Cessation of capitalisation

Learning objectives

• Determine the date on which recognition of costs in the carrying amount ceases.L2
• Distinguish costs incurred before and after the asset is ready for use.L2, L3

Normative references

• IAS 16 §20Recognition of costs ceases when the asset is in the location and condition necessary; costs of using or redeploying the item are excluded (asset capable of operating but not yet in use or operated at less than full capacity, initial operating losses, relocation or reorganisation).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

1 question

• A machine is installed and capable of operating as intended on 1 March, but production only starts on 1 May for lack of orders. The entity then incurs: 6,000 of costs during the idle period in March–April; 9,000 of initial operating losses in May while demand builds up; 4,000 to move the machine to another hall in June. What amount should be added to the cost of the machine?L3