Some businesses acquire assets such as plant, equipment, machinery and motor vehicles from external suppliers and some businesses also develop some assets internally such as brands, patents, office buildings, hardware and software. For these assets to be recorded in accounting books their value should be measurable or the business should be able to quantify the cost incurred by the business, since accounting only records business events that can have a monetary value assigned to them.
International Accounting Standard (IAS) 16 and the accounting framework argue that assets should only be recognised if there is a probable inflow of future economic benefits from them, and the cost of the asset should be reliably measurable. The purpose of ascertaining the cost of the asset is to ensure that the reliable measurement condition set in IAS 16 is met. An asset cannot be recognised in the accounting books if its monetary cost cannot be quantified or calculated.
Both externally acquired assets and internally developed or built assets fall under the scope of International Accounting Standard (IAS) 16. Under IAS 16 the cost of acquiring a completed building or the cost of building or developing an asset internally should include the direct costs or purchase price and overhead costs related to bringing the asset into its working condition. Administration costs are generally excluded from the cost of the asset as these would have been incurred whether the assets had been developed or not. Such costs are known as unavoidable costs and therefore are not relevant for the costing of the asset.
Below is a brief discussion of the main costs that form the cost of an asset for both assets acquired externally from a third party supplier and for assets developed internally within the business.
Costs of Asset Acquired Externally
For businesses acquiring a completed asset that is ready for use such as a van or machinery to use in manufacturing products, the cost is made up of the purchase price, customs and excise duty, non-recoverable value added tax (VAT) and any non-refundable tax that is inbuilt in the purchase price.
The business should also include directly attributable costs incurred in the bringing the asset to a working condition or for the intended use. The directly attributable costs would include delivery costs, installation costs, professional fees, training costs and any provisions that should be recognized for the estimated costs of dismantling and restoring site to its original state.
Costs of Asset Developed Internally
Businesses that develop assets themselves internally should include in the cost the direct costs of developing or building the asset, such as the costs of materials used in developing, labour costs of developing, site preparation costs, building costs in case of a property development, installation costs, consultants and professional fees. Just like with assets acquired externally, the business should also recognize as a cost provisions for any estimated costs of dismantling and restoring the site to its original state.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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