Initial measurement of property, plant, and equipment

Keywords: Mazars, Thailand, Accounting, TFRS for NPAEs, PPE, TFAC, TAS 16

24 December 2021

• An item of PPE that qualifies for recognition as an asset shall be measured at cost.
• The cost of an item of PPE consists of:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

(b) 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.

(c) 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.

• Examples of directly attributable costs are:

1. costs of employee benefits (as defined in Thai Accounting Standard 19, Employee Benefits) arising directly from the construction or acquisition of the item of PPE;
2. costs of site preparation;
3. initial delivery and handling costs;
4. installation and assembly costs;
5. costs of testing whether the asset is functioning 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
6. professional fees.

• Examples of costs that are not costs of an item of PPE are:

1. costs of opening a new facility;
2. costs of introducing a new product or service;
3. costs of conducting a business in a new location or with a new class of customer;
4. costs of training staff for acquiring new machinery or a factory; and
5. administrative and other general overhead costs.

Scenario

On 1 January 2020, Company A began the construction of a new factory. Costs relating to the factory, incurred in the year ended 31 December 2020 are as follows:

Issues

a) How should Company A calculate and record the initial cost of the factory?

b) What costs should be recognized as expenses in the financial statements?   

Response

According to TFRS for NPAEs, and the accounting manual noted above, Company A must calculate and record the initial cost of the factory as follows:

Any costs not capitalized as part of factory costs will be expensed to the statement of profit or loss as incurred.

References: TFAC website and TFRS for NPAEs, and TAS 16 manual