Introduction
There are many companies that invest greatly in property, plant and equipment, especially companies that are in capital intensive industries such as the automobile industry. Those companies commit a great amount of their resources or assets to property, plant, and equipment. As a result, investors and creditors are greatly interested in the valuation of those assets. They carefully examine the financial statements of those companies and the valuation methods used to record the assets. Those investors and creditors rely on accountants to report the extent of amount committed to long term assets and to report the proper value of the assets. Cost is the preferred method used to record property, plant or equipment acquisitions. Unfortunately, it is not always easy to record long-term assets. There are different more complicated situations of recording fixed assets such as when recording self-constructed assets.
Self-constructed asset is the long lived asset that has been constructed or made by the company itself. There are different costs that are incurred by the company when constructing an asset, and the issue of what costs should be capitalized as part of the asset`s cost arise. Generally it is agreed that all costs or expenses directly related to the construction process should be included as part of the asset`s cost. However, there are controversial issues regarding the assignment of fixed overhead costs and interests. Should any fixed overhead costs be assigned to the cost of the asset? And if yes, how much should be allocated? Should interest expenses incurred from borrowing money to supply the construction process be capitalized as part of the asset’s cost?
A practical example of an asset that is being self-constructed is the first nuclear energy plant in the UAE that is being constructed by Emirates Nuclear Energy Corporation (ENEC). They