IAS 16

 Initially recognised at cost  Cost – amount of cash or cash equivalents paid or fair value of other consideration given to acquire asset  Cost model  Revaluation model

 Cost – purchase price +directly attributable costs to bring the asset to location & working condition. Include the following: ◦ Purchase price ◦ Import duties ◦ Non-refundable purchase taxes (VAT if non-refundable) ◦ Employee benefit cost (arising directly from construction or acquisition) ◦ Site preparation ◦ Initial delivery & handling costs ◦ Installation & assembly costs ◦ Cost of testing the asset less any selling proceeds from items produced during the testing phase ◦ Professional fees

 Cost is reduced by the amount of any trade discounts, volume rebates and settlement discounts.  Ch.15 pg. 3 – example 15.1  Testing asset – excludes initial operating losses or subsequent expenses  Any provision for the expected costs of dismantling and removing the asset and site restoration that have, in accordance with IAS 37, been recognised as a liability. Where recognition of the provision takes place subsequent to the initial measurement of the asset, it is added to the cost of the related item of property, plant and equipment

The following costs are excluded from the cost of property, plant and equipment: ◦ costs of opening a new facility; ◦ costs of introducing a new product or service (including costs of advertising and promotional activities); ◦ costs of conducting business in a new location or with a new class of customer (including staff costs of staff training); ◦ administration and other general overhead costs. ◦ Costs of subsequently redeploying an asset are not capitalised (par 20). ◦ Ch.15 pg. 4 – example 15.2

 Items acquired in exchange for shares: ◦ cost = fair value of the item received unless that fair value cannot be estimated reliably, otherwise fair value of shares granted  Items acquired in a barter transaction: ◦ The cost of the item received in a barter transaction is measured at its fair value unless,  the exchange transaction lacks commercial substance (see paragraph 25) or  the fair value of neither the asset received nor given up is reliably measured. ◦ If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

 Imported PPE: ◦ Recorded at the spot rate at the date of the transaction  Component parts & regular major inspections: ◦ Recognise significant parts & depreciate each part (eg. airplane) ◦ Some PPE items need to be regularly inspected for faults as a condition to continue operating – cost of inspection included as a separate component of the asset & depreciated over the expected period to the next inspection ◦ Example 15.3 – Ch.15 p. 6

 Self-constructed assets: ◦ Cost of construction ◦ Cost of employee benefit arising from construction ◦ Borrowing costs capitalised

 Capitalisation of borrowing costs (IAS 23): ◦ Directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. ◦ Qualifying asset:  PPE, investment property, inventory produced under construction contracts;  must take a substantial period of time to het ready for intended use or sale ◦ Borrowing costs:  Interest expense calculated using the effective rate method,  finance charges on finance leases, and  exchange differences arising from foreign borrowings to the extent that they represent interest rate differentials (possibly calculated with reference to inflation rate differentials).

 Capitalisation of borrowing costs (IAS 23): ◦ Amount of BC capitalised will depend on the source of the funds borrowed:  Where specific loans are raised to fund the production of the asset, then the costs attached to those funds, reduced by the earnings from the investment of the surplus loaned funds  Where general funds are used, a suitable weighted average capitalisation rate is utilised. These capitalised borrowing costs cannot exceed the actual borrowing cost of the reporting entity for that period. (Only borrowing costs that have actually been incurred may be capitalised.)

 Capitalisation of borrowing costs (IAS 23) requirements: ◦ expenditures are being incurred on the qualifying asset, ◦ borrowing costs are being incurred, and ◦ activities to prepare the asset have begun (including technical and administrative activities prior to construction, but excluding the act of merely holding an asset). ◦ Capitalisation ceases when substantially all activities to prepare the asset are completed. Therefore no capitalisation occurs after construction has been completed, irrespective of whether the asset is held as property, plant and equipment or inventory. ◦ Examples 15.5 & 15.6 – p.10,11,12