A tangible fixed asset should initial measured at cost.
Cost is purchase price and any cost directly attributable to bringing the asset into working condition for its intended use.
For example of directly attributable costs are;
- Acquisition costs such as stamp duty
- Cost of site preparation and clearance
- Initial delivery and handling costs
- Installing costs
- Professional fees like legal fees
- The estimated cost of dismantling and removing the asset and restoring the site
Any abnormal costs, such as those arising from design error, industrial disputes or idle capacity are not directly attributable costs and therefore should not be capitalized as part of the cost of the asset.
The capitalization of finance costs, including interest, is optional. However if an entity does capitalize finance costs they must do so consistently.
All finance costs that are directly attributable to the construction of a tangible fixed asset should be capitalized as part of the cost of the asset.
Directly attributable finance costs are those that would have been avoided if there had been no expenditure on the asset.
If Finance costs are capitalized, capitalization should start when,
- Finance costs are being incurred
- Expenditure on the asset is being incurred
- Activities necessary to get the asset ready for use are in progress
Capitalization of finance costs should cease when the asset is ready for use.
Subsequent expenditure on a tangible fixed asset should only be capitalized in the following three circumstances.
- It enhances the economic benefits over and above those previously estimated. An example might be modifications made to a piece of machinery that increases its capacity or useful life.
- A component of an asset that has been treated separately for depreciation purposes has been restored or replaced.
- It relates to a major inspection or overhaul that restores economic benefits that have been consumed and reflected in the depreciation charge.