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Costs incurred in fulfilling a contract, unless within the scope of another standard (such as IAS 2, IAS 16 or IAS 38 are recognised as an asset if they meet the following criteria :
a) the cost relate directly to an identifiable contract ( costs such as Labour, materials, management costs)
Q) my question is that Labour, material, management costs are all direct expenses then why it is mentioned above that they all are assets.
Because we can allocate those costs directly to a contract work in progress
Imagine that you are building a house. You’ll need to buy all the materials and pay for all the skilled workers to help you to build that house.
But materials and workers’ wages are all expenses!
So you will finish up with a whole load of expenses and a big deficit on your statement of profit or loss and … no asset!
That cannot be right.
So expenses that are directly attributable to an asset such as contract work-in-progress are capitalised
OK?
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