## PPE – Elements of Cost (AS 10 / Ind AS 16)

An item of Property, Plant and Equipment (PPE) that qualifies for recognition as an asset must be measured at cost.

### Three Elements of Cost

Element 1 – Purchase Price

Includes import duties and non-refundable purchase taxes.
Less: Trade discounts and rebates.

Element 2 – Directly Attributable Costs

Costs necessary to bring the asset to its working location and condition.
Examples: installation charges, freight, professional fees for site preparation.

Element 3 – Decommissioning / Restoration Costs

Initial estimate of costs to dismantle, remove, and restore the site.
These are known as decommissioning, restoration, and similar liabilities.
Obligation arises either at acquisition or due to usage during a period (other than to produce inventories).

### Decommissioning — Key Concept

When an old plant is dismantled to make way for a new plant at the same location, the dismantling cost is capitalised as part of the new PPE (not expensed).

> Rule: Costs of dismantling, removing, and restoring the site form part of the cost of the new asset.

### Auditor's Verification

Obtain cost sheet / capital work in progress schedule.
Verify each cost element against invoices and supporting documents.
Check whether decommissioning costs have been estimated and included.

Worked example

### Example 1

Scenario (JB Limited): JB Limited incurred ₹5,70,000 on dismantling an old obsolete plant so that a new plant could be set up at the same location. How should this be treated?

Answer: The ₹5,70,000 is a decommissioning cost (Element 3) and must be capitalised as part of the cost of the new plant, not charged to the P&L as an expense. This treatment follows AS 10 / Ind AS 16 — initial estimate of decommissioning costs forms part of the asset's cost.

### Example 2

Cost Classification Exercise: Classify the following for a new machine acquired:

Purchase price: ₹10,00,000 ✓ Element 1
Import duty: ₹50,000 ✓ Element 1
Trade discount received: (₹20,000) — deducted from Element 1
Freight to factory: ₹30,000 ✓ Element 2
Test run costs: ₹15,000 ✓ Element 2
Future dismantling estimate: ₹25,000 ✓ Element 3
Total capitalised cost: ₹11,00,000

⚠️ Common exam mistakes

Treating dismantling costs as revenue expenditure (P&L charge) instead of capitalising them as part of the new asset cost.
Including refundable taxes in the purchase price — only non-refundable taxes are capitalised.
Forgetting to deduct trade discounts and rebates from the purchase price.
Confusing decommissioning costs with routine maintenance costs — routine maintenance is always revenue expenditure.

Reference:

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PPE – Elements of Cost and Decommissioning

Worked example

⚠️ Common exam mistakes