PROPERTY, PLANT AND EQUIPMENT:

IAS 16
STATE UNIVERSITY OF ZANZIBAR
(SUZA)

Related Standards
IAS 17 Leases
IAS 20 Accounting for government grants
and disclosure of government
assistance
IAS 23 Borrowing costs
IAS 36 Impairment of assets
IAS 40 Investment property
IFRS 2 Share-based payment
IFRS 5 Non-current assets held for sale and
discontinued operations

IAS 16 - Overview

Objective and scope

Recognition
Measurement at recognition
Measurement after recognition (CM, RM)
Derecognition
Disclosure

Assets
Conceptual Framework for financial
reporting
Definition
An asset is a resource controlled by the
entity as a result of past events and from
which future economic benefits are
expected to flow to the entity .

IAS 16 - Objective and Scope

IAS 16 objective: standards for the
recognition and derecognition of PP&E
assets, measurement at and after
acquisition, and disclosures
Scoped out: assets held for sale,
agricultural biological assets, nonrenewable natural resource rights and
reserves
Includes investment property under
construction and when ready, if cost
model applied
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IAS 16 - Objective and Scope

Property, plant and equipment (IAS 16.6):
Tangible items that:
(a) are held for use in the production or
supply of goods or services, for rental to
others, or for administrative purposes;
and
(b) are expected to be used during more
than one period

IAS 16 Recognition Criteria

Costs are recognized as PP&E only if:
1. Probable that future economic
benefits associated with the item will
flow to the entity, and
2. The cost can be measured reliably.
Applies to costs at acquisition and
after acquisition.

Spare Parts and Servicing Equipment

It is major

It can be used only in

connection with an item of
PPE

If yes - it will qualify as PPE

If no - it will be charged to Expenses

Recognition Criteria
is met

IAS 16 - Recognition
The government requires HTY Ltd. to
affix
new
pollution
reduction
equipment to existing equipment. Is
this a PP&E costor an expense?
Apply general principle:
1. Future economic benefits
2. Reliable measure
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IAS 16 - Recognition
Meets the future economic benefits
criterion if costs are incurred to obtain the
economic benefits or to increase the
economic benefits from other assets
Cost of pollution reduction equipment =
PP&E asset cost
Same criteria apply to major repairs and
overhauls
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Subsequent Costs
Replacement Costs
Day to day expenses is charged to Profit and Loss Account
as repair and maintenance.
Major replacement cost qualify as PPE if recognition
criteria is met.
The carrying amount of those parts that are replaced is
derecognised.
Inspection Cost
Where major regulation inspection is required to operate
the item of PPE, the cost of such item will qualify as PPE if
recognition criteria is met.
Any remaining carrying amount of the cost of previous
inspection is derecognised.

 Works
in
combination
with
a
components approach
- Recognize major components as separate
PP&E assets and depreciate separately
- When major overhaul or replacement
takes place, remove old components
remaining un-depreciated cost
- Recognize new component as PP&E asset
- Gain/loss to income statement
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Example
- ABC & Co., has acquired a heavy road transporter
at a cost of Rs. 100,000 (with no breakdown of
component parts).
- The estimated useful life is 10 years.
- At the end of the sixth year, the power train
requires replacement, as further maintenance is
uneconomical due to the off-road time required.
The remainder of the vehicle is perfectly road
worthy and is expected to last for the next four
years.
- The cost of the new power train is Rs. 45,000.
- Can the cost of new power train can be recognized
as the asset, and if so, what treatment should be
used?

Measurement
An item of PPE is measured at COST

Cost Price Comprises of

Purchase Price

Costs directly
Attributable to bringing
the asset to location and
condition intended by
management

Initial estimate of
dismantling the assets
and restoring the site to
its original condition

IAS 16 - Measurement at Recognition

Need to know:
1. What elements of cost are included
2. How to measure cost

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Measurement cont.
Only costs that are directly attributable may be capitalised.
The standard lists type that are not directly attributable
Costs of opening new facility
Costs of introducing a new product or service
Costs of conducting business in a new location or with a
new class of customer
Administration and other general overhead costs
Self Constructed assets is determined using the same
principles as for an acquired asset.
Exchange of Assets
If fair value can be measured cost will be measured at
fair value.
If fair value can not be measured cost will be recognised
at carrying amount of asset given up.

IAS 16 - Measurement at Recognition

Cost elements to include:
1. Purchase price net of discounts,
rebates, and add non-recoverable
taxes, duties
2. Costs to get in place and ready to use as
management intended
3. Costs of obligation to decommission
asset and restore site as a result of
acquiring the asset
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IAS 16 - Measurement at Recognition

Cost elements to exclude:
1. Costs after asset in place and ready for
use as management intended
2. Costs to open a new facility, introduce a
product, move to new location
3. General and administrative overhead
type costs

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IAS 16 - Measurement at Recognition

If self-constructed:
1. Apply same principles
2. Charge abnormal costs to P or L
3. Interest costs during construction: IAS
23
4. Government assistance: IAS 20

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IAS 16 - Measurement at Recognition

Situation-equipment:
Tshs100m cost, 7% sales tax
Tshs10m to transport to plant, Tshs 500,000
storage cost (plant not ready)
Tshs 3m labor, Tshs 2m materials to calibrate
machine. Tshs 4m recovered from trial run
production
Used at 50% of capacity: costs = Tshs 50m, sales =
Tshs 55m
Tshs 11m to consultant for services related to
choice of machine and calibration
Tshs 1m interest cost during one month storage
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IAS 16 - Measurement at Recognition

Equipment cost:
Invoice and tax: 100 + 7 =
Transportation
Calibration: 3 + 2 4 =
Professional fees

Tshs 107
10
1
11
$129

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IAS 16 - Measurement at Recognition

How to measure cost?
Cost is defined (IAS 16.6) as:
Cash or cash equivalents paid or the FV
of other consideration given to acquire
asset when acquired or constructed
Other IFRS such as IFRS 2: Share-based
payment may have other specific
requirements

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IAS 16 - Measurement at Recognition

If non-monetary transaction, exception

to FV principle if:
1. FV cannot be reliably determined, or
2. Transaction lacks commercial substance
i.e., transaction has no economic
effect on the entity

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IAS 16 - Measurement at Recognition

Commercial substance exists if:
1. Cash flows (amount, timing, risk) of
new asset differ from those of old
asset(s) transferred; or
2. After-tax cash flows of part of business
taking on new asset (entity specific
value) have changed; and
3. Difference in 1 or 2 is significant

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Measurement after recognition

An entity may choose either the cost model or the
revaluation model as its accounting policy

Cost Model

Revaluation Model

Carrying amount =

Carrying amount =

Cost (Accumulated
Depreciation + Accumulated
Impairment Loss)

Revalued amount
(Accumulated Depreciation +
Accumulated Impairment
Loss)

IAS 16 - Measurement after Recognition

Cost Model (CM):
PP&E are carried after acquisition at cost, less
accumulated depreciation and accumulated
impairment losses
Revaluation Model (RM):
PP&E are carried after acquisition at fair value at
date of revaluation, less any accumulated
depreciation and impairment losses after
revaluation
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IAS 16 - Measurement after Recognition: Cost

Model (CM)
Depreciation:
Each major component may have a
different depreciation policy
Depreciable amount: carrying amount less
residual value
Residual value defined:
- estimate of net amount entity would
receive now from assets disposal, if asset
was as old and in same condition as
expected at end of its useful life
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IAS 16 - Measurement after Recognition: Cost

Model (CM)

Depreciation (continued):
Depreciation period begins when PP&E
is in place and ready to use, continues
even if not used or is retired from active
use
Depreciation period ends when PP&E is
derecognized or classified as held for
sale (IFRS 5)
Depreciate over useful life to entity
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IAS 16 - Measurement after Recognition: Cost

Model (CM)
Depreciation (continued):
Useful life consider capacity, wear and tear,
technology changes, changes in product demand,
contractual or legal limits
Choose method based on pattern that assets
economic benefits are expected to be received:
SL, DB, or activity-based
If change in pattern, change method
prospectively (change in estimate)
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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)
Revaluation will be made at sufficient regularity to
ensure that the carrying amount does not differ
materially from that which would be determined
using fair value at the end of the reporting period.
If an item of PPE is revalued, the entire class of PPE to
which that asset belongs will be revalued.
Apply only to assets whose FV can be reliably
measured
Revalue often enough that carrying amount is close
to FV
Depreciate revalued amount using same principles as
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for CM

IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

RM accounting - what happens if an

increase in assets carrying amount?

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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

RM accounting - what happens if a decrease

in assets carrying amount?

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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

Debits and credits to Revaluation Surplus

are reported in OCI
Choice of entries to revalue assets and
accumulated depreciation:
Proportionately, or
Eliminate existing accumulated depreciation

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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)
Situation:
On January 1, Year 1, ABC Co. acquires a building
at a cost of $1,000. The building is expected to
have a 25-year life and no residual value. The
asset is accounted for under the revaluation
model and revaluations are carried out every
three years.
On December 31, Year 3, the fair value of the
building is appraised at $900. Prepare the entries
required on December 31, Year 3
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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

35

IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

36

IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

New depreciation rate is needed as of

January 1, Year 4:

$900 carrying amount = $41 per year

25 3 years
37

IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

Revaluation Surplus account?

As asset is used, transfer difference
between depreciation taken using RM
and amount if CM had been used directly to Retained Earnings, OR
Transfer directly to Retained Earnings
when asset derecognized

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Depreciation
The standard prescribe following principles for depreciation
Each part of an item of PPE with a cost that is significant in
relation to the total cost of the item will be depreciated
separately.
The depreciation charge for each year will be recognised in
profit and loss account unless it is included in carrying amount
of another asset.
The depreciable amount of an asset will be allocated on a
systematic basis over useful life.
The residual value and useful life of an asset will be reviewed
at least each financial year end.
Any difference in estimates from previous expectation will be
accounted for as a change in accounting estimates i.e.
changes will be applied prospectively.

Depreciation Method
The standard does not prescribe any depreciation method.
An entity may choose any method as per the nature of
business. However method adopted by the entity should
reflect the following principles:
The depreciation method will reflect the pattern in which
the assets future economic benefits are expected to be
consumed by the entity.
The depreciation method applied will be reviewed at
each financial year end. Any change from the previous
year will be treated as change in accounting estimates.

IAS 16 - Derecognition
When disposed of, or when no future
economic benefits to be received from use
or disposal
Remove carrying amount from statement of
financial position
Gain or loss = difference between carrying
amount of asset (or part of asset if a
replacement) and net proceeds on disposal

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IAS 16 - Disclosure
Whether CM or RM :
Depreciation methods used
Depreciation rate or useful lives
Beginning and ending balances and
reconciliation of the two for gross amount
and total of accumulated depreciation
and impairment losses

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IAS 16 - Disclosure
If RM used:
Date of revaluation
Independent valuation?
Methods, techniques used
Assumptions made in determining FV
Amounts if CM had been used
Details of changes in Revaluation Surplus
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THANK YOU !!

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