Which asset costs to capitalise and which to expense

Which costs of buying and installing an asset belong in property, plant and equipment under IAS 16, which must be expensed, and how to reclassify.

By Achekam · 11 October 2026 · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya

The invoice for a new production line reaches the file with a stack of companions: the supplier's price, a freight bill, a customs entry, an installer's account, a training course for the operators and the bill for a launch dinner. The client's bookkeeper posted the lot to "Plant and machinery". Or posted the lot to expenses. Either way, the year-end file has to sort it out.

IAS 16 gives a clear structure for the sorting. The work lies in looking at each item.

Starting with the purchase price

Under IAS 16, an item of property, plant and equipment is first measured at its cost, which includes its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.

Three points catch small clients:

• Import duties belong in cost. A machine imported through a sea port carries duty that should not be expensed as a customs charge.
• Purchase tax the client can reclaim is not cost. Only non-refundable purchase taxes go in. A VAT-registered client capitalises the machine without the VAT it claims back as input tax; a client that cannot claim it back includes what it paid.
• Discounts and rebates reduce cost, even when they arrive later as a credit note.

Directly attributable costs

ACCA explains that cost under IAS 16 includes the purchase price, the directly attributable costs of getting the asset ready for use, and the initial estimate of dismantling and site restoration costs recognised as a provision under IAS 37. ACCA's list of directly attributable costs includes employee benefits arising from construction, site preparation, delivery and handling, installation and assembly, testing, and professional fees.

On the production line, that brings the freight bill, the customs entry, the installer's account and the engineer's testing fee into the asset's cost.

Costs that never qualify

ACCA explains that the costs of opening a new facility, introducing a new product (including advertising), conducting business in a new location (including staff training) and general administration overheads are not part of the cost of property, plant and equipment, and are expensed as incurred.

That removes the operator training course and the launch dinner from the asset. They are real costs of the project, but they do not make the machine work; they help the business use it. A quick test for each invoice: would the asset be in place and capable of working without this cost? If yes, it is an expense.

Recognition, repairs and later spending

ACCA explains that under IAS 16 a cost is recognised as property, plant and equipment only if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably. It notes that the same test applies to costs incurred after the asset is in use, while day-to-day servicing, repairs and maintenance are expensed.

That is the line between replacing a roof, which may be capitalised, and patching a leak, which is not. Many clients also set a level below which small items are expensed for practical reasons. That is a policy choice rather than a rule of the standard, discussed in a capitalisation threshold policy.

When capitalisation stops, and abnormal waste

ACCA explains that capitalisation of costs stops when an asset is ready for use, even if it is brought into use later, and that abnormal costs such as wasted material cannot be capitalised. Two practical consequences:

1. Costs incurred after the line was ready, such as waiting for orders, relocating it within the factory or running it at a loss in its first weeks, are expenses.
2. Steel ruined by a contractor's error does not inflate the asset's cost. It is a loss, and possibly a claim against the contractor.

Reclassifying with an approved journal

Once the analysis is done, the correction is a journal: costs wrongly expensed move to the asset, and costs wrongly capitalised move to expenses.

In Achekam's Financials Studio, staff can post a year-end adjusting entry for this, and a wrong adjusting entry is reversed with who and why rather than deleted. Where the client's own books run through Achekam's Financial Intake, journals proposed from documents, bank lines or adjustments are only candidates; only a person can approve and post one, and AI is refused both steps. Low-confidence fields and possible duplicates wait in the Intake Review Queue for a person to decide.

Remember the knock-on effect on depreciation. The Studio does not calculate depreciation; it shows the trial balance charge and flags it when it disagrees with the movement in accumulated depreciation. Adding freight and installation to the asset increases the amount to be depreciated, so the client's register and the charge may need to follow. A well-kept register makes this much easier; see the client's fixed asset register.

A one-page sorting table

The IFRS Foundation's summary of IAS 16 sets out the principles for recognising property, plant and equipment, measuring its carrying amount and working out depreciation. How the result appears in the statements is covered in the property, plant and equipment note.

Sorting the invoices once, carefully, at the time of purchase saves sorting them again at every year end for the life of the asset.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.