INTERNATIONAL ACCOUNTING

STANDARD 16
(IAS 16)

PRESENTATION BY:

Timothy Ayamga
 PROPERTY, PLANT AND EQUIPMENT
(IAS 16)

 Objective and scope

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

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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 (IFRS 5), Agricultural biological assets (IAS 41),
non-renewable natural resource rights and reserves (IFRS 6) and
investment property (IAS 40).
These are all treated under separate standards

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IAS 16
SOME USEFUL DEFINITIONS

Definition of PPE
“Tangible resources 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”

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IAS 16
SOME USEFUL DEFINITIONS

• Carrying amount
• It is the amount at which an asset is recognised after
deducting any accumulated depreciation and any
accumulated impairment losses

• Depreciation
• It is the systematic allocation of the depreciable
amount of an asset over its useful life.

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IAS 16
MEASUREMENT OF INITIAL COST OF PPE

Cost elements to include:

 Purchase price after trade discounts but before settlement discounts, and
includes transport and handling costs and non-refundable tax such as
import duties, etc

 If self-constructed, labour costs of own employees (but abnormal costs

such as wastage and errors are excluded).

 Please note: staff training costs relating to the use of PPE must written off
to the Profit or Loss immediately– these must not be capitalized.
 Also, it is not permissible to add a profit margin to self-constructed assets.

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IAS 16
MEASUREMENT OF INITIAL COST OF PPE

 Includes site-preparation and installation costs and professional

fees (such as legal and architect’s fees).

 Also included can be borrowing costs during construction

phase only (for self-constructed qualifying assets)
 Include removing and dismantling and restoration costs which
qualify as a liability (where a present obligation exists) under
IAS 37.

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IAS 16
MEASUREMENT OF INITIAL COST OF PPE
Cost elements to exclude:
1. Costs after asset is in place and ready for use as
management intended.
2. Borrowing cost if the asset is not a qualifying asset
3. Costs to open a new facility, introduce a product,
move to new location
4. General and administrative overhead type costs

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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.

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IAS 16
ILLUSTRATION 1
Situation-equipment:
• Price list GH₵ 100,000 cost,
• 7% sales tax
• GH₵ 10,000 to transport to plant,
• GH₵3,000 labour, GH₵2,000 materials to calibrate machine.
• GH₵4,000 general administrative cost
• GH₵ 11,000 to consultant for services related to choice of
machine and calibration

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 IAS 16 – SOLUTION 1
Equipment cost: GH₵
Invoice price 100,000
Sales tax: 7,000
Transportation 10,000
Material and Labour/Calibration 5,000
Professional fees 11,000
133,000

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 IAS 16 - ILLUSTRATION 2
Construction of LBK block began on 1st April 2017. The following costs were incurred
on the construction:
GH¢000
– Freehold land 4,500
– Architect fees 620
– Site preparation 1,650
– Materials 7,800
– Direct labour costs 11,200
– Legal fees 2,400
– General overheads 940
The firm secured a loan of GH¢25m on 1st April 2017 to finance the construction of the
block (which meets the definition of a qualifying asset per IAS 23). The loan carried an
interest rate of 8% per annum and is repayable on 1st April 2018.
The amount of the interest on the loan for the current year stands at GH₵1,500
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IAS 16
ILLUSTRATION 2
The block was completed on 1st January 2018 and brought into use following
its grand opening on the 1st April 2018.

Required:
Calculate the amount to be included as property, plant and equipment in
respect of the new store for the year ended 31st March 2018 in accordance
with IAS 16.

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IAS 16
SOLUTION 2

GH¢000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
Borrowing cost 1,500
29,670

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IAS 16
MEASUREMENT AFTER RECOGNITION
Subsequent Measurement
Choice of two models:
1. Cost model
2. Revaluation model

Separate decision for each class of PP&E assets. Examples of a

class: land, office equipment, machinery, buildings

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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
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 asset’s
disposal, if asset was as old and in same condition as expected at
end of its useful life.

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IAS 16
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
 Useful life – consider capacity, wear and tear, technology
changes, changes in product demand, contractual or legal limits

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IAS 16
COST MODEL (CM)

• Impairment
• Decrease in service potential of an asset as a consequence of an
irregular event or catastrophe, resulting in its recoverable amount being
less than its carrying amount.

• Impairment of an Asset
•  An asset is impaired if the fair value of the asset is lower than the
carrying amount (book value) of the asset.
• If an asset is impaired, the carrying amount is reduced to the fair value
and the difference between fair value and carrying amount is recognized
as an impairment loss

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IAS 16
REVALUATION MODEL (RM)
RM accounting –
What happens if the carrying amount of an asset increases?

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IAS 16
REVALUATION MODEL (RM)
RM accounting –
What happens if the carrying amount of an asset decrease ?

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IAS 16
REVALUATION MODEL (RM)
ILLUSTRATION 1

Facts:
On January 1, Year 1, LBC Limited acquires a building at a cost of
GH₵ 10,000. 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 GH₵ 9,000.

Required:
Prepare the entries required on December 31, Year 3

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IAS 16
REVALUATION MODEL (RM)

At December, 31 of Year 3
December, 31-Year 3
DR Building with GH₵ 200
GH₵
CR Revaluation Surplus GH₵ 200
Building 10,000
Accumulated Depreciation
New depreciation rate is needed as of
(10,000/25 yrs) x 3yrs January 1, Year 4 end:
1,200 GH₵9,000 carrying amount = GH₵410 per year
Carrying Amount 8,800 25 – 3 years

Revaluation Amount 9,000

Revaluation Gain 200

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IAS 16
DERECOGNITION

When disposed off or when no future economic benefits can be

derived from the use of the assets:

 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 REQUIREMENTS

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 REQUIREMENTS
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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INVESTMENT PROPERTY
IAS 40
 IAS 40 - OVERVIEW
 Objective and scope
 Recognition
 Measurement at recognition
 Measurement after recognition
 Transfers
 Derecognition
 Disclosures

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 IAS 40- OBJECTIVE AND SCOPE
 IAS 40 identifies what an investment property is,
 how it differs from property, plant and equipment
(owner-occupied property); and
 what recognition, measurement and disclosure
standards apply to investment properties.

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 IAS 40- OBJECTIVE AND SCOPE
Investment property is defined as:
property held to earn rentals or for capital appreciation or both,
rather than for
(a) use in the production or supply of goods or services or for
administrative purposes; or
(b) sale in the ordinary course of business

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 IAS 40- RECOGNITION CRITERIA
Investment property is recognized as an asset when::
1. probable that future economic benefits associated
with the item will flow to the entity, and
2. the cost can be measured reliably.

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 IAS 40- INITIAL RECOGNITION
• Investment property is recognized initially at cost –
 applying the cost model of IAS 16 Property, Plant and
Equipment
 – including what is capitalized in cost and the principles for
non-monetary transactions
 Leased investment property is measured according to IAS 17
Leases

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IAS 40– MEASUREMENT AFTER RECOGNITION
 After initial recognition, an entity has a choice of methods to
account for investment property:

Use either
 Fair value model (FVM), or
 Cost model (CM)
 Must apply one model to all of its investment property

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IAS 40– MEASUREMENT AFTER RECOGNITION
FVM example:
Investment property is acquired January 11, 2014, at a cost of
GH₵200,000.
Fair values on:
December 31, 2014 - GH₵ 190,000
December 31, 2015 - GH₵ 198,000
December 31, 2016 - GH₵ 205,000

Required:
Account for how the above transaction should be treated.

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IAS 40– MEASUREMENT AFTER RECOGNITION

FVM example:
Dec.31/2014 – Dr Loss in value or P & L GH₵10,000
Cr Investment property GH₵10,000
Dec.31/2015 Dr Investment property GH₵8,000
Cr Gain in value or P & L GH₵8,000
Dec.31/2016 Dr Investment property GH₵ 7,000
Cr Gain in value or P & L GH₵7,000

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IAS 40– MEASUREMENT AFTER RECOGNITION
Cost model (CM)
 - Applies cost model described in IAS 16
 Assets reported at cost less accumulated depreciation and
accumulated impairment losses
 Depreciation expense recognized each period of the
statement of profit or loss

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IAS 40– TRANSFERS

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 IAS 40– DERECOGNITION
Derecognize investment property
 On disposal – when sold or transferred under a finance
lease, or
 On retirement – when permanently removed from use
and no benefits are expected from its disposal
 Gains and losses on disposal generally recognized in profit
or loss

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 IAS 40–DISCLOSURE REQUIREMENTS
• whether the FVM or the CM is applied
 if FVM, whether and when any operating leases are classified as
investment property
 criteria used to distinguish between owner-occupied investment
property and property held for sale where judgment is needed
 methods and assumptions underlying fair value measurements,
including extent to which market-related evidence is used
 extent to which the fair values were determined by an
experienced, professional, and independent appraiser
 existence of restrictions and contractual obligations related to the
properties
 amounts and specific types of income and expense recognized in
profit or loss

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