IAS 16 Property, plant and equipment

Definitions:
IAS 16 gives a large number of definitions which you should be familiar with:
 PROPERTY, PLANT AND EQUIPMENT are tangible assets that:
 are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
 are expected to be used during more than one period.
 CARRYING AMOUNT is the amount at which an asset is recognized in the statement of financial position after deducting
any accumulated depreciation and accumulated impairment losses.
 COST is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an
asset at the time of its acquisition or construction.
 DEPRECIATION is the result of systematic allocation of the depreciable amount of an asset over its useful life.
 DEPRECIABLE AMOUNT of a depreciable asset is the cost of an asset or other amount substituted for cost, less its
residual value.
IAS 16 Property, plant and equipment
Definitions:
 FAIR VALUE is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
 An IMPAIRMENT LOSS is the amount by which the carrying amount of an asset exceeds its recoverable amount.
 RECOVERABLE AMOUNT Is the higher of an asset’s fair value less costs to sell and its value in use.
 The RESIDUAL VALUE is the net amount which the entity expects to obtain for an asset at the end of its useful life after
deducting the expected costs of disposal.
 USEFUL LIFE is one of two things.
 The period over which an asset is expected to be available for use by an entity
 The number of production or similar units expected to be obtained from the asset by the entity.
IAS 16 Property, plant and equipment
Recognition:

Recognition simply means incorporation of the item in the business's accounts, in this case as a non-current asset. The
recognition of property, plant and equipment depends on two criteria:
(a) It is probable that future economic benefits associated with the asset will flow to the entity
(b) The cost of the asset to the entity can be measured reliably

Recognitions are two types:

 Initial recognition
 Subsequent recognition
IAS 16 Property, plant and equipment
Initial Recognition:

The standard lists the components of the cost of an item of property, plant and equipment:
 Purchase price, less any trade discount or rebate
 Import duties and non-refundable purchase taxes
 Directly attributable costs of bringing the asset to working condition for its intended use, e.g.:
 The cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Testing
 Professional fees (architects, engineers)
 Initial estimate of the cost of dismantling and removing the asset and restoring the site on which it is located
 Interest (if IAS 23 criteria met)
IAS 16 Property, plant and equipment
Subsequent Recognition:
 Subsequent expenditure on property, plant and equipment should only be capitalized if it improves the asset beyond its
originally assessed standard of performance e.g.
 faster production
 higher quality output.
All other subsequent expenditure should be written off.

 Separate components, inspection and overhaul costs:

If items of property, plant and equipment comprise separate components with different useful lives, the separate
components should be capitalized as separate assets and each depreciated over their useful lives.

 Normally all inspection and overhaul costs are expensed as they are incurred. However, to the extent that they satisfy
the IAS 16 rules for separate components, such costs should be capitalized separately as a non-current asset and
depreciated over their useful lives.
IAS 16 Property, plant and equipment
Depreciation:

 Straight line
 Reducing balance
 Machine hours etc.
Depreciation starts when the asset is ready for its intended use and not from when it starts to be used.

Change in depreciation method:

The depreciation method chosen should be reviewed at least every financial year end. If there has been a significant
change in the way the entity uses the asset, the method of depreciation should be changed to reflect this. A change in the
method of depreciation should be accounted for as a change in accounting estimate under IAS 8 and accounted for
prospectively, i.e, the new method should be applied in the current and future accounting periods. No changes to earlier
periods are required.
IAS 16 Property, plant and equipment
Change in useful life or residual value of an asset:

The depreciation charge on a non-current asset depends not only on the cost (or value) of the asset, but also on its
estimated useful life and its residual value.
Once decided, the useful life should be reviewed at least every financial year end and depreciation rates adjusted for the
current and future periods, if expectations vary significantly from the original estimates. Residual value should also be
reviewed and amended as necessary. Any change to useful life or residual value should be accounted for prospectively, i.e,
in the current and future accounting periods. No change should be made to past accounting periods.
IAS 16 Property, plant and equipment
Subsequent Measurement:

Subsequent
Measurement

Cost Model Revaluation Model

IAS 16 Property, plant and equipment
Subsequent Measurement:

IAS 16 allows two possible treatments here, a choice between keeping an asset recorded at cost or revaluing it to fair
value.
a) Cost model. Carry the asset at its cost less accumulated depreciation and any accumulated impairment losses.
b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation less
any subsequent accumulated depreciation and subsequent accumulated impairment losses. The revised IAS 16
makes clear that the revaluation model is available only if the fair value of the item can be measured reliably.
IAS 16 Property, plant and equipment
Impairment of asset:

The difference between the determined recoverable amount of an asset and its carrying value will be applied as an
impairment loss or reversal.

Impairment losses or reversals are applied to individual assets as an 'Impairment Adjustment' in the appropriate period.
IAS 16 Property, plant and equipment
Revaluation:
 Entire Class of asset should be revalued
 Review periodically and keep revaluations up to date
 Consistent policy for each class of asset (avoids cherry-picking of assets)
 Revalue at fair value
 Depreciate the revalued asset less residual value over its remaining useful life

Methods of Revaluation:
a) Gross-up Approach /Gross Method
b) Netting Approach / Net Method
IAS 16 Property, plant and equipment
 Gross-up Approach /Gross Method:
Restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset
after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an
index to determine its depreciated replacement cost.

Steps in Revaluation by Gross-up Approach /Gross Method:

 Calculate fair value increase/ decrease percentage
 Restate cost / revaluation by fair value increase/ decrease percentage
 Restate accumulated depreciation by fair value increase/ decrease percentage
 Transfer the difference to revaluation reserve
 Calculate current year’s depreciation on restated cost / revaluation
IAS 16 Property, plant and equipment
Accounting for Revaluation in Gross-up Approach /Gross Method:
Dr Non-current assets cost/valuation
Cr Accumulated depreciation
Cr Revaluation Reserve (Other Comprehensive Income)
IAS 16 Property, plant and equipment
Netting Approach / Net Method:
Eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.
This method is often used for buildings.

Steps in Revaluation by Netting Approach / Net Method:

 Restate cost / revaluation to revalued amount
 Remove any existing accumulated depreciation/ impairment
 Transfer the difference to revaluation reserve
 Calculate current year’s depreciation on revalued amount

Accounting for Revaluation in Netting Approach / Net Method:

Dr Accumulated depreciation
Cr Non-current assets cost/valuation
Cr Revaluation Reserve (Other Comprehensive Income)
IAS 16 Property, plant and equipment
Release of Revaluation Reserve:
 One time – release total reserve at derecognition/ disposal
 Year by year - A company has the option to make an annual reserve transfer for any excess depreciation charged as a
result of the revaluation.
IAS 16 Property, plant and equipment
Retirements and disposals:
When an asset is permanently withdrawn from use, or sold or scrapped, and no future economic benefits are expected
from its disposal, it should be withdrawn from the statement of financial position.
Gains or losses are the difference between the net disposal proceeds and the carrying amount of the asset. They should
be recognized as income or expense in profit or loss.

Profit or (Loss) on Disposal = Net Disposal Proceeds – Carrying Amount

Derecognition:
An entity is required to derecognize the carrying amount of an item of property, plant or equipment that it disposes of on
the date the criteria for the sale of goods in IAS 18 Revenue would be met. An entity cannot classify as revenue a gain it
realizes on the disposal of an item of property, plant and equipment.
IAS 16 Property, plant and equipment
Disposal of a previously revalued asset:
The profit or loss on disposal is calculated as previously and any gains held in reserves are transferred to retained earnings
in the statement of changes in equity.

Example:
Dartford Inc bought an asset for $50,000 at the beginning of 20X3. It had a useful life of five years. On 1 January 20X4 the
asset was revalued to $60,000, the useful life remained the same (i.e. 4 years remaining). On 31 December 20X4, the asset
was sold for $63,000. (Note: Dartford does not transfer the excess depreciation to retained earnings.)
Required:
Account for the disposal of the asset and show the double entries required.
IAS 16 Property, plant and equipment
Disclosure:
The standard has a long list of disclosure requirements, for each class of property, plant and equipment.
a) Measurement bases for determining the gross carrying amount (if more than one, the gross carrying amount for
that basis in each category)
b) Depreciation methods used
c) Useful lives or depreciation rates used
d) Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the
beginning and end of the period
e) Reconciliation of the carrying amount at the beginning and end of the period showing:
i. Additions
ii. Disposals and assets classified as 'held for sale' in accordance with IFRS 5
iii. Acquisitions through business combinations
iv. Increases/decreases during the period from revaluations and from impairment losses
IAS 16 Property, plant and equipment
Disclosure:
iv. Impairment losses reversed in profit or loss
v. Depreciation

The financial statements should also disclose the following.

a) Existence and amounts of restrictions on title, and items pledged as security for liabilities
b) Amount of commitments to acquisitions

Revalued assets require further disclosures.

a) Basis used to revalue the assets
b) Effective date of the revaluation
c) Whether an independent valuer was involved
d) Carrying amount of each class of property, plant and equipment that would have been included in the
financial statements had the assets not been revalued.
e) Revaluation surplus.
IAS 16 Property, plant and equipment
Disclosure:
The following format (with notional figures) is commonly used to disclose non-current asset movements.

Total Land and Buildings Plant and Equipment

Cost or Valuation $ $ $
At January 20X1 50,000 40,000 10,000
Revaluation surplus 12,000 12,000 -
Additions in year 4,000 - 4,000
Disposals in year (1,000) - (1,000)
At 31 December 20X4 65,000 52,000 13,000

Depreciation
At January 20X1 16,000 10,000 6,000
Charged for the year 4,000 1,000 3,000
Eliminated on disposal (500) - (500)
At 31 December 20X4 19,500 11,000 8,500

Carrying Value
At January 20X1 34,000 30,000 4,000
At 31 December 20X4 45,500 41,000 4,500