Capitalization of Property, Plant & Equipment

Capitalization of Property, Plant and Equipment

Long lived tangible assets (which include plant, property and equipment as well as development costs) provide economic benefits to an enterprise for a period greater than that covered by the current year’s financial statements. Accordingly, these assets must be capitalized rather than immediately expensed, and their costs must be allocated over the expected periods of benefit for the reporting entity.

At VPL, we carry out the capitalization of the PPE as per IFRS or as per Indian GAAP. We go through the records and determine the amounts at which to initially record the acquisition of such assets and the appropriate methods by which to allocate the assets costs to future periods.

Capital assets might have been acquired through purchase or may be self-constructed. The asset value, when purchased, will be the initial cost plus the trade-in value of any old asset given up, plus all costs related to placing the asset into operation. The cost of self-constructed assets will include all costs of construction, erection, commissioning, test run and Unit hold up.

The various steps involved in this exercise include :

  • Identifying the Purchase Price of the Asset
  • Estimating and Verification of the Bill of Quantities

Technical Aspects :
  • Understanding the Process and the various products / by-products and the key inputs. Study the process flow.
  • Understanding the capacity of the plants
  • Understanding the configuration of various units of the plant.
  • Understanding the operational aspects of the various units of the plant.
  • Study the detailed engineering drawings of each unit and confirm the bill of quantity with reference to each of the unit.
  • Plant site and confirm that the bill of quantity provided for various items of each unit have been physically installed.
  • Preparation of List of Items, unit-wise, area-wise giving salient makes, salient technical features, quantities etc.

Commercial Aspects :
  • Review of Purchase orders issued by the company, review of various contracts/Agreements entered by the company to identify the item wise cost.
  • Review of commercial files, change orders etc issued by the company at various stages.
  • Categorization of the commercial file line items Asset wise and unit wise.
  • Tracing the Purchase Price of the Asset by going through the contracts and agreement, purchase records etc.
  • Identifying the duties and taxes and all other direct costs such as License fees, Project Management Consultancy etc.
  • Componentization of items which have a substantial value and different useful life.
  • Identifying the item from Sch II of the Companies Act 2013 for the Useful Life and Residual Value.
  • Preparation of Fixed Assets Register with Tag Nos and all the above details.