Financial Reporting · Ind AS 16 Property, Plant and Equipment

Ind AS 16: Measurement at Recognition and Cost of PPE

Updated 5 October 2026 · Fact-checked

Under Ind AS 16, an item of PPE that qualifies for recognition is measured at cost. Cost is the purchase price (net of trade discounts and rebates, plus non-refundable duties), directly attributable costs of bringing the asset to working condition, and the initial estimate of dismantling costs. Add these, then exclude general overheads, training and start-up losses.

Understand Measurement at Recognition and Cost of PPE

Ind AS 16 says an item of PPE that qualifies for recognition must be measured at its cost. Cost is what you give up to get the asset ready for its intended use. It is not the price on the invoice alone.

Cost has three parts. First, the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Second, any directly attributable cost of bringing the asset to the location and condition needed for it to operate in the manner management intends. Third, the initial estimate of costs of dismantling, removing and restoring the site, where the entity has an obligation to incur them, either when it acquires the asset or as a consequence of having used it during a period for purposes other than producing inventories (those costs go to Ind AS 2).

Examples of directly attributable costs are employee benefits arising directly from construction or acquisition, site preparation, initial delivery and handling, installation and assembly, professional fees, and the cost of testing whether the asset works properly. For testing, the proceeds from selling items produced during testing are recognised in profit or loss along with the cost of those items, under Ind AS 2. They are not deducted from the cost of the asset.

Costing stops when the asset is in the location and condition to operate as management intends. After that point, costs go to profit or loss. Examples of costs that are not part of cost: opening a new facility, introducing a new product (advertising), conducting business in a new location or with a new class of customer (including staff training), administration and other general overheads, costs incurred while an asset is capable of operating but not yet used or running below full capacity, initial operating losses, and costs of relocating or reorganising operations.

Special cases are frequently tested. If payment is deferred beyond normal credit terms, cost is the cash price equivalent, and the difference is interest over the credit period (unless capitalised under Ind AS 23). Borrowing costs on a qualifying asset are capitalised under Ind AS 23. Government grants related to assets are dealt with under Ind AS 20, and under Ind AS 20 the grant is either deducted in arriving at the carrying amount or shown as deferred income. For exchanges of assets, cost is the fair value of the asset given up or received, depending on which is more clearly evident, unless the exchange lacks commercial substance or fair value cannot be measured reliably. In that case cost is the carrying amount of the asset given up.

Key rules to remember

Cost of PPE: Cost = Purchase price (net of trade discounts and rebates, plus import duties and non-refundable taxes) + Directly attributable costs + Initial estimate of dismantling and restoration costs; Exclude taxes that are recoverable, such as eligible GST input credit. Include only non-recoverable taxes.
Deferred payment: Cost = Cash price equivalent at the recognition date (present value of payments if no cash price is given); The excess over cash price is interest expense over the credit period, unless capitalised under Ind AS 23.
Exchange with commercial substance: Cost = Fair value of asset given up (or of asset received, if more clearly evident) ± cash paid or received; Gain or loss on the asset given up goes to profit or loss.
Exchange without commercial substance: Cost = Carrying amount of asset given up ± cash paid or received; Also applies if fair value of neither asset can be measured reliably. No gain or loss is recognised.
Commercial substance test: Exchange has commercial substance if (a) the configuration (risk, timing, amount) of cash flows differs, or (b) the entity-specific value of the affected operations changes, and the difference is significant relative to fair value of assets exchanged; Both tests apply to the cash flows of the asset received versus the asset given up.
Cost of self-constructed asset: Cost = Same principles as for a purchased asset; abnormal waste (material, labour, other resources) is excluded; Internal profits are never included.
Grant treatment: Carrying amount = Cost − Grant (deduction method), or Cost recorded gross with grant as deferred income; Ind AS 20 permits either presentation for asset-related grants.

How to solve Measurement at Recognition and Cost of PPE questions

Use this method for any cost computation or treatment question on PPE at recognition.

1Check recognition first: is the item an asset, held for use in production, supply, rental or administration, and expected to be used for more than one period?
2Start with the purchase price. Deduct trade discounts and rebates. Add import duty and purchase taxes that are not recoverable. Exclude taxes the entity can claim as credit.
3Add each directly attributable cost incurred up to the date the asset is ready for its intended use: freight, installation, site preparation, professional fees, testing costs and staff costs directly linked to the asset.
4Add the initial estimate of dismantling and restoration cost (at present value if the effect is material) where there is an obligation.
5Check special conditions: deferred payment (use cash price equivalent), borrowing costs (apply Ind AS 23 to qualifying assets), grants (apply Ind AS 20) and exchange (test commercial substance).
6Remove items that do not qualify: general overheads, training, advertising, start-up losses, idle capacity costs, abnormal waste and costs after the asset is ready for use.
7Total the cost, give the journal entry if asked, and state the Ind AS 16 paragraph logic in one line as your reason.

Quickest way: Include-or-Exclude scan

When to use it: Use this when a question lists many cost items and asks for the capitalised amount. You have only a few minutes, so you need a quick line-by-line pass.

Write each item on its own line with a tick (capitalise) or cross (expense).
Tick only items that are needed to get the asset to its location and working condition, or for dismantling obligations.
Cross anything after the ready-for-use date, anything general or administrative, and any recoverable tax.
Adjust the price for discounts first, then for deferred payment and grants.
Add the ticked items and write a one-line reason beside each cross. Examiners award marks for reasons.

Common mistakes in Measurement at Recognition and Cost of PPE

Capitalising trading and training costs, or general overheads, as part of the asset.
Students assume any cost linked to the project is directly attributable.
Fix: Ask whether the cost is necessary to bring the asset to working condition. Training, advertising and general administration costs fail this test.
Capitalising costs incurred after the asset is ready for use, such as initial operating losses or idle capacity costs.
Students look at the project timeline rather than the date the asset is capable of operating as intended.
Fix: Stop capitalisation at the ready-for-use date. Costs afterwards go to profit or loss.
Deducting the sale proceeds of items produced during testing from the cost of the asset.
Older practice and the old AS 10 treatment are remembered.
Fix: Under current Ind AS 16, recognise the sale proceeds and related cost of those items in profit or loss under Ind AS 2.
Including recoverable GST or other input tax credit in cost.
Students take the full invoice value as the purchase price.
Fix: Include only taxes that cannot be recovered from tax authorities.
Using the invoice total in deferred payment cases instead of the cash price equivalent.
The total of instalments looks like the price paid.
Fix: Capitalise the cash price equivalent (or present value of instalments) and charge the difference as interest over the credit period.
Recognising a gain on an exchange without checking commercial substance.
Students apply fair value to all exchanges.
Fix: First test commercial substance and reliability of fair value. If either fails, use the carrying amount of the asset given up and recognise no gain or loss.

Worked examples

Example 1

Case: Meridian Ltd (an Ind AS company) buys a machine with a list price of ₹50,00,000 less a 10% trade discount. It pays freight of ₹1,20,000, non-refundable import duty of ₹2,50,000, and recoverable GST of ₹8,10,000. Installation costs ₹90,000 and testing costs ₹60,000. Staff training costs ₹40,000. Opening ceremony costs ₹30,000. The initial estimate of dismantling costs, which the company is obliged to incur, is ₹1,00,000 at present value. Compute the cost of the machine.

Show the solution

Purchase price after trade discount: ₹50,00,000 − 10% (₹5,00,000) = ₹45,00,000.
Add non-refundable import duty: ₹2,50,000. The recoverable GST of ₹8,10,000 is excluded because it is claimed as credit.
Add directly attributable costs: freight ₹1,20,000 + installation ₹90,000 + testing ₹60,000 = ₹2,70,000.
Add the dismantling cost at present value: ₹1,00,000, as the company has an obligation.
Exclude staff training (₹40,000) and opening ceremony (₹30,000). Both are not necessary to bring the asset to working condition.
Total: ₹45,00,000 + ₹2,50,000 + ₹2,70,000 + ₹1,00,000 = ₹51,20,000.

Answer: Cost of the machine = ₹51,20,000. Training and opening ceremony costs (₹70,000) are expensed.

Example 2

Case: On 1 April, Arka Ltd buys equipment for ₹60,00,000 payable in full after 2 years. The cash price on 1 April is ₹50,00,000, and the credit period is beyond normal credit terms. Separately, Arka exchanges an old machine (carrying amount ₹8,00,000, fair value ₹10,00,000) for a new machine with fair value ₹11,00,000, paying ₹1,00,000 in cash. The exchange has commercial substance and the fair value of the asset given up is the more clearly evident. Compute the cost of each asset and the gain on exchange.

Show the solution

Equipment: cost is the cash price equivalent, ₹50,00,000. The extra ₹10,00,000 is interest over 2 years (charged to profit or loss, unless capitalised under Ind AS 23).
Exchange: the exchange has commercial substance, so cost is the fair value of the asset given up plus cash paid: ₹10,00,000 + ₹1,00,000 = ₹11,00,000.
Gain on the old machine: fair value ₹10,00,000 − carrying amount ₹8,00,000 = ₹2,00,000, recognised in profit or loss.
Journal entry: Dr New machine ₹11,00,000; Cr Old machine ₹8,00,000; Cr Cash ₹1,00,000; Cr Profit or loss (gain) ₹2,00,000. Debit and credit both total ₹11,00,000.

Answer: Equipment is recorded at ₹50,00,000, with ₹10,00,000 as interest expense over 2 years. The new machine costs ₹11,00,000, with a gain of ₹2,00,000 in profit or loss.

Exam tips

In list-type questions, write a short reason beside every excluded item. Marks are usually split between the amount and the reasoning.
Watch the dates. Costs before the ready-for-use date are capitalised. Costs after it are expenses, even if the asset is not used at full capacity.
In exchange questions, state both tests: commercial substance and reliable fair value. Then pick the correct basis and say whether a gain or loss arises.
In MCQ case scenarios, spot the trap quickly: recoverable taxes, trade discounts, testing proceeds and training costs are the common ones.
Link the paragraph logic in a line: Ind AS 16 for cost, Ind AS 23 for borrowing costs, Ind AS 20 for grants and Ind AS 37 for the dismantling provision.

Practice questions from Ind AS 16 Property, Plant and Equipment

Measurement at Recognition and Cost of PPE in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Measurement at Recognition and Cost of PPE: frequently asked questions

What are directly attributable costs under Ind AS 16?

They are costs necessary to bring the asset to the location and condition for it to operate as management intends. Examples are delivery, installation, site preparation, professional fees, testing and employee costs arising directly from construction. General overheads and training costs are not included.

How is cost determined when payment is deferred?

If payment is deferred beyond normal credit terms, cost is the cash price equivalent at the recognition date. The difference between that and total payments is interest, recognised over the credit period unless it is capitalised under Ind AS 23.

When does an exchange of assets have commercial substance?

It does if the configuration of cash flows of the asset received differs from the asset given up, or the entity-specific value of the affected operations changes, and the difference is significant relative to the fair value of the assets exchanged. In that case cost is measured at fair value.

Are dismantling costs part of the cost of PPE?

Yes. The initial estimate of costs of dismantling, removing the item and restoring the site is included in cost where the entity has an obligation. The liability is measured under Ind AS 37.

How are government grants treated in the cost of PPE?

Under Ind AS 20, a grant related to an asset is either deducted in arriving at the carrying amount of the asset or presented as deferred income recognised in profit or loss over the useful life. Read the question to see which presentation it asks for.