Subsequent Expenditure and Recognition of Expenses under AS 26

Understand Subsequent Expenditure and Recognition of Expenses

Key rules to remember

Subsequent expenditure rule

Capitalise only if: (1) it is probable the spend will generate future benefits beyond the original standard of performance, AND (2) it can be measured and attributed to the asset reliably. Otherwise expense.

Both conditions are needed. Most subsequent spending fails, so the default answer is expense.

Costs always expensed when incurred

Start-up costs; training costs; advertising and promotional costs; relocation or reorganisation costs.

Start-up costs include legal and secretarial costs of forming a legal entity, pre-opening costs of a new facility, and pre-operating costs of a new operation or product.

Research and development

Research phase: expense when incurred. Development phase: capitalise only if all the AS 26 development recognition criteria are met; otherwise expense.

Do not put research in the same list as start-up, training or advertising. Development cost is the one that can become an asset.

Items that cannot be recognised as intangible assets

Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance are not recognised as intangible assets. Spend on them is expensed.

The cost of generating them cannot be distinguished from the cost of developing the business as a whole. This is a separate list from the costs above.

No reinstatement of past expenses

Expense once recognised in the Statement of Profit and Loss is never added back to the cost of the intangible asset later.

Applies when an item earlier expensed later meets the recognition criteria.

Prepayments

Expense is recognised when you receive the goods or services, or the right to access them, not when you pay.

Applies to advertising material, catalogues and similar items paid for in advance.

Website costs (ICAI interpretation based on SIC-32, applied with AS 26)

Planning stage: expense. Development stage (application, infrastructure, graphic design, content): capitalise if criteria are met. Operating stage (maintenance, updating content): expense, unless it meets the AS 26 subsequent expenditure test (the two conditions above).

Content developed only to advertise or promote your own products is expensed. The stage-wise treatment comes from ICAI's interpretation on website costs, applied within AS 26. SIC-32 itself is not part of AS 26.

How to solve Subsequent Expenditure and Recognition of Expenses questions

1. 1List every cost item separately, with its amount and the year it was incurred.
2. 2Tag each item: purchase or creation cost of the asset, subsequent expenditure, research or development cost, or one of the named expense items (start-up, training, advertising, relocation).
3. 3Expense every named item straight away, even if it relates to the new asset.
4. 4For research and development, expense the research phase. Capitalise the development phase only if all the development recognition criteria are met; otherwise expense it.
5. 5For subsequent expenditure, test the two AS 26 conditions: is it probable that it gives benefits beyond the original standard of performance, and can it be measured and attributed to the asset reliably? If either fails, expense it.
6. 6For website or software, split the cost by stage: planning, development, operating. Capitalise only the development stage costs that meet the criteria.
7. 7Add up the amount to capitalise and the amount to expense. Check the total equals the total spend.
8. 8Compute amortisation on the new carrying amount if asked, over the remaining useful life.
9. 9Write the conclusion with the reason in one line for each item.

Quickest way: Capitalise or expense in 30 seconds

Common mistakes in Subsequent Expenditure and Recognition of Expenses

• Capitalising staff training cost because the new software needs trained users.

  The training looks necessary to make the asset work, like installation.

  Fix: AS 26 expenses training costs always. Capitalise only the directly attributable cost of preparing the asset for its intended use, not training.

• Capitalising advertising spent to launch a new product or brand.

  Students link the spend to the benefit of future sales.

  Fix: Advertising and promotional costs are expensed when incurred, including launch campaigns. Remember them as always expense.

• Capitalising all later spending on software upgrades.

  Students treat any spend after purchase as adding to the asset.

  Fix: Capitalise only if the upgrade extends performance beyond the original standard and meets both conditions. Routine maintenance is expensed.

• Treating research and development as one item, either all expensed or all capitalised.

  Students remember 'R&D' as a single phrase.

  Fix: Expense research costs. Capitalise development costs only if all the development recognition criteria are met; if any is not met, expense them.

• Capitalising website planning or content-update costs.

  Students treat the whole website as one asset.

  Fix: Split by stage. Planning and operating costs are expensed. Development stage costs are capitalised if the criteria are met.

• Adding back an earlier expensed item to the asset cost when the criteria are later met.

  Students think the cost is now eligible.

  Fix: AS 26 prohibits reinstating past expenses. Only costs incurred after the criteria are met can be capitalised.

• Expensing a prepayment in the year of payment.

  Students link expense recognition to cash outflow.

  Fix: Recognise the expense when you receive the goods or services, or the right to access them. Until then it is a prepaid asset.

Worked examples