Purchase price of PPE

THE CASE Purchase price of property

Entity K purchased a plant for a gross price of CU 200 million. The seller granted a 0.5% rebate. The gross price includes excise duty CU 18 million for which the buyer entity will get a tax refund and non-refundable VAT of CU 10 million. The company has also incurred CU 15 million for transportation costs, handling charges and insurance, CU 5 million for installation and CU 3 million for testing and technical engineering fees. It has earned CU 0.2 million from selling goods produced out of testing. The company borrowed CU 100 million for financing the new purchase @ 10%. The entire process of purchase to ‘Go live’ into (normal) production took nearly 15 months. The company earned CU 0.1 million from short –term depositing of the money borrowed pending payment to suppliers and meeting all costs.

What should be the initial cost of the plant?

The asset components are main, part 1 and part 2. What is the result of accounting for the purchase price of these components?

Overview purchase price of the three components

Note: Borrowing costs are capitalised applying amortised cost valuation. As per IAS 23 Borrowing Costs, borrowing costs are capitalised during construction – refer to IAS 23 10-15.

It is assumed that the stand-alone purchase prices for part 1 and part 2 are CU 20 million and CU 25 million respectively. The entity shall first allocate CU 181 million among the three components main, part 1 and part 2, and then allocate the balance of the additional costs in proportion thereof, as follows:

Cost allocation

Costs inclusion/exclusion for determination of the initial purchase price

Costs to be included in the initial purchase price

Costs to be excluded from the initial purchase price

  1. Purchase price net of discounts and rebates, including import duties and nonrefundable purchase taxes,
  2. directly attributable costs of bringing the asset to working condition and
  3. the initial estimate of the costs of dismantling and removing the item and restoring the site.
  1. Costs of opening a new facility;
  2. cost of introducing new product or service, i.e. promotional costs of the produce not of the asset ;
  3. costs of conducting business in a new location or with a new class of customer;
  4. administrative and other general overheads; and
  5. staff training costs.
Break-up of directly attributable costs:

  1. employee benefit costs,
  2. site preparation cost,
  3. initial delivery and handling costs,
  4. installation and assembly costs,
  5. cost of testing net of sale proceeds of any goods produced in the testing process, and
  6. professional fees.

Also interest expenses included in deferred payment of (parts of) the purchase price are excluded.

No costs are added to the carrying amount after the assets become operational in its location as intended by the management :

  1. initial operating losses
  2. dislocation expenses
Specific points for determining cost of self-constructed assets:
Cost of materials, labour, and directly attributable overheads

Borrowing costs in accordance with IAS 23 if the self-constructed is a qualifying asset under that standard

Present value of estimated site restoration costs.

Abnormal wastage and internal profit

Purchase price of property

Purchase price of property

Specific point for measurement of cost of assets under finance lease:

Cost of any asset held under finance lease is determined applying IFRS 16 Leases. Purchase price of property

Specific point for measurement of cost of assets for which there is government grant:

The carrying amount of an asset can be reduced by the amount of any government grant in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. Purchase price of property

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