IAS 16 Property, Plant, and Equipment

number of production or similar units expected to be

obtained from the asset

Scope
Recognition
Applies to PPE except when another Standard requires or
permits a different accounting treatment
RECOGNITION CRITERIA
Applies to bearer plants, but not to its produce
1. probable future economic benefits will flow
Does not apply to:
2. cost of item can be measured reliably
PPE held for sale
Exploration and evaluation assets (of Mineral Resources) COST include
Non-regenerative resources (oil, natural gas, minerals)
1. costs incurred initially
But IAS 16 applies to PPE used to develop and maintain items
2. subsequent costs to add to, replace, or service PPE
above.
Investment property use cost model in this Standard
spare parts, stand-by equipment, servicing equipment
PPE when it meets recognition criteria
otherwise, inventory
Definitions
1. PPE tangible items that are
used in business
held for use
in the production
or supply of goods and services,
for rental to others,
for administrative purposes
expected to be use during more than one period
2. Bearer plant living plant used in:
production or supply of agricultural produce
expected to bear produce for more than one period
not sold as agricultural produce, except for incidental
scrap sales

Judgment used when applying recognition criteria

It may be appropriate to aggregate individually significant
items

Initial Costs
Items acquired for safety or environmental reasons
although not directly increasing the future economic
benefits of any particular existing item of PPE
qualify as PPE because they enable entity to derive
future economic benefits from related assets in excess of what
could be derived had those items not been acquired

Subsequent Costs
3. Depreciable amount cost of an asset less residual value
4. Depreciation systematic allocation of the depreciable
amount of an asset over its useful life
5. Entity-specific value PV of cash flows an entity expects to
arise from continuing use of an asset and from its disposal at the
end of its useful life or expects to incur when settling a liability
6. Impairment loss amount by which carrying amount of an
asset exceed its recoverable amount
7. Recoverable amount higher of FVLCTS and its value in use
8. Residual value estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the
estimated costs of disposal
if the asset were already of age and in the
condition expected at the end of its useful life
cost is often immaterial/insignificant in
calculating depreciable amount
9. Useful life
period over which an asset is expected to be
available for use, or

Cost of day-to-day servicing

costs of labor and consummables
cost of small parts
expense as incurred
Repairs and Maintenance
Cost of replacement
recognition criteria met? capitalized
Cost of major inspection
capitalized
remaining carrying amount of previous inspection
derecognized
WHY? considered cost of replacement if recognition
criteria is satisfied

Measurement at Recognition
initial recognition - at COST
Elements of Cost
1. Purchase price includes
import duties
non-refundable taxes
after deducting trade
discounts/rebates

2. Directly attributable costs to bring the asset

to its location and condition for it to be capable of operating in a
way intended by management
3. The initial estimate of the costs of
dismantling and removing the item and restoring the site on
which it is located.*

Revaluation Model

*IAS 2 applied if costs incurred are because it was used in

producing inventory

TWO APPROCHES IN RECORDING REVALUATION

adjust carrying amount:

Capitalizing cost stops when the item is in the location and

condition necessary for it to be capable of operating in a way
intended by management

1) proportional approach
ACC DEP at the date of revaluation is RESTATED
PROPORTIONARELY with change in GROSS CARRYING AMOUNT
of asset
asset after revaluation = revalued amount

Measurement of Cost
COST cash price equivalent at recognition date
Payment deferred beyond normal credit terms?
Interest expense recognized over period of credit
Exchange of Non-monetary assets
Cost is measured at fair value UNLESS:
1. exchange transaction lacks commercial substance
2. FV of asset given up or received cannot be measured
Not measured at FV? Cost measured at carrying amount
of asset given up
COMMERCIAL SUBSTANCE
considering extent of change in future cash flows due
to transaction
exists when:
1. configuration of asset received is different
from asset transferred
2. entity-specific value of operations affected
changes*
3. difference in #1 and #2 is SIGNIFICANT
*should reflect post-tax cash flows
FAIR VALUE is reliably measured if
a. variability in the range of reasonable fair
value measurements is NOT significant
b. probabilities of various estimates within the
range can be reasonably assessed and used when measuring
fair value
Cost of PPE held under finance lease IAS 17
Carrying amount of PPE may be reduced by government
grant (IAS 20)

Subsequent Measurement
choose between cost model and revaluation model
Cost Model
Cost LESS Acc Dep and Acc Impairment Loss

After initial recognition measure reliably at REVALUED

AMOUNT
REVALUED AMOUNT FV at the date of revaluation LESS Acc
Dep and Acc Impairment Loss

2) elimination approach
ACC DEP is eliminated against GROSS CARRYING
AMOUNT of asset
Net amount restated to revalued amount of asset
REVALUATION made at sufficient regularity
to ensure carrying amount does not differ
materially from the year-end FV
Frequency of Revaluation
depends upon changes in FV of PPE
changes are
significant and volatile ANNUAL
NOT every 3-5 years
REVALUATION OF ALL ITEMS IN CLASS
when an item is revalued, revalue the entire class of
PPE to which it belongs
class grouping of assets of similar nature and use in
an entitys operations
items within a class are revalued simultaneously
WHY? to avoid selective revaluation
to avoid reporting a mixture of costs and values
at different dates
e.g.
land
machinery
ships
aircraft
motor vehicles
furniture and fixtures
office equipment
bearer plants
REVALUATION SURPLUS aka revaluation increment
= FV (or depreciated replacement cost) carrying amount of PPE
Increase in value CR Revaluation Surplus in OCI
reversal of a revaluation decrease of the same asset
previously recognized as an expense? P&L
Decrease in value P&L

reversal of a revaluation increase of the same asset

previously recognized as an expense? decrease Revaluation
Surplus in OCI
DISPOSAL OF REVALUED ASSET revaluation surplus
transferred to RE
The transfer to RE is not made through P&L
TAX EFFECT OF REVALUATION IAS 12

Depreciation
Each item of PPE depreciated separately
Each part of an item if possible, depreciate separately
Significant parts of the same item have the same useful
life and depreciation method? GROUP TOGETHER
Remainder parts not significant depreciate separately
DEPRECIATION
charged to P&L
unless included in carrying amount of another asset
(e.g. as cost of conversion)
allocated on a systematic basis over useful life of asset
Residual value, Useful life, Depreciation method reviewed
annually at reporting date
Changes - Change in Accounting Estimate
When residual value > carrying amount, DEPRECIATION = 0
until residual value < carrying amount
Depreciation begins when the asset is available for use.
Depreciation stops when (whichever is earlier):
asset is classified as held for sale
asset is derecognized
Future economic benefits consumed through
1. usage
assessed through expected capacity or physical output

2. physical wear and tear

depends on operational factors
(number of shits used, care, maintenance)

3. obsolescence (technical, commercial)

changes/improvements in production
change in market demand for product

4. legal limits
expiry dates of related lease

Useful life may be shorter than economic life

JUDGMENT is used in determining useful life
LAND AND BUILDING
separable assets
Building: limited useful life, depreciated
Land: unlimited useful life, not depreciated
unless it has limited useful life
Cost of site dismantlement, removal, and restoration
related to Land depreciated over period of benefits obtained
by incurring said costs

Depreciation Method
reflects the pattern in which future economic benefits are
expected to be consumed
reviewed at least annually at reporting date
Change Change in Accounting Estimate
DEPRECIATION METHODS
1. STRAIGHT LINE constant charge over the useful life
2. DIMINISHING BALANCE decreasing charge over the useful life
3. UNITS OF PRODUCTION charge based on the expected use or
output
Applied consistently unless there is a change in the expected
pattern of consumption of those future economic benefits

Impairment
(a) impairment of PPE IAS 36
(b) derecognition of PPE retired or disposed IAS 16
(c) Compensation from third parties for PPE that were
impaired, lost or given up shall be included in P&L when
the compensation becomes receivable.
(d) cost of PPE restored, purchased, constructed as
replacements IAS 16

Derecognition
Derecognize PPE when:
1. for disposal
2. no future economic benefits are expected to from
use or disposal
Gain/loss from derecognition P&L
Difference between net disposal proceeds and carrying
amount
PPE held for rental to others ceased to be rented and
becomes held for sale transferred to inventory at carrying
amount
Date of disposal = date recipient obtains control of item
Carrying amount of replacement parts derecognized
regardless of whether depreciated separately
Carrying amount not determined? Cost of replacement