Acquisiton cost of a PPE item

Acquisition cost of a PPE item is important. It’s a value an asset is initially recognized on the face of a balance sheet and furthermore is depreciated into expenses over a period of time. As it impacts both the amount you carry within your company’s assets and your expenses over a period of time, it’s important to understand and agree on what exactly is included within the cost of the item and what not. 

There are in most accounting frameworks definitions of expenses that could be considered to be a part of an assets cost. I say ‘could’ since there are also areas where there’s a choice you have to make to include or exclude some expenses from the assets cost. I suggest you consult with your applicable accounting framework with regards those choices.

Some of the expenses that normally would be capitalized as assets include obviously direct cost (i.e. the purchase price), but also nonrefundable taxes and duties paid, borrowing expenses and charges incurred whilst setting the equipment up. Note that expenses incurred whilst testing the equipment (i.e. expenses on raw material, other resources) are not capitalized and are put directly into expenses of the period when the testing occurred.

Something to note as well, once you chosen types of expenses (where there’s a choice) to be capitalized or not capitalized, this should be followed consistently for similar types of assets in coming periods as well.