Property, plant and equipment
IAS 16 Property, Plant & Equipment defines property, plant and equipment as “…tangible items that: a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than one period”
Examples of property, plant and equipment
- Land and buildings
- Plant and machinery
- Equipment and tools
- Vehicles (ships, trains, planes, lorries, vans, cars, bikes etc)
- Fixtures and fittings
Calculating the cost of property, plant and equipment
When an item of property, plant or equipment is acquired, or purchased, it will be capitalised (i.e. recorded as a non-current asset) at its cost; but how do we calculate cost?
The cost of an item should include:
- The purchase price of the item less any trade, bulk or similar discounts
- The cost of any import duties paid when an asset is brought into the country
- The cost of any VAT paid that cannot be reclaimed. This would be relevant where the business acquiring the asset is not registered for VAT or where the business is registered but reclaiming the VAT is not permitted; e.g. in most circumstances businesses cannot reclaim VAT on the purchase of cars
- Any other costs incurred in getting the item to the location and condition needed for it to be operated as intended (e.g. delivery costs and installation costs)
- If the business is obliged to pay for the costs of dismantling and removing the item at the end of its life we will include an estimate of this cost
There are however, certain types of costs that should not be included in the cost of an item of property, plant and equipment. We should not include running or maintenance costs such as insurance, servicing and power costs, and should also not include any VAT or other taxes that have been paid but which can be reclaimed.
Illustration 1
A business has purchased a building. The purchase price was £850,000 on which stamp duty land tax of £34,000 was paid. Solicitors fees relating to the purchase were £9,000 and the building was insured on purchase at a cost of £15,000.
The cost of the building would be calculated at £893,000 being the purchase price plus the stamp duty and solicitors fees as all these costs were necessary to obtain ownership of the building. The insurance costs would not be included as this is a running cost of the business and would instead be treated as a business expense.
Illustration 2
A business has bought a new car. The cost’s list price was £18,900 and a further £1,200 was charged for metallic paint, but the business negotiated a discount of £2,600. Delivery fees of £150 were paid as was car vehicle tax for the year of £200.
The cost of the car would be calculated at £17,650 being the purchase price plus the charge for the metallic paint and the delivery fees but less the discount. The car vehicle tax would be treated as an expense as this is a running cost of the car.
Illustration 3
A VAT registered business bought a new machine. Its purchase price was £110,000 plus delivery costs of £2,500 and installation costs of £1,000. The business also paid for a one-year servicing contract costing £800 and VAT of £22,860 was charged on the purchased.
The cost of the machine would be calculated at £113,500. This includes the purchase price, the delivery costs and the installation costs as all were incurred in getting the machine to the location and condition required for it to be used as intended. The servicing contract is a running cost and would therefore be treated as an expense and the VAT would be reclaimed and so would not be included in the cost.
Expenditure after the initial purchase
Businesses often have to spend money on an asset after it has been purchased. This might be spent on repairs or maintenance, or insuring it or improving the asset. But how should these costs be treated?
Improvements and repairs to items of property, plant and equipment
If money is spent improving the performance or value of an item of property, plant or equipment beyond its original specifications then that cost should be treated as an improvement to that asset and be added to the cost of the asset; for example:
- A business builds an extension to its factory
- A business upgrades a machine with the result that the number of units that it produces is increased above it original capacity
Those amounts spent on maintaining an asset in good condition will instead be treated as a business expense.
Illustration
A business has spent the following sums on its factory; first it spent £150,000 on the cost of building an extension and secondly, it spent £20,000 replacing part of the factory roof which had been damaged recently by a storm.
The cost of the extension will be added to the cost of the factory as it represents an improvement to the factory. The cost of replacing part of the roof would not be an improvement as it is simply maintaining the condition of the factory and would instead be treated as a expense (i.e. repairs).
