 PAS 16

Property, Plant and Equipment

Introduction

PAS 16 prescribes the accounting treatment for property, plant and equipment (PPE). It
addresses the principal issues of recognition of depreciation charges.

PAS 16 applies to all items of PPE except to the following for which other standards apply:

a. Assets classified as held for sale (PFRS 5 Non-current Assets Held for Sale and
Discontinued Operations)

b. Biological assets other than bearer plants (PAS 41 Agriculture). PAS 16 applies to bearer
plants but it does not apply to the produce on bearer plants

c. The recognition and measurement of exploration and evaluation assets (PFRS 6

d. Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources

However, PAS 16 applies to PPE used to develop or maintain the assets described in (b)-(d).
(PAS 16.3)

Property, Plant and Equipment (PPE)

PPE are:

a. Tangible assets (have physical substance);

b. Used in business (used in the production or supply of goods or services, for rental, or for
administrative purposes); and

c. Long-term in nature (expected to be used for more than one period).

Examples of PPE:

a. Land used in business

b. Land held for future plant site

c. Building used in business

d. Equipment used in the production of goods

f. Equipment held for rentals

g. Major spare parts and long-lived stand-by equipment

h. Furniture and fixture

i. Bearer plants

The following are not PPE:

a. Land held for speculation

b. Land held for an undetermined future use

c. Land and/or building classified as investment property under PAS 40 Investment

d. Property held for sale in the ordinary course of business

e. Assets classified as held for sale under PFRS 5

f. Biological assets related to agricultural activity, other than bearer plants

g. Intangible assets

h. Minor spare parts and short-lived stand-by equipment

Recognition

An item of PPE is recognized if:

a. It is probable that future economic benefits associated with the item will flow to the
entity; and

b. The cost of the item can be measured reliably. (PAS 16.7)

Spare parts, stand-by equipment and servicing equipment are recognized as PPE if they meet
the definition of PPE (i.e., they are expected to be used for more than one period); otherwise,
they are classified as inventory. (PAS 16.8)

Safety and environmental equipment are usually recognized as PPE because, although they do
not directly increase the future economic benefits of other existing assets, they are necessary in
obtaining future economic benefits from other assets. For example, a factory may be required
to install safety and environmental equipment by the government; non-compliance may result
to the factory being shut down.

Initial Measurement

An item of PPE is initially measured at cost. Cost comprises the following:

a. Purchase price, including import duties, nonrefundable purchase taxes, less trade
discounts and rebates.

b. Direct costs of bringing the asset to the location and condition necessary for it to be
used in the manner intended by management.

c. Initial estimate of dismantlement, removal and site restoration costs for which the
entity incurs an obligation by acquiring or using the asset other than to produce
inventories.

Examples of directly attributable costs:

a. Cost of employee benefits arising directly form the construction or acquisition of PPE;

b. Costs of site preparation;

c. Initial delivery and handling costs (e.g., freight costs);

d. Installation and assembly costs;

e. Testing costs, net of disposal proceeds of samples generated during testing; and

f. Professional fees. (PAS 16.17)

Examples of costs that are expensed outright:

a. Costs of opening a new facility.

b. Costs of introducing a new product or service (including costs of advertising and

c. Costs of conducting business in a new location or with a new class of customers

d. Administration and other general overhead costs.

Illustration:

Entity A acquires equipment on January 1, 20x1. information on costs is as follows:

Trade discount available 10,000

Freight costs 20,000

Testing costs 30,000

Net disposal proceeds of samples generated

during testing 5,000

Present value of estimated costs of dismantling the

equipment at the end of its useful life 6,209

 The initial cost of the equipment is computed as follows:

Purchase price, net of trade discount (1M-10K) 990,000

Freight costs 20,000

Testing costs 30,000

Net disposal proceeds of samples generated (5,000)

Present value of dismantlement costs 6,209

Initial measurement 1,041,209

Incidental operations

Incidental operations before or during the construction of a PPE are not necessary in bringing
the PPE to the location and condition necessary for it to be capable of operating in the manner
intended by management. Accordingly, income and related expenses of incidental operations
are recognized in profit or loss, and hence do not affect the measurement of cost of a PPE.

For example, a vacant lot may be temporarily used as parking space before or during the
construction of a building. The income and the related expenses from the parking space are
recognized in profit or loss.

Self-constructed assets

“The cost of a self-constructed asset is determined using the same principles as for an acquired
asset”. (PAS 16.22)
Accordingly, the cost of a self-constructed asset excludes internal profits (e.g., savings on self-
construction) and the cost of abnormal amounts of wasted material, labor, or other resources
incurred in self-constructing the asset.

Bearer plants

A bearer plant is a living plant that:

a. Is used in the production or supply of agricultural produce;

b. Is expected to bear produce for more than one period; and

c. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales. (PAS 16.6)

Bearer plants are accounted for similar to self-constructed assets. PAS 16 uses the term
‘construction’ to include activities that are necessary to cultivate the bearer plants before they
are in the location and condition necessary to be capable of operating in the manner intended
by management.

Measurement of cost

Cost is measured at the cash price equivalent at the acquisition date.

If payment is deferred beyond normal credit terms, the difference between the cash price
equivalent and the total payment is recognized as interest over the credit period.

The cost of a PPE acquired through an exchange of non-monetary assets is measured using the
following order of priority:

1. Fair value of the asset given up

2. Fair value of the asset received

3. Carrying amount of the asset given up

If the exchange lacks commercial substance, the PPE acquired is measured at the carrying
amount of the asset given up.

Subsequent expenditures on recognized PPE

Capitalization of costs ceases when the PPE is in the location and condition necessary for it to
be capable of operating in the manner intended by management. Therefore, costs incurred in
using or redeploying a PPE are not capitalized.
The following subsequent expenditures on PPE are recognized as expenses:

a. Costs of day-to-day servicing of a PPE (i.e., repairs and maintenance expenses).

b. Costs incurred while an item capable of operating in the manner intended by

c. Initial operating losses.

d. Costs of relocating or reorganizing part or all of the entity’s operations. (PAS 16.20)

An entity uses the recognition criteria when determining whether subsequent expenditures can
be capitalized. PAS 16 specifically addresses the capitalization of the following subsequent
expenditures:

a. Replacement costs – some PPE have parts that need to be replaced, e.g., the seats in an
aircraft. The cost of replacing a part of an item of PPE is capitalized if the recognition
criteria are met. The carrying amount of the replaced part (old part) is derecognized and
charged as loss, regardless of whether it had been depreciated separately or not. If the
carrying amount of the replaced part cannot be determined, the cost of the
replacement part (new part is used as an indication of what the cost of the replaced part
was at the time it was acquired or constructed.

b. Major inspections – some PPE require regular major inspections as condition for their
continued operation. For example, a cruise ship may not be permitted to continue
sailing without the inspection. Major inspections are accounted for similar to
replacement cost, i.e., the cost of a major inspection is capitalized while the carrying
amount of the previous inspection is derecognized.

Subsequent Measurement

After initial recognition, an entity chooses either the cost model or the revaluation model as its
accounting policy and applies that policy to an entire class of PPE.

Cost model

Under the cost model, a PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

 Cost is “the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction or,
 where applicable, the amount attributed to that asset when initially recognized in
accordance with the specific requirements of other PFRSs”. (PAS 16.6)

Depreciation

 Depreciation is “the systematic allocation of the depreciable amount of an asset over its
useful life”. (PAS 16.6)

 Depreciable amount “the cost of an asset, or other amount substituted for cost, less its
residual value”. (PAS 16.6)

 Residual value 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”. (PAS 16.6)

 Useful life is: “(a) the period over which an asset is expected to be available for use by
an entity; or (b) the number of production or similar units expected to be obtained from
the asset by an entity”. (PAS 16.6)

Each significant part of an item of PPE is depreciated separately. For example, the engines and
airframe of an aircraft are depreciated separately. (PAS 16.44)

Depreciation is recognized as expense (in profit or loss) unless it is included in the cost of
producing another asset. For example, the depreciation of a factory building is included in the
cost of inventories.

Depreciation starts when the asset is available for use, in the manner intended by
management.

Depreciation stops when the asset is:

a. Derecognized (i.e., sold or disposed of);

b. Classified as held for sale under PFRS 5; or

c. Fully depreciated. An asset is fully depreciated when its carrying amount is zero or equal
to its residual value. However, if the residual value decreases below the carrying
amount, the decrease is recognized as an additional depreciation.

 Carrying amount is “the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses”. (PAS 16.6)

Depreciation does not cease when the asset becomes idle or is retired from active service.