Capitalisation of expenditure
Capitalisation of expenditure is only possible when one of the following situations occur:
- Capital expenditure (including equipment repairs and maintenance)
- Recording lease contracts – Right-of-Use Assets
- Capitalisation of borrowing costs
- Capitalisation of cloud computing costs
- Capitalisation of intangible assets
- Capitalisation of internally capitalized intangible assets
- Research & development costs
- Prepaid expenses
Capital expenditure (including equipment repairs and maintenance)
- it is probable that future economic benefits associated with the item will flow to the entity; and
- the cost of the item can be measured reliably. (IAS 16.7)
Certain properties which are used on rental are classified as an investment property in which case IAS 40 Investment property will apply. Only tangible items which have a useful life of more than one period are classified as property, plant and equipment as per IAS 16. But refer to the words “more than one period” as more than one accounting period of 12 months.
Also, an entity shall determine a threshold limit commensurate to its size for recognizing a tangible item as property, plant and equipment. For example, a tangible item of insignificant amount although satisfying the definition of property, plant and equipment may be expensed.
Initial recognition of indirect costs
Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets.
Such items of property plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.