Cost of Property plant and equipment

Last update 29/12/2019

Cost of Property plant and equipment – The cost of an item of property, plant and equipment comprises: Cost of Property plant and equipment

its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Cost of Property plant and equipment
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.
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 during that period. Cost of Property plant and equipment

Examples of directly attributable costs are: Cost of Property plant and equipment

costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment;
costs of site preparation; Cost of Property plant and equipment
initial delivery and handling costs; Cost of Property plant and equipment
installation and assembly costs; Cost of Property plant and equipment
costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and
professional fees.

Dismantling, removing and restoring the site

An entity applies IAS 2 Inventories to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period. The obligations for costs accounted for in accordance with IAS 2 or IAS 16 Property, Plant and Equipment are recognised and measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

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. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment:

costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity;
initial operating losses, such as those incurred while demand for the item’s output builds up; and
costs of relocating or reorganising part or all of an entity’s operations.

No cost of Property plant and equipment

Examples of costs that are not costs of an item of property, plant and equipment are:

costs of opening a new facility;
costs of introducing a new product or service (including costs of advertising and promotional activities);
costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
administration and other general overhead costs.

Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities.

For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense.

Self-constructed asset

The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (see IAS 2). Therefore, any internal profits are eliminated in arriving at such costs.

Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset. IAS 23 Borrowing Costs establishes criteria for the recognition of interest as a component of the carrying amount of a self-constructed item of property, plant and equipment.

Bearer plants

Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to ‘construction’ in this Standard should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management.