Issue on Provision

for Capital Work-in-Progress

Presented by : P.T Pannilarathne

Financial & Management Consultant

Content

1. Client Profile

2. Introduction to the issue

3. Details of the issue – Identification

4. Details of the issue –Accounting

treatment

5. Application of LKAS

6. Conclusion

The Client is a high tech manufacturer of Solid tyres.

The full production is for export purpose.

The company has 2 factories in Sapugaskanda and Biyagama EPZ.

The Client reports to the parent in Sweden.

Client Profile

Introduction to the issue

Area relevant to the issue : Capital Work in Progress.

Key risks identified in the kick-off meeting of the audit

- relevant to the PPE area;

High Technological Complexity of the Area might lead to misjudgments.

Details of the issue - Identification

(CWIP) Project Name

Amount in LKR (000)

Project A 8,800

Project B 6,000

Project C 620

Total CWIP 15,420

Project wise CWIP Break-up of the

“T” Company

Breakup of an Individual CWIP project (e.g. Project A)

Project - AAmount in LKR (000)

Opening balance 4,300

Transferred to PPE (Capitalized)

(500)

CWIP additions 5,000

Total CWIP 8,800

Substantive testing : CWIP additions were tested againstthe supporting documents.

Details of the issue - Identification

Date ReferenceAmount in LKR (000)

13/Jun/25 Supplier 1 800

13/Sep/02 Supplier 2 1,500

13/Nov/01 Supplier 1 1,700

13/Dec/31 Provision 1,000

Total 5,000

CWIP additions listing - Project ABreakup of an Individual CWIP project (e.g. Project A)

Project - AAmount in

LKR (000)

Opening balance 4,300

Transferred to PPE (Capitalized)

(500)

CWIP additions 5,000

Total CWIP 8,800

Observation : Except for the group instructions sent by parent company and an approved JV, no any supporting documents relevant to the CWIP provision was available. In almost all of the CWIP projects a provision similar to this had being made as per the group instructions. No evidence supporting for the actual occurrence of the expense of a given nature.

Details of the issue –Accounting treatment

Accounting treatment

E.g.

When the capital provision is made

CWIP (Asset) A/C DrCWIP Provision A/C Cr

When the actual expense occurs (provision gets settled)

CWIP Provision A/C DrCash/Supplier Cr

Basis of the CWIP Provision

At the end of a financial year engineering committee of the company estimates

how much of a cost will be further required to the CWIP projects in the next year

(By evaluating individual project by project basis).

The amount decided will be debited to the CWIP. Hence this was a decision taken

by the group, the company has to adhere to the same.

Application of LKAS

LKAS 16 - (Paragraph- 10)

“An entity evaluates under this recognition principle all its property, plant and

equipment costs at the time they are incurred.

These costs incurred initially to acquire or construct an item of property, plant and

equipment and costs incurred subsequently to , add to, replace part of, or service it”

LKAS 16 - (Paragraph- 22)

“The Cost of self constructed asset is determined using the same principles as for

an acquired asset..”

LKAS 37 - (Paragraph- 8)

“This standard neither prohibits nor requires capitalization of the costs recognized

when a provision is made”

Conclusion

• The given CWIP provision is merely an estimated capital expenditure and

has not being incurred at the time of capitalizing as result could not

be considered as a CWIP.

Hence, it was recommended to remove the provision from the CWIP balance

and to reverse the provision.

Proposed entry

CWIP Provision A/C Dr

CWIP (Asset) A/C Cr

Thank You!