05/02/2023 IAS 16 1

IAS 16PROPERTY PLANT AND EQUIPMENT

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IAS 16 Overview

IAS 16

Objective Scope

Definitions

Measurement

DisclosureTransitional Provisions

Recognition & de-

recognition

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OBJECTIVE Prescribe accounting treatment for

property plant and equipmentRecognition of assetsDetermine carrying amountsDetermine depreciation chargesDetermine impairment losses

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SCOPE IAS 17 Leases determines recognition of leased assets

on transfer of risk and rewards; IAS 16 deals with accounting treatment of such assets

IAS 40 investment property dealt with by IAS 16 until development is complete and IAS 40 thereafter

IAS 16 excludes: Assets classified as held for sale (IFRS 5) Biological assets in agricultural activity (IAS 41) Exploration and evaluation assets (IFRS 6) Mineral rights and reserves such as oil, natural gas and non-

regenerative resources Includes property, plant and equipment used to maintain the

above assets

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Definitions Carrying amount: amount in balance sheet net of accumulated depreciation and

accumulated impairment loss Cost:

amount paid or fair value of consideration to acquire asset at time of acquisition or construction

Amount attributed to asset when recognised according to IFRSs Depreciable amount: cost less residual value Residual value: estimated amount from current disposal net of costs of disposal when asset is

at end of useful life Useful life: period available for use by the entity or number of units expected to be obtained

from it by the entity Depreciation: systematic allocation of depreciable amount over useful life of asset Entity-specific value: present value of cash flows expected from continuing use and disposal Fair value: amount asset can be exchanged for between knowledegable, willing parties in an

arm’s length transaction Impairment loss: excess of carrying amount – recoverable amount Recoverable amount: higher of net selling price and value in use Property, plant and equipment are tangible items:

○ Held for use in production or supply, rental or administration○ Expected to be used for more than one reporting period

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RECOGNITION

Recognition

Initial costs Subsequent costs

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Recognition

Recognition• At cost• If asset creates

probable future economic benefit

• Cost can be measured reliably

Initial costs• At cost when

incurred• Review for

impairment per IAS 36

Subsequent costs• Excludes day to

day servicing costs (repairs and maintenance, labour, consumables, small parts)

• Includes replacement of major parts

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Recognition Spare parts & servicing equipment:

Carry as inventory To P&L as consumed PP&E if major or stand-by equipment used in more than one period PP&E if used as part of item of PP&E

Safety equipment: Do not directly contribute economic benefit Enable related assets to contribute excess benefit Qualify for recognition as PP&E

Replacement of major components: At regular intervals or one off Derecognise old components Also major inspection required to operate assets If not identified at recognition, use estimate for derecognition

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MeasurementMeasurement

At recognition

Elements of cost

Measurement of cost

After recognition

Cost model

Revaluation model

Depreciation

Amount

Period

Method

Impairment

Compensation

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MEASUREMENT AT RECOGNITION: Elements of costPurchase price Directly

attributable Dismantle, remove & restore

Not part of PP&E

Cost Employee benefits (IAS 19)

Initial estimate Opening new facility

Import duties Site preparation Dismantle asset to remove

Promotion

Non-refundable purchase taxes

Delivery and handling

Restore site Staff training

Deduct trade discount

Installation & assembly

Administration overheads

Deduct rebates Testing Not being used

Professional fees

Reorganising operations

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Elements of cost Directly attributable costs: to bring the asset to the location and

condition necessary for operation in the manner intended by management

Costs of testing: Assess whether asset is functioning properly Deduct net proceeds of any items produced and sold during testing

Dismantling, removing and restoring: Obligation when asset acquired or used IAS 2 inventories applied when cost incurred to produce inventories Measure using IAS 37 Provisions

Self constructed assets: Use same principles as for acquired assets Eliminate internal profits Exclude wasted material & internal labour Use IAS 23 Borrowing Costs to allocate interest to carrying amount of asset

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Items not part of cost Recognition ceases when:

Item in location and condition ready for operationItem is capable of operating but not brought into useOperating at less than full capacityWaiting for demand/output to build upRelocating or reorganising entity operations

Incidental operations:Occur before or during construction & developmentExample: building site used as car parkIncome and expenses recognised as profit and loss

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Measurement of cost Cash price at recognition date Total payment less cash price equivalent = interest over

period of credit or part of carrying value under IAS 23 allowed alternative treatment

Fair value of asset received, unless Transaction lacks commercial substance

○ Risk, timing and amount of assets don’t vary○ No effect on entity’s operations (post-tax cash flows)○ Effect significant relative to value of assets exchanged

Fair value cannot be measured reliably Recognise acquired asset even if asset given up cannot be

derecognised If fair value not available, use carrying value of asset given

up as cost

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Measurement after recognition

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CHOOSE ACCOUNTING POLICYFurniture and

fixturesOffice Equipment

Land and buildings

LandApply to

entire class

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MODEL

Revaluation model Cost model

After recognition, carry item at fair value when fair value can be measured reliably at the date of revaluation less subsequent accumulated

depreciation less subsequent accumulated

impairment losses Revalue regularly so that carrying

amount is not materially different from fair value at balance sheet date Volatile changes = annual revaluation Insignificant changes in value = every

3 to 5 years

After recognition, carry asset at:○ cost○ less accumulated

depreciation ○ Less accumulated

impairment losses

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FAIR VALUE: MV using market based evidence

Land and Buildings•Market valuation by qualified valuer

Plant & Equipment•Market value by appraisal

Specialised Property, Plant & Equipment•Estimate using income or depreciated replacement cost approach

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Revaluation adjustment

Carrying Amount Accumulated Depreciation

Increase Credit increase to revaluation

surplus directly in equity Credit portion that reverses a

previous decrease in value of the same asset to profit and loss

Decrease First clear any credit balance

in valuation surplus in equity Then debit profit and loss

Restate Restate cost and

accumulated depreciation in proportion so that carrying value = revalued amount

Eliminate Against cost Restate net cost to

revalued amount

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Transfers from revaluation reserve to retained earnings Transfer revaluation reserve directly to retained

earnings when asset scrapped or disposed of As asset is written off via depreciation charge,

use option to transfer depreciation based on revalued amount less depreciation based on cost to retained earnings or leave surplus to transfer when asset finally derecognised

Transfer is made in statement of changes in equity, and not through profit and loss

The effect of taxes on income treated according to IAS 12

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DEPRECIATION

Significant parts Recognition

Each part with significant cost is depreciated separately In relation to total cost of an

item Allocate cost to significant

parts Group parts with similar

useful life and depreciation method together

Represent consumption pattern of the asset

Annual charge to profit & loss or to carrying amount of another asset When asset is used to

produce other assets

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Depreciable amount Allocate depreciation on a systematic basis over

the useful life of the asset Review residual value and useful life at the end of

each period Treat changes as change in accounting estimate

(IAS 8) Recognise depreciation of fair value > carrying

amount Depreciation charge zero if residual amount >

carrying amount Residual value often immaterial in practice

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Depreciation period Begins when asset available for use

Location and condition necessary to operate Ceases when asset is classified as held

for sale, derecognised or fully depreciatedNot when asset becomes idle or retired from

active use Depreciation charge can be zero whilst

there is no production

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Useful life of asset Factors to consider:

Technical or commercial obsolescence Wear and tear Expected usage in the entity Repair and maintenance programme Planned replacement Improvements in production methods Changes in market demand Land has unlimited useful life

○ Except portion of cost for dismantlement, removal and restoration Buildings have a limited useful life Limits on use of the asset

○ Legal○ Expiry dates○ Lease periods

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Depreciation method Reflect the pattern in which the asset is used

Straight line method (depreciable amount/useful life) – constant charge

Diminishing balance method (carrying amount/useful life) – decreasing charge

Units of production method – charge based on expected output

Review at each financial year end Change in depreciation method treated as change

in accounting estimate (IAS 8) Apply the method consistently from period to period

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Impairment Apply IAS 36 Impairment of Assets Include compensation for impairment or

loss in profit & loss when it becomes receivableImpairment – IAS 36Derecognition – IAS 16Replacements – IAS 16 (cost)

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Derecognition Derecognise On disposal When no future economic benefit is expected from use Include gain or los in profit or loss

Net disposal proceeds less carrying amount Proceeds at fair value Cash price equivalent of deferred revenue; IAS 18 interest revenue

Do not classify gains as revenue Date of disposal – IAS 18 Disposal by sale and leaseback – IAS 17 Use cost of replaced part as estimate to derecognise part of

the asset replaced if not separately recognised and depreciated

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Disclosure For each class of PP&E

Measurement bases for gross carrying amount Depreciation methods Useful lives/depreciation rates Gross carrying amount and accumulated depreciation at

beginning and end of period Additions Disposals Reclassified as held for sale Acquisitions in business combinations Revaluations Impairment losses through profit/loss or equity Depreciation charge Net foreign exchange differences of currency translation

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Disclosures Restrictions on title (existence and

amounts) Pledged as security for liabilities Assets in the course of construction Contractual commitment for acquisitions Compensation from third parties for

assets impaired, lost or given up Changes in estimates

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Disclosures Revalued assets

Effective dateIndependent valuerMethodsSignificant assumptionsObservable prices in active market or recent

market transactionsCarrying amount of class under cost modelRevaluation surplus, change in the periodRestrictions on distributions to shareholdersImpaired assets

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Optional disclosures Carrying amount of idle assets Gross carrying amount of fully

depreciated assets still in use Assets retired from use Fair value of assets materially different

from carrying values at cost

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Transitional provisions Cost of PP&E acquired in exchange of

assets transaction shall be applied prospectively to future transactions

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Summary Recognise initial costs and subsequent

replacements Carry at cost or revalued amount Depreciate according to use Review for impairment Review residual amount, depreciation

method and useful life Derecognise when sold or scrapped Include detailed disclosures in notes