Skip to content

Financial Accounting · Property, Plant and Equipment (AS 10)

Measurement of Cost of PPE under AS 10

Updated 10 October 2026 · Fact-checked

Under AS 10, the cost of an item of PPE is its purchase price (with import duties and non-refundable taxes, less trade discounts and rebates), plus costs directly attributable to bringing it to working condition, plus the initial estimate of dismantling and restoration costs. Exclude general overheads, opening costs and abnormal wastage.

Understand Measurement of Cost of PPE

Cost is what you record when an asset first enters the books. Every later figure, such as depreciation and profit on sale, starts from it. So an error in cost carries into every later year.

AS 10 builds cost from three blocks (para 17). First, the purchase price: it includes import duties and non-refundable purchase taxes, and you deduct trade discounts and rebates. Second, directly attributable costs: the costs of bringing the asset to the location and condition where it can operate as management intends. Third, the initial estimate of decommissioning, restoration and similar liabilities, where the obligation arises on acquiring the asset or from using it for purposes other than producing inventories.

Para 18 gives 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 (less net proceeds of items sold during testing), and professional fees. Para 20 lists what is not cost: inauguration costs, costs of introducing a new product (advertising and promotion), costs of conducting business in a new location or with a new class of customer (including staff training), and administration and other general overheads.

A self-constructed asset is costed on the same principles as a purchased one (para 23). Internal profits are eliminated, and abnormal wastage of material, labour or other resources is not capitalised. Interest is capitalised only if AS 16 allows it.

Special situations: if payment is deferred beyond normal credit terms, cost is the cash price equivalent and the excess is interest (para 25). In an exchange, cost is generally fair value; otherwise it is the carrying amount of the asset given up (para 26). For a lump-sum purchase of several assets, split the price on relative fair values (para 29).

Key rules to remember

Cost of purchased PPE
Purchase price + import duties + non-refundable taxes − trade discounts and rebates + directly attributable costs + initial estimate of dismantling and restoration costs
Para 17. Refundable taxes, such as credit-eligible GST, are not part of cost.
Testing costs
Testing cost − net proceeds from sale of items produced during testing
Para 18(e). Only the net amount is capitalised.
Deferred payment
Cost = cash price equivalent at recognition date; total payments − cash price = interest
Para 25. Interest is charged to profit or loss unless capitalised under AS 16.
Exchange of assets
Cost = fair value (of asset given up, unless the asset received is more clearly evident); otherwise carrying amount of asset given up
Para 26 and 28. Use carrying amount if the exchange lacks commercial substance or neither fair value is reliably measurable.
Lump-sum purchase of several assets
Cost of each item = Total price × (Fair value of item ÷ Total fair value of all items)
Para 29. If fair values cannot be measured reliably, competent valuers estimate them on a fair basis.
Self-constructed asset
Cost of construction on same principles as purchase − internal profit − abnormal wastage
Para 23. Borrowing cost is included only as per AS 16.

How to solve Measurement of Cost of PPE questions

Use this sequence for any PPE cost problem. List every item in the question and give each one a decision: capitalise, expense, or adjust.

  1. 1Start with the invoice price and deduct trade discounts and rebates. Do not deduct cash discount for early payment unless the question treats it as a rebate; treat it as financial income.
  2. 2Add import duties and non-refundable taxes. Leave out taxes that are recoverable as credit.
  3. 3Add directly attributable costs: freight, handling, site preparation, installation, testing (net of sale proceeds), professional fees and employee costs arising directly from the asset.
  4. 4Add the initial estimate of dismantling and restoration costs if the obligation exists. Where the question gives a present value, use that figure.
  5. 5Reject items under para 20: inauguration, advertising, staff training, administration overheads, and abnormal wastage or idle costs.
  6. 6For deferred payment, use the cash price and treat the extra as interest. For exchanges, decide between fair value and carrying amount. For lump-sum purchases, apportion on fair values.
  7. 7Show total cost with a working note for each included and excluded item, then state the amount.
  8. 8 Check that the total ties to the sum of the items you capitalised.
  9. 9

Quickest way: Capitalise or expense: two-question filter

When to use it: Use for MCQs and for long lists of expenses in a written problem.

  1. Ask: was this spent to bring the asset to its location and working condition? If yes, capitalise.
  2. Ask: would this cost arise even if the asset were already working (training, advertising, overheads, wastage, running-in losses)? If yes, expense it.
  3. Net off trade discounts and sale proceeds of test output.
  4. Add the initial dismantling estimate, then total.

Common mistakes in Measurement of Cost of PPE

  • Capitalising general overheads or inauguration costs

    The costs are linked to the new plant, so they feel like part of it.

    Fix: Para 20 excludes inauguration, advertising, training and administration overheads. Link must be direct, not just timing.

  • Adding refundable GST to cost

    Students add all taxes shown on the invoice.

    Fix: Only non-refundable purchase taxes form cost. Credit-eligible taxes are left out.

  • Ignoring the net proceeds from test production

    Students add testing cost but forget the sale of samples.

    Fix: Deduct net proceeds from items sold while testing, per para 18(e).

  • Capitalising abnormal wastage in a self-constructed asset

    All cost of construction looks like asset cost.

    Fix: Para 23 excludes abnormal wastage of material, labour and other resources. Remove it and also strip out any internal profit.

  • Recording a deferred-payment asset at total instalments

    The total cash outflow looks like the price.

    Fix: Record the cash price equivalent; the excess is interest over the credit period (para 25).

  • Using fair value in every exchange

    Students remember the general rule and miss the exceptions.

    Fix: If the exchange lacks commercial substance or neither fair value is reliably measurable, use the carrying amount of the asset given up.

Worked examples

Example 1

Aarav Industries Ltd bought a machine with list price ₹12,00,000. Trade discount 10%. Non-refundable purchase tax ₹40,000. Freight ₹25,000, installation ₹35,000, testing cost ₹30,000 with ₹5,000 received from sale of test output. Staff training ₹20,000 and administration overhead allocated ₹15,000. Estimated present value of dismantling cost ₹50,000. Find the cost of the machine.

Show the solution
  1. Trade discount = 10% × ₹12,00,000 = ₹1,20,000. Net price = ₹10,80,000.
  2. Add non-refundable purchase tax ₹40,000: ₹11,20,000.
  3. Add freight ₹25,000 and installation ₹35,000: ₹11,80,000.
  4. Testing cost net of proceeds = ₹30,000 − ₹5,000 = ₹25,000. Total: ₹12,05,000.
  5. Add dismantling estimate ₹50,000: ₹12,55,000.
  6. Staff training ₹20,000 and administration overhead ₹15,000 are excluded under para 20.

Answer: Cost of the machine = ₹12,55,000.

Example 2

Meera Textiles Ltd bought three assets for a lump sum of ₹18,00,000 with fair values: machine A ₹10,00,000, machine B ₹6,00,000, machine C ₹4,00,000. It also acquired a vehicle on deferred terms: cash price ₹8,00,000, paid ₹2,00,000 now and 3 yearly instalments of ₹2,50,000 each. Find the cost of each asset recorded and the total interest on the vehicle.

Show the solution
  1. Total fair value = ₹10,00,000 + ₹6,00,000 + ₹4,00,000 = ₹20,00,000.
  2. Machine A = ₹18,00,000 × 10 ÷ 20 = ₹9,00,000.
  3. Machine B = ₹18,00,000 × 6 ÷ 20 = ₹5,40,000.
  4. Machine C = ₹18,00,000 × 4 ÷ 20 = ₹3,60,000. Check: ₹9,00,000 + ₹5,40,000 + ₹3,60,000 = ₹18,00,000.
  5. Vehicle total payment = ₹2,00,000 + 3 × ₹2,50,000 = ₹9,50,000.
  6. Vehicle cost is the cash price ₹8,00,000. Interest = ₹9,50,000 − ₹8,00,000 = ₹1,50,000, recognised over the credit period.

Answer: Machine A ₹9,00,000; Machine B ₹5,40,000; Machine C ₹3,60,000; Vehicle ₹8,00,000; interest ₹1,50,000.

Exam tips

  • In written answers, show a working note listing each item as included or excluded with the reason. Step marks come from this.
  • Read each MCQ for the one word that decides it: trade discount, refundable, abnormal, net of proceeds.
  • For exchange questions, check commercial substance and reliability of fair value before choosing the basis.
  • Borrowing cost in a self-constructed asset depends on AS 16. Cross-check the qualifying asset and capitalisation period in that chapter.

Practice questions from Property, Plant and Equipment (AS 10)

Measurement of 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 of Cost of PPE: frequently asked questions

What are the components of cost of PPE under AS 10?

Cost has three parts: purchase price net of trade discounts and rebates, directly attributable costs of bringing the asset to working condition, and the initial estimate of dismantling and restoration costs. Import duties and non-refundable taxes are part of purchase price.

Are administration overheads part of the cost of a fixed asset?

No. Para 20 lists administration and other general overhead costs among items that are not costs of PPE. Only costs directly attributable to the asset are capitalised.

How is an asset acquired in exchange measured?

It is measured at fair value, unless the exchange lacks commercial substance or neither fair value is reliably measurable. In those cases cost is the carrying amount of the asset given up.

Can interest be included in the cost of a self-constructed asset?

Only if AS 16 criteria for capitalising borrowing costs are met. AS 10 itself refers you to AS 16 for this.