AS 16 (Property, Plant and Equipment)

IAS 16 is the most important standard which is taught to the Accountancy Students at the very basic level.
We read it, revise it and apply it again and again that we start thinking that it is on our finger tips and we do
not need to study it. It happens with students as well when they prepare themselves for the final exams.
Sometimes it causes problems as well.

Summary of IAS 16 (Property, Plant and Equipment) is provided here in order to enable the students and
professional to grasp the spirit of IAS 16 (Property, Plant and Equipment) in a short span of time. We shall
start with the definitions as these are frequently used in our explanations.

Property, plant and equipment

A tangible asset held by the entity for use in the production or supply of goods and services, in renting to
others or in the area of administration and expected to be used for more than one year.
An asset can only be recognized as property, plant and equipment under IAS 16 (Property, Plant and
Equipment) when it meets the definition and recognition criteria of property, plant and
equipment. Recognition criteria are given below:

 It is probable that future economic benefits will flow to the entity.

 Cost or fair value of the asset can be measured reliably.

Cost of each significant part of the asset should be recognized separately in order to facilitate the more
accurate calculation of depreciation. For example a train consists of body, seats, wheels and engine etc. All
these assets should be recognized separately in the train account and should be depreciated upon their
useful lives separately. However in financial statements train should be disclosed as one single item and its
amount will be the accumulation of carrying amount of individual items.

Initial Measurement

An item of property, plant and equipment may be acquired in consideration of cash, exchange of asset and
government grants. We shall discuss the initial measurement of property, plant and equipment in detail if
acquired from any of these three methods.

Cash Payment

An item of property, plant and equipment must be measured at cost initially according to IAS 16
(Property, Plant and Equipment). If cash payment is deferred beyond normal credit terms, then the asset
must be recognized at the present value of the future payment and differential amount will be recognized as
finance cost. A company purchased a machine for $110. Payment will be made after one year of purchase.
Interest rate is 10%. Machine will be recognized at present value of $110 that is $100. $10 will be
recognized as finance cost.

Exchange of Asset

When recording an asset acquired through exchange of an asset, the cost of the new asset will be the  fair
value of the asset given up. However in following cases the fair value of the asset received is used.

 Fair value of the asset given up is not available

 Fair value of the asset received is more clearly evident.

If the exchange of asset is deemed to have no commercial substance the cost of the asset acquired will
be the carrying amount of the asset given up. If two vehicles of same vintage, mileage and condition are
exchanged, they are said to have no commercial substance.
 Government grants

If asset is acquired by way of government grant, the asset must be measured either at its fair value or
nominal amount paid for it, if any. For further details of the treatment of asset acquired through government
grant, you can read the Summary of IAS 20 (Government Grants).
  
Initial Cost

Following expenditures are included in the cost of the asset.

1. Purchase price (excluding refundable taxed)

2. Directly attributable cost i.e. cost incurred directly to bring the asset to a location and condition that enable it to

be used as intended by the management. Recognition of cost in the asset’s carrying amount must be stop as soon as the

asset becomes available for use. Examples of directly attributable cost are given below:
a) Installation and assembly cost

b) Cost of testing that the asset is functioning properly. However if any item is produced from this testing,
sale proceeds of this item should be deducted from the cost of testing.

c) Borrowing cost should be recognized in the cost of the asset according to Summary of IAS 23
(Borrowing Cost).. For further details of the treatment of borrowing cost, you can read the  Summary of
IAS 23 (Borrowing Cost).

1. The ownership of an asset may come with an obligation to dismantle the asset, remove it and restore the site on

which it is located at some stage in the future. These future costs must be estimated and included in the cost of the

asset. It is worth noting that the fair value of the future cost is recognized in the carrying amount of the asset according to

IAS 16 (Property, Plant and Equipment).

2. Following costs are not included in the cost of the asset according to IAS 16 (Property, Plant and Equipment).
a) Administration cost
b) Advertising cost
c) Cost of training staff
d) Abnormal wastage
e) Cost of moving the asset to another location

Subsequent Cost

Further costs are frequently incurred after the acquisition or construction of the asset. The cost can be
categorized as follows:

 Day to day servicing cost should be expensed out in the period they are incurred.

 When part of an asset is replaced, cost of new part should be recognized in the carrying amount of the asset

while cost of the item which is replaced should be derecognized.

 Major inspections should be recognized in the carrying amount of the asset. For example, an air craft needs to

be tested after every 3 years. This inspection cost should be added in the carrying amount of the air craft and should be

depreciated over three years.

Subsequent Measurement

All property, plant and equipment should be depreciated with the exception of land. In certain cases land
may have a useful life in which case it must also be depreciated.
Depreciable amount is depreciated over the useful life of the asset using a suitable method of
depreciation. Depreciable amount is the cost less residual value. Residual value is expected proceeds on
disposal less the expected cost of disposal. Useful life is the period over which the asset is expected to be
available for use by the entity. There are manymethods of depreciation that can be used but famous are
straight line balance method and diminishing balance method. If a company decides that any one of the
three factors (residual value, useful life, or method of depreciation) needs to be changed, this must be
adjusted according to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). For
further details, you can read the Summary of IAS 8 (Accounting Policies, Changes in Accounting
Estimates and Errors).
Every item of property, plant and equipment must be tested for impairment annually according to  IAS 36
(Impairment of Assets). You can read it in detail in Summary ofIAS 36 (Impairment of Assets).

Revaluation

The revaluation model involves revaluing the asset’s carrying amount to its fair value. If an entity uses the
revaluation model for a particular asset, it will have to apply the revaluation model to all assets within the
class of assets.

If an asset is revalued upwards, the incremental amount over the carrying amount shall be recognized
as “Revaluation Surplus” in the equity through “Statement of Other Comprehensive
Income”. Carrying amount of the asset will also be increased with the same amount. This revaluation
surplus will be realized to retained earnings over the remaining useful life of the asset or when the asset is
disposed off according to IAS 16 (Property, Plant and Equipment). Depreciation will be charged on new
carrying amount onwards.
If an asset is revalued downwards, the differential amount of the carrying value and fair value shall be
recognized as expense immediately. Depreciation will be charged on new carrying amount onwards.

Deferred Tax

If tax authorities do not treat an item of property, plant and equipment in the same way as IAS 16
(Property, Plant and Equipment) requires it to be treated, IAS 12 (Deferred Tax) comes in to interaction.
Further details of treatment of IAS 12 (Deferred Tax) are given in the Summary of IAS 12 (Deferred Tax).
It concludes IAS 16 (Property, Plant and Equipment). I hope it will be helpful for you to have complete
understanding of all concepts of IAS 16 (Property, Plant and Equipment) in short time. Please do not forget
to leave your comments below.