Costs incurred will be both of capital and revenue (P&L) expenditure in nature. In due course CPAs will be raised for both projects against which we will record the costs which are deemed to be capital expenditure in line with IFRS and also the Group Accounting policies. As these CPAs will not be in place in January all project costs should initially be recorded under separate cost centres (business units in JDE) which are then charged against Exceptional Costs in the P&L, ie below EBIT.
On a quarterly basis (ie March, June, September and December) these costs will be reviewed with Group Finance (note 1) and approval obtained of amounts to be capitalised.
Other costs deemed to be revenue expenditure relating to the projects will remain in the separate cost centre and be charged to exceptional items. Approval for such costs to be deemed exceptional will also be given by Group Finance (note 1).
For City announcements we can only show costs in exceptional items if we have made public announcements in respect of these projects. This will be an issue for the business if announcements for either of these projects have not been made by the time we publish our half year results (31 July 2013). Announcements will be made at the stage of an irrevocable commitment to proceed. This situation will require to be closely monitored in Q2 depending on progress.
The classification of costs between capital and revenue should follow in line with the with the existing Group policy (Devro Finance Procedure 4.2) which was clarified further in the review carried out in Quarter 3, 2012. There were 2 main principles established during that review:
1. Capitalisation of labour during build and process development stage of projects:- The labour used to design and build the PPE should be capitalised across the whole group in line with IAS 16. In addition, certain engineering labour and other specific development labour clearly identified as evolving the process development capability of equipment to the point where it functioned as intended, should also be capitalised.
2. Capitalisation of labour during commissioning stage of projects :- Generally the cost of direct labour operators used during the commissioning of PPE should be expensed. As well as keeping classification simple and avoiding cumbersome record keeping, during the commissioning period product is being generated that can in some instances be sold. Hence this is not purely a capital phase of the development. Also it was deemed that direct labour operators are generally performing regular routine tasks or training at this stage which do not enhance the value of the asset. On the same basis it was clarified that material waste or losses from lower yields during the commissioning stage of the project should not be capitalised.
However in the case of Columbia and Dragon, both of which involve a complete new facility, it may be appropriate to also capitalise operator labour costs and material waste during the commissioning phase, given that no normal operating production will be underway at this stage on the particular phase of lines being brought into production.
Costs to be classified as Capital costs :
People costs for those working 100% on the construction of the new factories eg Project Manager, Engineering Manager. This will include personnel from other sites where positions are backfilled to free up resource to work on the project together with directly related travel costs.
Others, whose time is largely devoted to the project as above (at least 50% of the time they spend on site), provided that appropriate records are