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In this part, we have covered what will be the initial cost of PPE.

  • 1
    AS Initial measurement 10 PROPERTY PLANT EQUIPMENT PART 3 REVISED Once an item of property, plant and equipment qualifies an asset, it will be initially measured at cost. What is cost The cost of items of PPE comprises : for recognition as 0 Purchase price, including import duties, non—refundable purchase taxes, I ess trade discounts and rebates. 0 Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by management. 0 Initial estimates of cost of cl ismant I ing/decomrnissioning, removing, and site restoration at present value if the entity has an obligation that it incurs on acquisition of the asset or as a result of using the asset other than to produce inventories. AS—29 prescribes the discounting of such provisions and provision is made at present value by applying pretax discount rate. Example 6: N DA Ltd has put plant in 2010 on leasehold land; the leasehold period is 15 yrs. N DA Ltd has to dismantle the plant removing from the leasehold land and restore the leasehold land at the same position at the time of inception of lease. The estimated cost of dismantling the plant after 15 years will be R5.20 crores. The pretax rate of the time value of money and risk specific to the liability is 10%. Calculate the amount to be included in the cost of the plant , The PV of cost of dismantling of the plant to be paid after 15 years crore5/1.1 78,410. 78, 20 This amount to be included in the cost of the Plant in 2010 Examples of directly attributable costs include: 0 Employee benefits of those involved in the construction or acquisition of an asset 0 Cost of site preparation 0 Initial delivery and handling costs 0 Installation and assembly costs 0 Costs of testing, less the net proceeds from the sale of any product arising from test production 0 Borrowing costs to the extent permitted by AS—16, Borrowing Costs 0 Professional fees Examples of costs that are not directly attributable costs must be expensed in the income statement include: and therefore
  • 2
    0 Costs of opening a new facility (often referred to as preoperative expenses ) 0 Costs of introducing a new product or service including Advertising and promotional costs 0 Costs of conducting business in a new location or with a new class of cus tome r 0 Training costs 0 Administration and other general overheads 0 Costs incurred while an asset, capable of being used as intended, is to be brought into use, is left idle, or is operating at below full capacity 0 Initial operating losses yet 0 Costs of relocating or reorganizing part or all of an entity's operations 0 The income and related expenses of operation that are incidental to the construction or development of an item of P PE should be recognized in the income statement. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognized in profit or loss and included in their respective . classifications of income and expense . Cost of dismantling/ decornmissioning o The elements of cost to be incorporated in the initial recognition of an asset are to include the estimated costs of its eventual dismantlement decornmissioning cost') That is, the cost of the asset is "grossed up for these estimated terminal costs, with the offsetting credit being posted to a liability account. 0 It is important to stress that recognition of a liability can only be affected when all the criteria set forth in AS—29 for the recognition in provisions are met. 0 It seems odd to capitalize decornrnissioning costs that are not going to emerge until later in the asset's life. However, if there is an obligation as a direct consequence of acquiring or constructing property, plant and equipment to incur further costs in the future that cannot be avoided. o A provision is recognized in accordance with AS—29. Therefore, decornrnissioning costs at the end of the asset's life are just as cost of acquiring or constructing the asset as the costs incurred at the the asset's life. the much a start of
  • 3
    0 Decommissioning or similar costs such as dismantling expenditure can often arise in connection with operating leases and leasehold improvements. For example, the terms of an operating I ease may allow the tenant to tailor the property to meet their specific needs by, say, building an additional internal wall, but on condition that the tenant returns the property at the end of the lease in its original state, this will entail dismantling the internal wall. On building the internal wall, the tenant creates an obligation to remove the wall, which it cannot avoid, therefore, must recognize a provision for that obligation in accordance with AS—29. The cost to the tenant, therefore, of the leasehold improvement is not only the cost of building the wall, but also the cost of restoring the property at the end of the lease by dismantling the internal wall. As such, both costs are capitalised when the internal wall is built and will be recognized in the profit and loss account over the useful life of the asset (generally the expected lease term) as part of the depreciation charge. Examples of decomrnissioning costs that may be capitalised as part of the cost of the asset typically arise in oil and gas and electricity industries where environmental damage is caused by, . say the construction and cornrnissioning of the facility (for example, the 0" platform, as in the example referred to above, or nuclear plant) Similar costs are incurred in other industries such as: abandonment costs in the mining and extractive industries; clean up and restoration costs of landfill sites and environmental; cleanup costs in the number of industries. 0 It is to be noted that estimated cost of dismantling is to be included in the cost of the property, plant and equipment will be at its present value as per AS—29. END OF PART 3


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