Acquisition of asset after testing period
We ordered a machine from a supplier. The details are as follows:
- 1 January 20X1: We pay the prepayment of 40%.
- 1 March 20X1: The supplier delivers a machine and we pay 50% of its price. The machine is ready to use.
- We have 1 month to test the machine. After 1 month we can return the machine to the vendor. If we decide to keep the machine, we will pay remaining 10%.
The question is at which point can we capitalize the machine and start depreciating it?
There are in fact two questions.
I. When to recognize an asset?
An item of PPE should be recognized only if it is probable that the future economic benefits associated with it will flow to the entity and the cost is reliably measurable. Here, both conditions are met.
Also, the company should demonstrate the control of asset, because an asset is a resource controlled by the entity as the result of past events.
It seems that all these 3 parameters are met when the asset is delivered to the company by the supplier, so that’s the point when the machine should be recognized as an asset (capitalized).
II. When to start depreciation?
The answer is very simple here – when the asset is available for use. This is when the asset is in the location and condition necessary for it to be capable for operating by the manner intended by the management. Please see more here.
The question here is: What type of testing is it? Is the asset available for use during the testing?
That can be matter of judgment and the specific circumstances under which you operate.
If the testing period is arranged just as a “security” measure to protect customer and the asset is capable of full operation, then it is available for use right when delivered to the desired location and the depreciation starts then.
If the testing is required to prove that the asset does not have any defects or it is required by the legislation before the full operation starts, then the asset is not available for use without the tests completed. It will be available for use after tests are successfully done and depreciation starts after the testing.
For your reference, please see Framework 4.4, IAS 16.7, IAS 16.55.
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