Nature of property, plant, and equipment
Assets may fluctuate in value due to a variety of circumstances and we need to make sure the carrying value of the assets does not exceed its recoverable amount. If the carrying amount is greater than the recoverable amount then we have to record impairment loss is recognized, thus we need to decrease the value of the asset.
Impairment of assets applies to assets such as land, plant & equipment, Intangible assets & Goodwill. However, inventory is not part of the impairment process as per IAS 36. Let’s take an example of Property, Plant & Equipment (PPE). PPE are non-financial tangible assets are used by the entity during business operation for more than one period. PPE is non-current assets.
PPE assets can only be recognized when
- Probable future economic benefits will flow to the entity
- Cost of the item can be measured reliably
Cost of PPE can be calculated as
- The purchase price including any import duties & non-refundable purchase taxes (Plus)
- Directly Attributable costs
- Cost of installation, removing the asset or restoration of the site.
Inclusions & exclusions of costs
- Employee Benefits cost arising directly from construction
- Cost of the site preparation
- Initial delivery & handling costs
- Cost of testing of the asset
- Professional fee
Also, borrowing costs can be capitalized as a cost of qualifying assets. However, Expenditure that is not including in the cost of the asset is
- Cost of opening a new facility
- Cost of introducing a new product or service
- Cost of conducting business in the new location i.e Staff training
- Administration & other overhead costs
- Cost of relocation the part or all of the entity operations.
We will cover capitalization of borrowing cost on a qualifying asset in the next blog…
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