Cost of Property plant and equipment

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

  1. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Cost of Property plant and equipment
  2. 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.
  3. 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

  1. 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;
  2. costs of site preparation; Cost of Property plant and equipment
  3. initial delivery and handling costs; Cost of Property plant and equipment
  4. installation and assembly costs; Cost of Property plant and equipment
  5. 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 Cost of Property plant and equipment
  6. professional fees.
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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:

  1. 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;
  2. initial operating losses, such as those incurred while demand for the item’s output builds up; and Cost of Property plant and equipment
  3. costs of relocating or reorganising part or all of an entity’s operations. Cost of Property plant and equipment

No cost of Property plant and equipmentCost of Property plant and equipment

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

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

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.

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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.

Subsequent expenditure and replacement parts Cost of Property plant and equipment

IAS 16 does not contain any specific principles for subsequent expenditure on PP&E and, consequently, the general criteria apply. Therefore, for any subsequent expenditure to be recognised as an asset, there must be additional probable future economic benefit associated with it (i.e. the subsequent expenditure) that will flow to the entity. Cost of Property plant and equipment

The decision on how to account for subsequent expenditure will often boil down to a question of whether an existing part of PP&E is replaced or a new element/function is created. IAS 16 is more specific with replacement parts, which are included in the cost of PP&E, but the parts being replaced must be derecognised (IAS 16 13). Cost of Property plant and equipment

It will often be the case that an entity will not know what is the cost of the replaced part as it was never separated when PP&E was recognised (IAS 16 requires a separation of significant parts for depreciation purposes). In such a case, entity must estimate it, e.g. based on the current cost, and derecognise the old part after taking into account accumulated depreciation.

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Repairs and maintenance are recognised in P/L as incurred. Cost of Property plant and equipmentCost of Property plant and equipment

Self-constructed assets

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.

Cost of Property plant and equipment

Cost of Property plant and equipment

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