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Corporate Financial Reporting · Property, Plant and Equipment (Ind AS 16)

Cost of PPE under Ind AS 16: Elements of Cost

Updated 11 October 2026 · Fact-checked

Under Ind AS 16, an item of PPE is first measured at cost. Cost is purchase price (with import duties and non-refundable taxes, less trade discounts), plus directly attributable costs of making the asset ready for use, plus the initial estimate of dismantling and restoration costs. Exclude abnormal waste, and use cash price equivalent.

Understand Measurement at Recognition and Cost Components

Ind AS 16 says an item of PPE that qualifies for recognition is first measured at its cost. The exam question is almost always: which payments go into that cost, and which go to profit or loss?

The test is simple. Cost includes what you spend to bring the asset to the location and condition needed for it to operate in the manner management intends. Once it is capable of operating that way, further spending stops being part of cost.

Paragraph 16 gives three elements. First, the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Second, directly attributable costs. Third, the initial estimate of dismantling, removal and site restoration costs, where you incur the obligation when you acquire the item or by using it during a period for purposes other than producing inventories.

Paragraph 17 lists examples of directly attributable costs: employee benefit costs arising directly from construction or acquisition, site preparation, initial delivery and handling, installation and assembly, testing costs (net of proceeds from selling items produced during testing), and professional fees. Any excess of net sale proceeds over testing cost is not taken to profit or loss. It is deducted from the directly attributable costs.

Three special situations are also tested. A self-constructed asset uses the same cost principles, with internal profits and abnormal waste excluded. An asset bought on deferred terms is recorded at cash price equivalent, with the difference treated as interest. An asset acquired in exchange is measured at fair value unless the exchange lacks commercial substance or fair value cannot be reliably measured.

Key rules to remember

Cost of PPE (para 16)
Cost = Purchase price (incl. import duties and non-refundable taxes, less trade discounts and rebates) + Directly attributable costs + Initial estimate of dismantling and restoration costs
Add borrowing costs only if Ind AS 23 criteria for a qualifying asset are met.
Testing proceeds (para 17(e))
Capitalised testing cost = Testing cost − Net proceeds from selling items produced during testing
If net proceeds exceed the testing cost, the excess is not recognised in profit or loss. It is deducted from the other directly attributable costs.
Self-constructed asset (para 22)
Cost = Same elements as an acquired asset − Internal profits − Abnormal wastage
Abnormal amounts of wasted material, labour or other resources are not part of cost.
Deferred payment (para 23)
Cost = Cash price equivalent at recognition date; Interest = Total payment − Cash price equivalent
Interest is recognised over the credit period unless capitalised under Ind AS 23.
Exchange of assets (para 24)
Cost = Fair value, unless the exchange lacks commercial substance or neither fair value is reliably measurable; then Cost = Carrying amount of the asset given up
Commercial substance depends on whether the entity's future cash flows are expected to change significantly (para 25).

How to solve Measurement at Recognition and Cost Components questions

Use this sequence for any numerical on cost of PPE. Take each item in the question and decide whether it is in or out.

  1. 1Start with the invoice price. Deduct trade discounts and rebates. Do not deduct cash discounts that are merely a financing choice unless the question treats them as a reduction of price.
  2. 2Add import duties and non-refundable purchase taxes. Exclude taxes the entity can recover, such as input tax credit that is available.
  3. 3Check the payment terms. If payment is deferred beyond normal credit terms, use the cash price equivalent and treat the balance as interest.
  4. 4List every directly attributable cost: site preparation, delivery and handling, installation, assembly, professional fees, employee costs, and testing. Net off any sale proceeds from test output.
  5. 5Add the initial estimate of dismantling and restoration cost. Under Ind AS 37 this is measured at present value, with a matching provision.
  6. 6Exclude costs that are not needed to make the asset ready, such as general overheads, start-up and training losses, initial operating losses, and abnormal wastage.
  7. 7Apply Ind AS 23 if the asset is a qualifying asset and borrowing costs were incurred during the construction period.
  8. 8Total the capitalised amounts and state, in one line, why each excluded item is expensed.

Quickest way: In-or-out tick method

When to use it: Use this for MCQs and for long numericals with many cost items listed in a table.

  1. Write each item and mark it In or Out in the margin before touching a calculator.
  2. Mark In: price, duties, non-refundable taxes, delivery, site prep, installation, professional fees, testing net of proceeds, dismantling estimate.
  3. Mark Out: trade discount (deduct), recoverable taxes, abnormal waste, internal profit, admin overheads, training, and costs after the asset is ready for use.
  4. Add only the In items. Then check for present value, deferred payment and exchange adjustments.

Common mistakes in Measurement at Recognition and Cost Components

  • Capitalising recoverable GST or other taxes

    Students see tax on the invoice and assume it is part of the price.

    Fix: Only non-refundable purchase taxes are included. If input tax credit is available, exclude the tax from cost.

  • Taking test-run sale proceeds to profit or loss

    Students treat the sale of samples as ordinary income.

    Fix: Under para 17(e), deduct net proceeds from the testing cost. If proceeds exceed the cost, deduct the excess from the other directly attributable costs. It never goes to profit or loss.

  • Adding the undiscounted dismantling cost

    The question gives a future figure and students add it directly.

    Fix: Para 18 says the obligation is measured under Ind AS 37. Discount the expected amount to present value at the date of recognition and credit the provision for the same amount.

  • Including abnormal wastage or internal profit in a self-constructed asset

    Students total all costs shown in the cost sheet.

    Fix: Para 22 excludes abnormal waste of material, labour and other resources, and internal profits. Strip them out and charge abnormal waste to profit or loss.

  • Recording a deferred-payment asset at the total instalments

    Students add the sum of all payments.

    Fix: Para 23 requires the cash price equivalent. The excess is interest, recognised over the credit period unless Ind AS 23 allows capitalisation.

  • Always using fair value in an exchange

    Students remember the general rule and forget the exceptions.

    Fix: Check commercial substance first. If it is absent, or neither fair value is reliably measurable, cost is the carrying amount of the asset given up.

Worked examples

Example 1

Bharat Engineering Ltd buys a machine from a Pune supplier. Invoice price ₹50,00,000; trade discount 10% on invoice price; non-refundable purchase taxes ₹2,00,000; freight and handling ₹1,00,000; site preparation ₹1,50,000; installation ₹2,00,000; professional fees ₹50,000; testing cost ₹1,00,000, with net sale proceeds of test output ₹30,000; staff training ₹40,000; general administration overhead allocated ₹60,000. Compute the cost of the machine.

Show the solution
  1. Trade discount = 10% × ₹50,00,000 = ₹5,00,000. Net price = ₹45,00,000.
  2. Add non-refundable purchase taxes ₹2,00,000. Running total = ₹47,00,000.
  3. Add freight and handling ₹1,00,000, site preparation ₹1,50,000, installation ₹2,00,000 and professional fees ₹50,000 = ₹5,00,000. Running total = ₹52,00,000.
  4. Testing: ₹1,00,000 − ₹30,000 = ₹70,000 capitalised. Running total = ₹52,70,000.
  5. Exclude staff training ₹40,000 and administration overhead ₹60,000. They are not directly attributable and are expensed.

Answer: Cost of the machine = ₹52,70,000.

Example 2

On 1 April 2026, Kaveri Mining Ltd acquires equipment for ₹80,00,000 cash and incurs ₹4,00,000 on installation. It must dismantle the equipment and restore the site after 5 years. The expected cost then is ₹10,00,000. Assume a discount rate of 10% and a present value factor of 0.6209 for 5 years. Compute the cost of the equipment and the provision.

Show the solution
  1. Present value of the dismantling cost = ₹10,00,000 × 0.6209 = ₹6,20,900.
  2. Purchase price ₹80,00,000 plus installation ₹4,00,000 = ₹84,00,000.
  3. Add the present value of the dismantling obligation ₹6,20,900, as para 16(c) requires the initial estimate to be included in cost.
  4. Cost = ₹84,00,000 + ₹6,20,900 = ₹90,20,900.
  5. Journal: Dr Equipment ₹90,20,900; Cr Bank ₹84,00,000; Cr Provision for dismantling ₹6,20,900. The provision is measured under Ind AS 37 and unwinds as a finance cost over the 5 years.

Answer: Cost of equipment = ₹90,20,900; provision for dismantling at recognition = ₹6,20,900.

Exam tips

  • For MCQs, scan for traps: recoverable taxes, abnormal wastage, training, and costs after the asset is ready for use. These usually decide the right option.
  • Always show the working for present value of dismantling cost, and name the Ind AS 37 link. Markers award marks for the provision entry as well as the cost.
  • In exchange questions, state the commercial substance test first, then pick fair value or carrying amount. Quote para 24 and 25 in your reasoning.
  • Present the answer as a statement with each capitalised item on its own line, and list excluded items with a one-line reason. This protects partial marks.

Practice questions from Property, Plant and Equipment (Ind AS 16)

Measurement at Recognition and Cost Components 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 Components: frequently asked questions

Is dismantling cost capitalised under Ind AS 16?

Yes. Para 16(c) includes the initial estimate of dismantling, removal and site restoration costs in the cost of PPE. This applies where you incur the obligation on acquiring the item, or by using it during a period for purposes other than producing inventories. The amount is measured under Ind AS 37 and a provision is set up.

Are borrowing costs part of the cost of PPE?

They can be. Para 22 refers to Ind AS 23, which sets the criteria for capitalising interest on a qualifying asset. If the criteria are not met, borrowing costs are expensed.

When does an exchange of assets have commercial substance?

Under para 25, it has commercial substance if the risk, timing and amount of the cash flows of the asset received differ from those of 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. Post-tax cash flows are used for the entity-specific value.

How is a self-constructed asset measured?

Use the same principles as for an acquired asset. Eliminate internal profits and exclude abnormal wastage of material, labour or other resources. Add eligible borrowing costs under Ind AS 23.