A
tangible non-current asset is initially recorded at cost which may include:
purchase price after any trade discounts, transport and handling costs,
non-refundable tax such as site preparation, import duties, professional fees,
installation costs, and labor costs of the entity’s own employees, borrowing
costs, future dismantling and restoration costs.
Subsequent
expenditure on non-current asset may be capitalized where it enhances the
economic benefits of the asset in excess of its current standard of
performance.
Related
Accounting Standards:
IAS 16 Property, Plant
and Equipment overview
There are essentially four key areas when accounting for property,
plant and equipment that you must ensure that you are familiar with:
¤ initial recognition
¤ depreciation
¤ revaluation
¤ derecognition (disposals).
Initial recognition
The basic principle of IAS 16 is that items of property, plant and
equipment that qualify for recognition should initially be measured at cost. One
of the easiest ways to remember this is that you should capitalise all costs to
bring an asset to its present location and condition for its intended use. Commonly
used examples of cost include:
¤ purchase price of an asset (less any trade discount)
¤ directly attributable costs such as:
– cost of site preparation
– initial delivery and
handling costs
– installation and
testing costs
– professional fees
¤ the initial estimate of dismantling and removing the asset and
restoring the site on which it is located, to its original
condition
(ie to the extent that it is recognised as a provision per IAS 37,
Provisions, Contingent Assets and Liabilities)
¤ borrowing costs in
accordance with IAS 23, Borrowing Costs.
Subsequent costs
Once an item of PPE has been recognised and capitalised in the financial
statements, a company may incur further costs on that asset in the future. IAS
16 requires that subsequent costs should be capitalised if:
¤ it is probable that future economic benefits associated with the extra
costs will flow to the entity
¤ the cost of the item can be reliably measured. All other
subsequent costs should be recognised as an expense in the income statement in
the period that they are incurred.
The
following article explains IAS 16 and is available on ACCA’s website:
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IAS 23 Borrowing costs
IAS
23 requires that borrowing costs associated with the acquisition, construction
or production of a qualifying asset are be capitalized as part of the cost of
that asset.
-
Interest related to specific borrowing is capitalized net of income generated
by the investment of surplus funds and interest and
-
Interest related to general borrowing is capitalized based on the amount of
borrowings used on the qualifying asset and the weighted average cost of
general borrowings
-
Capitalization commences when expenditure is being incurred on the asset
borrowing costs are being incurred and activities to prepare the asset for its
intended purpose are in progress
-
Capitalization ceases when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete.
-
Capitalization is suspended when work on the asset is suspended.
IAS 20 Accounting for Govt.
Grants and disclosure of Government Assistance