Can You Capitalize It As PPE or Not - IfRSbox

7/20/2017 Can you capitalize it as PPE or not?
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Home Articles IFRS Accounting Can you capitalize it as PPE or not?
Can you capitalize it as PPE or not?

Posted in:IFRS Accounting, Intangible assets, Inventories, PPE (IAS 16 and related)
Posted by:Silvia M.
265
Is it an item of property, plant and equipment or a part of its cost?
Or is it a piece of inventories instead?
Or just an expense that goes straight in profit or loss?
Hmmm, what about an intangible asset?
In 90% of all cases, the answer to the above questions is clear its obvious that buildings, machinery or other BIG pieces of tangible assets
presumably used for more than 1 period are PPE.
But Im convinced that you have come across at least 1 or 2 situations in which you were not so sure about the right conclusion.
I can confirm it based on a number of e-mail questions I receive in relation to this topic.
Let me give you my answers to the most common ones.
What does IAS 16 Property, Plant and Equipment prescribe?

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
http://www.ifrsbox.com/capitalize-ppe-ias16/ 1/63
7/20/2017 Can you capitalize it as PPE or not? - IFRSbox
Are expected to be used during more than 1 period.
Thats the definition taken right from IAS 16.
Also, IAS 16 answers our first and basic question: When should we recognize an item of PPE?
The answer in IAS 16 is taken directly from the Conceptual Framework: the cost of an item of property, plant and equipment shall be
recognized as an asset if, and only if:
It is probable that future economic benefits associated with the item will flow to the entity; and
The cost of the item can be measured reliably.
Therefore, in general, when youre assessing whether some item shall or shall NOT be treated as an item of PPE, you need to take the
following factors into account:
the purpose for which an item is acquired and / or held

the useful life of an item (longer than 1 period)
future economic benefits flowing to the entity and
cost is reliably measurable.
OK. So we have just set up the fundamentals.
But while its easy to assess and categorize some assets, other assets are not so clear and we need to use judgment and often apply the
concept of materiality in order to make a conclusion.
Now lets take a look at several unclear or shady examples.
Should
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There is no uniform opinion about capitalizing spare parts. Instead, spare parts require your own judgment of a specific situation.
In most cases, spare parts and servicing equipment are included in inventories and treated in line with IAS 2 Inventories.
However, major spare parts can qualify for PPE, especially when they can only be used in connection with an item of PPE. For example,
some reserves engines for airplanes would rather be included in PPE than in inventories.
Let me give you an example of the opposite situation.
I received a question from my reader about treatment of a big amount of sand (or other construction material). He wrote me that it was a
great opportunity to get this sand at a very good price, therefore the company piled up a big stock.
However, a company was not going to use the sand immediately in the construction process. The sand could have stayed in the warehouse
for many years.
What to do in this case?
In my opinion, although the sand indeed did have useful life longer than 1 period, its NOT an item of PPE.
It was a raw material and its purpose was to be consumed in the production process which perfectly meets the definition of inventories.
Instead of charging depreciation of the sand, I would rather check whether the cost of sand exceeds its net realizable value at the end of each
reporting period and if not, then I would leave it in inventories until its consumed.
Should we capitalize small items acquired in large amounts?

Imagine you run a library.
There are thousands of books there, each has an acquisition cost of a few dollars (whatever currency) and it will definitely be used for more
than 1 period.
Should you treat each book separately and as a result, recognize it in profit or loss when acquired? Or should you treat all books as 1 item of
PPE?
Other similar examples are tool sets, furniture sets, pallets and returnable containers which are used in more than one accounting period, but
the cost of 1 piece is low or even negligible.
What to do in this case? How to treat these small items in large amounts?
Again, theres no uniform answer.
Standard IAS 16 (9) says that the unit of measurement for recognition of PPE is NOT prescribed.
In other words, sometimes its appropriate to aggregate individually insignificant items and to apply the criteria to the aggregate value.
And "After 2 months,
sometimes, its not. I landed a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
In our library example, it can be appropriate to treat books as 1 single asset (or a few assets) and depreciate these assets, especially if a
running a library belongs to main revenue-producing activities.
Should we capitalize improvements on a leasehold property?

Imagine you rented an office space. The big one.
But, you need to adjust it to fit your needs and therefore, you decide to install glass partitions to divide the space and make it look more
elegantly.
Glass partitions are damn expensive. They represent a significant investment.
However, they cannot be used separately without the office space and once your rental contract expires, glass partitions are useless for you.
You cant even take them out and install them in another place.
How to treat your investment in the improvement of leasehold property?
I repeat again: theres no uniform answer and it depends on your contract and specific circumstances.
First of all are future economic benefits from these improvements probable? Maybe yes, as glass partitions make the office space usable
for you.
Another question are you going to use these improvements for more than 1 period?
In most cases, you can estimate improvements useful life quite reliably and therefore, its appropriate to capitalize them as an item of PPE.
The useful life will basically depend on the term of your lease, so you need to take that into account.
Should we capitalize pre-operating expenses?

You are establishing a business. Before you can actually start a production process, you need to obtain permits, hire employees and do a lot
of things and all of this costs money.
You need to pay salaries, rent, professional advisers and you might incur many other types of expenses in the pre-operating stage of your
business.
Can you capitalize these pre-operating expenses?
In most cases NO. You cannot capitalize them as a separate intangible asset.
Why?
Because they do not meet the definition of an intangible asset in line with IAS 38 as they are not identifiable, i.e.:
They cannot be separated and sold/transferred, and

They do not arise from contractual or other legal rights.
There is one exception when you actually can capitalize pre-operating expenses.
When you construct an item of PPE and your pre-operating expenses were incurred in relation to constructing that PPE, then you can
capitalize them if they meet the IAS 16 criteria.
For example, when you build a production hall during the pre-operating stage, you can include salaries of direct production workers to the
cost of that production hall.
These are 4 the most discussed and ambiguous examples of capitalizing/not capitalizing an item as PPE. Please help me share this article
with your friends or colleagues and if you have some question or remark, just leave me a comment right below this article.
Ill also welcome your answers and experiences youll help to make Internet a better place!
Tags: IAS 16IAS 2IAS 38
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265 Comments:
Silvia M.
October 9, 2014
SILVIAS NOTE: Wow, thank you for all your comments and questions. I see that this is a HOT topic.
Ill try to respond to everyone, but please give me some time for that THANKS!
And by the way please feel free to post your own response to questions of other readers, I think everyone will appreciate!
That brings me to another question: would you like me to launch an IFRSbox forum? In fact, Ive been playing with that idea
for some time. What do you think?
Reply
OLUWASEUN
October 10, 2014
Thanks So Much Silvia for This very educating and extremely problem solving article.
Its a Great help.
And also as per the IFRS forum, i think its a wonderful idea. Pls carry on with it cos it Will help to share more ideas from
diffrent ppl.
Thanks.
Reply
Ameyedowo
October 10, 2014
Hello Silvia,
Please am contemplating how to treat these expenses(material) in respect of start-up business under IFRS.
1. Extension of electricity to site(for the fact that owner is Electricity Company because anyone can connect power without our
permission)
2. Road works to site
3. Extension of water to site(for the fact that owner is Water Company because anyone tap without our permission)
Thank you.
Reply
Silvia M.
October 12, 2014
Hi Ameyedowo,
first of all, thanks a lot for answering questions of Oxana and Samir.
Secondly all 3 items you mentioned represent the inevitable expenditure to construct a building or whatever you plan to
build on the site. Therefore, you should capitalize these costs into the cost of building. You would need to examine
whether they represent the separate asset or not, but in general, if the building is not operational without these assets, then
I would include them in the cost of building.
S.
Reply
Sergei
October 20, 2016
When costs are necessary, but indirect, do we capitalize them or not?
Reply
Silvia M.
October 20, 2016
Yes, depending on what they are, e.g. salaries of a production team apportioned on some reasonable basis. S.
Oxana
October 13, 2014
Nice idea
Reply
Njabulo
March 20, 2016
Yes Silvia please open IFRSBox Forum.
Reply
Martina Ras
April 9, 2016
Hi Silvia, in my case company is building a laboratory (lab equipment category for fixed assets). Bills from the vendors are
coming through for professional fees plus the cost of them to travel + accomodation + food. Should I capitalize all of these
charges or should I expense their travel+accom+food and only capitalize their profesional fees? Can you please refer to the
policies under IFRS and equivalent US GAAP? Thank you. Martina
Reply
Jean
January 10, 2017
Hi Silvia,
I have a qns and hope to seek your advice.
If Company contracted a vendor to do some electrical wiring and cabling of network points, can this cost be capitalized as ppe?
Purpose is to install new network points for newcomers and relocate existing workstations.
I am confused whether to capitalized or expensed it off.
Appreciate your advice on this. Thank you!
Reply
Samir
October 9, 2014
Silvia, thanks for your insight. it was really helpful as always! I have a question. In case of items like LPG Gas Cylinders or other
reusable bottles for Cold Drinks, what is the correct classification for the seller? I have seen some sellers classify them as component
of Inventory and some as Fixed Assets!
Thanks!
Reply
Silvia M.
October 9, 2014
Hi Samir, what is the purpose of LPG Gas Cylinder or reusable bottle?

If they are used in the sales or the production process, but are not being sold themselves (in terms of not traded, I dont mean
occasional sale here), then they are PPE (provided everything else is met).
Of course, the producer of reusable bottles would classify them as inventories (if the producer sells them). S.
Reply
samir
October 9, 2014
Please consider this example. XYZ is a company that sales LPG gas (a kind of natural gas)to retail customers. It
purchases bulk amount of gases, refills them into small size cylinders and sales them to customers. (please note it does
not extract gases itself. rather only acts an intermediary). the peculiar thing is that the cylinders are to be returned to XYZ
by the customers each time in exchange for new refilled cylinder.
XYZ takes certain security deposit from customers for the cylinder. Each time cylinder is exchanged, a certain amount is
billed to the customer by XYZ.
In this case, should XYZ recognize the cylinders as Inventories or PPE?
Could you please help me by clearing this confusion!
Reply
Ameyedowo
October 10, 2014
Samir.
I think that for the fact that the cylinders are XYZ property whose cost can be measured reliably, usable for more
than an accounting year and have future economic benefits to XYZ; they are PPE. A
Reply
Silvia M.
October 12, 2014
You see, Samir, that each case and situation needs to be carefully considered. In my opinion, it is still PPE, mainly
when the useful life of cylinders is longer than 1 year. It does not matter that this cylinder is borrowed to a client.
However, I understand that the practicalities of such a treatment are not that great, as its difficult to keep the
register of all cylinders.
Reply
Samir
November 7, 2014
Thanks Ameyedowo and Silvia!

Helped me a lot!
Heres to hoping that someday i too might help!
Thanks again! Cheers!
Gavin
October 13, 2014
From my opinion those empties can last more than one period, can be lend to someone,can be used to deliver the contents to the
customer and weather or not they can be sold,meaning their cost can be reliably measured, therefore i think they can be
classified under PPE IAS16
Reply
Lemley Joseph
"After
October2 9,
months,
2014 I landed a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
Hi Madam Silvia,
Thank you for these knowledge, we really appreciate.
The question of which items to capitalize, which one to treat as inventories or which ones fall under IAS 38 intangible assets, is a
question that bothers many of us, and we end up doing wrong things for lack of knowledge or idea of their treatment. Youve
simplified everything for us by sharing this comprehensive knowledge. Thank You!
Reply
Oxana
October 9, 2014
Thank you very much for the article. I also have a situation I hope you can help me. Lets say 6 years ago our company bought an
expensive equipment (a switch for a call center). This year some other company reinstalled the switch, a bit repaired, some new wire
was used too, but in the invoice they wrote technical sevices of the equipement total amount 1000 USD lets say. As it is a big amount
compared to the value of the switch, I feel rather uneasy to book it as current expenses. Do the IFRS say for sure whether it is current
expense or should it be capitalized and added to PPE to that particular switch?
Reply
Ameyedowo
October 10, 2014
Oxana,
I did face an akin situation in the past where I have to capitalise a desk handset of GHS 75 and expense iphone of GHS 1500.
So the value may not necessary be the issue. If the switch was installed immediately the technical services would have been
capitalised. Hope my response is useful. A
Reply
Silvia M.
October 12, 2014
Hi Oxana, I would capitalize it into the carrying amount of the switch. It seems that these costs were not mere day-to-day
servicing, but they prolonged the useful life of a switch. S.
Reply
Gavin
October 13, 2014
For this situation i think if the equipment was userble before the subsequent is expended that cost can be classified as an
expense or if it was not userble the cost is the cost that brought an asset to the condition where it can be used therefore is
capitalised to the cost of an asset correct me if im wrong Silvia
Reply
Islam Sharaf
October 9, 2014
What about football player contract?

Please advise me!
Reply
Silvia M.
October 9, 2014
OK without any knowledge about that contract, the basic rule is that its not an intangible asset as you dont have a control over
human (you never know about injuries, etc).
However, based on the terms stated in the contract, you might recognize it as some prepayment (if the payment was made in
advance), and recognize it in P/L in line with the service of that football player. I would need to see the details. S.
Reply
Islam Sharaf
October 13, 2014
thank you so much for this clarification about this point.

but i judge about it as a general question as an intangible asset according to this link:
https://www.facebook.com/ifrsplus/posts/609253445778633
and in my opinion for it according IAS 38 as the following
1- Identifiability: an intangible asset is identifiable when it:
A) is separable (we can separate it).
B) arises from contractual or other legal rights.
2- control according to FIFA rules.
3- future economic benefits from that contract.
but in our countries the clubs are social clubs, so its out of IFRS
in some other countries they treat it as you mentioned.
thanks a lot for your great website and your replying for your fans
Islam Sharaf
Reply
Silvia M.
October 14, 2014
Hello,
this is very very interesting and thanks a lot for your link. Yes, I thought about this contract in the same way it is
identifiable, there are future economic benefits, but from the point of view of a control over that resource Im not
really sure because we are talking about humans. You simply cant control humans actions for the same reason,
training of employees is never capitalized.
Therefore, I would rather recognize this contract among long-term prepayments (receivables) and amortize it
but of course, if that is generally applied practice, I do not object. Im really happy to learn, too! Thanks a million
times for posting it!
S.
Reply
Islam Sharaf
October 14, 2014
Mrs Silvia,
im so honor to get a best negotiation with my IFRS leader.
thank you so much for your interesting.
and im going with your opinion in resources cases (Human).
but as well as an exclusive contract with FAMOUS singer for 5 years as monopoly contract.
my point of view as the same with football player contract.
but when i treat with Human, this is an issue to judge on our case.
Ooh, we treat with a stander has frivolous cases
"After 2 months, I landed a new
so, could youposition
post thoseoftopics
IFRSforconversion
discussion? manager with 70% pay rise." Click here to learn more
best
Islam Sharaf
Silvia M.
October 14, 2014
Dear Mr. Islam,

as I wrote previously if thats generally applied practice, then its probably OK to treat these contracts as
intangible assets. However, for me as a long-term accountant, it seems very very odd. You know what
happens when a football player is hurt? I mean theres only 1 Ronaldo in the world But of course, I
accept whats common in this world to do, but I just cant get rid of the strange taste of doing so
Of course, a contract with famous singer for 5 years is an analogy and very similar
And in the future, I will issue an article about intangible assets, so Ill make sure I include this extremely
interesting (but very judgmental) case. More power!
Silvia
I
October 9, 2014
This is really insightful Mada Silvia. Your aticle has clarified a lot of confusion in the eal indusry .Much appreciated. IL
Reply
MUKTAR
October 9, 2014
THANK U
Reply
Richmond Jallah
October 9, 2014
Silvia,
Thanks for this useful tip. My question is in line with Capitalizing Pre-operating Expenses-Some operations, like in the mining
Industries, capitalize pre-operation expenses,,,eg: Pre-feasible studies, salaries etc until production when these items will be
amortized over a specific period. Any thoughts on this?
Thanks
Reply
Silvia M.
October 12, 2014
Hi Richmond,
mining industry is quite an exception, because you should follow IFRS 6. Under that standard, you can develop your own
accounting policy which means that certain exploration and evaluation expenditures can be capitalized. S.
Reply
Oluseyi O
October 9, 2014
Thank you Silvia for enlightening me on this.
Reply
Ubong Ita
October 9, 2014
Hi,
Please in the case of spare parts(with huge cost implications) purchased for use in an oil transportation vessel(not as a replacement,
but as an improvement to the vessel).. Do you prescribe that I capitalize the cost?. Its been an heated topic with my director. Thanks
Reply
Silvia M.
October 9, 2014
Hi Ubong, it seems that you described the replacement of certain part of a vessel, am I right? For what reason? Was it planned
replacement, or did the part just break?
In fact, IAS 16 says that you should treat major parts of an asset separately, e.g. if engine has a useful life of 5 years but
remaining airplane 10 years, then you depreciate engine over 5 years and remaining airplane over 10 years. Analogically, when
you replace that part on a vessel, you should derecognize carrying amount of the replaced part from the vessel and capitalize
the cost of new part into the vessel.
I hope I understood you question well. S.
Reply
Qamar Afroz
October 9, 2014
Beautifully written. Very helpful. Keep up the good work.
Reply
OYEWOLE
October 10, 2014
Thanks for the educative information pass out.
Much love.
Reply
OYEWOLE
October 10, 2014
Thanks for the educative information liberating on IFRS standard

God bless you
Reply
Siraj
October 11, 2014
Today at 1:36 PM
Dear Silvia,
The article is very useful for the current business operation.
thank you so much for sharing these information.
I have small query on PPE.
Is it allowed to add a residual value to an asset after depreciating the assets for a two years.
Eg: A motor vehicle was capitalized on 1/1/2012 for the value of $ 100,000.
depreciation policy is 4 years on straight line basis i.e. $ 25,000 per annum (no residual value).
In 1/1/2014, a residual value is fixed for the Motor vehicle and depreciation value is changed.
Is it allowed as per PPE IAS 16.
Reply
Silvia M.
October 12, 2014
Hi Siraj,
yes, the change in a depreciation is simply a change in the accounting estimate in line with IAS 8. You simply calculate new
depreciation charge as assets carrying amount divided by the remaining useful life (probably revised). You account for that
prospectively, so no restatement of previous periods.
Reply
Anand Varma
October 12, 2014
Silvia, You are an excellent IFRS expertise resource by presenting questions & answers in a simple, convincing and short manner on
this vast and complex global accounting field!
Reply
Silvia M.
October 12, 2014
Thank you, Im happy to know this!
Reply
Aderonke
October 13, 2014
Hello Silvia,
"After 2 months,
I trust you are well.I landed a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
I have a question that is not really quite related to the topic above but its in respect of PPE held for sale.
In my company, we recently classified some non-current assets (PPE & prepayments) as held for sale in line with IFRS 5 after
meeting the criteria. However, the sale will not crystallize until the end of this year. The standard says not to depreciate or amortise
while the assets are in the category, but as a business, we are still using it to generate revenue until the time it is transferred to the
buyer. The question right now is do we continue to charge depreciation/amortisation as we are still using it?
Reply
Gavin
October 14, 2014
Hallo Madam Silvia,can you asist me,how can we eastimate depreciation of 2nd hand old machinery that we bought from the
pawndshop without knowing when it was firstly used
Reply
Sokoyi Phisipho
October 26, 2014
Thank you, SilviaI dont know how would accounting life be if were not there for us.
Reply
Silvia M.
October 26, 2014
Hi Phisipho The accounting life would be just as it is right now, Im sure about that But thank you for your appreciation,
Im only trying to bring some clarity and fun into such a damn boring thing!
Reply
Star
November 17, 2014
I have a situation raised in my accounting class in which an entity wants to build a building above a man-made island. Hence that
building is located at the sea just like the Burj Al Arab in Dubai. The problem is how will you account that man-made island or man-
made land, is it part of the cost of the land or cost of the building?
I am just confused since LAND as an item of PPE is natural in the sense that it is made by God and always ready for acquisition or
purchase and is not subject to depreciation. Since most land that we accounted for as part of PPE are natural land and not man-made,
so what is the accounting treatment of the cost of filling the part of the sea by masses of soil/land in order to build a structure there?
I am also thinking that the man-made island may be subject to depreciation since it is artificial.
Thank you. I will be patiently waiting for your answer.
Reply
Silvia M.
November 21, 2014
Dear Star,
thats an interesting question. First of all, I know nothing about man-made land, but I would examine whether it has some
definite useful life or not. Can this man-made land stay there forever? Or will it require some maintenance?
"AfterAlso,
2 months,
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2 separate assets with
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IFRS
require you treating significant part of assets as a separate asset for depreciation purposes.
Hope it helps!
S.
Reply
Sonam Choeden
November 24, 2014
Hi Silvia
1. Can we in any circumstances capitalize per-incorporation expenses.

2. For eg. my company has carried out feasibility studies for construction of hydro power projects. After the completion of studies
and finding out the feasibility of the project, a separate company is formed who will then construct the project. The expenses incurred
for pre-feasibility studies are adjusted in the form of equity investment in the books of company carrying out the pre-feasibility
studies. If you could confirm as to how to account in such scenarios.
Reply
Sonam Choeden
November 24, 2014
Hi Again
How do we account where Running and Maintenance expense is carried over beyond a one financial , for eg. lets assume we
are carrying out running and maintenance of civil structures and work is completed after two years , and in the first year the
expense incurred is CU 100 and in the second year the expense incurred is CU 50, the total expense being CU150, so this
CU150 is expended of altogether in the second year after the completion of work or CU100 is expense off in the first year itself
the expense is incurred.
Reply
Silvia M.
November 27, 2014
Hi, match the expense with the service received. S.
Reply
Sonam Choeden
November 24, 2014
Hi Silvia
You know the advances are normally treated as advance and also accounted as advance in the books , are there any exceptions for eg
advance against capital expenditure and book advance as an capital work in progress or all kinds of advance whether capital or
revenue in nature has to be shown as an advance only.
Reply
Silvia M.
November 27, 2014
Hi Sonam,
"Afterin2 reality
months, yes,Ithere
landed a new position
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between IFRS conversion manager
according to with
their nature. 70%
Some pay rise."
advances Click here
are monetary to learn
asset (e.g.more
long-
term advance given to owner of a rented property that will be returned back to you), some of them are non-monetary (e.g.
advance for acquisition of PPE where is a small chance of receiving advance back instead of PPE).
And you treat monetary asset differently from non-monetary asset. S.
Reply
Yuliya
December 8, 2014
Hi Silvia
Thank you for your site. I have some experience in IFRS, but I prefer to read your articles one new things first as it is so easy to
understand.
I would like to have your and the readers of your sites opinion, on the following case:
Oil & gas company is drilling a well. It capitalises the related expenditures and one day after testing it is proved to be ready to operate
as intended by Management and put in operation with the relative depreciation to be started. However, Company need to finalise
activities around the well, build road to the well, site preparation, concreting, fencing etc (while well is already in operation). All
these expenses are quite significant. We can not continue capitalisation of them in the cost of well since, since it is already in PPE.
You mentioned in one of the comments below in the question (Ameyedowo) as I have that we should not capitalise them separately as
the costs road works to site does not classify for capitalisation. As well those cost do not classify for capitalisation of the well since
they neither improve capacity or life of the well. Is there only one option left just to expense? It looks odd. In my opinion those road
construction costs, fencing to be capitalised as separate assets. Can you please share your ideas on the subject?
Reply
Silvia M.
December 9, 2014
Dear Yulia,
OK, I need to revise my previous comment as it brings some confusion and as I see it, its very strongly written, I admit.
I would capitalize the expenses you mentioned, sure. You just need to assess whether its separate asset or not, for example I
would definitely say that fence around the well can be treated as a separate asset.
For other expenses, treat them as a subsequent expenditure if they cannot be treated as a separate asset. For example, concreting
what is it for? Is it improving something, like stability or useful life of the well? It is the first-time expense? Hope it helps! S.
Reply
Nasir Khan
January 3, 2015
Thank you Silvia i was not going to appear in Fincancial Reporting paper of CA Final. It is you that brought confidence in me.
Now i think that i can appear
Reply
Yuliya
February 13, 2015
Thank you Silvia for your reply
For example, concreting what is it for? Is it improving something, like stability or useful life of the well? It is the first-time
expense? Hope it helps! S.
Silvia I think that an example with a new building would fit to this case as well. And hope it will be useful since more clear for the
"After 2 months, I landed a new position of IFRS conversion manager with 70% pay rise."
most people. Click here to learn more
There is a new building, commissioned and already usedbut there are some activities ongoing around making access to the
building, paving around it etcI know may be is a strange in some developed countries to have commissioned a building without a
final access to it and fencing, but it can happen in the different countries. Therefore, this access to the building neither improves
capacity nor useful time of the buildingtherefore can not be capitalised to cost of the building. Our decision was to recognise this
access and concreating (paving) as a separate asset. But having meet the opposite opinion that we should not capitalise cost of roads
to the site I was wondering whether we have are doing something wrong. I think that this paving and road to the site meet
definition of the asset, since it will bring the value to the Company (less problems with parking, car breakage, fuel consumption etc)
and can be measured reliabely, it will be used during the period more than 12 monthsUsually these expenditures are quite high and
to expenses theme looks very strange.
I would be happy to hear a different opinionmay be I am missing something important and hope it will be useful for other
readers
Reply
Sarah F
February 22, 2015
Hi Silvia
Thanks for your great website. I have a question for you around pre-opening costs for a new hotel. There are often success fees or
finders fees paid to securing a contract for a new hotel. The hotels then under go large refurbishments before they open. There would
be 4 options in treatment I can see. 1) Its meets the definition of PPE (directly attribute costs) and is capitalised (the asset being the
leasehold improvements) 2) The stages of finding and developing a new hotel are similar to to research and development under IAS
38 and these fees if meet the definition of development costs should be capitalised as an intangible asset (costs incurred finding an
appropriate site are expensed like research) 3) The fees could be recognised as prepayment and written off over the life of the contract
or 4) expensed as they incurred. I would really appreciate your thoughts on what you think is the best treatment under IFRS and what
you have seen in practice.
Thanks!
Reply
Silvia M.
February 23, 2015
Hi Sarah,
with regard to success fees (something like commission to real estate agent for getting the contract) and all the necessary
refurbishments, I agree with option 1.
However, finder fees for researching the market, evaluating the options to invest and selecting the best option this is really
like a research and for me, it does not meet the definition of directly attributable cost, because it is very questionable whether
these fees were necessary to bring the asset to the location and condition necessary for it to be capable of operating in the
manner intended by management. Really, finder fees relate to assessment of other sites and properties. As a result, I would
expense them in P/L.
But I tell you, I have seen various treatment in practice, some companies capitalized also finder fees, but then auditors
examined their nature and had their say.
S.
Reply
Jack Cheung
March 18, 2015
Hi Silvia,
I just wonder how to treat a Zebra in the zoo. Will it be also treated as part of the PPE?
Reply
Silvia M.
March 18, 2015
What is the purpose of zebra? How are you monetizing zebra?

Are you getting money from people who came to observe zebra? Then zebra would be classified as PPE under IAS 16.
Are you having this zebra for breeding an offspring (its children) and selling them? Then its a biological asset under IAS 41.
If zebra is used in both cases, then you should make a judgement whats the main purpose of it and then classify accordingly.
S.
Reply
Sonam Choeden
March 26, 2015
Hi Silvia
During the project construction phase are we required to prepare Profit or Loss Statement or all the expense and incomes
are required to be capitalized and moreover as per BAS 21 The Effects of Changes in Foreign Exchange Rates , para 28 ,
exchange difference are required to be recognized in profit or loss , so during the project construction phase if there are
any exchange differences where do we account them , as P&L item or as adjustment in BS.
Your clarification on this would be highly appreciated.
Thanking you
Sonam Choeden
Bhutan
Reply
Silvia M.
March 27, 2015
Hi Sonam,
Im a bit lost in your question.
During pre-operating / construction phase, you can capitalize all eligible items as per IAS 16 and all the rest is in
P/L so if it does not relate to acquisition of PPE, then Im sorry, it needs to go in P/L. You simply cannot
capitalize general pre-operating expenses as they would not meet the definition of an asset.
With regard to exchange rate differences I think my article on how to account for prepayments in foreign
currencies could answer to your question.
S.
Reply
KS
March 27, 2015
Dear Silvia,
I am impressed that you have been diligently answering the queries, well done!
A quick question for on assets under construction. We are building a production factory and are capitalizing directly attributable costs.
We pay rent on that piece of land that the factory is being built.. I hope we can capitalize the rent expense during the construction
period?
Cheers!
KS
Reply
Shareej
March 31, 2015
Dear Ms Silvia,
I am really impressed and enlightened with all the information available here on property plant and equipment capitalization.
I have a question as well,
We have lease rentals and this building which is an operating lease was operational as a clinic till end of 2012 and from 01-jan-2013
the place plus is going for an overhaul to be made as a medical day surgery center.
could the period of 01-01-2013 till now and future until the building gets ready for its intended use, the lease rentals can be
capitalized according to ias 16
thank you so much
Reply
Silvia M.
April 2, 2015
Dear Shareej,
this looks like an operating lease of a building and it will be continued as an operating lease, am I right?
In this case, no, you should not capitalize operating lease rentals of the building itself.
However, you can capitalize leasehold improvements (overhaul).
S.
Reply
Gehad
April 1, 2015
I need to ask about Incorporation Costs, shall we capitalize it or just expense it immediately ?
Reply
Silvia M.
April 2, 2015
Gehad, I guess that incorporation costs are just associated with setting up a business and not with the acquisition of some
particular asset in such a case, you indeed need to expense them as they do not meet the definition of an asset. S.
Reply
Muhammad Tahir Godil

April 6, 2015
Can The Clubs Can Recognized Players or their Contract in b/s??
Reply
Silvia M.
April 7, 2015
Yes, especially long-term contracts. But it depends on the specific conditions of the contract. S.
Reply
Usman
April 23, 2015
Hi Silvia,
Can you send me any any IFRS quote which donot allow us to capitalize operating lease rentals (of the land where we are
constructing the building) to the cost of the building.
Regards,
Usman
usman.haider066@gmail.com
Reply
Silvia M.
April 24, 2015
Hi Usman,
I am not aware of such a quote.
In fact, the opposite can be true. Amounts charged under operating leases during construction period can be viewed as directly
attributable cost but you need to apply this approach consistently.
Reply
jasmin
April 23, 2015
Hi Silvia, Greetings.
Please advise the proper classification for hotel assets owned by an entity & operated by a hotel operator (third party) via operating
agreement.
is it IAS 16? or 40? why?
thanks..
Reply
Silvia M.
April 24, 2015
Hi, Jasmin,
from the point of view of an entity owning the assets the question is how the operating agreement is structured. Is it an
operating lease? Or a finance lease? What are the specific provisions in the contract?
Lets suppose its an operating lease in such a case, an entity can classify the building under IAS 40 as well as IAS 16, again
based on the specific situation and the judgement, as both standards would fit.
Reply
Jonathan
April 29, 2015
Hi Silvia,
Wow, you really do seem like the most helpful person when it comes to helping out with capilisation queries.
I have what is probably a straight-forward answer, and just based on judgement. Our office recently purchased some blinds, which
cost a total of 1,300. Our company is a fairly small one, and there is in fact no current capex policy in place, (Im thinking of having
it set at 1,000).
My question is whether the blinds would fall under being an asset, under the definition Im stuck on whether it would provide
economic benefits (maybe because the blinds would keep out sunlight which would prevent work being completed :P).
Also, 1,300 is a small amount of money for big businesses, however its a more sizeable sum for ours.
Any help in clearing this up would be much appreciated.
Thank you Silvia
Reply
Silvia M.
April 30, 2015
Hi Jonathan,
thank you!
In my opinion yes, blinds certainly do provide economic benefits, because they simply enhance your or leased asset. By
installing new blinds, your office becomes more agreeable, personnel can work better etc. I would capitalize. S.
Reply
IanW
May 13, 2015
Hello Sylvia,
Thanks for your answers, I was interested in how you go about setting a capex threshold policy. I realise that it is not
worth capitalising light bulbs and wate paper bins because they are so small, but do you have any guidance on what this
threshold should be based on? I am happy for this to be relatively high so that it reduces management of the fixed asset
register.
Many thanks,
Ian
Reply
Silvia M.
May 13, 2015
Hi Ian,
Im afraid I must disappoint you this time there is no right or wrong answer with regard to capitalization
threshold. It is judgemental and specific for every company. E.g. for a big production company, new set of chairs
can be very immaterial, but for the small office, the same set can be significant in comparison with other PPEs
carrying amount.
However, I would agree that in almost 100%, the bulbs and waste paper bins would be expensed
S.
Reply
J High
May 6, 2015
Hi Silivia,
Some great insight, but Im still confused on an issue. My company is buying a spare motor for a piece of equipment. If we were
replacing the motor today, we would capitalize it, but we dont expect to replace the motor for several years. We are only purchasing
it because if the active motor fails, production would be shut down without a replacement.
Expense or Capital? If capital, when do I start depreciating, now or when it actually gets put into service?
Reply
Silvia M.
May 6, 2015
Hi J High,
I have seen the similar case in one private clinic they invested in the 2nd back-up electricity generator. So in the case the
electricity is shut down for some reason, the clinic can use the 1st back-up generator and when that generator stops working,
only then the clinic would use the 2nd generator in order to keep all the machines going.
Now, is this 2nd generator bringing the future economic benefits?
Well, if you are a patient and you are making a choice where to go for surgery, which hospital would you chose? The one with
no back-up generator, the one with 1 generator or the one with 2 generators (lets say this is the only difference)?
So you see, even back-up assets as your motor can bring future economic benefits although they are not directly in use.
Finally, their back-up function is exactly the reason why you make investment, isnt it? Therefore, they should be capitalised as
an item of PPE.
As for the depreciation its up to you to estimate the useful life of a motor, but you should include the back-up period in it
as well. Just let me remind you that the pattern of depreciation does not necessarily need to be straight line, so for example, if
you assume not using motor in the first 2 years and then installing it somewhere else, you might adjust your depreciation
charges accordingly.
Hope it helps S.
Reply
Abdul Kalam
May 11, 2015
Hello Silvia,
I have a similar query as J High above. We have some tower cranes which require motors and gears (parts) which are quite expensive.
Currently, we treat such replacement as maintenance exp and show as inventory while in stock. Going through your above posts, I
think it can be capitalized, since it has separate useful life and can be used for other cranes as well. Can you please advise me on this.
And, if we decide to capitalize hence forth, how the disclosure should be in the financials. Will it be treated as change in accounting
policy and has to be disclosed with retrospective effect?
Thanks in advance.
Reply
Silvia M.
May 11, 2015
Dear Abdul,
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they should Click here to
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treated
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And yes, it is a change in accounting policy rather than change in accounting estimate (if not a correction of error).S.
Reply
Abdul Kalam
May 12, 2015
Dear Silvia,
Thank you so much for your prompt response!
regards
Reply
Taka
May 20, 2015
Hi Silvia,
We have an operating lease of a building.

We recently received invoices for Competitive Bidding Admin, Bid Analysis, Permit Coordination. I understand that these costs can
be capitalized if this was an acquisition of a new building, but can these costs be capitalized if we are only doing construction on a
leased building?
Thank you in advance for your help!
Reply
Silvia M.
May 20, 2015
Hi Taka,
in most cases yes, you can capitalise leasehold improvements. S.
Reply
Justyna
May 21, 2015
I would like to confirm the date of depreciation start. We have purchsed car in May and it is available for use in may but it will not be
use till July. I assume that depreciation should start in May.
Reply
Silvia M.
May 21, 2015
Correct!
Reply
Frederic
May 22, 2015
Hi Silvia,
First of all, congratulation for your site which is a good source of information. i will definitely share it with my team.
We are in the process of improvement power system for different locations. Which mean bringing almost 500 set of power system
(Generator + Bateries+) the project timing is over 6 months and the equipments will be received by batch. Therefore we will need
to lease storage location just for this project with a limitation in time. Could the lease of the warehouse be capitalised under directly
attributable costs ?
Is the result the same if we use our actual warehouse ? can we capitalize the part of the warehouse that we use for this specific project
?
Thanks for your valuable contribution.
Regards,
Frederic
Reply
Frederic
May 22, 2015
Hi Silvia,
Again me but an additional point.
Today in our warehouse we have material (towers) that will be used in the future. as we do not know when we will use them
(depending on customer order) we consider it as inventory and not WIP PPE.
1. Is it the correct allocation or can we consider them as WIP ?
2. also in the case of WIP, can we consider the cost of warehousing in the valuation of the tower?
From my point of view the biggest problem is to estimate the costs as we do not know for how long it will stay in the warehouse.
Thanks in advance,
Frederic
Reply
Matt H
June 4, 2015
Hi Silvia. In the pharmaceutical sector would it be possible to capitalise uniform that is used in a production environment as PPE.
These are garments that have to be worn on the production line by operators to ensure hygiene standards etc and would have a useful
life of 2-3 years?
Reply
Silvia M.
June 4, 2015
Hi Matt,
why not? If its useful life is more than 1 year and it meets the purpose of PPE (from what you wrote it does), then I dont see
any reason why not.However, think about its value and unit of account it might be more practical to capitalise some set of
garments rather than each individual garment. S.
Reply
Arun Runthala
June 9, 2015
Can the expenditure incurred during construction period of a new factory (Various Building & Plant & Machinery set up)be classified
as Expenditure during Construction Period in IFRS under Assets since all expenditure cant be directly allocated.
Reply
Silvia M.
June 10, 2015
Hi Arun,
you should be able to allocate the expenditure either directly, or at least apportion it on a reasonable basis. If its not possible,
then its a general expenditure that is recognised in P/L but I believe this is not the case. S.
Reply
Bstreak
June 11, 2015
If a team requires to attend meetings and trvel aborad abroad for the project. where would the costs be adjusted. can they be
capitalized under ppe?
Reply
Sarosh
June 17, 2015
We have a land (owned property) around which we have got fencing built for safety purposes. The land is vacant and had already
been capitalized in the books. I have two questions:
(1) Is such fencing eligible for capitalization, or should it be expensed out?
(2) If capitalized, what is the most appropriate categorization to be made; land or land improvements?
Many thanks in advance for your valuable comments
Reply
Silvia M.
June 18, 2015
(1) Its eligible for capitalising.

(2) As the fence has its definite useful life (unlike land), you need to capitalise it separately and depreciate over estimated
useful life.
S.
Reply
Anjoo
June 18, 2015
Silvia
"After 2 months,
If we build I landed
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it ok more
to treat it as
an item of PPE.can u tell me the accounting treatment please.
Reply
Silvia M.
June 18, 2015
Again, if the stage is going to be used for more than 1 year, you can capitalise it.
Reply
Anjoo
June 19, 2015
Thanks but Silvia the stage does not exist. It was disassembled/dismounted after the show actually there are only small partitions of
plywoods left. i dnt know if we can use them to construct another stage with it.can we still capitalise the whole cost of setting up the
stage and depreciate it when the stage actually dnt exist. Please advise.
Reply
Silvia M.
June 19, 2015
Anjoo,
in such a case, I guess the previous stage had some residual value as the partitions can be used further therefore, there should
have been something left. Sure, you can use these partitions again, why not? And then capitalise their cost+works into another
stage. As I said after depreciating the previous stage, the residual value equal to the value of partitions should have been left
in the carrying amount and that could have been used as the new cost.
Reply
Bstreak
June 26, 2015
Hi can you answer my concern. thanks.
Reply
Silvia M.
June 27, 2015
In most circumstances no, you cannot capitalize, but it depends.
Reply
Bianka
June 30, 2015
Hi Silvia,
Can we capitalize costs for returning of pallets to vendor, which are carrying the purchased PPE?
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We import the PPE Iwhich
landed a pallets,
is on new position of IFRS
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costs to learn more
transportation and forwarding occurs.
Should these costs be capitalized as CAPEX or should be considered as OPEX?
Thanks
Bianka
Reply
Bianka
June 30, 2015
Silvia, one more issue with the capex.
In our FAR we have printer, that is maintained by outsourcing company for a fee. The Co is offering us to replace the printer with
new one for a reasonable surcharge. This option will probably decrease the maintenance fees, which are expensed in the PL. The old
printer is still having net book value.
What should be the accounting treatment for this issue? Write off the old printer and capitalize new with the price paid? Or?
Thanks
Bianka
Reply
masroor
July 8, 2015
Hi Silvia,
Do we capitalize brokerage fees in the cost of the land. My view point is that it wouldnt because it is not necessary to bring the asset
to its location and use in the way as intended by the management. Can you please share your viewpoint on this.
regards
Reply
Dinesh
July 14, 2015
A machine has been purchased by our company and also we got the consult from the outside for the installation of machine. Same
Hotel fee has been incurred for the consulates (when we got the consult). Can be capitalized the above mention Hotel fee for the
consulates When Initial recognize of the machine?
Reply
Danoon
July 23, 2015
Can an access road be capitalized?
Reply
Silvia M.
July 24, 2015
Yes.
Reply
Mubashir Anwar
July 28, 2015
Thank you for clarifying the capitalization of PPE.
I have a very specific question. I am auditing a company which deals in Serviced offices. They are launching a new location. All costs
from during the setup until the property is in operation is carried as pre-opening cost. Once the new property starts operation, they
will capitalize the rent expense of the preopening period as leasehold improvement.
I feel they should expense it, but they dont. This has happened at every new location they have launched over the years. It is big
group. My firm has not raised an objection in the past audits. Could I get a reference to the IAS where it allows rent expense to be
capitalized. And what is the rationale behind capitalizing it? Is it because the Company earns from renting out serviced offices, so it
will gain future benefits from the property over the life of the property. And without renting the property they would not be any future
benefit.
Thanks. I really appreciate all your efforts.
Reply
Titilayo
July 30, 2015
Weldon Silvia. Youre such a very good fellow.
Reply
Loku H
August 3, 2015
Dear Madam,
The Establishment Expenses brought forwarded continuously during last three years,and meet the criteria of IAS 16.Further i want to
pay your attentionif the management has decided to capitalized over last three years and inform to accountant to revise the journal
entries related to adjustment
01.Limitations of capitalization of formation Expenses
02. Prior year adjustments
03.if seem to be massive classification errors regularly basis, you professional proficient with this regard.
Thanking You.
Loku
Reply
Silvia M.
August 3, 2015
Sorry, Loku, I dont get your point. S.
Reply
Benj Flores
August 11, 2015
Dear Ms. Silvia,
Thank you for your website. I learned a lot in reading your articles. May I ask questions please?
There is a plan for building expansion, normally this would fall under leasehold improvement, but Im wondering if it can be
capitalized also as Building?
The lease contract is for a period of five years. The lessor is an affiliate/related party. there is no plan to leave the premise even after
the contract expires, probably we will just renew it again. Estimated useful life of the improvement is 14 years, is it okay to use this as
the basis of depreciation, instead of the shorter between the lease term and the useful life?
Also can you give me the general useful life of various assets (machineries, software, buildings, office equip/fixtures) if there is any
general or industry based useful life, just for benchmarking.
Thank you very much,
Benj
Reply
Silvia M.
August 12, 2015
Hi Benj, if you have the option for the renewal of the lease contract (so noone can stop you from doing so) and you intend to
use it, then yes, you can set your useful life to 14 years.
For benchmark depreciation rates: please understand the difference between useful life and economic life. Useful life
depends on your intentions to use the asset; economic life takes assets characteristics and limitations into account. E.g. while
economic life of certain machine can be 4 years (because beyond that, it would be too obsolete), you can plan to use it only for
3 years and thats your useful life.
So the useful life depends on the entity and therefore its not really possible to set some benchmark. S.
Reply
Verna
August 13, 2015
Hi Ms. Sylvia,
Thank you for your clearing this PPE recognition issue. It is really a vague area in Accounting.
We are a manufacturing company. Our capitalization policy is at more than $1,000 and can be used for more than one period. Our
Maintenance personnel are buying spare parts for our machines which usually fall on our capitalization policy. This spare parts will
not be used right away and will be used only when there a damaged parts in the machines. Currently we are classified it as inventory
and will be expensed as Repairs & Maintenance during withdrawal to Warehouse. Are we doing it right?
Also, we have program modifications in the machines to accommodate new products or improvements. Can we capitalize this
modifications? Is it additional cost of the machine?
Your reply will be very much appreciated.
Thank you.
Reply
Bianka
August 14, 2015
Hi Silvia,
We have purchased new production machine and classified as AUC. The acceptance test did not commence yet, since it is agreed in
the purchase contract that the acceptance test will commence when the maximum capacity will be reached. If acceptance test be
negative, we have right to return the machine to the vendor. Also, it is mentioned in the contract that, the titles and the ownership of
"After 2 months,
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contract
yet, because positive acceptance test is needed for the last invoice to be issued and paid.
Now, we started the production, we are selling produced products (the machine started to bringing economic benefits)but according to
the contract we are not the owners of the machine yet. Should we reclassify the machine as final asset and start the depreciation or not
yet?
If we should capitalize as final assets in this moment(prior to acceptance test), and start depreciation, should we provision the
expected invoice and capitalize as provision, or the later received invoice should be posted as subsequent expenditure?
Thanks
Bianka
Reply
Sameer
September 3, 2015
Dear Slyvia,
I dont believe I read majority of the discussions that happened on this website. Its only that I could find clear and convincing answers
from you for all the queries raised by different people. I am myself from a finance background and have a query w.r.t. capitalisation of
land lease rentals during construction for a building. I read in one of your comments that we should not capitalize the land lease.
However, IAS 23 states the following:
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that necessarily takes
a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are
recognised as an expense.
In the above query, land is required for construction of the building without which building cannot be constructed. hence, the land
lease paid during the construction of the building should be capitalize. And after construction is complete, the economic benefits from
the building will flow to the company. So, in a way, the land lease which was paid during construction of building qualifies all four
conditions viz. PURPOSE, USEFUL LIFE (by giving space to construct building), ECONOMIC BENEFITS (by usage of building)
and MEASURABLE. Also, even the salaries paid to employees engaged in construction of building could be capitalized on the same
grounds. They in itself doesnt have any separate identity, but they assist to add value to the ultimate asset which is under
construction. In short, if all such costs wouldnt have been incurred, the asset (BUILDING) could not be constructed.
Awaiting your response.
Many thanks in advance..!!
Sameer from Dubai
Reply
Silvia M.
May 31, 2016
Hi Sameer,
thank you for your kind words. Let me just tell you that the rental expense is not a borrowing cost and therefore IAS 23 does
not apply.
As for rental expenses, theres a lot of debate going on. And you are right, amounts charged under operating lease during the
construction period can be seen as directly attributable. S.
Reply
Haroun
September 3, 2015
Hi Silvia,
I am looking at a particular case where an entity has constructed its own office building on a leashold land.
In this case, can we capitalise the leashold land and depreciate it ?
Reply
Olusegun Ajayi
September 4, 2015
Dear Sivia,
Thank you for a great job of simplifying ifrs beyond belief.
Please if company A acquires an operating license but which it didnt use before it sold it (i.e the license) to company B. In company
Bs books, will it be correct to account for the cost of buying the license from company A as an Intangible assets? Also will be be
correct for company B NOT to amortize the cost since it has an indefinite life span and it can only remain in business if the license is
in place? i.e Company B operates in a regulatory sector
Thank you.
Olusegun
Reply
Silvia M.
September 5, 2015
Olesegun, I would say yes, most licenses meet the definition of an intangible asset. If its genuinely an asset with indefinite
useful life, then its not amortized. S.
Reply
Mahendra
September 7, 2015
Dear Silvia,
Good Informatics shared, First of all thanks for the same.

Secondly, I have a Question for CWIP and PPE.
What will be treatment of CWIP which is not available for use and not in actual possession of entity at the end of the year?
IAS 16 is clearly Includes for PPE which are Available for use
IAS 38 does not support inclusion in Intangible asset recognition criteria.
What can be the correct Classification of CWIP in FS?
Thanks in advance.
Reply
Ramesh
September 8, 2015
Dear Silvia
Thank you for your article. really cherishing.
I have a situation. I have a 70% subsidiary company overseas which is taking a new premise. I have agreed to pay 50% of the costs
and the subsidiary will bear the rest of the costs.
The new premise is under an operating lease for 5 years. the new premise will have the following costs:-
"After 2 months, I landed a new position of IFRS conversion manager with 70% pay rise."
1.Deposit Click here to learn more
2.Space planning and project management
3.Moving furniture
4.reinstallation of server/IT/Telephone
5.Furniture existing in the old premise and now moving to new premise.
6.New furniture
7.Installation costs of electricity/water and other, of which, the landlord will pay 50% as installation allowance.
All the above costs will be 50% borne by me and 50% by the subsidiary.
Can you please advise:-

1. How will I treat the 50% being paid by me in my books?
2. Which items can be capitalised and which are those which needs to be expensed?
3. All capital items will be booked in the subsidiarys book to gain capital allowance, so do I expense the 50% costs I am bearing in
my book?
Thank you for your help Silvia.
Regards
Ramesh
Reply
Silvia M.
September 10, 2015
Dear Ramesh,
1) this is extremely difficult to reply as I dont have enough information. Is there some contract between parent and subsidiary?
Whats the ground of this transaction? Is the parent going to use the premise as well? If its just money going out without
anything getting back (no use of premises, no return of money), then its simply a gift or an expense in your books (unless
you assume the recovery of some costs). As its a related party transaction, you should make an appropriate disclosure.
2) Deposit is a receivable in the books of a subsidiary. All other items can be capitalized.
3) See response 1).
S.
Reply
Ramesh
October 6, 2015
Dear Sylvia
Thank you for your response. The Parent will be benefiting in terms of Dividend payable by the subsidiary and also profit
generated from the subsidiary will be consolidated at the parents level.
The subsidiary runs on its own and parents presence is merely a representative working there, using some furniture,
chairs, etc. We want to keep track of all the fixed assets bought by the subsidiary as they are quite messy when handled
by them.
So, we have decided to acquire (100% funding) all the assets, include all these assets in the parents FAR and make a
recharge the subsidiary a fees for using the Assets.
My Question is, How to calculate the recharge to be made to the subsidiary and what will be the basis?
I am stuck here as I need to provide them something which will not create disagreement..
Wish you could help me out urgently as they are visiting us today..
Reply
Anwar ul Mustafa
September 11, 2015
I am conducting the audit of a textile mill. During the course of audit, i came to know that the stores and spares are kept in stores for
more than one year and management view is that the stores and spares can be used even after three or four years. My question is that
if these stores are not used in the year then whether the company should capitalize it or it should remain as stores and spares?
Reply
Silvia M.
September 16, 2015
Hi Anwar, it indicates that you spares are a part of PPE as they can be used for more than 1 year. S.
Reply
Suresh
September 16, 2015
Hi Silvia,
Our company intends to erect a fence (2 Km) and share costs with a neighbour, a farmer. Should the full value of both contributions
be capitalised (our cash + donated asset from neighbour). Or, just the company costs.
Based on service potential and economic benefit, there is an argument for the full value or contribution but then increased
depreciation need to be considered.
Any thoughts, please!
Thanks
Suresh
Reply
Silvia M.
September 16, 2015
Hi Suresh,
it depends on the specific agreement with your neighbour. If both of you will take care about the fence, share the repair &
maintenance expenses, etc., then I would suggest that each of you should recognize its share of the asset in the financial
statements. S.
Reply
Karen
September 24, 2015
Hi Silvia,
Can security expenses incurred during the construction of a building be capitalized? And what if the security was hired specifically
for the construction, meaning there were other security there for the rest of the property.
Reply
Silvia M.
"AfterSeptember
2 months,25,I landed
2015 a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
Hi Karen, I would say no. The reason is that the security service is not inevitable in order to bring the asset to its desired
location and condition, is it? Maybe there is a situation when asset under construction can be damaged without security, but
when its fully completed no security service is needed anymore, in this case I would think about it. But you would really
need to fight hard to justify it. S.
Reply
Karen
September 26, 2015
Hi Silvia,
Thanks so much for your response. It is my client that wants to capitalize the security costs on the basis that the company operates in
a volatile area and that the contractors requested extra security. Now the premises already had security as there are other buildings on
it, but it was thought that extra security was required and it is the cost of that additional service which he wants to capitalize. We
agree that yes additional security would have reduced the pilferage on the site but argued that the building would have been erected
whether or not there was this additional security so it was therefore an incidental cost per IAS 16 par. 21 and not a direct cost
necessary to bring the building to its location and stage. We even referred him to the paragraphs that give guidance to the elements of
cost which are allowed to be capitalized but he still insists on his claim to capitalize the security costs. I think he may have had a
better argument if there were no other security on the premises. What do you think?
Reply
Silvia M.
September 27, 2015
Karen,
when I think about it closely it seems I would NOT capitalize any security cost in most circumstances. It would have really
been an exceptional situation when an entity would have justified that these costs are absolutely inevitable for bringing an asset
to its location and condition. So I agree with you. S.
Reply
Marta
September 30, 2015
Dear Silvia,
our company reline the electrolysis pot shells (each pot shell every 5th year). Costs of relining are capitalized. But there is filling
inside each shell which is tapped to another shell (or held as an inventory) before overhaul. First filling of shells (when production
started) was capitalized. Filling after relining is not capitalized and is recorded as materials consumed costs. I would like to know, if
the filling after relining should be capitalized or can be recognized as expense.
Thank you in advance,
Marta
Reply
Yani
October 1, 2015
Dear Silvia
I enjoy reading your replies, quite enlightening.

I have a question about when depreciation should start. If a new production company acquires production equipments but production
will only start 1 year later.Should depreciation start when PPE recorded even if idle or only when put to use?
Reply
Silvia M.
October 1, 2015
Yani,
ubelievable currently Im working on an article about starting the depreciation But to give you a quick reply: you should
start depreciation when an asset is available and ready for use, not when it is actually put into use. However, when theres no
production, you can still apply zero depreciation charge. S.
Reply
Epraimy
October 12, 2015
Hi Sylvia, I must admit, I am enjoying this discussions.

Thank you and the entire team.
We did some extension and renovations to our office premises which is owned by the organization. I am concerned about what to
capitalize and what not to capitalized as everything is included in the invoices at each level of the project by the construction
company. We also paid the quality surveyors huge amounts of money. Should the entire cost be capitalized?
A new stove was fitted into one part of the extension. Should the stove be capitalized or expensed?
PLease help.
Reply
Epraimy
October 12, 2015
Should an alarm system installed in the office be capitalized or expensed. The cost was quite significant. I am not an IT person but I
believe the Alarm could be reinstalled if we happen to move it to another location.
And the cost of wiring the building for electricity? These are all cost incurred during the renovation of our office space.
Reply
Silvia M.
October 13, 2015
Hello, these expenses can be capitalized, as they meet all the criteria for PPE. S.
Reply
Piper
October 13, 2015
Thanks for your comprehensive illustration!
I have a question on PPE capitalization:
According to IAS 16 para. 8:

Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this HKFRS when they
meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.
Does it mean that even if the amount of spare parts is insignificant (e.g. $1), as long as the spare parts meet the definition of property,
"After 2 months,
plant and equipmentI (purpose
landed a+ new position
> 1 period), ofspare
such IFRS conversion
parts manager with
should be recognised 70% pay rise."
as PPE? Click here to learn more
Reply
Silvia M.
October 15, 2015
In fact, yes. But let me remind you that:

- theres always a question of a materiality
- IAS 16 enables you to recognize some assets as a set, rather than by units. Its a question of unit of account. In practice, if you
have 1 000 000 spare parts at $1 each, and their useful life is longer than 1 year, maybe its better to recognize them as 1 piece
of PPE. S.
Reply
Pricilla
October 13, 2015
Can I know how to record fixed assets (furniture) purchased infill the construction of a building is over.thanks
Reply
Silvia M.
October 15, 2015
Priscilla,
furniture can be seen as a separate piece of PPE in most cases. Therefore, if it meets the PPE criteria, you can record it as PPE.
S.
Reply
Navaneethan
October 14, 2015
Ms Silvia,
How to recognize pre incorporation expenditures, i understood that there is no any specification in IFRS to capitalize those
expenditure, but will assume that if it a significant amount, wont it make any impact to the Company as if we directly recognized in
PL? is there exception??
Reply
Silvia M.
October 15, 2015
Dear Navaneethan,
the only exception for capitalizing incorporation expenditures is when they relate to the acquisition of some asset like PPE,
inventories or intangibles. If not, then they must be expensed for example, all salaries of employees working on
incorporation, legal or consulting fees,etc. Even when they are significant. S.
Reply
Sylwia
October 20, 2015
Hi Silvia
Thanks for all useful information. Would you be able to help me with the below? I am in the frieght industry and we have renewed a
contract with an existing client. Please can you advise if I can capitalise a once off sign on bonus fee for a client that will be
renewing a contract for 3 years. The bonus is payable on signature (November/December), and the effective date of the contract is 1
February 2016.
Thanks in advance for your help!
Kind Regards
Sylwia
Reply
Kevin
October 21, 2015
Hi Silvia,
My company changed its name and will have to change the name on all their buildings. Should the cost of the new signs be
capitalized?
Thank you for your assistance!
Reply
Silvia M.
October 23, 2015
Hi Kevin,
are these signs a sort of advertising or just labeling the building? Are they located on the companys buildings? If these signs
are on your own buildings, then its possible to capitalize. S.
Reply
B
October 25, 2015
Hi there,
My client is building a wedding venue to rent out and is in the planning and construction phase. Not yet operational.
1. Can I capitalize the legal, feasibility study, and soil testing expenses prior to becoming operational, as part of the building and land
costs?
2. The only other expenses other than the land and building materials purchase is the website development cost and branding. Can I
book these to goodwill (intangible assets)? Or expense?
Reply
Qasim Dosani
October 26, 2015
Urgent!
I am on audit of Oil Refinery. Company has installed SBM first time in Pakistan, and purchase extra high tension rope as a spare parts
to be used in emergency.
Should I capitalize these ropes in PPE or classify it in Spare Parts and what will be the depreciation treatment in both cases?
Thanks in advance,
Reply
jack
November 1, 2015
Hi
If I build a plant and I need to pay a lot of money for license agreements, lawyers and such, before I have the legal right to start the
construction.
What should I do with all those costs ?
Reply
D
November 12, 2015
We purchased a large warehouse building that is to be torn down and replaced with a new building for our entitys use. Can I
capitalize the insurance premiums and property tax payments on this property while construction is in progress. I realize that it is
expensed once the building is complete and ready for company use. From what I understand, I can capitalize both if the building was
for resale but Im unclear if we are going to keep the building for company business if they are capitalizable or not. Thanks for your
help!
Reply
Musira
December 9, 2015
Thank you very much for the conversation real i got something special to me.
i have a question please assist me,how can we treat revaluation Surplus.
Reply
Silvia M.
December 9, 2015
Dear Musira,
please could you read this article on summary of IAS 16 Property, plant and equipment? Theres a video at the end and it
answers your question nicely.
Thank you and have a nice day!
S.
Reply
AMAR MANHAS
December 24, 2015
In case of preoperative expenses which are incurred with respect to transportation for shifting machinery from a closed out factory to
a new factory can be capitalized ? If yes then whether as an intangible asset or as a tangible asset as an addition to the cost of the
machinery which is being shifted.
Reply
Ammar
December 28, 2015
Hi, i have a case for which the PPE (office renovation) had been completed 6 months back but the exact cost not provided by admin.
for PPE recognition: benefit is there but the cost provided by admin that will not exceed $220k.. What to do in this case?
How to capitalize in order to depreciate the 6 months back of an asset life being used before the year end ?
Reply
Epol Ramz
January 19, 2016
Dear Sylvia,
Praise God for your superb knowledge & wisdom

I would like to seek your assistance as regards to specific ruling that applies to asset capitalization under rented land and/or facilities
and would appreciate quoting the appropriate IFRS and/or IAS standards..
Thank you very much and God bless you..
Reply
Samar Chakraborty
February 1, 2016
Dear Sylvia,
i have a case, what is the treatment for preliminary expenses and unallocated revenue expenses and how can a company write of a
preliminary expenses and unallocated revenue expenses, it will be too much helpful for me if you give any reference IAS Or IFRS
Thank you
Best Regards
Samar
Reply
Pooran
February 7, 2016
When we should capitalize the Spare parts in PPE, at the time of purchase or at the time when the part installed in machine.
Thank you. Example we purchased in 2013 but installed in machine in Jan 2016.
Best regards
Pooran
Reply
Pooran
February 7, 2016
Dear Sylvia,
Spare parts can capitalized at the time of when they purchased or at the time whey they installed in machine. For example purchased
"After
in 20132and
months, I landed
installed a new
in machine position
in Jan 2016 of IFRS conversion manager with 70% pay rise." Click here to learn more
Thanks and regards
Pooran
Reply
Silvia M.
February 7, 2016
Hi Pooran, please check this article about spare parts for more info S.
Reply
Brian
February 9, 2016
Hi Silvia,
If existing assets have to be relocated to accommodate a new construction project (and that is the only reason they are being
relocated), can the relocation costs be capitalized to the project?
Thank you,
Brian
Reply
Silvia M.
February 11, 2016
See, Brian, you can capitalize all expenditures necessary to bring the asset to the desired condition and location, so I would say
yes.
Reply
Jc
February 25, 2016
Hi Silvia,
How about lost sales due to temporary shutdown of facility in order upgrade and install new machines that will in effect increase
capacity and improve quality f products? Would you consider capitalizing them as well?
Thanks,
Jc
Reply
Anas
March 7, 2016
Hi Silvia,
Can we capitalize ISO certification cost in line with Intangible Assets standards?
Because some clients require ISO certificates before they sign contracts with us. So the economic benefits derives as a result of the
certification. The cost is huge and one time cost.
Appreciate your reply.
Thanks & Regards
AG
Reply
Marino Robert
March 16, 2016
ISO certification costs generally cant be capitalised under IAS 38 because it would not meet the identification test for
intangibles.
Normally the certification doesnt give you any rights but only privilege. Right is something you own, where as privilege is
something some else owns and they let you apply subject to certain conditions.
It would be bit of stretch to consider the certification costs as development costs.
Reply
Anas
March 16, 2016
Thanks.
But validity period of the certificate is 3 years. Shouldnt we amortize this over 3 years (as prepaid) regardless of
applying IAS 38?
Regards
Reply
Cherry Lene SH
March 16, 2016
Hi Good day!
I would just like to ask if rent expense incurred during the construction period of leasehold improvement be capitalized. Also, should
the application fee and maintenance and security fees incurred for the construction of leasehold improvement, should they be
capitalized also?
Thanks,
-Lene
Reply
Silvia M.
March 16, 2016
Hi Cherry,
in general no, this type of rent should not be capitalized, but it depends. Application fee maybe yes depending on what it is,
but maintenance and security fees are hard to justify for capitalization. S.
Reply
diana
March 18, 2016
We purchased a machine in September. It was capitalized in September. We have an invoice for concrete and slab work to install the
machine. Can these installation costs still be added to the machine even though the machine was capitalized 6 months ago.
Reply
Silvia M.
March 18, 2016
yes
Reply
Liang
March 21, 2016
hi, if i import a machinery on 31/1/2016 and make payment on 15/02/2016. My machinery should recognise at rate at date 31/1/2016
or 15.02.2016.
Reply
Silvia M.
March 23, 2016
Hi Liang, at the date when you gained a control over that machinery. S.
Reply
huzaini
March 22, 2016
Hi Silvia,
Can we capitalise legal fees for obtaining financing of a purchased land by a property developer?
Thanks
Reply
Silvia M.
March 23, 2016
Huzaini, if you capitalize borrowing cost under IAS 23, then in general yes.
Reply
Vanessa
March 28, 2016
Hi Silvia,
just wandering if you can help me out in this scenario.

say a company is building new machinery for a new factory that produces computer tablets, from their own engineers and equipment.
Can this machinery be included as an asset, i immediately thought yes, but got confused by IAS 16, para 19 that states that costs that
do not form part of the cost of an item PPE being costs of opening a new facility. what exactly does that mean?
and if the answer is yes it can be included as an asset, does expenses such as employee travelling interstate be attributable cost?
Thank you in advance for any insight.
Reply
Shivangi
May 5, 2016
Hi
Can you please in deciding whether following expense can be capitalized or not :
1. Cost incurred for obtaining Environmental permits before construction of plant?
2. Cost incurred for making Flood Risk Assessment of a plant before completion ?
Thanks
Reply
Steph Clarke
May 17, 2016
Under software, can you capitalise expenses of travelling, meal, leasing a car to contractors directly attributable to the project that is
being capexed
Reply
Dominique
May 20, 2016
Hi
We have a product that we needed to improve according new global specifications, because of that we are considering that as a new
product and due that able to capitalize. Therere costs of material, tests, prototypes and Engineering hours. In this case can we also
capitalize the Engineering hours?
Reply
Silvia M.
May 20, 2016
Hi Dominique,
yes, you can, as soon as these engineering expenses are directly attributable to the product. S.
Reply
Abdur Rahman
May 22, 2016
Hi Silvia M
I have a client who signed a lease agreement on a building. He has been paying rental on this property for almost two years without
"After 2 months,
taking physical I landed
occupation of a
thenew position
property. of IFRS
My clients conversion
intention manager
is to secure with
a tenant and 70% pay rise."
then purchase Click here
the property to learn
from the more
landlord, however he has not as yet secured a tenant, hence he has not taken ownership of the proeprty as yet. Kindly give guidance as
to whether the rent paid can be claimed as an expense, if not how should I then deal with the rental income.
Reply
Silvia M.
May 23, 2016
Dear Abdur,
it appears that the rent your client is paying does not meet a definition for capitalizing as an asset. Its an expense in profit or
loss.
S.
Reply
Lsyee
June 14, 2016
Hi,
I have few question about repair & maintenance vs renovation.
1) My company has changed the roof for the building, instead of renovation can i classified the expense as repair & maintenance to
the P&L account?
2) How about if i am renting the building,the expense incurred for the changing of the roof ,should i recognised to renovation or
repair & maintenance?
Reply
Silvia M.
June 15, 2016
Hi,
I would capitalize the expenses for changing the roof (see paragraph 13 of IAS 16). If you change the roof on the leasehold
property, you can still capitalize it and depreciate over the lease term. S.
Reply
Hendrik Lie
June 15, 2016
Hi Silvia,
In big amount of sand example, I understand that the intention is for the sand to be used in construction of, lets say, houses for sale.
Its not a company building an office building. Is my understanding correct?
Thanks for your time.
Best regards,
Hendrik L.
Reply
Silvia M.
"AfterJune
2 months,
15, 2016I landed a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
Dear Hendrik,
I dont think it really matters here. The sand perfectly meets the definition of inventories (= to be consumed in the production
process), whether it is to be used in the production of goods for resale (= houses for resale) or own PPE. S.
Reply
Ronald
June 22, 2016
Hi Silvia,
Two question please:

1)During a project phase when using moving machinery in order to create the asset, should the machinery be depreciated (capitalised)
during the project phase?
2) How should the depreciation (if capitalised) of the machinery be treated as you probably do not want to see depreciation in your
books during a project phase?
Much appreciated
Ronald
Reply
Nirav Shah
June 29, 2016
Dear Silvia,
I have recently come across with your web site. First of all, I must congratulate you for spreading IFRS knowledge in such a simple
manner.
I have one query.
we have one business division called Yard. This is located in some port zone. There has been a requirement where port authority has
raised a one time compliance requirement to assess whole ship yard and their assets. Then whatever recommendation comes all
needs to be conducted to modify/replace assets etc.
the query is this assessment cost/survey cost can be capitalised OR considered as part of cost of assets whehn modified/replaced etc.?
how should we treat initially when this money is spent ?
I appreciate your reply.
Thanks.
Reply
Silvia M.
July 6, 2016
Dear Nirav, as I understand, you have to spend this money in order to continue the operation, right? In this case you can
capitalize the expense for obligatory assessment to the cost of shipyard (alocate in proportion). S.
Reply
Cheong
June 30, 2016
Hi,
I have a query I am advertising to gather contractors for submission of tender on renovation of business outlet as it is a relatively
large amount of business. I feel such costs should be in P/L instead of capitalizing as PPE, am I right?
Given the same scenario, what would be the counter arguments to capitalize as PPE instead?
Thanks
Reply
Silvia M.
July 6, 2016
Dear Cheong, you are perfectly right, the advertising cost cannot be capitalized. This is specifically written in the standard.
However, I have seen that some companies capitalized procurement costs (finding the cheapest and most suitable suppliers in
line with the legislation) if the procurement process is required by the law, you would be able to justify its capitalization. S.
Reply
Blanca
July 15, 2016
I have a large machine that is fully depreciated. The machine broke down and requires a major part (not general maintenance) to
continue to operate. Can I depreciate the new part. Similiar to an engine or an overhaul.
Reply
Silvia M.
July 15, 2016
Dear Blanca,
if the new part exceeds the machines capacity (I guess it does as it extends its useful life), then yes, capitalize. S.
Reply
Pramod
August 4, 2016
Hi Silvia,
My question relates to a hydropower developing company under license from government. The terms of PPA (purchase power
agreement) states that the company shall construct hydro power project, sale the generated electricity to government owned electricity
authority at rate as per ppa and after 25 years 50% ownership will be transferred to government free of cost. In this case what portion
of PPE will be treated as Intangible asset (IAS 38) as per IFRIC 12? Whether land and general office equipment will also be treated
intangible asset? Please give your clarification.
Thanks
Reply
Fiona
August 4, 2016
Dear Silvia,
We are exploring new market/region for our products, we can capitalize the cost of new market development as per IFRS. At what
"After 2 months,
stage should I landed
we start a new
amortizing themposition of IFRS conversion manager with 70% pay rise." Click here to learn more
Reply
Morsi Adel
August 4, 2016
Dear Silvia,
Thank you for your great efforts ,
really your page helps me a lot
I have a question related to the conversion from the phase of projects under construction to Fixed Assets
the case is :
we have finished the construction of a factory and we have bulk material :
- Piping Bulk ( Pipes )
- Electrical Bulk ( Cables , )
all these bulk material will be capitalized in the cost of the factory but how it will be recorded in the fixed assets register ??
as in the fixed assets register will record the equipment and the buildings
and this bulk is very expensive = 25 % of the total project and if I allocated the cost of this bulk to the related equipment this will
increase the equipment cost by a very high percentage
For example :
there is unit for waste water treatment
contain some equipment like pumps and its cost = 300,000 $ and the bulk related to this unit = 800,000 $
how can we solve this issue ?
can I record the pipes and cables in the fixed assets registered separated from the main equipment or add the cost of the bulk material
to the equipment regardless of the high cost that will be charged for the equipment which will cause a problem in the case of
replacement
Thank you very much
Reply
Laiq
August 7, 2016
Case Study: I open a Dental Clinic on a rental space, it took like 4 months to build and during this I paid for 4 months rent (Pre-
commencement expenditure) can I capitalized this 4 months rent cost separately or club with Leasehold improvement or Construction
Cost?
Reply
Silvia M.
August 7, 2016
Dear Laiq,
I think this article will answer your question. S.
Reply

August 21, 2016
I need to ask about Incorporation Costs?
Reply
Silvia M.
August 22, 2016
Yes, ask. But in general, as written in the article, you cannot capitalize them unless they can be attributed to an acquisition of a
specific item of PPE or intangible asset or similar. S.
Reply
Jenny
August 24, 2016
Dear Sylvia,
if our own workers are performing major inspection, should we capitalize labor costs?
Thanks!
Reply
Kamran
September 7, 2016
Can we capitalize flower and flowerpot which has significant value?
Reply
Silvia M.
September 7, 2016
Interesting question, but in general yes, based on its purpose. If its there to decorate your place, then yes, you can capitalize it
(I guess it will stay there for more than 1 year). S.
Reply
Kingmany
September 21, 2016
Hello!
Can I ask a question regarding PPE capitalization? I wonder if we can capital thumb drive used for ATM machine in PPE? or we just
record in repair maintainance expense?
Thank you.
Reply
Student
September 22, 2016
Its a very informative article, so thank you for that.I do have one question though.
A bank purchased an ATM machine for $10,000.It is being depreciated on a reducing balance method at the rate of 20%.After a few
years, a major part needed replacement and was hence replaced with a new one for $2,000.The disposed part had $0 disposal value
and was dumped. Now, something that maintains the earning capacity of an asset qualifies as revenue expenditure and hence should
be written off.So by this definition , should we book the new purchase as expense? Or if we book the amount as asset, what amount
"After
should 2bemonths, I landed
derecognitized a new
for the position
part that of IFRS conversion manager with 70% pay rise."
was disposed? Click here to learn more
Reply
Silvia M.
September 22, 2016
Dear Student,
the recognition criteria in IAS 16 say that you should recognize a subsequent expenditure as an asset when the cost is reliable
measurable and there are future economic benefits (IAS 16.7). So, something that maintains the earning capacity of an asset
qualifies as revenue expenditure does not apply anymore (yes, something like that applied many years ago). Moreover, when a
replacement of a certain part is required in regular intervals, then you should recognize it and depreciate separately. Long story
short you should recognize a new part and depreciate it over its useful life.
Reply
student
September 22, 2016
Dear Sir,
Thank you for your answer. I shall be grateful if you could kindly answer some of the questions that have popped up after
reading your earlier response.
So, when you said .and there are future economic benefits (IAS 16.7) , I assume the above statement means future
economic benefits flowing to the entity for more than one year and hence a capital expenditure and not a revenue
expenditure? and another thing is , in my example above, what amount should be de-recognized , as the machine was
booked as a whole machine and we dont know the cost of the replaced part, since as per IAS 16.6.2 ,the carrying amount
of replaced or renewed part must be derecognized.
Thanks in advance.
Reply
Kayla
September 30, 2016
Dear Silvia,
Can I book the lease negotiation fee as the leasehold improvement? The useful life is same as the lease term, is that correct?
Thanks,
Reply
Silvia M.
October 7, 2016
Dear Kayla, some of these fees can be considered as directly attributable costs of acquiring the asset, but not as leasehold
improvement. It depends what the fee was paid for. S.
Reply
Micheal
October 12, 2016
Thank you Silvia for all your help. Need a solution to a proble, in relation to capitalisation of expenses.
"After 2 months,
A company I landed
purchased a new
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office. conversion
The manager
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or 10 years. Cantoitslearn
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be
capitalised?
Reply
Silvia M.
October 12, 2016
Hi Micheal,
there is no minimal value for capitalization. So yes, you can capitalize the cost as the purpose and duration is in line with IAS
16 and its definition of property, plant and equipment. However, think of materiality and aggregation is 1500 USD material
for your financial statements? If not, then even if you dont capitalize, your financial statements would still present the true and
fair view.
Reply
Raheel
October 24, 2016
Dear Silvia,
I have an asset and some depreciation have charged in it. I want to transfer this asset to CWIP project for employees training. So that
new CWIP Plant can be run smoothly.
In this case, What would be the treatment. Should I made disposal / write off or add Book value in CWIP.
Thanks,
Reply
Silvia M.
October 28, 2016
Hi Raheel, maybe I dont have enough information, but for me it seems that you should not trasnfer any asset. You can include
this assets depreciation charges allocated on some reasonable basis into the cost of newly constructed asset (CWIP as you
name it). S.
Reply
Ashleigh
October 24, 2016
Dear Sylvia
We are in the process of a new project, the building of a new filling plant, and we have hire charges for construction machinery.
The hire period is no longer than 1 week overall are these to be expensed?
Thanks
Reply
Silvia M.
October 25, 2016
Dear Ashleigh,
"Afteryou
2 months, I landed
can capitalize thesearental
newcharges,
positionbecause
of IFRS
theyconversion manager
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a new more
filling
plant. Also, as machinery was rented only for this purpose and only during the building period, theres no reason not to
capitalize. S.
Reply
Tyraaa
November 18, 2016
can you help me to iccured trelated cost of ppe? i got a problem to classify the ppe, whether it is land? land & building? equipment?
plant?
Serene Plantation Bhd commenced plantation operations in Bukit Serendah. The operations, which start on 1 January 2011, are for the
cultivation of oil palm. The following information summarizes the costs incurred in relation to the plantation areas:
1. land aqcuisition and incedental cost = $21 million

2. self-construct palm oil mill = $ 8 million
3. purchase & installing plant and machinery of palm oil mill = $ 4million
4. estate building = $ 15million
5. general infrastructure (telephone lines, water systems, generators, cables) = $ 10million
6. site preparation(land clearing, levelling, terrace) = $ 2million
7. utilities (road, railways, drains, canal) = $3 million
Reply
Silvia M.
November 21, 2016
Hi Tyraa,
n. 1 is clearly land, n. 6 depends on why the preparation is performed (are you going to build something there? then its a part
of the acquisition cost). The remainin items should be regular PPE items on their own, especially if their useful life is different
from the life of a building/plant. S.
Reply
Omeldo
November 22, 2016
Hi Silvia,
The whole project for construction of solar farm ends within the same financial year end. The company has purchased an accounting
software. Under the norm, this should be capitalized as Fixed Assets. However, the directors advised to expense it off since the
project has completed and the item will not carry any economic future benefit. Is this practical? If yes, where should this classify in
profit & loss? TIA. Omeldo
Reply
Silvia M.
November 29, 2016
Hi Omeldo,
from what you wrote it seems that yes, it would be OK to expense the software in the financial statements, because no future
economic benefits are expected. You can classify it as some project cost (based on whether you present expenses by nature or
by function). But, let me warn you about the deferred tax, because in most cases, the tax rules do not permit you to expense the
software in 1 year (if its cost is higher than certain amount), and therefore, deferred tax may arise. S.
Reply
Shard
December 13, 2016
Hi Silvia
During the course of the construction of a building, let say one of the contractors is fired. Should the amount paid as damages to the
contractor for breach of contract be capitalized in the cost of the building?
Thanks.
Reply
Silvia M.
December 16, 2016
Dear Shard,
is it a cost directly attributable to bringing the building to its desired condition/location? I think not. Its an expense. S.
Reply
Nompilo Mange
December 14, 2016
Hi Sylvia, I would like to know that how would you treat the cost of moving the assets from one place to another and where would
you allocate the cost of moving, to the actual asset moved or what?
Reply
Silvia M.
December 16, 2016
Dear Nompilo,
you cannot capitalize asset relocation costs please refer to IAS 16.20. S.
Reply
Kalani Vidanapathirana
December 16, 2016
Hi Sylvia,
What about royalty payment to the supplier? Can we capitalized it as cost of PPE?
Reply
Silvia M.
December 16, 2016
Hi Kalani,
interesting question. Is this royalty payment just one-off? Or, is it for the continuing use of the asset? If its one-off and you
cannot really start using the asset, then yes, you can capitalize. But, if you need to pay the royalty for assets usage as it is used
(continuously), then no, because its not the directly attributable cost to bringing the asset to its desired condition/location
instead, it is the cost of operating the asset. S.
Reply
EveSim
December 20, 2016
Hi Silvia,
If I pay compensation equivalents to 3-years rental,to the existing tenant before I take possession of the premise that I bought, can I
capitalise the compensation made? Thank you!
Reply
Silvia M.
December 22, 2016
Dear EveSim,
if you really cannot acquire the premise without that compensation, then yes, its directly attributable cost and you can
capitalize. S.
Reply
Khairul Hasan
December 21, 2016
Thank you for your wonderful and exciting effort.

Problem 1:
We have a CAPEX vendor for telecommunication equipment and vendor use a warehouse run by himself that cost they included with
equipment price. Currently we have decided to cancel the contract and vendor asking for the warehouse rent as they were used the
warehouse for our equipment only. Can we do the warehouse rent as a capex as some of the procured equipment still in WIP stage?
Problem -2:
We have changed our equipment vendor. When we cancel the contract we found some order is on progress then we cancel the order.
Now vendor ask plenty for PO cancelation. Can we do the plenty cost capitalization with new vendor provided equipment cost? If not
what would be the accounting?
Reply
Jane
January 16, 2017
Dear Sylvia, how to account for networking and telemetry system introduction?
Best regards,
Reply
Andy
January 23, 2017
Dear Silvia,
IAS 16 state that you should recognise a PPE if and only if

1) it is probable that future economic benefits will flow to the entity.
Asset is resource that the entity have control over.
In these scenario:-
"After 2 months,
Co. enter I landed
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with external vendors toofconstruct
IFRS conversion manager
a machinery/plant whichwith
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in their Click here
production. to learn more
However this
machinery/plant will take a long period to complete. Can they capitalise the amount paid at each milestone reached by the supplier of
completion as PPE?
Reply
Silvia M.
January 24, 2017
Dear Andy,
it all depends on terms of a contract. Who controls a machinery in progress? Is that supplier or customer? Who bears the risks
of ownership? E.g. if theres an earthquake and machine is broken, who would bear the loss?
If you assess that the control is with supplier, then you should account only for prepayments made. S.
Reply
Kallama Nelson
January 25, 2017
If a company is engaged in housing development, is land recorded as inventory or PPE. Also, can expenses such as valuation ,
infrastructure be added to the value of the land?
Reply
Shaq
February 14, 2017
Hi Silvia,
My company is going to undertake some consultancy work to advise on and make on assessment whether the office can be redesigned
to turn it into an Agile working space. This would involve putting partitions up, rearranging the office layout and purchasing new
furniture. Im sure these latter costs can be capitalised but can the consultancy work also be?
Thanks,
Shaq
Reply
Randesh
February 15, 2017
Hi Silvia!
Great to be at this forum.
Ragrding Shaq queston above, if it is substantial amount, if Agile working space going to be utilised for more than 1 period, it will
meet IAS16 requirement if it becomes part of office space fixtures/partitions. Independently it should not be considered as fixed asset.
Reply
Shaq
February 16, 2017
Thanks Randesh!
Reply
Silvia M.
February 19, 2017
Randesh, thanks for answering your question. In general, I agree, you can capitalize consultancy work. However, be careful,
because if its something as feasibility study or decision making on whether to do or not to do that might not be directly
attributable expense, but research. It all depends on what the legal requirements are, why the study was done, etc. S.
Reply
Shaq
February 20, 2017
Thanks for your response, Silvia.
Reply
Pricilla
February 19, 2017
Dear Ms Silvia,
Thanks a lot for your support on IFRS learning and clearing issues.
I have one issue with our software accounting package. For a long time the asset (which is classified under intangible assets) is kept
at zero NRV. How I should deal with this balance in future? Can I re-classify it to PPE or offset the cost with the accumulated
amortization or revalue it. Anyway the asset has no much value since the license in not compatible with the new operating systems.
Reply
Silvia M.
February 20, 2017
Dear Pricilla,
if you think that the asset has not much value and will not be used for a long time because of incompatibility, then if its not
material, dont do anything with it.
However, if the assets value is material, then you should correct the error, because you apparently did not revise the assets
useful life. You can read more about it here. S.
Reply
Mahmoud
February 24, 2017
If we capitalized raw materials purchased for the purpose of testing a new machine. How should we treat this raw materials if we sold
the Finished Goods which consumed this raw materials?
Reply
Shivraj Chavan
March 9, 2017
This explanation of IAS 16 is very useful, Request you to throw some light on period as mentioned in Para 16.6 b) of IAS16, Want to
"After
know if2that
months, I landed
refers to reportingaperiod
new position
only? of IFRS conversion manager with 70% pay rise." Click here to learn more
Thanks in advance
Shivraj Chavan
Reply
Jane
March 17, 2017
Dear Sylvia,
parent company issued an invoice to the related party for the use of trademark. The amount of the invoice is measured in relation the
the revenues that related party achieves during the year.
How to account for this transaction?
Thank you!
Reply
Silvia M.
March 17, 2017
Hi Jane,
its an expense. You dont capitalize it, as you paid just for the right to use the trademark, not purchasing the trademark itself. S.
Reply
diani
April 18, 2017
Dear Silvia,
Appreciate your support in providing useful insights.
I have a question. Can we capitalize the advertising expenses which have been incurred for a launch of new product in a new
company? At the initial stage high cost will be incurred to promote the brand for a new product. Please advise how to account for this
particular situation
Reply
Silvia M.
April 18, 2017
Hi Diani,
advertising costs are specifically listed as prohibited to capitalize, so no, you cant capitalize, but recognize as an expense in
profit or loss. S.
Reply
Diani
April 18, 2017
Thanks a lot for your speedy response.
Reply
Jane
April 19, 2017
Dear Sylvia,
a company has works under construction stated at cost which includes cost of materials and direct labour. These costs however relate
to property, plant and equipment in use (already depreciated). Should the company leave these costs as works under construction or
treat them as subsequent costs? The Company believes these are works under construction since subsequent costs need a while to be
ready for use.
Thank you.
Kind regards!
Reply
Olatayo
April 25, 2017
Hi Silvia.
Thank you for always being there!
This is my question.
A Company constructed a sugar mill, after completion, they put the asset to test run the asset and in this process, they produced sugar
and by-product Molasses. Should the proceeds from selling the produce credited to the cost of the asset or the cost of producing and
the proceeds together?
Reply
Silvia M.
April 25, 2017
Dear Olatayo,
good question. The standard says that you should include the cost of testing LESS net proceeds from selling of items produced
when testing. However, all testing must happen before the asset is brought to the conditions and location for its intended use (if
its done when the asset has already been capable of operations, then all income is recognized in profit or loss).
Now, what happens if the cost of testing is less than the net sales proceeds of items produced? Well, this is unclear and theres
no right answer to that. In my opinion, it would be OK to recognize the excess of the net proceeds over cost of testing in profit
or loss (that is, no deduction from the asset). I think that there are still discussions about it and theres the proposal that in the
future, you will NOT be able to deduct the net proceeds from the cost of testing, but recognize them in profit or loss. S.
Reply
Mira
May 11, 2017
hi Silvia, could you please help to understand following issue. should we capitalize licenses with useful life less than one year which
was purchased last year and which was purchased next year again with new contract, so total useful life more than 1 year. should we
consider this as one asset, while were purchased under different contracts.
Reply
Silvia M.
May 11, 2017
Hi Mira, you can capitalize if you believe you will renew the licenses after 1 year (and you will have the right to do so), but you
still need to amortize the full amount paid for 1 year in profit or loss. S.
Reply
LIJO THOMAS
May 14, 2017
Dear Silvia,
We have a Recycling project for which expenses are being incurred for Land preparation, Machinery Purchase , Factory Building etc.
Currently the expenses are being parked in Capital WIP account. Once the project is completed the CWIP would move into each
respective heads of Fixed assets, Factory Building, Machinery etc. The project costs will be incurred for another
We have a project manager who is exclusively for this recycling project. He is involved in coordination with different vendors,
purchase of machinery, overall management of project till its completed.
Can we book the payroll cost of the project manager to the Recycling project Capital WIP? If Yes, how do we eventually allocate this
cost for capitalization to different assets like factory building, Machinery etc. once the project is completed?
Reply
Sana Quadri
May 30, 2017
Hi I would like to know whether we can classify softwares as tangible assets/ PPE integral to the business
Reply
Silvia M.
May 30, 2017
Sana, normally, software is an intangible asset under IAS 38, not PPE.
Reply
Sana Quadri
May 31, 2017
Thanks But what about software that is vital to the operating profits of the company such as software used for Branchless
Banking
Reply
Silvia M.
May 31, 2017
Sana, software is software an intangible asset. You can amortize it over few years if you plan to use it that way,
but its still an intangible.
Reply
Vinod
June 1, 2017
Hi,
Car used for director, can it be capitalized as a asset as it does not derive any direct economic benefit. However ownership lies with
company.
Please reply in context of conceptual Framework for financial reporting by IASB.
Thanks in advance
Regards
Vinod
Reply
Silvia M.
June 6, 2017
Hi Vinod, I dont think that a directors car does not derive any economic benefit. It is a remuneration of the director and a
director brings an economic benefits
Reply
Viralab
June 5, 2017
hi
land purchased in 1990 but for the purpose of ownership land mutation charges are paid in current financial year.
what shall be the treatment? capitalize/expene off
Reply
Silvia M.
June 6, 2017
What are land mutation charges? Are these some enhancing works on the land? If yes, then they shall be capitalized when
performed. Its a subsequent expenditure.
Reply
Rachel
June 8, 2017
Hi Silvia,
I like to get some advice on the Pre-Operating costs. In a scenario where we have pre final investment decision costs include for
service fees, feasibility studies, salaries of staff, should such costs be capitalized into an asset and amortized only down the road or we
should expense the costs even there is a positive final investment decision? Thank you so much.
Best Regards
"After
Rachel2 months, I landed a new position of IFRS conversion manager with 70% pay rise." Click here to learn more
Reply
Tammy
June 9, 2017
Thanks for the advise here very helpful. I have a question I think is a gray area. Making Improvements to a building should I
capitalize the advertising cost to secure a project manager?
Reply
Samanth
June 19, 2017
Purchase of Hard disk 1,2,3,4 Tb can be capitalised if they are replaced in old ones with lower storage.
Reply
Ecca
June 28, 2017
Hi Silvia,
Thanks for the wonderful guidance!
Need your opinion on the followings:-
1. My Company is currently built a building together with the air conditioning and electrical installation etc and we already started a
soft operation before our year end on 31 December. My question is, we have yet to receive the original tax invoice from our
contractor, can we capitalised the building cost to our accounts according to the agreed contract sum and make accruals over the
balance of progress claims and the retention sum?
Many2 thanks!
Reply
Silvia M.
June 30, 2017
I would say yes, because you already have control over the asset and I hope that its cost is reliably measurable (i.e. estimate of
cost can be made based on the contract).
Reply
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Home Articles IFRS Accounting Can you capitalize it as PPE or not?

Can you capitalize it as PPE or not?

Is it an item of property, plant and equipment or a part of its cost?

Or is it a piece of inventories instead?

Or just an expense that goes straight in profit or loss?

Hmmm, what about an intangible asset?

Let me give you my answers to the most common ones.

What does IAS 16 Property, Plant and Equipment prescribe?

Thats the definition taken right from IAS 16.

the purpose for which an item is acquired and / or held

OK. So we have just set up the fundamentals.

Now lets take a look at several unclear or shady examples.

Let me give you an example of the opposite situation.

What to do in this case?

Should we capitalize small items acquired in large amounts?

Again, theres no uniform answer.

Should we capitalize improvements on a leasehold property?

Glass partitions are damn expensive. They represent a significant investment.

How to treat your investment in the improvement of leasehold property?

Should we capitalize pre-operating expenses?

Can you capitalize these pre-operating expenses?

They cannot be separated and sold/transferred, and

Tags: IAS 16IAS 2IAS 38

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Its a Great help.

When costs are necessary, but indirect, do we capitalize them or not?

Yes Silvia please open IFRSBox Forum.

I am confused whether to capitalized or expensed it off.

Appreciate your advice on this. Thank you!

Hi Samir, what is the purpose of LPG Gas Cylinder or reusable bottle?

Thanks Ameyedowo and Silvia!

What about football player contract?

thank you so much for this clarification about this point.

Dear Mr. Islam,

Thank you Silvia for enlightening me on this.

Beautifully written. Very helpful. Keep up the good work.

Thanks for the educative information pass out.

Thanks for the educative information liberating on IFRS standard

The article is very useful for the current business operation.

thank you so much for sharing these information.

I have small query on PPE.

Is it allowed as per PPE IAS 16.

Thank you, Im happy to know this!

Thank you. I will be patiently waiting for your answer.

1. Can we in any circumstances capitalize per-incorporation expenses.

Hi, match the expense with the service received. S.

Thank you Silvia for your reply

What is the purpose of zebra? How are you monetizing zebra?

Your clarification on this would be highly appreciated.

I have a question as well,

thank you so much

Muhammad Tahir Godil

Can The Clubs Can Recognized Players or their Contract in b/s??

is it IAS 16? or 40? why?

Any help in clearing this up would be much appreciated.

Thank you Silvia

Now, is this 2nd generator bringing the future economic benefits?

Thank you so much for your prompt response!