Should Manpower Cost be capitalized during Project implementation phase?

A. Facts of the Case

A Company engaged in City Gas Distribution (CGD), is promoted by two Public Sector Unit (PSU) majors in the petroleum sector, namely A Ltd. and B Ltd and Geographical Area (GA) for these offices are in Haryana and Maharashtra and have a Head office at Mumbai.

The Company has project for laying of pipeline for domestic PNG connections and that has to be completed in their geographical areas (GA) within a 5-year period commencing from the respective authorisation date. As the top management comprising the CEO and CFO are responsible for accomplishment of the Company’s objectives and Accounts officer (AO) posted on deputation at HO to handles all project related financial activities pertaining to both the geographical areas.

Based on a careful analysis of the job profile of the afore mentioned officers, the Company concluded that 15% of the manpower cost of CFO and AO in terms of both time spent and nature of job may not be directly attributable to asset creation. Accordingly, the Company decided for charging 85% of the cost to CWIP and balance 15% to Profit and Loss Account.

B. Issue

The company has sought the opinion on the following issues arising from the above

• Whether manpower cost of CFO and AO can be capitalised and if so, in what ratio; or whether the cost should be expensed off.
• The basis of changes (if required) to the current treatment and whether it can be done retrospectively or prospectively.

C. Opinion

On the basis of the above, the opinion in respect of the issues raised by the company:

• As far as capitalisation of the manpower cost of Accounts Officer and CFO is concerned, AO is engaged in overall book keeping and accounting related activities and CFO of an organisation is generally involved in overall finance related activities of the Company as a whole. [that cost cannot be capitalised as per IND AS 16]
• However, in certain exceptional cases where it can be clearly demonstrated that these are directly attributable cost for bringing the Project/ PPE to the location and condition necessary for it to be capable of operating in the manner intended by management, [Can be capitalised as per Ind AS 16]
• The extent to which these costs are directly attributable to Project is a matter of judgement in the specific circumstances, which should be exercised and demonstrated by the management of the Company.
• Any changes, required in accounting treatment should be corrected by the Company as a prior period error retrospectively in the first set of financial statements approved for issue after the discovery of the error. [IND AS 8].

The above opinion was affirmed by the ICAI-Expert Advisory Committee.