Purchased or created fixed assets (hereinafter - FA) are credited to the balance of the company at the original cost (para. 7 of Accounting Standards 7). What should be taken into consideration by the accountant when the formation of the original cost of FA is in the following.
Expenses from which the original cost of FA item is composed
It should be recalled that the original cost of FA is a historical (i.e., actual) production cost of non-current assets in the amount of cash or the fair value of other assets paid (transferred), used to purchase (create) of non-current assets. In turn, fair value refers to the amount at which an asset can be sold or a liability settled under normal conditions on a given date.
The original cost of FA item consists of the following expenses:
- amounts paid to asset suppliers and contractors for construction and installation work (without indirect taxes);
- registration fees, government fees and similar payments made in connection with the acquisition (obtaining) of rights to the item of FA;
- amount of import duty;
- amounts of indirect taxes in connection with the acquisition or creation of FA (provided that they are not reimbursed to the company);
- expenses of insurance of risks of FA delivery;
- expenses for transportation, installation, reconciliation of FA;
- other expenses directly related to bringing FA to a condition in which they are suitable for use with the intended purpose.
It should be remembered that financial expenses are not included in the original cost of FA purchased (created) in whole or in part due to borrowings (excluding financial expenses included in the production cost of qualifying assets in accordance with Accounting Standards 31 “Financial expenses”).
Formation of original cost of FA
Formation of original cost of FA items depends on the way they to be created or received to the company, namely:
- if FA created by economic means (on its own), its original cost consists of direct material costs, direct labor costs, total production costs, the cost of services by outside organizations, depreciation of equipment used during manufacture and other expenses stipulated in para.8 of Accounting Standards 7;
- if FA created by contractual way (with the help of outside organizations), its original cost is made up of expenses for the payment of the cost of works performed by the contractors and other expenses stipulated in para.8 of Accounting Standards 7;
- if FA made into the authorized capital, the initial value is agreed by the founders (participants) of the company with its fair value, taking into account the additional expenses provided for in para.8 of Accounting Standards 7;
- if FA received free of charge, its original cost is equal to the fair value at the date of receipt, taking into account the additional expenses provided for in para.8 of Accounting Standards 7;
- if the item transferred to FA from current assets (stocks), the original cost is its production cost, determined in accordance with Accounting Standards 9 “Stocks” and Accounting Standards 16 “Expenses”;
- if FA received in exchange for a similar item - the residual value of the transferred FA item. If the residual value of the transferred item exceeds its fair value, then the original cost of transferred FA item is its fair value, with the inclusion of the difference to the expenses of the reporting period. It should be recalled that such (homogeneous) items are objects that have the same functional purpose and the same fair value (para.4 of Accounting Standards 7);
- if FA acquired in exchange (or partial exchange) for a non-similar asset - the fair value of the transferred non-monetary asset is increased (decreased) by the amount of cash or cash equivalents that was transferred (received) during the exchange.
The reason for enrollment on the balance of FA is the act of acceptance-transfer (commissioning) of the FA.
