Accounting for Legally Secured Employee Training Costs Under Ind AS

1. Question

Skylark Airlines Limited (hereinafter referred to as “the company”), a rapidly expanding domestic carrier, recently invested in a new fleet of Airbus A320 aircraft. To operate these new planes, the company incurred significant expenditure of Rs. 40,000,000 on specialised “type-rating” training for a batch of 10 new pilots during the financial year 2023-24.

To secure its investment in human capital, the company requires each pilot to enter into a legally binding service agreement before commencing the training. The key terms of this agreement are:

The pilot is bonded to provide a guaranteed 3 years of service to the company upon successful completion of the training.

If a pilot leaves employment during this 3-year period, they are obligated to reimburse a proportionate amount of the training cost to the airline.

This reimbursement obligation is secured by an unconditional bank guarantee furnished by the pilot.

The company has a consistent track record of successfully enforcing these claims and recovering the costs from pilots who have left prematurely in the past. The company’s CFO has proposed to capitalise the entire ₹40,000,000 training expenditure as an intangible asset.

Is the company’s proposal to capitalise the pilot training expenditure compliant with the requirements of Ind AS 38, Intangible Assets?

2. Relevant Provisions

Ind AS 38, Intangible Assets

Para 8 – “An intangible asset is an identifiable non-monetary asset without physical substance.”

Para 13 – “An entity controls an asset if the entity has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law.In the absence of legal rights, it is more difficult to demonstrate control. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits in some other way.”

Para 15 – “An entity may have a team of skilled staff and may be able to identify incremental staff skills leading to future economic benefits from training. The entity may also expect that the staff will continue to make their skills available to the entity. However, usually an entity has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training for these items to meet the definition of an intangible asset. For a similar reason, specific management or technical talent is unlikely to meet the definition of an intangible asset, unless it is protected by legal rights to use it and to obtain the future economic benefits expected from it, and it also meets the other parts of the definition.”

Para 21 – “An intangible asset shall be recognised if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably.”

3. Analysis

In the instant case, to determine if the pilot training costs can be capitalised, the expenditure must meet the definition of an intangible asset under Ind AS 38, with the most critical test being control. While the standard generally requires staff training costs to be expensed because a company typically lacks sufficient control over its employees who are free to leave, it provides a crucial exception. Capitalisation is permitted if the expenditure is “protected by legal rights to use it and to obtain the future economic benefits expected from it.” In the case of the company, this exception is clearly met. The company has established robust control through a legally binding 3-year service agreement that is further secured by a bank guarantee. This legal framework ensures that the company will receive the future economic benefits from its investment. If a pilot fulfils the service bond, the airline benefits directly from their skilled services. If the pilot leaves prematurely, the airline recovers the economic value of its investment through the reimbursement clause, which is backed by the bank guarantee. This enforceable legal right gives the company control over the benefits for the 3-year period, allowing the costs to be recognised as an intangible asset.

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