IAS Twenty-One Foreign Currency Loss Capitalization Limits in Commissioning
Foreign exchange losses on commissioning payables belong in profit or loss under IAS 21, capped strictly under IAS 23.6(e) for borrowing interest adjustments.
Mechanical Completion Date
Meaning
Engineering contracts define the specific milestone when a production facility is physically constructed and all individual components are installed and cold-tested. Reaching the mechanical completion date indicates that the construction contractor has finished the physical assembly and the project is ready for hot commissioning. This event triggers the transfer of care and custody of the plant from the builder to the owner.
Milestone Validation
Inspections must confirm that all piping, electrical circuits and structural elements are in place according to the design blueprints. Achieving the mechanical completion date is documented by a signed certificate after all punch list items are resolved. This milestone release shifts the project into the pre-commissioning phase.
Financial Implication
Contractual payment schedules often link significant progress payments to this specific achievement. Reaching this point can also stop the accrual of liquidated damages for construction delays. The owner’s project financing begins to shift from construction drawdowns to operational term loans.
Transition Risk
Operational teams must be fully trained and ready to take control of the facility at this point. If the owner calls the milestone early before the systems are fully ready, they assume liability for any subsequent failures. This can lead to insurance disputes and project cost overruns.