FR – Nov 2014 – L2 – Q7a – Property, Plant and Equipment (IAS 16)

Identify the elements of cost for PPE and provide examples of directly attributable costs.

Question

a. IAS 16 covers all aspects of accounting for Property, Plant and Equipment (PPE), including its measurement and qualification for recognition as an asset. The standard also describes the elements of cost, stating that some costs are directly attributable to the costs of PPE while some other costs fail to qualify as costs of an item of PPE.

Required:

In the context of IAS 16, identify the elements of cost of an item of Property, Plant, and Equipment, giving SIX examples of directly attributable costs. (5 Marks)

Answer

Elements of Cost of Property, Plant, and Equipment (PPE):

Purchase Price: The initial cost of acquiring the asset, including import duties and non-refundable purchase taxes.
Directly Attributable Costs: Costs that are necessary to bring the asset to its intended location and condition for use.
Installation and Dismantling Costs: Expenses related to the installation of the asset or dismantling it at the end of its useful life.
Site Preparation Costs: Costs incurred to prepare the site where the asset will be located.
Professional Fees: Fees paid to architects, engineers, and other professionals directly associated with the acquisition or construction of the asset.
Finance Costs: Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset.

Examples of Directly Attributable Costs:

Transport Costs: Costs incurred to transport the asset to its location.
Installation Costs: Expenses related to installing the asset at the intended site.
Testing Costs: Costs incurred to test the asset to ensure it is functioning as intended.
Legal Fees: Fees paid to legal professionals for contracts related to the acquisition of the asset.
Site Preparation: Costs incurred for clearing, leveling, or preparing the site for the asset.
Direct Labor Costs: Wages for labor directly involved in constructing or preparing the asset for use.

Tags: Cost Elements, Directly Attributable Costs, IAS 16, Plant and Equipment, Property
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)
Series: NOV 2014

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