The rule. Capitalize the costs directly attributable to bringing the asset to the location and condition necessary to operate as management intends. That's the wording in IAS 16 and Ind AS 16, and US GAAP reaches the same place. In practice it covers:
- Purchase price plus import duties and non-refundable purchase taxes, less trade discounts and rebates.
- Directly attributable costs: site preparation, delivery and handling, installation, testing and trial runs, professional fees.
- The initial present value of dismantling and site-restoration obligations, with a matching provision. US GAAP calls this an "asset retirement obligation". Mines and telecom towers carry them, and so do leasehold fit-outs.
- Borrowing costs during construction of qualifying assets (see capitalised borrowing costs).
What stays out of the cost, with a worked example
What stays out, expensed as incurred. Staff training stays out, because the skill belongs to employees, who can leave. So do general overheads, advertising and launch costs, initial operating losses while demand builds, relocation or reorganization costs and abnormal waste. And so does everything after the asset is ready for use. Once it can operate as intended, capitalization stops, even if commissioning is delayed for commercial reasons.
Worked example: cost build-up. Pragati Precision (synthetic Indian machine-shop) imports a CNC machining centre:
| Item | ₹ lakh | Treatment |
|---|---|---|
| Invoice price (after 5% trade discount) | 190.0 | Capitalize |
| Customs duty (non-refundable) | 22.8 | Capitalize |
| IGST (available as input tax credit) | 34.2 | Exclude — refundable via credit |
| Freight + transit insurance | 6.0 | Capitalize |
| Foundation and site preparation | 9.0 | Capitalize |
| Installation engineers | 4.5 | Capitalize |
| Trial runs (materials and power) | 2.7 | Capitalize |
| Operator training programme | 3.0 | Expense |
| PV of contractual dismantling obligation | 5.0 | Capitalize (with provision) |
| Capitalized cost | 240.0 |
You'd journal it as Dr PP&E ₹240 lakh, Cr Bank/Payables ₹235 lakh, Cr Provision for dismantling ₹5 lakh. Notice that the ₹3 lakh of training and the recoverable IGST never touch the asset.
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Cost model or revaluation model?
Cost model vs revaluation model. After recognition, the frameworks give you these choices:
| US GAAP | IFRS | Ind AS | |
|---|---|---|---|
| Cost model (cost − accumulated depreciation − impairment) | Only option | Allowed | Allowed |
| Revaluation model (carry at fair value; upward revaluations to OCI/revaluation surplus) | Prohibited | Allowed, class-by-class | Allowed, class-by-class |
In practice the overwhelming majority of Indian and US companies use the cost model. There's one Indian wrinkle. On first-time Ind AS adoption, companies could elect previous-GAAP carrying values as "deemed cost" under Ind AS 101. So an old plant's carrying value may reflect a 2015-era election instead of its original cost, and the note will tell you so. Revaluation brings its own mechanics, including the asymmetry that sends a reversal against the surplus before it reaches profit. Investment property held to earn rent or for capital appreciation has separate rules too. Both get worked through properly on their own pages: revaluation model and investment property.
Componentization: one asset, several depreciation clocks
A large asset is a bundle of parts that wear out at different speeds. An airframe lasts decades. Engines run to overhaul cycles. A mandatory heavy-maintenance check is "used up" the moment the next check falls due. Put one blended life on all of that and you misstate every year's expense.
The rules. IAS 16 and Ind AS 16 require component accounting. Each part with significant cost and a different useful life is depreciated separately. In India this has statutory teeth. Schedule II of the Companies Act 2013 has mandated component-level lives since FY 2015-16, and it publishes indicative lives by class: general plant and machinery 15 years, factory buildings 30, computers 3, servers 6, motor cars 8. A company may deviate if it discloses the deviation and can justify it technically. US GAAP permits componentization but doesn't require it, and blended lives dominate US practice.
Worked example: Coastal Air's aircraft
Worked example. Coastal Air (synthetic, Ind AS) buys an aircraft outright for ₹600 crore and componentizes:
| Component | Cost (₹ cr) | Life | Residual | Annual depreciation (₹ cr) |
|---|---|---|---|---|
| Airframe | 380 | 25 yrs | 10% | (380 − 38)/25 = 13.68 |
| Engines | 160 | 10 yrs | 5% | (160 − 8)/10 = 15.20 |
| Major-check component | 60 | 5 yrs (to next D-check) | nil | 12.00 |
| Total | 600 | 40.88 |
Treat it naively as one asset, ₹600 crore over a 20-year blended life with a 5% residual, and you'd charge only ₹28.5 crore a year. That understates early-years expense by about ₹12 crore. Now suppose the D-check is performed in year 5 at, say, ₹70 crore. That new check is capitalized as a fresh component and depreciated to the next check, and the old, fully depreciated one is derecognized. You'll see this in real filings. InterGlobe Aviation's (IndiGo) notes capitalize major-inspection costs as separate components depreciated to the next check. Delta Air Lines' 10-K discloses flight-equipment lives of roughly 20 to 34 years (check in the current filing). So componentization is one legitimate reason two airlines' depreciation lines are hard to compare, and that's before you reach the useful-life and salvage games.