Is your pre-operative entity recognising depreciation properly? Many entities incorrectly capitalize depreciation to defer losses; a practice not aligned with IFRS and Bangladesh Tax Act 2023. Per IAS 16, depreciation is mandatory once assets are "available for use"—regardless of revenue. For tax purposes, depreciation is an allowable deduction provided the asset is "used for the purpose of the business.
Technical Insight: Depreciation Accounting and Tax Compliance for Pre-operative Entities
In the corporate lifecycle, companies often encounter an extended gestation period between incorporation and the commencement of commercial operations. A frequent point of technical contention during this "inoperative" phase is the accounting and tax treatment of depreciation for capital assets—including infrastructure, plant machinery, and administrative equipment.
Historically, some entities sought to capitalize depreciation as "Unallocated Revenue Expenditure" to defer its impact on the financial statements. However, under prevailing International Financial Reporting Standards (IFRS) and the Bangladesh Income Tax Act 2023, this practice is largely obsolete and conceptually inconsistent with the principles of accrual accounting.
The Financial Reporting Framework: IAS 16 Perspective
Under IAS 16 (Property, Plant, and Equipment), the mandatory commencement of depreciation is triggered by the asset being "available for use"—defined as the point when it is in the location and condition necessary for it to operate in the manner intended by management. For administrative assets such as furniture, fixtures, and IT infrastructure, or site-related assets like buildings and boundary walls, this condition is typically met upon installation or completion, irrespective of whether the entity has generated revenue.
IFRS is explicit that depreciation does not cease when an asset becomes idle or is retired from active use. Consequently, inoperative entities must recognize a depreciation charge in the Statement of Profit or Loss, leading to an accumulated loss. Failing to record these period costs may lead to a material misstatement and subsequent qualification in the Independent Auditor’s Report.
The Statutory Tax Perspective: Income Tax Act 2023
The Third Schedule of the Bangladesh Income Tax Act 2023 aligns closely with the principle of asset utility. For tax purposes, depreciation is an allowable deduction provided the asset is "used for the purpose of the business." In a pre-operative context, tax authorities generally recognize "use" for infrastructure and administrative assets (e.g., office equipment and IT assets) required to maintain the corporate entity's legal and operational existence.
Crucially, while these depreciation charges may result in a net fiscal loss during inoperative years, the Act provides a mechanism for the "Carry Forward of Business Losses." By correctly claiming depreciation in the pre-operative phase, entities can build a tax-loss shield that can be offset against future taxable profits once commercial production commences, thereby optimizing long-term cash flows.
Distinguishing Use vs. Readiness
The professional application of these standards requires a distinction between two primary assumptions. Where assets are installed and capable of performing their function—such as IT systems supporting administrative filings or buildings securing the site—depreciation must be recognized. Conversely, assets that are not yet commissioned, such as machinery in transit or plant equipment awaiting utility connections, are classified as Capital Work-in-Progress (CWIP). In this state, the "available for use" criterion is not met, and depreciation should not be recognized until the asset is fully commissioned.
Strategic Conclusion
For entities in the pre-operative phase, the deferral of depreciation is neither a compliant accounting strategy nor an effective tax planning tool. Proper recognition ensures compliance with IFRS, provides a transparent view of the company's financial position, and secures the right to future tax benefits. Management should ensure that Fixed Asset Registers are meticulously maintained to document the "available for use" dates, providing a robust audit trail for both statutory auditors and tax authorities.
