Maintaining a non-current assets register is essential for business management professionals to ensure accurate financial reporting and effective asset control. In Kenyan enterprises, ranging from retail businesses to county government offices, a well-maintained assets register supports compliance with accounting standards and aids in budgeting for asset replacement. This chapter focuses on how to determine the costs of non-current assets in line with accounting principles, enabling managers to record assets correctly and make informed decisions about asset utilization and depreciation.

7.1 Determining costs of assets as per accounting standards

Determining the cost of a non-current asset is a foundational step in asset management and financial accounting. For business management professionals in Kenya, understanding the components of asset cost ensures compliance with the International Financial Reporting Standards (IFRS) and the Kenya Financial Reporting Standards (KFRS). This knowledge supports accurate valuation on the balance sheet and impacts depreciation calculations, affecting profit reporting and tax obligations.

7.1.1 Definition and Components of Asset Cost

The cost of a non-current asset represents the total expenditure incurred to acquire the asset and prepare it for use. This cost forms the basis for subsequent accounting entries including depreciation and impairment assessment. Kenyan businesses must ensure the cost reflects all relevant expenses to avoid under- or over-valuing assets.

Components of Asset Cost

• Purchase Price: The cash or cash equivalent amount paid to acquire the asset, including import duties and non-refundable taxes. For example, a retail chain purchasing delivery trucks must include the invoice price plus import duty payable to KRA.
• Directly Attributable Costs: Expenses necessary to bring the asset to working condition, such as installation, delivery charges, and testing fees. A county government office acquiring office furniture includes transportation and assembly costs.
• Site Preparation Costs: Costs incurred to prepare the location where the asset will be installed, such as clearing land or constructing foundations. For instance, a hotel investing in kitchen equipment accounts for modifications to the kitchen layout.
• Professional Fees: Payments to architects, engineers, or consultants directly related to the asset acquisition and installation. A cooperative building a warehouse includes fees paid to structural engineers.
• Initial Delivery and Handling: Expenses related to transporting the asset to the business premises, including insurance during transit. A manufacturing firm importing machinery factors in shipping insurance.
• Testing and Trial Runs: Costs incurred to verify that the asset functions properly before it is ready for use. For example, a school installing computer labs includes the cost of software installation and testing.

7.1.2 Exclusions from Asset Cost and Treatment of Subsequent Expenditures

Not all expenditures related to an asset qualify as part of its initial cost. Differentiating between capital and revenue expenditures is crucial for accurate financial reporting.

Exclusions from Asset Cost

• General Administrative Costs: Expenses such as salaries of administrative staff or office rent during asset acquisition are not capitalized. A bank acquiring new servers does not include IT department salaries in asset cost.
• Initial Operating Losses: Losses incurred before the asset reaches productive capacity, such as trial production losses, are expensed immediately.
• Training Costs: Costs to train staff to operate the asset are recognized as expenses, not asset costs.
• Costs of Opening New Facilities: Expenses related to launching a new branch or plant are treated as operational costs.
• Advertising and Marketing Expenses: Any promotional costs associated with the asset are excluded from its cost.

Treatment of Subsequent Expenditures

• Capital Expenditures: Costs that enhance the asset’s capacity, efficiency, or extend its useful life are added to the asset’s carrying amount. For example, a SACCO upgrading its office computers with more memory modules capitalizes these costs.
• Repair and Maintenance: Routine maintenance costs that maintain the asset’s current condition are expensed as incurred. A hotel repairing air conditioning units does not capitalize these costs.
• Impairment Losses: When the asset’s recoverable amount falls below its carrying amount, impairment must be recognized, reducing the asset value on the register.

7.1.3 Valuation Methods for Asset Cost Determination

Kenyan businesses apply specific valuation techniques to ensure the recorded asset cost reflects fair value and complies with accounting standards.

Common Valuation Methods

• Historical Cost Method: Assets are recorded at the original purchase price plus directly attributable costs. This method is prevalent in county government offices and retail businesses where asset purchases are straightforward.
• Fair Value at Acquisition: When an asset is acquired through exchange or business combination, fair value replaces historical cost. For example, a university receiving donated equipment records it at fair value.
• Present Value of Future Payments: In cases of deferred payment or hire purchase, the cost is the present value of future payments discounted at the interest rate implicit in the arrangement, as practiced by insurance firms acquiring vehicles on hire purchase.
• Revaluation Model: Some entities periodically revalue assets to reflect current market values. This is common in real estate holdings by cooperative societies.
• Component Approach: For assets composed of significant parts with different useful lives, each part is valued separately. A bank’s building may be separated into structure and HVAC systems for valuation.

7.1.4 Documentation and Record-Keeping for Asset Cost

Accurate documentation supports verification and audit of asset costs, ensuring transparency and compliance with regulatory requirements in Kenya.

Essential Documentation Practices

• Invoice and Purchase Agreements: Maintain original purchase documents detailing price and terms. A retail business keeps supplier invoices for stockroom equipment.
• Delivery and Installation Receipts: Records confirming delivery dates and installation completion help substantiate directly attributable costs.
• Payment Records: Proof of payments, including bank statements or receipts, verify the transaction amounts.
• Asset Register Entries: Detailed entries include asset description, cost, acquisition date, and location. A county government office updates its fixed assets register monthly.
• Supporting Professional Fees and Site Preparation Costs: Contracts and receipts for consultants and site work must be filed to justify capitalization.

This thorough documentation process ensures that asset costs are defensible during audits by bodies such as the Auditor-General and facilitates accurate depreciation calculations in financial statements.

Chapter Summary

This chapter focused on how to maintain a non-current assets register in accordance with financial accounting principles. It began by explaining the process of determining the costs of assets, emphasizing compliance with accounting standards to ensure accurate asset valuation. The computation of depreciation was then explored, highlighting various methods used to allocate the cost of assets over their useful lives. Following this, the chapter examined how depreciation should be recorded in accounting books, stressing adherence to established guidelines for consistency and transparency. The accounting treatment of depreciation was also discussed, including its impact on financial statements and asset valuation. Procedures for acquiring non-current assets were outlined, covering proper documentation and initial recognition in the register. The chapter further addressed the disposal of non-current assets, detailing how to update records and account for gains or losses arising from disposal. Finally, it covered how to determine the closing balances of assets, ensuring the register accurately reflects the current status of the organization’s fixed assets.