Capital Expenditure Or Revenue Expenditure

[zurpk]

AOA to All

We have a small type of Private Limited Company. We are involved in business of consultancy. We prepare feasibility and others reports to others organizations and thus they make payment to us against our consultancy charges.
Now a day, we are preparing a feasibility report. For that purpose, we purchase a report of Rs. 40,000/- from another organization to get some information for our feasibility report.
I am a little bit confused about the accounting transaction of the report which we purchased. I am confused whether we shall treat it as expense or we shall charge it to the company asset? Because the amount of the report is Rs. 40,000/- which is sufficient to capitalized. On the other hand, we have purchased it for generating of another report. Please let me know what will be the transaction of this report?

I shall be thankful for positive and an early response.

Regards,
Zia ur Rahman

[kamranACA]

Dear Zia-ur-Rahman,

It's quite a strange transaction. Buying a report to develope a report first time heard by me.

The criteria of recognition for Property, plant and equipment is given in Paragraph 7 of IAS 16, while the recognition criteria for intangible assets is given in paragraph 21 of IAs 38.

Logically, both criterias are same i.e. probability of inflow of future economic benefits and reliable measurement of cost of asset.

Therefore, if the report is supposed to be used only for the current assignment and will contribute towards earning from the job in hand only, its cost should be charged to profit and loss account.

In contrast, if management feels that the report is a valuable guideline for future and should be retained as other library books and reference manuals, and would be used as a guideline for future assignments as well causing the inflow of economic benefits specifically attributed to holding of such report in the long-run. Its cost could be capitalized.

It's in fact a matter of management's judgment being an accounting estimate and opinion of your auditors.

This report could be capitalized as a part of library books, if decided to be capitalized.

Best regards,

Kamran.

[Khawaja]

I had gone to give reply of this query but Mr. kamranACA's reply is very clear so I think there is no need to give you any more clarification in this regard.

[msc286]

Might be capitalized as "Technical Books". Income Tax law also allows depreciation on this type of assets.

[zurpk]

First of all, I am very thankful to all of you for giving me good responses.
We have purchased it just for our currnet project only. we want to get some valuable information just for our current project. and we don't have any intention to use it in future.

Zia ur Rahman

[kamranACA]

Dear Zia,

If you dont have to use it in future, you must charge its cost to profit and loss account.

Also check my replies to your queries in "TAX" section.

Regards,

Kamran.

[msc286]

Now it's very simple. If it has to be consumed for this project only, it should be charged to profit and loss account, as economic benefits are not expected to continue to flow.

By the way what makes you believe that the subject study will be used solely for this project only? I mean if you have another assignment of the same nature, you'll certainly need the same again.