The cost of an item of property, plant and equipment is recognised as an asset under IAS 16 when it is probable that future economic benefits associated with the item will flow to the entity, and the cost can be measured reliably. That cost includes the purchase price and the directly attributable costs of preparing the asset for use, but excludes day-to-day operating costs and the costs of opening new facilities.
The Two Recognition Criteria
The Standard states expressly that the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.
What Does the Cost Comprise at Initial Recognition?
The Standard specifies that the cost of an item of property, plant and equipment comprises:
- its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates;
- any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and
- the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories.
Examples of Directly Attributable Costs
The Standard gives examples of directly attributable costs, including: costs of employee benefits arising directly from the construction or acquisition of the item, costs of site preparation, initial delivery and handling costs, installation and assembly costs, costs of testing whether the asset is functioning properly, and professional fees.
When Does Cost Recognition Stop?
The Standard provides that recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Costs incurred afterwards, while using or redeploying the item, are therefore not included in its carrying amount.
What Costs Are Excluded From the Cost of the Asset?
By contrast, the Standard clarifies that certain costs are not costs of an item of property, plant and equipment, including: costs of opening a new facility, costs of introducing a new product or service (including advertising and promotional costs), costs of conducting business in a new location or with a new class of customer (including staff training costs), and administration and other general overhead costs.
Similarly, day-to-day servicing costs are not included in the carrying amount of the asset; instead, these costs are recognised in profit or loss as incurred.
Legal References
- IAS 16 — Property, Plant and Equipment, paragraph 7 (the two recognition criteria)
- IAS 16 — Property, Plant and Equipment, paragraph 16 (components of the cost of the asset)
- IAS 16 — Property, Plant and Equipment, paragraph 17 (examples of directly attributable costs)
- IAS 16 — Property, Plant and Equipment, paragraph 19 (examples of excluded costs)
- IAS 16 — Property, Plant and Equipment, paragraph 12 (exclusion of day-to-day servicing costs)
- IAS 16 — Property, Plant and Equipment, paragraph 20 (cost recognition stops once the asset is ready for use)
For questions about your specific situation, you can ask the Private Sector Accounting Helper on Helpers, or consult a licensed chartered accountant.