Acquisition cost

Acquisition cost refers to the total cost of acquiring an asset, including the purchase price and all the incidental costs necessary to bring the asset into the condition in which it is intended to be used. Acquisition cost is the figure capitalised on the balance sheet when the asset is bought, and it forms the basis for later depreciation and for the asset's carrying amount.

Why it matters

Acquisition cost is the starting point for most of the accounting around an asset. It determines how much is to be depreciated over the asset's useful life, how large a depreciation base the company has for tax purposes, and what the result of any later sale of the asset will be. Errors in the acquisition cost therefore carry through to both the profit and loss account and the balance sheet for many years to come.

Calculation formula

Acquisition cost = Purchase price + Incidental costs – Deductions

Components:

• Purchase price: The agreed price for the asset
• Incidental costs: Costs necessary to make the asset ready for use, such as freight, customs duty, installation, assembly and legal fees
• Deductions: Discounts, rebates or other reductions given by the seller

Value added tax is normally kept outside the acquisition cost if the company is entitled to deduct VAT. If the company has no right of deduction, for example when buying certain passenger cars, the VAT forms part of the acquisition cost. (This follows the Norwegian VAT rules.)

An example of the calculation

A business buys a production machine for NOK 500 000. On top of this come freight of NOK 20 000, assembly of NOK 30 000 and customs duty of NOK 10 000. The supplier gives a cash discount of NOK 15 000.

Acquisition cost = 500 000 + 20 000 + 30 000 + 10 000 – 15 000 = 545 000 kroner

It is this amount, NOK 545 000, that is entered on the balance sheet and from which the depreciation is calculated in the years to come, not just the agreed purchase price of NOK 500 000.

Tips for handling it

1. Document all the costs connected with the acquisition, not just the purchase price itself.
2. Consider all potential incidental costs when planning, so that the budget matches the real cost.
3. Be familiar with the depreciation rules for the various asset types, since the acquisition cost is the basis from which the depreciation is calculated.