Property, plant and equipment schedules template includes a line named as “Additions”. The synonym for this word is also “Acquisitions”. You may come across both of them, but just so you’d know, we’ll explain a bit the conditions for recognizing an assets as an addition to PPE and little insight as to how to do it.
According to IAS (International Accounting Standards) 16 an item of property, plant and equipment should be recognized as an asset when it’s probable that future economic benefits associated with the assets will flow to the entity and the cost of the item can be reliable measured. When either of those conditions is not met, the recognition is usually not done.
While the part about “future economic benefits” may be clearer (also discussed in our previous post about PPE), the other part sometimes imposes difficulties in itself. What is this “cost” we are talking about? It is said that an asset should initially be measured at cost. According to the same IAS cost is fair value of consideration given for the asset. This applies both to assets purchased and to assets constructed by the company itself. Now, in order to dig deeper, we need to determine, what this consideration may consist of.
According to the definition, cost comprises purchase price and any other 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. So not only buying or building the asset is an expense that is capitalized, but also expenses incurred during the transportation and build up. On rare cases those are applicable; the cost also includes estimated costs of dismantling and removing the asset as well as restoring the site on which it is located.
Yes, the purchase price is something that is fairly simple to understand, but what are those “directly attributable costs”? Again we are moving deeper. As a non-exhaustive list, those costs can be the following: costs of site preparation, initial delivery and handling costs, installation and assembly costs, costs of testing whether the asset is functioning properly after deducting net proceeds of sale from items produced while testing, professional fees, employee benefit costs arising directly from the construction or acquisition of the asset etc. Note however that administration and other general overheads as well as start-up costs, initial operating losses, reorganization expenses and other costs of similar nature are not capitalized.
So the line “Additions” in the Property, plant and equipment schedules template can only have a value if the behind this value is an asset that can bring economic benefits to the company and if the costs can be reliable measured. Do take good care of what costs are included and what not. Over- or underestimating the costs does not give a true and fair view of the accounts.