Employee Training Costs Must Be Expensed | Ind AS

1. Question

Demo Limited (hereinafter referred to as “the Company”) is engaged in the business of providing customer support and business process outsourcing services to clients across various sectors. It enters into a contract with ClientCo Limited to provide customer service operations for a term of three years.

To fulfil its contractual obligations, the Company is required to train its employees on ClientCo’s internal processes, software platforms, customer interaction protocols, and data security procedures. These training sessions are conducted by external trainers and internal domain experts prior to the commencement of the contract’s service delivery phase.

Under the terms of the agreement –

The Company is entitled to recover the cost of training from ClientCo for both the initial workforce and any additional employees hired due to scale-up during the contract.

However, the Company bears the cost of training new recruits who are replacing employees who have resigned or been removed.

The Company has recognised all training costs associated with the ClientCo contract as an asset, citing their direct link to the contract and their anticipated recoverability. The Company considers these costs to meet the recognition criteria under Ind AS 115.

State whether the accounting treatment adopted by the Company aligned with the requirements of Indian Accounting Standards.

2. Relevant Provisions

Ind AS 115, Revenue from Contracts with Customers

Para 95 – “If the costs incurred in fulfilling a contract with a customer are not within the scope of another Standard (for example, Ind AS 2 Inventories, Ind AS 16 Property, Plant and Equipment or Ind AS 38 Intangible Assets), an entity shall recognise an asset from the costs incurred to fulfil a contract only if those costs meet all of the following criteria –

(a) the costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved);

(b) the costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future; and

(c) the costs are expected to be recovered.”

Para 96 – “For costs incurred in fulfilling a contract with a customer that are within the scope of another Standard, an entity shall account for those costs in accordance with those other Standards.”

Ind AS 38, Intangible Assets

Extract of Para 69 – “Other examples of expenditure that are recognised as an expense when it is incurred include –

(b) Expenditure on training activities.”

Para 3 – “If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this Standard does not apply to –

(a)….

(i) assets arising from contracts with customers that are recognised in accordance with Ind AS 115, Revenue from Contracts with Customers.”

3. Analysis

The Company’s decision to capitalise training costs requires evaluation under both Ind AS 115 and Ind AS 38.

While Ind AS 115 does permit the capitalisation of fulfilment costs under certain conditions, this is only applicable if the costs are not within the scope of another Standard. Paragraph 96 of Ind AS 115 explicitly states that if costs are within the scope of another Standard, that Standard must be applied. In this case, the relevant standard is Ind AS 38.

According to paragraph 69(b) of Ind AS 38, training expenses are to be recognised as an expense when incurred, regardless of the potential for future economic benefit. This is based on the fact that training enhances the skills of employees, but employees are not controlled resources, and no identifiable intangible asset arises from such training. The benefit of the training is not separable nor does it arise from contractual or legal rights, which are key conditions for asset recognition under Ind AS 38.

Furthermore, even if Clientco reimburses some of the training costs, this does not meet the asset recognition criteria under Ind AS 38 or Ind AS 115. The recoverability of cost alone does not justify capitalisation. The right to receive reimbursement from the customer would be treated as revenue or a receivable, but the cost itself must still be evaluated independently for capitalisation.

The Company may argue that the training costs are –

• Directly related to a specific contract (with ClientCo),
• Enhancing the resources (employee readiness) required for service delivery, and
• Expected to be recovered (in full or part).

However, since training costs are specifically scoped into Ind AS 38, and Ind AS 38 requires immediate expensing of such expenditure, these costs fail the recognition test under Ind AS 115.

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