Recap of part 1 and 2

Definition of Property Fund and Equipment

  • Understand that property funds and equipment (PPE) are tangible items characterized by:

    • Must meet three core requirements:

      • Must be a tangible item

      • Expected to be used for more than one year

      • Must be essential for producing goods or services, rental, or administrative purposes.

Recognition Criteria

  • Recognition criteria derived from the slides covers essential aspects:

    • Cost: Not only the purchase price but also includes:

      • Import duties

      • Non-refundable taxes must be added to the cost

      • Refundable taxes must be excluded from the cost

      • Example: VAT depends on the company's VAT registration status. If registered, VAT on purchases is a refundable tax and should be excluded from the total asset cost.

    • Discounts: Any applicable discounts on purchases should also be excluded from the asset cost.

Elements of Cost

  • Costs directly attributable to the asset must be capitalized:

    • Example: Salaries of staff solely dedicated to creating the PPE.

  • Testing Costs: Outcomes of testing can vary:

    • If sold: Recognized as revenue with associated costs counted as cost of sales.

    • If not sold: These costs need to be capitalized to the asset.

Incidental and Redeployment Costs

  • Redeployment Definitions & Implications:

    • If management postpones using an asset once it’s ready, any additional costs incurred to prepare the asset for use later cannot be capitalized.

    • Costs to be excluded from capitalization:

      • General overheads (e.g., marketing, advertising, or parties for factory openings)

      • Staff trading costs that do not affect the operational capacity of the asset.

Capitalization Process

  • When to begin and cease capitalization:

    • Capitalization begins: As soon as the asset's ownership and rights are transferred, coinciding with our recognition criteria.

    • Capitalization ceases: Once the asset is in a ready-to-use condition, not just ready for sale.

  • Important Consideration: The asset must be in its intended location and condition for capitalization to stop.

Example Clarification of Free on board

  • Discussing the Scenario of Purchasing a Bottling Machine:

    • Ownership Transfer: Understanding "free on board" (FOB) contracts is crucial:

      • FOB specifies when ownership transfers and who bears shipping costs.

    • Example Breakdown:

      • If purchased "free on board Germany," ownership transfers at that point, and costs incurred until that moment are not capitalized.

  • Capitalizable Costs:

    • Explore costs incurred (e.g., shipping, insurance, installation) and determine which should be added to the asset's cost based on FOB and readiness.