[Case Study] Ind AS 16 | Treatment of Capitalization of Insurance Policy Premium

As per para 16 of Ind AS 16, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management are required to be added to the cost of an item of property, plant and equipment. Therefore, the company is inclined towards capitalising the expenses on account of project insurance to the cost of an item of PPE considering as directly attributable expenditures to bring the project to the location and condition necessary for it to be capable of operating in the manner intended by the management.

But confusion arises when the auditor raised a query on capitalisation of insurance premium stating that expenses on account of project insurance may not be ordinarily essential for construction activity and cannot be considered directly attributable costs. So it should be recognised in the statement of profit and loss.

The Expert Advisory Committee (EAC) of ICAI has noted incurrence of insurance expense is essential or a pre-condition for obtaining project-related approvals, without which construction activities cannot be commenced and the project cannot be brought to the location and condition necessary for it to be capable of operating in the manner intended by management.

Accordingly, the insurance expenses can be considered as directly attributable expenditures to bringing the project to the location and condition necessary for it to be capable of operating in the manner intended by the management and therefore, can be capitalised with the cost of an item of PPE under the provisions of Ind AS 16.

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