Most businesses own assets that last for years: buildings, machines, vehicles and computers. The first question about any of them is how much to record. That figure, the cost, is the basis for depreciation, for any profit or loss on sale, and for the statement of financial position.
This topic explains what counts as property, plant and equipment, what goes into its cost under International Accounting Standard (IAS) 16, how to tell capital expenditure from revenue expenditure, how advance payments are treated, and how a non-current assets register and asset coding keep control of the assets.
In the 20 diets reviewed, a question on the cost of an asset or on capital and revenue expenditure appeared in nine diets, with another in Section A almost every year. Read the topic on the accounting equation, which introduces capital and revenue items. The next topic covers depreciation.
In 30 seconds
Property, plant and equipment are tangible items held for use in production or supply, for rent or for administration, and expected to be used for more than one period.
They are first recorded at Cost: the purchase price after trade discounts, plus import duties and non-refundable taxes, plus Directly attributable costs of bringing the asset to the place and condition for use, such as delivery, installation, site preparation, testing and professional fees. Administration and general overheads are excluded. Improvements and major overhauls are Capital. Day-to-day repairs are Revenue.
An advance payment is a receivable, not depreciated, until it becomes part of the asset’s cost. A Non-current assets register records each asset in detail for control.
Current and non-current assets
IAS 1 defines current assets and states that all other assets are non-current. Current assets include cash, receivables, prepayments and inventory. They are used or recovered in the short term. A non-current asset is used by the business over a number of years. It may be Tangible, a physical asset such as land and buildings, plant and equipment, and motor vehicles, or Intangible, with no physical existence, such as patent rights.
The intangible assets are covered in a later topic.
IAS 16: property, plant and equipment
Rules for these assets are in IAS 16. Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period. They are first recorded at Cost (IAS 16, paragraph 15).
Cost is the cash or cash equivalents paid, or the fair value of the other consideration given, to acquire or construct the asset.
The cost consists of (IAS 16, paragraphs 16 and 17):
- the Purchase price, after deducting trade discounts and rebates, plus import duties and non-refundable sales taxes; and
- the Directly attributable costs of bringing the asset to the location and condition necessary for it to operate in the manner intended by management. These may include employee costs arising directly from installation or construction, site preparation, delivery (carriage inwards), installation and assembly, testing, and professional fees directly attributable to the purchase.
Costs stop being capitalised when the asset is ready for use, that is, in the location and condition to operate as intended. A new building may include the architect’s and surveyor’s fees. The cost of property, plant and equipment resembles the cost of inventory, but it often includes more items. Administration and other general overhead costs are not part of the cost (IAS 16, paragraph 19).
An example makes the point: a machine with a list price of ₦1,000,000, a trade discount of ₦50,000, delivery of ₦100,000, installation of ₦125,000, site preparation of ₦200,000, architect’s fees of ₦15,000 and administration expense of ₦150,000 has a cost of ₦950,000 + ₦100,000 + ₦125,000 + ₦200,000 + ₦15,000 = ₦1,390,000. The administration expense is left out.
Capital and revenue expenditure after acquisition
The difference between capital and revenue items was explained in the topic on the accounting equation. After an asset is acquired, further spending is classified as follows (IAS 16, paragraphs 12 to 14).
| Spending | Treatment | Example |
|---|---|---|
| An improvement | Capital: added to the cost of the asset | An extension or air conditioning added to a building |
| Day-to-day repairs and maintenance that restore the asset to its original working order | Revenue: an expense of the period | Servicing a vehicle, replacing a small part |
| Major repairs and overhauls required periodically | Capital: capitalised | A major engine overhaul on an aircraft |
Replacing the engine of one of two identical vehicles is capital expenditure. Repairing the engine of the other is revenue expenditure.
Advance payments
A business may pay in advance towards a non-current asset. It is recognised as a Receivable, an advance, representing the right to receive the asset or part of it later: Dr Receivable (advance), Cr Bank. Advances are Not depreciated. When the asset is bought, the advance becomes part of its cost: Dr Cost of the asset, Cr Receivable (advance).
Why assets are depreciated
A non-current asset helps earn profit over several periods, so the cost of using it is charged to the statement of profit or loss in the periods in which it is used. Depreciation is the expense that matches the cost of the asset to the benefit from owning it, so the full cost is recognised over the whole period of use.
Small businesses calculate it as a year-end adjustment, and larger ones often do so monthly. The next topic sets out the methods.
The non-current assets register
A non-current assets register is a manual or electronic record of detailed information about the entity’s non-current assets. Keeping it is essential for managing and controlling the assets.
Contents
| Detail | What it records |
|---|---|
| Asset code or number | A unique identifier |
| Description | Type, model, serial, engine, chassis and registration numbers |
| Date of acquisition | When it was purchased, constructed or leased |
| Initial cost | Including all expenses to bring it to its location and condition |
| Accumulated depreciation | Total charged since acquisition |
| Carrying amount | Cost less accumulated depreciation and impairment losses |
| Location | The department or unit responsible for it |
| Supplier’s details | Name, address and contact |
| Revaluation details | Dates, revised values and reasons |
| Depreciation method and rate | Straight-line or reducing balance, and the annual percentage |
| Useful life | As estimated, adjusted under IAS 8 |
| Disposal details | Date, proceeds and method |
| Capital expenditure budget | Purpose, timing and amount budgeted |
| Transfers | Date, recipient and reason |
Uses
The register gives an Internal check by reconciliation with the general ledger balances. It helps locate suppliers or lessors for scheduled maintenance. It supplies the details for Insurance claims or police reports after a theft or loss. It is Audit evidence of existence, condition and valuation when compared with physical checks.
It supports Management decisions on acquiring, disposing of and maintaining assets, and helps compute carrying amounts and track accumulated depreciation.
Asset coding
Asset coding is a structured system that classifies assets into categories so they are easier to identify, track and manage. Six systems are listed.
| System | How it works | Example |
|---|---|---|
| Alphabetical | Letters for categories | A buildings, B vehicles, C computers, D furniture |
| Numerical | Numbers for categories | 100 buildings, 200 vehicles |
| Alphanumeric | Letters and numbers | A-100 buildings, B-200 vehicles |
| Hierarchical | Nested structure | 1 assets, 1.1 buildings, 1.2 vehicles |
| Block | Number ranges | 100 to 199 buildings, 200 to 299 vehicles |
| Group code | Short abbreviations | BL buildings, VH vehicles |
A fuller scheme combines a category code, a type code and a serial number. With C for computer hardware, LA for laptop and 001 as the serial, a laptop is C-LA-001, and a car might be V-CA-004.
The ideas in more depth
Cost is a cash-price idea. Discounts reduce it and taxes that cannot be recovered raise it. Directly attributable. The test is whether the cost was needed to get the asset ready. When capitalising stops. At the point of readiness, so later running costs are expenses. Revenue or capital after purchase. Ask whether the spending adds to the asset’s capacity or life or only keeps it working.
The register and the ledger. The register lists each asset and the ledger holds the total, so the two must agree.
Sources: IAS 16 Property, Plant and Equipment: paragraph 7 (recognition), paragraphs 12 to 14 (subsequent costs), paragraphs 15 to 17 (measurement at cost and elements of cost) and paragraph 19 (costs not part of cost).
Worked example: Ibadan Brewery
Scenario. Ibadan Brewery buys a bottling machine with a list price of ₦2,400,000, less a trade discount of 5%. It pays import duty of ₦180,000 and VAT of ₦171,000 that it can recover, carriage of ₦95,000, installation of ₦140,000, site preparation of ₦260,000, testing of ₦45,000, professional fees of ₦22,000, staff training of ₦30,000 and administration costs of ₦110,000. Later it pays ₦38,000 for the annual service and ₦400,000 to replace the engine. Required: the cost, and the treatment of the later items.
- Purchase price.
2,400,000 − 5% (120,000) = 2,280,000. - Add directly attributable costs. Import duty 180,000, carriage 95,000, installation 140,000, site preparation 260,000, testing 45,000 and professional fees 22,000.
- Cost.
2,280,000 + 180,000 + 95,000 + 140,000 + 260,000 + 45,000 + 22,000 = ₦3,022,000. - Excluded. Recoverable VAT (an input tax, not cost), staff training 30,000 and administration costs 110,000.
- Later items. The ₦38,000 service is day-to-day servicing, an expense of the period. The ₦400,000 engine replacement is a major replacement, capital, added to the cost.
- Advance. If ₦500,000 had been paid earlier as a deposit, it would sit in receivables as an advance, not depreciated, and be transferred to the cost on purchase.
Common mistakes in the exam
- Including administration or general overheads in the cost.
- Using the list price and forgetting the trade discount.
- Including recoverable VAT, or leaving out import duty and non-refundable taxes.
- Treating a major overhaul as repairs, or a small repair as capital.
- Depreciating an advance payment.
- Listing asset register details without saying what each is for.
Quick revision
- Property, plant and equipment (PPE): tangible, held for use, for more than one period. Measured at cost.
- Cost = net price + duties and taxes + directly attributable costs. No overheads.
- Improvements and major overhauls: capital. Day-to-day repairs: revenue.
- Advance payment: receivable, not depreciated, then added to cost.
- Register: code, description, date, cost, depreciation, carrying amount, location. Coding: alphabetical, numerical, alphanumeric, hierarchical, block, group.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. Property, plant and equipment are initially measured at:
- Market value
- Replacement cost
- Cost
- Net realisable value
Show the answer
C. IAS 16 measures property, plant and equipment at cost on initial recognition.
Question 2. Which cost is included in the cost of a machine?
- Carriage inwards
- Administration overheads
- Staff training
- Annual servicing
Show the answer
A. Carriage inwards is a cost of bringing the machine to its location, so it is part of the cost.
Question 3. A list price of ₦800,000 less a 10% trade discount, plus ₦50,000 installation, gives a cost of:
- ₦720,000
- ₦770,000
- ₦800,000
- ₦850,000
Show the answer
B. 720,000 + 50,000 = 770,000.
Question 4. Adding an extension to a building is:
- Revenue expenditure
- An accrual
- A prepayment
- Capital expenditure
Show the answer
D. It improves the asset.
Question 5. Repainting an office is:
- Capital expenditure
- Revenue expenditure
- An advance
- An asset
Show the answer
B. It restores the asset.
Question 6. An advance payment towards a machine is:
- An expense
- Depreciated at once
- A receivable, not depreciated
- A liability
Show the answer
C. An advance payment is a prepayment for an asset that is not yet available, so it is not depreciated.
Question 7. A major periodic overhaul of an aircraft engine is:
- Expensed
- Capitalised
- Ignored
- A prepayment
Show the answer
B. A major overhaul that restores the asset’s future benefit is capitalised and then depreciated.
Question 8. A non-current assets register contains:
- Only the purchase price
- Only supplier names
- Trade receivables
- Accumulated depreciation and carrying amount
Show the answer
D. The register shows the cost, accumulated depreciation and carrying amount of each asset.
Question 9. In block coding, 200 to 299 is assigned to vehicles. A van is coded:
- 250
- 150
- 350
- A-250
Show the answer
A. Vehicles are in the block 200 to 299, so a van is coded 250.
Question 10. Which is NOT a use of the assets register?
- Recording trade receivables
- Insurance claims
- Audit evidence
- Tracking depreciation
Show the answer
A. Receivables are not non-current assets, so the assets register does not record them.
Section B style: written questions
Question 11 (10 marks). (a) Define property, plant and equipment and cost. (4 marks) (b) State FOUR directly attributable costs. (4 marks) (c) State TWO costs that are excluded. (2 marks)
Question 12 (20 marks). Port Harcourt Logistics buys computer equipment. List price ₦1,500,000 with a trade discount of 10%. Import duty ₦120,000. Recoverable VAT ₦112,500. Carriage ₦60,000. Installation ₦90,000. Testing ₦25,000. Consultants’ fees on the purchase ₦35,000. Staff training ₦20,000. General administration ₦70,000.
(a) Calculate the cost of the equipment. (8 marks) (b) Classify as capital or revenue:
- (i) repainting buildings
- (ii) extending a warehouse
- (iii) a major engine overhaul on a delivery van
- (iv) servicing a van
- (v) legal fees on buying land
- (vi) wages of staff installing the company’s own machine
(6 marks) (c) State FOUR details held in an assets register and THREE uses of it. (6 marks)
A further written question
Question 13 (10 marks). (a) Explain asset coding and name THREE coding systems with an example of each. (5 marks) (b) State FIVE uses of a non-current assets register. (5 marks)
Model answers
Show the model answer to Question 11
(a) Property, plant and equipment are tangible items held for use in production or supply, for rent or for administration, and expected to be used for more than one period. Cost is the cash or cash equivalents paid, or the fair value of other consideration given, to acquire or construct the asset. (b) Delivery; installation; site preparation; testing; professional fees; employee costs of installation. (c) Administration and general overheads; staff training.
Show the model answer to Question 12
(a)
- Price net of discount 1,500,000 × 90% = 1,350,000.
- Add import duty 120,000, carriage 60,000, installation 90,000, testing 25,000, consultants’ fees 35,000: cost = ₦1,680,000.
- Recoverable VAT, staff training and general administration are excluded.
(b) (i) Revenue. (ii) Capital. (iii) Capital. (iv) Revenue. (v) Capital. (vi) Capital.
(c) Details: code, description, date of acquisition, cost, accumulated depreciation, carrying amount, location. Uses: internal check against the ledger, insurance claims, audit evidence, depreciation tracking.
Show the model answer to Question 13
(a) Asset coding is a structured system that classifies assets into categories for easy identification and tracking. Alphabetical: A for buildings. Numerical: 100 for buildings. Alphanumeric: A-100 for buildings. (b) Internal check against the ledger; locating suppliers for maintenance; insurance claims and police reports; audit evidence; management decisions; carrying amounts and depreciation tracking.
Pathfinder on Property, plant and equipment (IAS 16): cost and the assets register
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Asks you to state which of thirteen items are capital expenditure for the statement of financial position, including leasehold premises, solicitor’s fees, a computer upgrade, machinery, custom duty and carriage on machinery.
Revise first: Capital and revenue expenditure after acquisition
From the previous syllabus. Asks for the total acquisition cost of equipment from a list including a discount, transport, installation, repair costs and operators’ salaries.
Revise first: IAS 16: property, plant and equipment
From the previous syllabus. Opens with items to classify as revenue or capital expenditure (4 marks), then asks for financial statements.
Revise first: Capital and revenue expenditure after acquisition
From the previous syllabus. Asks for the costs of land and building, of plant and machinery and of a motor vehicle at 4 marks each from a list of transactions.
Revise first: IAS 16: property, plant and equipment
From the previous syllabus. Asks for the requirements of IAS 16 on initial recognition (3 marks), the treatment of later spending (3 marks) and a classification of plant costs into capital and revenue (14 marks).
Revise first: Capital and revenue expenditure after acquisition
From the previous syllabus. Opens with items to classify as revenue or capital expenditure, and ends with the details to include in a PPE register (4 marks).
Revise first: The non-current assets register
From the previous syllabus. Asks for the cost of a machine from clearing, installation and testing, purchase price and spare parts inclusive of VAT at 7.5%, with a rebate.
Revise first: IAS 16: property, plant and equipment
From the previous syllabus. Asks for the elements of the cost of an item of PPE under IAS 16 with four examples of directly attributable costs.
Revise first: IAS 16: property, plant and equipment
Asks how subsequent costs related to PPE are treated under the recognition principle of IAS 16.
Revise first: Capital and revenue expenditure after acquisition
Asks for a description of each cost element of PPE under IAS 16 and the conditions for capitalising them.
Revise first: IAS 16: property, plant and equipment
One or two items a diet ask which cost is capitalised, which items are capital expenditure, what is included in the cost of an asset, or the nature of non-current assets (for example November 2014 Q13 and Q17, November 2015 Q13 and Q19, November 2017 Q3, March/July 2020 Q4, November 2020 Q14 and Q18). Check Section A of every diet you practise.
Revise first: IAS 16: property, plant and equipment
Source: ICAN Pathfinder, Financial Accounting. Diets covered: November Diet, 2014, November Diet, 2015, May Diet, 2016, May Diet, 2017, November Diet, 2019, November Diet, 2020, May Diet, 2022, May Diet, 2023, November Diet, 2023 and May Diet, 2024 (the later ones are not all on the previous syllabus). Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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