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Querist : Anonymous

Querist : Anonymous (Querist)

19 January 2011 Whether Excavation cost for laying the foundation of an equipment needs to be capitalised as a part of equipment cost as per the requirement of component accounting under IFRS?

1.Excavation Cost
2. Foundation Cost
3. Equipment purchase Cost

Will the sum total of the above components is The Total Cost of the equipment?

Vivek Raju P

Vivek Raju P (Expert)
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19 January 2011 Yes all the three costs will form part of the cost of the fixed asset under IFRS, as they are very much relavant for bringing the asset to the working condition.

Apart from this IFRS also mandates that asset retirement obligations basically the removal or dismantling costs of the asset at the end of its life need to be estimated and discounted using the appropriate rate and added to the cost of the asset upfront.

Querist : Anonymous

Querist : Anonymous (Querist)

20 January 2011 Thanks Mr Raju for your response

But Please elaborate further on this as this is not much clear.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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10 August 2024 Under IFRS, particularly IFRS 16 for Property, Plant, and Equipment (PPE), costs directly attributable to bringing an asset to its working condition for its intended use are capitalized. Here’s how the different components should be treated:

### **1. Excavation Cost**

**Treatment:** If excavation is necessary for the foundation of the equipment and is integral to preparing the site for the installation of the equipment, the cost should generally be capitalized as part of the cost of the equipment. This is because it is directly attributable to preparing the asset for its intended use.

### **2. Foundation Cost**

**Treatment:** Costs for laying the foundation for the equipment are capitalized as part of the cost of the equipment. These are considered necessary to support the equipment and ensure it is functional, so they are part of the total cost of the equipment.

### **3. Equipment Purchase Cost**

**Treatment:** The purchase cost of the equipment itself is capitalized as part of the cost of the equipment. This includes the purchase price, import duties, and any other directly attributable costs necessary to bring the equipment to its working condition.

### **Total Cost of Equipment**

**Sum Total of Components:**
- **Excavation Cost**
- **Foundation Cost**
- **Equipment Purchase Cost**

**Capitalization:** The sum total of these components represents the total cost of the equipment under IFRS.

### **Component Accounting Under IFRS**

IFRS requires that you capitalize costs that are directly attributable to bringing an asset to its working condition. This includes:

- **Purchase cost of the equipment.**
- **Costs of site preparation (e.g., excavation).**
- **Foundation and installation costs.**
- **Any other directly attributable costs (e.g., transport, installation, testing).**

### **Summary**

In summary, under IFRS, the total cost of the equipment should include:

- The **purchase cost** of the equipment.
- **Excavation and foundation costs** if they are necessary to prepare the site and install the equipment.
- Any other costs directly attributable to bringing the equipment into working condition.

These components together form the capitalized cost of the equipment on the balance sheet. Ensure you keep detailed documentation for all capitalized costs, as they should be directly linked to the asset's acquisition and installation.

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