IAS 16

It deals with the accounting treatment for property, plant and equipment.

Property plant and equipment (PPE) are tangible assets that an entity holds for its own use for more than one period.

PPE 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 for more than one period.

Examples of PP&E are:

• Land & building,
• Machinery,
• Furniture and fixtures,
• Office equipment,
• Ships, aircrafts, motor vehicles,
• In June 2014 the Board amended the scope of IAS 16 to include bearer plants related to agricultural activity.

Land and buildings are separable assets and are accounted for separately, even when they are acquired together. Land has an unlimited useful life and therefore is not depreciated. Buildings have a limited useful life and therefore are depreciable assets.

Property, Plant and Equipment should only be recognized when below criteria met:

1. Future economic benefits will flow to the entity,
2. Cost can be measured reliably.

Initial measurement

At Cost

Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, installation & all other related professional fees & charges.

Subsequent measurement

IAS 16 recommends two models:

Cost Model

Property, Plant & equipment shown at cost less accumulated depreciation and after accumulated impairment losses as per paragraph 30 of standard.

Revaluation Model: Paragraph 31

• If revaluation model opts than revaluation should be carried for entire class of assets and carried out regularly.
• In this model the asset is carried at a revalued amount, being its fair value at the date of revaluation less depreciation and impairment.
• Revalued assets are depreciated in the same way as under the cost model.
• If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus”.
• If a revaluation results in a decrease in value, it should be recognized as an expense.
• Impairments should be accounted for in accordance with IAS 36, Impairment of Assets. An impairment loss under the revaluation model is treated as a revaluation decrease to the extent of previous revaluation surpluses. Any loss that takes the asset below historical depreciated cost is recognized in the income statement.
• The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is disposed of.

 Depreciation 

Depreciation is defined in this IAS 16 as ‘the systematic allocation of the depreciable amount of an asset over its useful life’.

• There are methods of depreciation including straight line method and reducing balance method.
• All depreciation should be charged to profit or loss account.
• Depreciation begins when the asset is available for use and continues until the asset is derecognized.

Impairment Test

An item of property, plant, or equipment shall not be carried at more than recoverable amount and hence required impairment testing as per IAS 36. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

Recommended Reading:  https://accountingblogger.com/ias-36-impairment-of-assets/

IAS 36 – Impairment Of Assets | Humayun Atif (CMA, CPA)

Disposal of PPE

An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognized in profit and loss.

Quiz

Question: If a company acquired safety equipment, should they qualify for PPE as these are not contributing any future economic benefits?

Answer:

Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.

Disclosure requirements

These are stated from paragraph 73 TO 79 and these can be viewed here:

Disclose for each class of property, plant and equipment:

• basis for measuring carrying amount
• depreciation method(s) used
• useful lives or depreciation rates
• gross carrying amount and accumulated depreciation and impairment losses
• reconciliation of the carrying amount at the beginning and the end of the period, showing:
• additions
• disposals
• acquisitions through business combinations
• revaluation increases or decreases
• impairment losses
• reversals of impairment losses
• depreciation
• net foreign exchange differences on translation
• other movements

Additional disclosures are:

The following disclosures are also required:

• restrictions on title and items pledged as security for liabilities
• expenditures to construct property, plant, and equipment during the period
• contractual commitments to acquire property, plant, and equipment
• Compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.

If property, plant, and equipment are stated at revalued amounts, certain additional disclosures are required:

• the effective date of the revaluation
• whether an independent valuer was involved
• for each revalued class of property, the carrying amount that would have been recognized had the assets been carried under the cost model
• The revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com