The document discusses an issue regarding the capitalization of provisions for capital work-in-progress (CWIP) by a client company. It provides background on the client and identifies capitalization of CWIP provisions as a key audit risk. It then details the client's practice of creating provisions in CWIP projects for estimated future costs based on engineering estimates, without supporting documentation for actual expenses. Application of relevant accounting standards suggests this is not in compliance as the costs have not actually been incurred. The conclusion recommends removing such provisions from the CWIP balance by reversing the provision entries.

1. Issue on Provision
for Capital Work-in-Progress
Presented by : P.T Pannilarathne
Financial & Management Consultant

2. 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

3.  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.

4. 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 - A
Amount 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 against
the supporting documents.

5. Details of the issue - Identification
Date Reference
Amount
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 - A
Amount 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.

6. Details of the issue – Accounting treatment
Accounting treatment
E.g.
When the capital provision is made
CWIP (Asset) A/C Dr
CWIP Provision A/C Cr
When the actual expense occurs (provision gets settled)
CWIP Provision A/C Dr
Cash/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.

7. 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”

8. 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!