I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

Cost

 is the amount of cash or cash equivalents paid or the fair value of the other consideration 

 given to acquire an asset at the time of its acquisition or construction'. 

 

'

Fair value

 is the amount for which an asset could be exchanged between knowledgeable, willing 

parties in an arm's length transaction.'  

 

'

Carrying amount 

is the amount at which an asset is recognised after deducting any 

accumulated depreciation and impairment losses.' 

      (IAS 16, para. 6) 

 

3.2 Recognition in the accounts 

Recognition simply means incorporation of the asset in the business's accounts. The recognition of 

property, plant and equipment depends on two criteria. 

(a) 

'It is probable that future economic benefits associated with the asset will flow to the entity'. 

(b) 

'The cost of the asset to the entity can be measured reliably'. 

      (IAS 16, para. 7) 

Property, plant and equipment can amount to substantial amounts in financial statements, affecting 

both the presentation of the company's statement of financial position and the profitability of the entity as 

shown in the statement of profit or loss. Smaller items such as tools are often written off as expenses of the 

period. Most companies have their own policy on this – items below a certain value are charged as 

expenses instead of being capitalised.  

3.3 Initial measurement 

Once an item of property, plant and equipment qualifies for recognition as an asset, it will initially be