IAS 16 PROPERTY, PLANT AND EQUIPMENT

Presented by Franck Armand Gueby

Objective

This presentation aims at giving a general explanation of IAS 16 standard and see its applicability its strengths and weaknesses.

OUTLINE

I- HISTORICAL BACKGROUNG OF IA16

II- OBJECTIVE AND SCOPE OF IAS 16

III-RECOGNITION AND MEASUREMENT

IV- MEASUREMENT AFTER RECOGNITION

V- DERECOGNITION AND DISCLOSURE

VI-STRENGTHS AND WEAKNESSES OF IAS 16

INTRODUCTIONInternational Accounting Standard 16 Property, Plant and Equipment or also known as IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). It is defined as tangible items 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. This accounting standard actually concerns accounting for property, plant and equipment known more generally as fixed assets, including recognition, determination of their carrying amounts, and the depreciation charges along with impairment lossesx

CONTINUED

Our presentation will address all these points by first of all giving a historical background of this standard along with its objective and scope. Then, in the third part of our analysis explain its recognition and measurement together with its measurement after recognition. The last session of our presentation will be dealing with the derecognition and disclosure of the standard and discuss at the time strengths and weaknesses of IAS 16.

HISTORICAL

HISTORICAL BACKGROUNG OF IA16

DATE DEVELOPMENT COMMENTS

August 1980 Exposure Draft E18 Accounting for Property, Plant and Equipment in the Context of the Historical Cost System published

March 1982 IAS 16 Accounting for Property, Plant and Equipment issued

Operative for financial statements covering periods beginning on or after 1 January 1983

1 January 1992 Exposure Draft E43 Property, Plant and Equipment published

CONTINUED12 December 2013 Amended by 

Annual Improvements to IFRSs 2010–2012 Cycle (proportionate restatement of accumulated depreciation under the revaluation method)

Effective for annual periods beginning on or after 1 July 2014

12 May 2014 Amended by Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)

Effective for annual periods beginning on or after 1 January 2016

30 June 2014 Amended by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)

Effective for annual periods beginning on or after 1 January 2016

OBJECTIVE OF IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognized in relation to them.

SCOPE

IAS 16 applies to all PPE except Assets held for sale (IFRS 5) Biological assets (IAS 41) Exploration and evaluation assets (IFRS 6) Investment property (IAS 40) Mineral rights and mineral reserves such as oil,

natural gas and similar non-regenerative resources

RECOGNITION

An item of property, plant and equipment is only recognized if : it is probable that the future economic

benefits associated with the asset will flow to the entity, and

nd the cost of the asset can be measured reliably.

MEASUREMENT

Items of property, plant and equipment should be measured at cost, which includes its original purchase price, any costs necessary to bring the asset to the location and condition for its intended use (e.g. site preparation, delivery and handling, installation, related professional fees for architects and engineers), and the estimated cost of dismantling and removing the asset and restoring the site

MEASUREMENT AT RECOGNITION

The elements of the initial cost of an item of property, plant and equipment includes all of the costs of acquisition, construction, installation and commissioning.

The initial cost excludes promotional, advertising, administrative or general overhead expenses including re-location or operating costs.

MEASUREMENT AT RECOGNITION CONTINUED

The cost of an item of property, plant and equipment is the cash equivalent price or, in the case of a item with no cost, its fair value at the date of acquisition.

MEASUREMENT AFTER RECOGNITION

AS 16 permits two accounting models for measurement of the asset in periods subsequent to its recognition, namely the cost model and the revaluation model.

MEASUREMENT AT RECOGNITION continued

• Under the cost model, the carrying amount of the asset is measured at cost less accumulated depreciation and eventual impairment (similar to the inventory's Lower of cost or market prudent principle). Under the cost model, the impairment is always recognized (debited) as expense.

MEASUREMENT AT RECOGNITION continued

Under the revaluation model, the asset is carried at its revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be determined reliably.

DERECOGNITION

Items of property, plant and equipment are derecognized on disposal or when no future economic benefit is expected from its use. An entity should recognize any gain or loss on disposal in its income statement. The gain or loss on disposal is the difference between the proceeds received in exchange for the asset disposed and the carrying amount at the time of disposal.

IMPAIRMENT

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.

DISCLOSURE

• IAS 16 requires an entity to disclose in its financial statements for each class of property, plant and equipment:

the basis for measuring carrying amount the depreciation method(s) used the useful lives or depreciation rates the gross carrying amount and accumulated

depreciation and impairment losses– net foreign exchange differences on translation– other movements

DISCLOSURE CONTINUED

a reconciliation of the carrying amount at the beginning and the end of the period, showing:

AdditionsDisposals acquisitions through business combinations revaluation increases or decreases impairment losses reversals of impairment lossesdepreciation

STRENGTHS AND WEAKNESSES OF IAS 16

IAS16 deals with the treatment of property, plant, and equipments. In that case, it determines how they should be prices and depreciated. Having said that, we can argue that it strengths include the use of both cost and revaluation model, and precise an amortization calculation. As for the Weaknesses, it can be regarded as the inability to treat cost of new facility or producing new product as being capitalized.

CONCLUSION

At the end of our analysis, it appears that IAS16 is a standard which deals with fixed assets. It in fact helps solve some problems related to the accounting of tangible assets. Having said that, we pointed out in our analysis that it does have some problems that need to be sorted out to better and ease accounting under this standard.