Employee Benefits and Food Trial Costs under Ind AS 16

1. Question

A company (hereinafter referred to as “the Company”) engaged in owning and operating luxury restaurants. Before opening an outlet, the Company conducts food and beverage trials and testing to ensure consistency in taste, presentation, ambience, lighting, and service quality across all outlets. These trials generally take about a month and involve calibration of kitchen equipment and other systems such as air conditioning, lighting, and audio-visual controls. The Company proposed to capitalise the employee benefits and food trial costs incurred during this phase as part of the cost of constructing the outlet, relying on paragraphs 7, 16, and 17 of Ind AS 16, Property, Plant and Equipment, which allow capitalisation of directly attributable costs incurred in bringing an asset to the location and condition necessary for it to operate as intended by management.

During an audit, the auditor objected that employee benefits and food trial costs incurred during the testing phase before opening a restaurant should not be capitalised as part of the cost of property, plant, and equipment as per Para 19 ofInd AS 16.

The Company has therefore sought guidance on the accounting treatment of:

(a) Salaries paid to staff/employees and

(b) Food and beverage material costs incurred during the testing phase before the opening of a new restaurant outlet.

2. Relevant Provisions

Ind AS 16: Property, Plant and Equipment

Para 7

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

Para 16

(a) the cost of an item of property, plant and equipment comprises: its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;

(b) 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; and

(c) the initial estimate of dismantling and restoring costs.

Para 17

Examples of directly attributable costs include:

(a) costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; and

(b) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition.

Para 19

Examples of costs that are not costs of an item of property, plant and equipment include:

(a) Costs of opening a new facility; and

(b) costs of conducting business in a new location or with a new class of customer (including costs of staff training).

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