START-UP Costs, how to record them ?

HOW to record Start-Up Costs arising from a new operation activities ? Should this type of cost be treated as Intangible Assets based on IAS 38 ?

Referring to IAS 38, the standard requires an entity to recognize an Intangible Asset, whether purchased or self-created (at cost), if, and only if :

1. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
2. the cost of the asset can be measured reliably

An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.

Read also my previous post : Recognition Criteria of Intangible Asset

Paragraph 68 of IAS 38 states that expenditure on an intangible item shall be recognized as an EXPENSE when it is incurred unless :

1. it forms part of the cost of an intangible asset that meets the recognition criteria (as stated above)
2. the item is acquired in a business combination and cannot be recognized as an intangible asset. If this is the case, it forms part of the amount recognized as goodwill at the acquisition date.

Further, paragraph 69 gives examples of the types of cost that are indistinguishable from the costs of developing the business as a whole and that should, therefore, be EXPENSED when it is incurred. The kind of such costs are include :

1. expenditure on START-UP activities (ie START-UP COSTS), unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS 16. Start-up costs may consist of establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure to open a new facility or business (ie Pre-Opening Costs) or expenditures for starting new operations or launching new products or processes (ie Pre-Operating Costs);
2. expenditure on training activities;
3. expenditure on advertising and promotional activities (including mail order catalogues);
4. expenditure on relocating or reorganizing part or all of an entity.

From the above explanations, it is clear that START-UP Cost has to be EXPENSED as incurred.

Following is the illustrated example of Start-Up Cost excerpted from Intermediate Accounting - Kieso, Weygandt, Warfield :

U.S-based Hilo Beverage Company decides to construct a new plant in Brazil. This represents Hilo’s first entry into the Brazilian market. Hilo plans to introduce the company’s major U.S brands into Brazil, on a locally produced basis. The following costs might be involved :

1. Travel-related costs; costs related to employee salaries; and costs related to feasibility studies, accounting, tax, and government affairs
2. Training of local employees related to product, maintenance, computer systems, finance, and operations
3. Recruiting, organizing, and training related to establishing a distribution network

Hilo Beverage Company should EXPENSE all these start-up costs  as incurred.

The same accounting treatment as Start-Up Cost, the Initial Operating Losses incurred in the start-up of a business also may not be capitalized (HRD).