Yes, the cost of installing a fixed asset is part of its asset value. This is because all costs necessary to bring the asset to the location and condition for its intended use are capitalized, meaning they are included in the asset’s total cost.
Accounting Standards
This principle is a core tenet of accounting for property, plant, and equipment (PP&E). Here are the relevant accounting standards:
- IFRS (International Financial Reporting Standards): IAS 16, Property, Plant and Equipment, states that the cost of an item of PP&E includes 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. Installation and assembly costs are specifically cited as examples of these directly attributable costs.
- US GAAP (Generally Accepted Accounting Principles): The concept is covered in the FASB Accounting Standards Codification (ASC) 360-10, Property, Plant, and Equipment. It defines the historical cost of an asset to include all costs “necessarily incurred to bring it to the condition and location necessary for its intended use.” This includes costs like installation, freight, and site preparation.
Why Installation Costs Are Capitalized
Including installation costs in the asset’s value, rather than expensing them immediately, is essential for proper matching of expenses with revenue. The fixed asset, along with its installation costs, is expected to generate economic benefits for the company over its useful life. By capitalizing these costs, they are allocated over the asset’s useful life through depreciation, which aligns the expense with the periods in which the asset helps generate revenue.
This accounting treatment prevents a large, one-time expense from distorting the company’s financial results in the year the asset was acquired. Instead, the cost is spread out, providing a more accurate picture of the company’s profitability over the asset’s lifetime.