Question

Should Architect's fees £600 for extension of the building be capitalised? Building is a commercial property and let out to other tenants.

Answer 1

As per IAS 16, an item of property, plant, and equipment should be recognized as an asset if and only if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the item can be measured reliably.

Any expenditure incurred that meets these recognition criteria must be accounted for as an asset. The Standard makes reference to individually insignificant items that can be aggregated. Subsequent costs should add to the utility or useful life of the asset. 

In this case the professional fees paid for the extension of the building should be aggregated to total cost of extension and capitalized.

Comments

Hi Shivangi,

Thank you for the answer above, as per IAS 16, an item can be capitalised if it meets certain criteria, such as you mentioned above, in addition to this criteria there is another criteria which suggests that, economic benefit should be received within defined timelimit, however in this case, fees is for architect's application! Results yet not known whether planning permission will be approved or not, also if it will be approved, it is not certain when extension will take place, HMRC may say capitalise it when extension is done in year or two year's time.

Any further thoughts on this?

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As per IAS 16 Future economic benefit from capitalized asset is one of the criteria to recognize capitalization.

In this case the future economic benefit is not certain as you said, hence, it is suggested to expense out the Fees expenses in income statement.

Answer 2

According to IAS 16, an item of property, plant and equipment should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.Hence in this case professional fees of architect must be capitalized.

Comments

Architect's fees is in relation to extension to existing building, means it is not certain if planning permission will be approved, in case planning permission is approved, time limit is not set!

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As architect's fee is subject to any condition, if condition exist then IAS16 would not permit the capitalization of this cost.