Recognising property, plant and equipment

Property, plant and equipment (PPE) are tangible items held for use in producing or supplying goods or services, for rental to others, or for administrative purposes, and expected to be used for more than one period (IAS 16.6). Land, buildings, machinery, vehicles and IT hardware are typical.

Recognition (IAS 16.7). The cost of an item is recognised as an asset only if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. Small items below a capitalisation threshold are usually expensed as a practical policy, and significant parts with different useful lives (an aircraft's engines, a building's lift) are recognised and depreciated as separate components.

Initial measurement at cost (IAS 16.16–17) includes: - the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; - directly attributable costs of bringing the asset to the location and condition needed to operate as management intends — site preparation, delivery and handling, installation and assembly, professional fees (engineers, architects), and the costs of testing whether it works properly; - the initial estimate of dismantling, removal and site restoration costs the entity is obliged to incur (measured under IAS 37 and recognised as a provision); - borrowing costs directly attributable to constructing a qualifying asset (IAS 23 requires capitalisation).

Not part of cost (IAS 16.19–20): recoverable VAT (reclaimed from the tax authority), staff training, advertising and promotion, opening a new facility, administration and general overheads, relocation, abnormal waste, and costs incurred after the asset is ready for use (initial operating losses, maintenance contracts). Since the 2020 amendment, proceeds from selling items produced while testing an asset are recognised in profit or loss with their cost, not deducted from the asset's cost.

Subsequent costs. Day-to-day servicing (labour, consumables, small parts) is an expense (IAS 16.12). Replacing a significant part — a furnace lining, a roof — is capitalised as a new component and the replaced part is derecognised (IAS 16.13). Major inspections are treated the same way.

US GAAP (ASC 360) applies broadly the same principle — costs to bring the asset to its intended use — and also capitalises interest on assets under construction (ASC 835-20); dismantling obligations are asset retirement obligations under ASC 410. Unlike IFRS, US GAAP doesn't require component depreciation and doesn't permit revaluation.