In procurement management, maintaining an accurate non-current assets register is essential for effective financial control and compliance with accounting standards. Non-current assets, such as office equipment, vehicles, and machinery, represent significant investments that require proper documentation of their costs for depreciation and audit purposes. This chapter explores how procurement professionals in Kenya determine the costs of assets in accordance with accounting standards, ensuring transparency and accuracy in asset management and financial reporting.

7.1 Determining costs of assets as per Accounting standards

Determining the cost of non-current assets is a foundational step in asset management and financial accounting. For procurement professionals, understanding how to correctly measure and record asset costs affects budgeting, depreciation calculations, and compliance with Kenyan accounting regulations such as the International Financial Reporting Standards (IFRS) adopted by the Institute of Certified Public Accountants of Kenya (ICPAK). This section dissects the components and principles involved in establishing asset costs to support effective asset tracking and reporting.

7.1.1 Components of Asset Cost

The cost of a non-current asset includes more than just the purchase price. It encompasses all expenditures directly attributable to bringing the asset to its intended location and condition for use. Procurement officers must be aware of these components to capture the full economic value of assets procured.

Purchase Price

The purchase price is the amount paid to acquire the asset, including the invoice price, import duties, non-refundable taxes, and any trade discounts. For example, a county government purchasing computers for its offices includes the invoice amount plus VAT (if non-recoverable) and shipping fees in the asset cost.

Directly Attributable Costs

These costs are necessary to prepare the asset for use, such as installation, assembly, professional fees (architects, engineers), and testing costs. A hotel acquiring kitchen equipment must include installation and calibration expenses to ensure the asset is operational.

Initial Delivery and Handling Costs

Expenses incurred during transportation and handling before the asset is ready for use are part of the asset cost. A retail business importing goods handling machinery includes freight charges, insurance during transit, and unloading fees.

Site Preparation Costs

Costs to prepare the site for the asset’s installation, such as clearing land or constructing foundations, contribute to the asset’s cost. For instance, a cooperative society installing solar panels includes the cost of preparing mounting structures in the asset valuation.

Estimated Dismantling and Restoration Costs

If the asset acquisition contract requires dismantling or restoring the site at the end of use, the present value of these future obligations is included. County governments may include expected costs of removing office furniture and restoring leased premises at contract termination.

7.1.2 Principles Guiding Asset Cost Recognition

The recognition of asset costs follows specific accounting principles that ensure consistency and comparability in financial statements. Procurement managers must align asset cost determination with these principles to uphold financial integrity.

Historical Cost Principle

Assets are recorded at their original purchase cost, reflecting the actual expenditure incurred. This principle emphasizes reliability over current market value, which can fluctuate. For example, an insurance company records office equipment at invoice plus installation costs, not at replacement cost.

Accrual Principle

Costs are recognized when incurred, not necessarily when paid. This means that if a supplier invoice is outstanding at the end of a financial period, the asset cost still includes that amount. A university acquiring laboratory equipment must recognize costs in the period the equipment is delivered and ready, even if payment occurs later.

Materiality Principle

Only costs significant enough to influence decisions should be capitalized as assets. Minor expenses might be expensed immediately to avoid cluttering the asset register. A SACCO may expense low-cost stationery rather than including it in asset costs.

Matching Principle

Costs are matched with revenues they help generate, so asset costs are allocated over useful life via depreciation. Procurement must ensure asset costs are properly classified to facilitate this matching in financial reports.

Consistency Principle

The method of determining asset cost should be applied consistently across similar asset types and periods. For instance, a hospital should use the same approach for valuing medical equipment acquisitions year after year to maintain comparability.

7.1.3 Adjustments to Asset Cost after Initial Recognition

After initial recognition, certain adjustments to asset costs may be necessary to reflect changes in value or condition, affecting procurement records and financial statements.

Capitalization of Subsequent Expenditures

Costs incurred after acquisition that enhance the asset’s performance or extend its useful life are added to the asset cost. For example, a county government upgrading IT infrastructure adds enhancement costs to the asset register rather than expensing them immediately.

Repairs and Maintenance

Routine repairs to maintain an asset in working condition are expensed as incurred and not added to asset cost. A retail store repairing a delivery vehicle’s engine records these costs as expenses, distinguishing them from capital improvements.

Revaluation

Under IFRS, assets can be revalued to fair value if the company adopts this model, affecting the carrying amount. However, procurement professionals must coordinate with finance teams to ensure revaluation complies with policy and is supported by professional valuations.

Impairment Losses

If an asset’s recoverable amount falls below its carrying amount, impairment must be recognized, reducing the asset cost on the register. A hotel with damaged kitchen equipment writes down the asset value to reflect its diminished utility.

Disposal and Derecognition

When an asset is sold or retired, its cost and accumulated depreciation are removed from the register, and any gain or loss is recorded. A cooperative selling a vehicle updates the asset register accordingly and reports the transaction in financial accounts.

7.1.4 Documentation and Record-Keeping for Asset Cost Determination

Accurate documentation is critical for verifying asset costs and supporting audit requirements. Procurement professionals must ensure comprehensive records accompany each asset acquisition.

Purchase Invoices and Contracts

Invoices provide evidence of purchase price and terms, while contracts detail obligations related to asset acquisition, installation, and dismantling.

Delivery and Installation Reports

Records confirming delivery dates, installation completion, and acceptance tests support the inclusion of directly attributable costs.

Payment Receipts and Bank Statements

Proof of payments, including deposits and final settlements, confirm the financial outflows related to asset acquisition.

Valuation Reports and Expert Opinions

For revaluations or impairment assessments, professional valuations justify adjustments to asset costs.

Asset Register Entries and Approval Records

Entries must reflect all cost components and be approved by authorized personnel to ensure accountability and control.

Chapter Summary

This chapter covered the essential process of maintaining a non-current assets register, starting with determining the costs of assets in accordance with accounting standards to ensure accurate valuation. It proceeded to explain methods for computing depreciation, emphasizing the importance of applying proper techniques to allocate asset costs over their useful lives. The chapter then evaluated how depreciation should be recorded following established accounting guidelines to reflect the asset's consumption correctly. Attention was given to the accounting treatment of depreciation in financial reports, highlighting its impact on profit and asset valuation. The procedures for acquiring non-current assets were detailed, focusing on proper documentation and recognition. Disposal of non-current assets was also examined, including how to handle gains or losses from sales or retirements. Finally, the chapter addressed determining asset balances, ensuring that the register accurately reflects the current status and book value of all non-current assets.