IAS 16 pertains to the Property, Plant and Equipment: their accounting treatment, recognition and determination of their carrying amounts, depreciation charges and impairment losses. Some of the major points of this standard with reference to the costing of Property, Plant and Equipment are discussed under the following bullets-
1. Scope:- This Standard is applicable only when another Standard does not require or permit a different accounting treatment for an item of property, plant or equipment like Biological assets related to agriculture (to be governed by IAS 41 Agriculture), Exploration and evaluation assets (to be governed by IAS 6 Exploration for and Evaluation of Mineral Resources) etc.
2. Recognition:- 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 (Para 7 of IAS 16)S
3. Spare parts and Servicing Equipments:- Spare parts and servicing equipments are generally carried as inventory and recognized in profit and loss as consumed. However major spare parts and stand-by equipments qualify as Property, Plant and Equipment when the entity expects to use them during more than one period. Similarly, if the spare parts and equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment. (Para 8)
4. Items of property, plant and equipment acquired for safety or environmental reasons:- 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. (Para 12 of IAS 16)
5. An entity recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria is met. Also the carrying amount of replaced parts is derecognized in accordance with the derecognition provisions. (Para 13 of IAS 16)
6. Inspection:- When an item of property, plant and equipment to be functional and operational requires regular major inspection, the cost of each such major inspection is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection (distinct from physical parts) is derecognized. This recognition is regardless of whether the cost of the previous inspection was identified or not. If the cost of inspection is not known separately estimation of future inspection cost may be used as base cost when the item was acquired or constructed (Done to bifurcate the past cost of item between cost and inspection) (Para 14 of IAS 16)
7. Elements of Cost:- The cost of an item of property, plant and equipment comprises:-
a) its purchase price, including import duties and non-refundable purchase taxes after deducting trade discounts and rebates; any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable operating in the manner intended by management;
b) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period (Para 16 of IAS 16). On the other hand when the asset is used to produce the inventory in the normal course of its business (or the purpose intended) the same cost is accounted for as per IAS 2 Inventories and added in the cost of inventories (Para 18 of IAS 16). In both the above cases the cost measured and recognized in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
8. Incidental Operations Cost:- Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring them to the location and condition necessary for it to be capable of operating in the manner intended by management (as discussed in clause (a) of the above bullet). These incidental operations may occur before or during the construction or development activities. For example a site during its construction as a residential complex may fetch some income through displaying hoardings. As this income is not in relation to the construction or development of the property the same can not be considered while costing of the property. These kinds of incomes or expenses should be appropriately recognized as an item of revenue under the proper heading. (Para 21 of the IAS 16)
Examples of directly attributable costs are :-
a) Costs of employee benefits (IAS 19 Employee Benefits) arising directly from the construction or acquisition the item of property, plant and equipment;
b) Costs of site preparation;
c) Initial delivery and handling costs;
d) Installation and assembly costs;
e) Costs of testing whether the asset is working properly after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and
f) Professional fees.
9. Training Cost:- It is to be noted that training cost may be classified under the employee benefit. In IAS 19 pertaining to employee benefits, the same is defined as “Employee benefits are all forms of considerations given by an entity in exchange for service rendered by employees” (Para 7 of IAS 19) Also Para 10 (b) of the same IAS 19 says, “the entity shall recognize the undisclosed amount of short term employee benefits expected to be paid in exchange for that service, as an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset (IAS 16 Property, Plant and Equipment)”
10. Derecognition of Training Cost:- When we recognize training cost, we will also have to derecognize the previous training cost incurred as per Para 67-72 of IAS 16. So when an employee is inducted to operate upon equipment, the training cost should be recognized as an element of cost of that equipment. But when that employee (or the group of employees) leaves or is relocated and new employees are again inducted for the same, the old training cost should be derecognized and the fresh training cost should be added in the cost of the asset. The abovementioned practice is also in line with the provisions of Para 16 (b) of IAS 16 which says that “any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management” to be added in the elements of cost. This argument is there because unless the employees are inducted or trained to use the equipment in the pre-desired manner the intention of the management can not be fulfilled. Hence inclusion of training cost in the cost of the asset.
11. Costs not forming part of asset cost:- Following are some of the costs which do not form part of an item of Property, Plant and Equipment (Para 19)- a) costs of opening a new facility; b) costs of introducing a new product or service (including costs of advertising and promotional activities); c) costs of conducting a business in a new location or with a new class of customers (including costs of staff training) ; d) administration and other general overhead costs.
12. Cost of the self constructed asset:- The cost of a self constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing as asset for sale (As stated in IAS 2 Inventories). Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour or other resources incurred in self constructing an asset is not included in the cost of the asset. Any financing or borrowing costs are accounted for as per IAS 23 Borrowing Costs. (Para 22 of IAS 16).
This concludes our discussion on the costing of an item of Property, Plant and Equipment. With regard to other matters of their costing, fundamental rules which prevail are to be applied. For example, if an expense brings about increase in the capacity or performance of an item of Property, Plant and Equipment the same is essentially an addition to their cost. In any other situation that cost is to be written off as revenue expenditure. Similarly any expenditure to bring an item of Plant, Property and Equipment to a place and condition necessary for their economic and commercial utilization is an addition to their cost and not an expense to be charged to the revenue. It is being expected that due to comprehensive nature of IAS 16, costing of an item of Plant, Property and Equipment will be more based on the logical consequence of an outflow rather than personal judgment of an accountant.