General rule is that everything paid specifically for the asset will form part of the cost of the asset purchased by the entity i.e. any cost incurred specifically towards the asset until it is brought in to an intended use, everything will form part of cost of the asset.
However, things are not that simple for taxes due to their recoverability. Some are recoverable and some are irrecoverable or non-refundable taxes.
In order to get a clearer understanding on this IAS 16 Property Plant and Equipment provides help.
The cost of an item of property, plant and equipment includes:
- its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
- any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
As IAS 16 refers that such taxes which are non-refundable will form part of the cost of the asset. However, sales tax is a refundable tax even if it is paid as part of the consideration of asset at the time of purchase.
One thing to remember that entity measurement of cost of the asset and measurement of liability connected with the purchase of asset are two different things. Entity is responsible for the full amount that is amount inclusive of sales tax. However, in its books if sales tax or input tax can be recovered than it will be debited separately from the asset’s account. In simple words the asset is recognized in the financial books exclusive of sales tax amount and thus it will not form part of depreciation calculation.
However, if entity cannot avail input tax credit or sales tax cannot be recovered for any other reason e.g. entity is not registered then in such case any sales tax paid will form part of cost of the asset i.e. it will be capitalised and amount of sales tax will not be accounted for in a separate account. And the depreciation of the asset will be calculated on such amount that includes the amount of sales tax.