Initial measurement of property, plant, and equipment

Paragraphs 126 to 127 of the Thai Financial Reporting Standards for Non-publicly Accountable Entities (“TFRS for NPAEs”) and the Thai accounting manual of the Thailand Federation of Accounting Professions in regard to property, plant, and equipment (“PPE”), state the following:

Keywords: Mazars, Thailand, Accounting, TFRS for NPAEs, PPE, TFAC, TAS 16

24 December 2021

An item of PPE that qualifies for recognition as an asset shall be measured at cost.
The cost of an item of PPE consists of:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

Examples of directly attributable costs are:

costs of employee benefits (as defined in Thai Accounting Standard 19, Employee Benefits) arising directly from the construction or acquisition of the item of PPE;
costs of site preparation;
initial delivery and handling costs;
installation and assembly costs;
costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and
professional fees.

Examples of costs that are not costs of an item of PPE are:

costs of opening a new facility;
costs of introducing a new product or service;
costs of conducting a business in a new location or with a new class of customer;
costs of training staff for acquiring new machinery or a factory; and
administrative and other general overhead costs.

Scenario

On 1 January 2020, Company A began the construction of a new factory. Costs relating to the factory, incurred in the year ended 31 December 2020 are as follows:

Items	Component	Total (Baht)
1	Purchase of materials to construct the factory	12,000,000
2	Architects’ fees directly related to the construction	3,500,000
3	Salary of a factory manager who Company A hired from overseas for consulting and overseeing construction of the factory	1,800,000
4	Costs of relocating staff who will work at the new factory	1,200,000
5	Accommodation costs for a foreign engineer who will be consulted on building the new factory	300,000
6	Costs of moving the property of the factory manager from overseas	250,000
7	The salary of the secretary of the factory manager	150,000
8	Costs related to the formal opening of the factory	125,000
	Total	19,325,000

Issues

a) How should Company A calculate and record the initial cost of the factory?

b) What costs should be recognized as expenses in the financial statements?

Response

According to TFRS for NPAEs, and the accounting manual noted above, Company A must calculate and record the initial cost of the factory as follows:

Items	Component	Cost of factory (Baht)	Reason
1	Purchase of materials to construct the factory	12,000,000	Costs include cost of purchase
2	Architects’ fees directly related to the construction	3,500,000	These expenses are direct costs of getting the asset ready for use
3	Salary of a factory manager who Company A hired from overseas for consulting and overseeing construction of the factory	1,800,000	These expenses are direct costs of getting the asset ready for use
4	Costs of relocating staff who will work at the new factory	-	Specifically disallowed by TFRS for NPAEs, and Company A must record these as expenses
4	Accommodation costs for a foreign engineer who will be consulted on building the new factory	-	Same as above
5	Costs of moving the property of the factory manager from overseas	-	Same as above
6	The salary of the secretary of the factory manager	-	Same as above
7	Costs related to the formal opening of the factory	-	Same as above
	Total cost of factory	17,300,000