Ias 16

IAS 16 Property, plant and equipment
An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected flow to the entity.
Property, plant and equipment 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 during more than one period.
-
Initial recognition:
PPE should initially be recognised in an entity's statement of financial position at cost.
Cost is the amount of cash and cash equivalents paid to acquire the asset at the time of its
acquisition or construction PLUS the fair value of any other consideration given.
Elements of Cost: Cost can include:
Purchase price less any trade discount (not prompt payment discount) or rebate
Import duties and non-refundable purchase taxes
Directly attributable costs of bringing the asset to working condition for its intended use.
Examples:
Where these costs are incurred over a
Costs of site preparation
period of time, the period for which the
Initial delivery and handling costs
costs can be included in the cost of PPE
Installation and assembly costs
ends when the asset is ready for use,
even if not brought into use.
Professional fees such as legal fees, architects fees
Initial costs of testing that asset is functioning correctly
(after deducting the net proceeds from selling any items produced)
The initial estimate of dismantling and removing the item and restoring the site where it is
located if the entity is obliged to do so (to the extent it is recognised as a provision per IAS 37).
Gains from the expected disposal of assets should not be taken into account in measuring a
provision.
In case of a land, if initial estimation of restoration cost is capitalised then this capitalised
restoration cost shall be depreciated.
Borrowing costs incurred in the construction of qualifying assets if in accordance with IAS 23
Borrowing costs.
Any abnormal costs incurred by the entity, for example those arising from design errors,
wastage or industrial disputes, should be expensed as they are incurred and do not form
part of the capitalised cost of the PPE asset.
Estimated economic life and residual value of asset should be reviewed at the end of
each reporting period. If either changes significantly, the change should be accounted for
over the useful economic life remaining.
The residual value of an asset is the 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 the age and in the condition expected at the end of its useful life. [IAS
16: 6]
Subsequent expenditure only to be capitalised if enhances the life of the asset, or improves
quality or quantity of output, or reduces the cost. If not capitalised then recognise as
expense in I/S.
Examples of subsequent expenditure to be capitalised can include:

Modification of an item of plant to extend its useful life
Upgrade of machine parts to improve the quality of output
Adoption of a new production process, leading to large reductions in operating costs
Where an asset is made up of many distinct (i.e. significant) parts (examples: aircraft, ship),
these should be separately identified and depreciated.
Major inspections or overhauls should be recognised as part of (i.e. increase) carrying amount
of the item of PPE, assuming that this meets the recognition criteria.
An example is where an aircraft is required to undergo a major inspection after so many
flying hours. Without the inspection the aircraft would not be permitted to continue flying.
As a separate component of PPE, the capitalised overhaul cost shall be depreciated over
the period to next overhaul.
Measurement after initial recognition: After initially recognising an item of property, plant and
equipment in its statement of financial position at cost, an entity has two choices about how it
accounts for that item going forwards.
Cost model:
Carrying asset at cost less accumulated
depreciation and impairment losses
Revaluation model:
Carrying asset at revalued amount less
subsequent accumulated depreciation and
impairment losses
Revaluation model:
An entity can, if it chooses, revalue assets to their fair value (only if the fair value of the item
can be measured reliably)
For land and buildings this is normally determined based on their market values as determined
by an appraisal undertaken by professionally qualified valuers.
If this model is applied to one asset, it must also be applied to all other assets in the same
class.
Note that when the revaluation model is used PPE must still be depreciated. The revalued
amount is depreciated over the asset's remaining useful life.
For a revalued asset, IAS 16 allows (and encourage) a reserve transfer in the statement of
changes in equity (from revaluation reserve to retained earnings) of the 'excess'
depreciation because of an upward revaluation.
Methods of depreciation:
Straight line method
Reducing balance method
Machine hour method

Sum-of-the-digits method
Sum of the years of assets expected life = N X (N+1)/2 where N is the

assets expected life
Cost of a lorry was $15,000 and expected to last for five years. No scrap
value.
Sum of the years of assets expected life = N X (N+1)/2 = 5 X (5+1)/2 = 15
Depreciation in Year
1
2
3
4
$15,000
$15,000
$15,000
$15,000
X
X
X
X
5
4
3
2
/15
/15
/15
/15
= $5,000
=$4,000
= $3,000
= $2,000
Derecognition: Property, plant and equipment shall be derecognised (i.e. removed from the
statement of financial position) either:
On disposal; or
When no future economic benefits are expected from its use or disposal.
The gain or loss arising from de-recognition is included in profit or loss.

This gain or loss is calculated by comparing the sale proceeds to the asset's carrying amount.
The gain or loss is calculated in the same way, regardless of whether the asset is revalued or
not.
Any gain should not be classified as part of the entity's revenue.
If on disposal of a revalued asset there remains a balance on the revaluation surplus relating to the
asset, this balance should be transferred to retained earnings.

Ias 16

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Ias 16

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IAS 16 Property, plant and equipment

Examples of subsequent expenditure to be capitalised can include:

Machine hour method

Sum of the years of assets expected life = N X (N+1)/2 where N is the

The gain or loss arising from de-recognition is included in profit or loss.

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