.

Such cases started a big debate about the capitalization of different expenditures which are proven to provide future benefits like training costs, advertisement and marketing costs etc that provide benefits extending beyond one accounting period and whether they shall be capitalized in the statement of financial position (balance sheet) or expensed out in the income statement.

In short we can have exceptions regarding training costs where they can be capitalized but that strictly depends on circumstances which are of extremely rare nature and entity treating it so might have to “visit” court of law to prove its opinion.

But one important implication for such confusion is that most of the time favours the entity to treat such costs as expense as it reduces the profits of the business and thus the tax liability and also as International Accounting Standards require training cost to be expensed than even such rare circumstances are even harder to find.


  1. Dear Sir,

    As a small start up, as explained above, if directors ( enterprenures ) spend certain amounts on

    1. Training and Education to build long term competence
    2. Visual Brand design and packaging developmen for sustaining over a long period of minimum 3-4 years
    3. Advertising Campaign for building brand

    can they be capitalised as intangible assets ?

    And which will also help the start up show on the books a bigger value of assets ?

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