Which costs to assign to a fixed asset

In general, the costs to assign to a fixed asset are its purchase cost and any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management.

More specifically, assign the following costs to a fixed asset:

  • Purchase price of the item and related taxes
  • Construction cost of the item, which can include labor and employee benefits
  • Import duties
  • Inbound freight and handling
  • Interest costs incurred during the period required to bring an asset to the condition and location necessary for its intended use
  • Site preparation
  • Installation and assembly
  • Asset startup testing
  • Professional fees

Also, assign to a fixed asset the cost of major periodic replacements. For example, an aircraft requires new engines and a building requires a new roof after a certain usage interval or time period. Upon replacement, the new items are recorded as a fixed asset, and the carrying amounts of any replaced items are derecognized.

Do not assign the following costs to a fixed asset:

  • Administration and general overhead costs
  • Costs incurred after an asset is ready for use, but has not yet been used or is not yet operating at full capacity
  • Costs incurred that are not necessary to bring the asset to the location and condition necessary for it to operate
  • Initial operating losses
  • New customer acquisition costs
  • New facility opening costs
  • New product or service introduction costs
  • Relocation or reorganization costs

Do not recognize as a fixed asset the ongoing costs of servicing a fixed asset, which typically includes maintenance labor, consumables, and minor maintenance parts; these costs should instead be charged to expense as incurred.

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