Financial Reporting · Tangible non-current assets
IAS 16 Initial Measurement: Cost of Property, Plant and Equipment
Updated 11 October 2026 · Fact-checked
Under IAS 16, an item of PPE is first measured at cost. Cost is the purchase price (after trade discounts, plus non-refundable taxes), plus costs directly attributable to bringing the asset to its location and condition for use, plus initial dismantling estimates. Capitalise qualifying borrowing costs under IAS 23. Expense everything else.
Understand Initial Measurement of Property, Plant and Equipment
PPE is first recognised when it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. At that point you measure it at cost. The cost is what it takes to get the asset ready to do what management intended.
Think of it as a test: did this cost arise because we needed to get this asset to its location and into working condition? If yes, it is a directly attributable cost and goes into the asset. Examples are the purchase price, import duties, non-refundable purchase taxes, delivery and handling, site preparation, installation and assembly, the costs of testing whether the asset functions properly, and professional fees such as architects and legal costs. Sale proceeds of any items produced during testing are not deducted from cost. They are recognised in profit or loss, together with the cost of those items.
Some costs are never capitalised. These are administration and other general overheads, training staff to use the asset, advertising and promotion, costs of opening a new facility, and costs incurred while the asset is capable of operating but not yet used, or running below full capacity. Initial operating losses are also expensed. Abnormal waste, such as wasted material or labour in a self-build, is expensed too.
Three special cases come up often. First, deferred payment: if payment is beyond normal credit terms, cost is the cash price equivalent, which is the present value of the payments. The difference is interest, charged over the credit period. Second, self-constructed assets: use the same cost rules as for a bought asset, including direct materials, direct labour and a share of directly attributable costs, and any borrowing costs under IAS 23. Third, dismantling and restoration: if you have an obligation to remove the asset or restore the site, add the present value of the estimated cost to the asset and recognise a provision under IAS 37. The discount then unwinds as a finance cost.
IAS 23 requires borrowing costs directly attributable to a qualifying asset (one that takes a substantial period to get ready for use) to be capitalised. Capitalisation starts when expenditure and borrowing costs are being incurred and activity is under way. It is suspended during extended periods when active development stops, and it ceases when the asset is substantially ready for use. For specific borrowings, capitalise actual interest less any investment income earned on temporary surplus funds.
Key rules to remember
- Cost of PPE
- Cost = purchase price (net of trade discounts and rebates) + non-refundable taxes + directly attributable costs + initial estimate of dismantling/restoration costs + qualifying borrowing costs
- Recoverable taxes such as VAT you can reclaim are not part of cost. Settlement (early payment) discounts are not trade discounts; follow the question's wording.
- Deferred payment
- Cost = present value of payments = sum of (each payment × its discount factor)
- Interest = unwinding of the discount, charged to profit or loss (or capitalised if the asset is qualifying under IAS 23). With a single payment, this is just payment × discount factor.
- Capitalised borrowing costs (specific loan)
- Capitalised = actual interest in the capitalisation period − investment income on unused funds
- Only for the period when capitalisation is allowed; stop when the asset is ready for use and pause during extended suspension.
- Capitalised borrowing costs (general borrowings)
- Capitalised = weighted average expenditure on the asset for the period × capitalisation rate
- Weight each amount of expenditure by the part of the period it was outstanding (for example, months ÷ 12 for a part-year). Capitalisation rate is the weighted average borrowing cost on general borrowings. Capitalised amount cannot exceed actual interest.
- Decommissioning cost
- Asset and provision = estimated future cost × discount factor
- Unwinding of discount each year = opening provision × discount rate, shown as a finance cost.
- Costs to exclude
- Expense: admin and general overheads, staff training, advertising, opening costs, initial operating losses, abnormal waste
- Use the 'bringing to location and condition' test.
How to solve Initial Measurement of Property, Plant and Equipment questions
Work through each cost in the question and decide whether it sits in the asset or in profit or loss. Then deal with timing, discounting and borrowing.
- 1List every cost given in the question and the date it was incurred.
- 2Start with the purchase price. Deduct trade discounts and rebates. Add non-refundable taxes. Leave out recoverable sales tax.
- 3Apply the test for each other cost: is it needed to bring the asset to its location and condition for use? If yes, capitalise. If it is training, admin, advertising or running-in losses, expense it.
- 4For deferred payment, replace the total payments with their present value using the discount rate or factors given. Note the interest for later.
- 5For self-construction, include direct materials, direct labour and attributable overheads. Remove abnormal waste and general overheads.
- 6Add the present value of any dismantling or restoration obligation, with a matching provision.
- 7Apply IAS 23 if the asset is a qualifying asset: work out the capitalisation period and the amount of interest, less any investment income.
- 8Total the cost, state the amount to be expensed, and show the journal entries if asked.
Quickest way: Capitalise or expense: the two-column sort
When to use it: Objective test questions with a list of costs, where you need the total cost of the asset fast.
- Draw two columns: Asset and Expense.
- Put each item in a column using the test: needed to get the asset to its place and ready for use?
- Cross out trade discounts as reductions and recoverable taxes as excluded.
- Add the Asset column. Check for any PV or interest to be added at the end.
- Check that you have not capitalised training, admin, advertising, opening costs or operating losses before use.
Common mistakes in Initial Measurement of Property, Plant and Equipment
Capitalising staff training and general overheads
They relate to the new asset, so they feel like part of its cost.
Fix: Training and general overheads are never directly attributable. Expense them.
Including recoverable sales tax in cost
The invoice total is used without checking whether tax can be reclaimed.
Fix: Only non-refundable taxes are included. Reclaimable tax is a receivable from the tax authority.
Using total deferred payments as cost
Students add up cash paid and forget the financing element.
Fix: Cost is the present value. The difference is interest, recognised over the credit period.
Capitalising borrowing costs for the whole year
The loan runs all year, so all interest is assumed to qualify.
Fix: Capitalise only while expenditure and construction activity are happening. Stop on completion and pause for extended suspension. Deduct investment income on specific loans.
Forgetting the dismantling cost
It is a future cost, so it seems irrelevant at purchase.
Fix: Add the present value of the obligation to cost and credit a provision. Unwind the discount as a finance cost.
Deducting sale proceeds of test output from the cost of the asset
Students follow the old rule, under which proceeds from items produced during testing were netted against the cost of the asset. IAS 16 was amended with effect from 1 January 2022 and no longer allows this.
Fix: Capitalise the cost of testing whether the asset functions properly. Recognise sale proceeds of items produced during testing, and the cost of those items, in profit or loss. Costs after the asset is ready to operate are expensed.
Worked examples
Example 1
Delta Co buys a machine. List price ₹40,00,000 less 10% trade discount. Delivery ₹1,20,000. Installation ₹2,50,000. Staff training ₹80,000. Non-refundable import duty ₹1,00,000. Testing before use ₹60,000. General admin overhead allocated ₹90,000. Calculate the cost to be capitalised.
Show the solution
- Purchase price after trade discount: ₹40,00,000 × 90% = ₹36,00,000.
- Add import duty (non-refundable): ₹1,00,000.
- Add delivery: ₹1,20,000.
- Add installation: ₹2,50,000.
- Add testing: ₹60,000.
- Exclude staff training (₹80,000) and admin overhead (₹90,000). Both are expensed.
- Total: 36,00,000 + 1,00,000 + 1,20,000 + 2,50,000 + 60,000 = ₹41,30,000.
Answer: Cost of the machine is ₹41,30,000. Training and admin overheads totalling ₹1,70,000 are expensed.
Example 2
On 1 January, Sigma Co starts constructing a factory for its own use. It takes a specific loan of ₹5,00,00,000 at 8% a year on 1 January. The loan funds the entire construction cost of ₹5,00,00,000, all incurred on 1 January. There are no other costs and no surplus funds to invest. Construction takes the whole year and finishes on 31 December. Calculate the borrowing cost capitalised and the total cost of the factory.
Show the solution
- The factory is a qualifying asset because it takes a substantial period to build.
- Capitalisation period: 1 January to 31 December, which is 12 months.
- Interest on the specific loan: ₹5,00,00,000 × 8% = ₹40,00,000.
- No investment income to deduct.
- Cost = construction expenditure ₹5,00,00,000 + capitalised interest ₹40,00,000 = ₹5,40,00,000.
Answer: Capitalised borrowing cost is ₹40,00,000, and the total cost of the factory at 31 December is ₹5,40,00,000.
Exam tips
- In objective tests, read the list of costs twice and write Asset or Expense beside each. Marks are all or nothing, so one wrongly included item loses the question.
- Watch the wording on tax and discounts: trade discounts reduce cost, recoverable tax is excluded, non-refundable tax is included.
- In written answers, show a cost table with each item and a short reason for each exclusion. Explanations earn marks even when a number is wrong.
- For borrowing costs, always state the capitalisation start, any suspension and the end date, and work out the months before you calculate.
- Check whether a decommissioning obligation is mentioned. It is a common extra step that is easy to miss.
Practice questions from Tangible non-current assets
Initial Measurement of Property, Plant and Equipment in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Initial Measurement of Property, Plant and Equipment: frequently asked questions
What costs can be capitalised under IAS 16?
You can capitalise the purchase price net of trade discounts, non-refundable taxes, and costs directly attributable to bringing the asset to its location and condition for use. This includes delivery, installation, site preparation, testing and professional fees. It also includes the initial estimate of dismantling costs and qualifying borrowing costs.
How do you calculate the cost of a self-constructed asset?
Use the same principles as for a purchased asset. Add direct materials, direct labour and attributable costs, and exclude abnormal waste and general overheads. Add qualifying borrowing costs under IAS 23 if the asset takes a substantial period to get ready.
When does capitalisation of borrowing costs start and stop?
It starts when expenditure, borrowing costs and construction activity are all under way. It is suspended during extended periods when active development stops. It ceases when the asset is substantially ready for its intended use.
How is PPE bought on deferred terms measured?
If payment extends beyond normal credit terms, cost is the cash price equivalent, which is the present value of the payments. The difference between total payments and that amount is interest, recognised over the credit period.