IAS 16 Property , Plant and Equipment

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment.

Property, plant and equipment are tangible items that:

(a) These items are  held for use in the production or supply of goods or services, for rental to others, or for administrative purposes;

(b) Expected to be used during more than one period.

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: 

(a) It is probable that future economic benefits associated with the item will flow to the entity; and

(b) The cost of the item can be measured reliably.

Elements of Cost:

-          Purchase price + (Import duties + Non refundable taxes) - (Trade Discounts + Rebates)

-          Directly attributable costs.

-          Initial estimate of the cost of dismantling and removing the item and restoring the site in which it is located.

Costs that are not Costs of Property, Plant & Equipment:

-          Costs of opening new facility;

-          Costs of introducing new product or service;

-          Costs of conducting business in new location or with new class of  customer;

-          Administration and other general overhead costs;

-          Costs incurred in using or redeploying an item;

-           Amounts related to certain incidental operations

Example:

ABC & Co., is installing a new plant at its production facility. It has incurred these costs:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Interest charges paid to supplier for deferred credit Rs. 20,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Operating losses before commercial production Rs. 40,000.

     Find out the costs to be capitalized as per IAS-16? 

Solution:

-         Cost to be capitalized include:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Total Cost = (250,000 + 20,000 + 60,000 + 70,000 + 30,000) = 430,000.

-         Interest charges can be capitalized as per allowed alternative treatment of IAS-23 Borrowing Cost.