IAS 16 Property, Plant and Equipment
IAS 16 Property, Plant and Equipment
IAS 16 Property, Plant and Equipment
EXAMPLE 16A
Complete the following table by stating whether the items listed below can be recognised as
property, plant and equipment and reason if they cannot be so recognised there for:
Items Y/N Reason
Small tools and spare parts
Standby generator expected to be used for 7 years
An office building.
A trademark
An office printer.
A plot of land held for resale
A factory including building and machineries.
A bus for pick-and-drop of staff members.
A generator given to another company on rent
Machinery under the custody of a bank as security,
which the bank has refused to release to the entity
because the seller did not pay back the loan.
Page 1 of 18 (kashifadeel.com)
IAS 16 Summary Notes
INITIAL MEASUREMENT
Page 2 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16B
B Co started construction on a building for its own use on 1 April 2007 and incurred the following
costs:
$000
Purchase price of land 250,000
Stamp duty 5,000
Legal fees (registry cost) 10,000
Site preparation and clearance 18,000
Materials 100,000
Labour (1 April 2007 to 1 July 2008) 150,000
Architect’s fees 20,000
General overheads 30,000
583,000
Required:
Calculate the cost of the building that will be included in property, plant and equipment.
EXAMPLE 16C
A machine is serviced at an annual cost of $10,000. During the most recent service, it was
decided to replace an important part which would result in faster work and the machine will
produce more units of product per hour. The cost of the replacement part is $20,000.
Page 3 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16D
Consider each case separately in which an entity has acquired a plant in exchange of equipment:
Case A B C
Carrying value of equipment $10,000 $10,000 $10,000
Fair value of equipment $9,700 $9,700 Not available
Fair value of plant $12,000 Not available Not available
Cash Paid (received) $2,500 $(500) $2,500
Pass the journal entries to record the assets acquired and gain or loss on disposal.
Page 4 of 18 (kashifadeel.com)
IAS 16 Summary Notes
DEPRECIATION
IMPORTANT DEFINITIONS
Carrying amount = Cost – accumulated depreciation
Depreciable amount = Cost – residual value
is the systematic allocation of the depreciable amount of an asset over
Depreciation
its useful life.
The residual value of an asset is the estimated amount that an entity
would currently obtain from disposal of the asset, after deducting the
Residual value
estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use
Useful life by an entity; or
(b) the number of production or similar units expected to be obtained
from the asset by an entity.
EXAMPLE 16E
An asset costs $100,000 and can be easily used for ten years. The company intends to use the
asset for six years at which point expected residual value will be $40,000 (at current prices).
Required:
What is the depreciable amount?
What is the amount of depreciation for first year using straight line method?
TIMING
Depreciation must be charged from the date the asset is available for use, i.e. it
is capable of operating in the manner intended by management.
Commencement
of depreciation This may be earlier than the date it is actually brought into use, for example,
when staff need to be trained to use it. Depreciation is continued even if the
asset is idle.
End of The depreciation is no more charged when the asset is derecognized or
depreciation disposed of.
EXAMPLE 16F
A company constructed a building for its own use. The building was completed on 1 July 2008 and
occupied on 1 September 2008. The company used the building for a long time but then due to
expansion in its business it decided on 1 July 2015 it decided to shift in new rented premises. The
company shifted to new premises on 1 August 2015 and disposed of the old building on 31
December 2015.
Required:
When the depreciation charge should be commenced on the building?
When the depreciation charge should be ceased on the building?
Page 5 of 18 (kashifadeel.com)
IAS 16 Summary Notes
CHANGE IN ESTIMATES
DEPRECIATION METHODS
There are various methods of charging depreciation. IAS 16 specifically mentions
three:
Available
Straight line
methods
Reducing balance
Sum of unit (sometimes called machine hour method)
Which The depreciation method used should reflect as fairly as possible the pattern in which
method the asset’s economic benefits are consumed by the entity.
to
choose?
EXAMPLE 16G
On 1 January 2001, Air Limited purchased an asset for $10,000 with nil residual value and is
intended to be used for 10 years. The company uses straight line method.
On 1 January 2003, Air Limited reconsidered the use of its depreciation methods and concluded
that the straight line method is not appropriate for this type of asset instead 25% depreciation on
reducing balance method is appropriate.
Required:
Calculate the depreciation charge for the year 2001, 2002, 2003 and 2004.
Page 6 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16H
On 1 January 2001, Water Limited purchased an asset for $12,000 with estimated residual value
of $2,000 and is intended to be used for 10 years. The company uses straight line method.
In 2003, Water Limited reviewed the useful life and residual value of the asset. It was estimated
that the asset’s remaining useful life is now only 5 years, however, the estimate of residual value
has been increased to $3,000.
Required:
Calculate the depreciation charge for the year 2001, 2002, 2003 and 2004.
Page 7 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16I
Wind Limited purchased a small aircraft that has an expected useful life of 20 years with no
residual value. The aircraft requires substantial overhaul at the end of year 5, 10 and 15.
The aircraft costs $25 million and $5 million of this amount is attributable to the economic benefits
that are restored by the overhauls.
Required:
Calculate the annual depreciation charge for the years 1 to 5, years 6 to 10, years 11- 15 and
years 16 to 20.
Page 8 of 18 (kashifadeel.com)
IAS 16 Summary Notes
SUBSEQUENT MEASUREMENT
RECORDING REVALUATION
JOURNAL ENTRIES
Step 1: Eliminate Accumulated depreciation
Dr. Accumulated depreciation
Cr. Asset / PPE
Step 2: Record gain or loss
Dr. Loss (SPL or OCI)
Cr. Asset / PPE
OR
Dr. Asset/ PPE
Cr. Gain (SPL or OCI)
EXAMPLE 16J
On 1 January 2001, Z Limited purchased a building for $100,000 with nil residual value and 10
years useful life.
On 31 December 2002, the depreciation for two years has been charged and the accumulated
depreciation balance is $20,000. At this date, the building was revalued to $125,000.
REQUIRED
Pass the journal entry for the revaluation.
Page 9 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16K
On 1 January 2001, Y Limited purchased a building for $100,000 with nil residual value and 10
years useful life.
On 31 December 2002, the depreciation for two years has been charged and the accumulated
depreciation balance is $20,000. At this date, the building was revalued to $62,000.
REQUIRED
Pass the journal entry for the revaluation.
EXAMPLE 16L
On 1 January 2001, M Limited purchased a building for $100,000 with nil residual value and 10
years useful life. On 31 December 2001, the building was revalued to $108,000.
On 31 December 2002, due to slump in the property market, the building was again revalued but
this time the worth was only $55,000.
REQUIRED
Pass the journal entries from 1 January 2001 to 31 December 2002.
EXAMPLE 16M
On 1 January 2001, J Limited purchased a building for $100,000 with nil residual value and 10
years useful life. On 31 December 2001, the building was revalued to $63,000.
On 31 December 2002, due to surge in the property market, the building was again revalued but
this time the worth was $92,000.
REQUIRED
Pass the journal entries from 1 January 2001 to 31 December 2002.
Page 10 of 18 (kashifadeel.com)
IAS 16 Summary Notes
EXAMPLE 16N
Consider each of the following cases separately:
Case 1: a plant had cost of $10,000 (nil residual value) and accumulated depreciation of $2,000
and remaining useful life of 8 years as at 1 January 2011. The plant was revalued to $12,000 on 1
January 2011.
Case 2: a building had cost of $100,000 (nil residual value) and accumulated depreciation of
$20,000 and remaining useful life of 8 years as at 1 January 2011. The building was revalued to
$120,000 on 31 December 2011.
Case 3: a machinery had cost of $50,000 (nil residual value) and accumulated depreciation of
$10,000 and remaining useful life of 5 years as at 1 January 2011. The machinery was revalued to
$54,000 on 30 June 2011.
The straight line method is to be used in each case. The company does not transfer any extra
depreciation to realised profits.
Required:
Calculate the depreciation charge for the year 2011 and revaluation surplus arising in each case.
EXAMPLE 16O
A company revalued its buildings at the start of the year to $6 million. The property cost was $4
million and it was bought 10 years ago. Its total useful life of 50 years is unchanged. The company
policy is to make an annual transfer of realised amounts to retained earnings.
Required:
Show the effects of the above on the financial statements for the year.
Page 11 of 18 (kashifadeel.com)
IAS 16 Summary Notes
DISPOSAL
Gain or loss The gain or loss on disposal of an asset is
= net sale proceeds – carrying amount
EXAMPLE 16P
A revalued asset with a carrying amount of $70,000 (after deducting accumulated depreciation of
$30,000) was sold for $95,000. There is a $40,000 revaluation surplus relating to this asset.
Required:
Pass the journal entries on disposal.
Page 12 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16A
Complete the following table by stating whether the items listed below can be recognised as
property, plant and equipment and reason if they cannot be so recognised there for:
Items Y/N Reason
Small tools and spare parts N Immaterial
Standby generator expected to be used for 7 years Y
An office building. Y
A trademark N Intangible asset
An office printer. Y
A plot of land held for resale N Inventory
A factory including building and machineries. Y
A bus for pick-and-drop of staff members. Y
A generator given to another company on rent Y
Machinery under the custody of a bank as security, N The future economic benefits
which the bank has refused to release to the entity are not probable.
because the seller did not pay back the loan.
ANSWER 16B
$000
Purchase price of land 250,000
Stamp duty 5,000
Legal fees (registry cost) 10,000
Site preparation and clearance 18,000
Materials $100,000 – 10,000 – 15,000 75,000
Labour (1 April 2007 to 1 July 2008) 150,000 141,000
– 9,000
Architect’s fees 20,000
General overheads (not included) 0
519,000
ANSWER 16C
$10,000 servicing cost is revenue expenditure (repair expense)
$20,000 replacement part enhances future economic benefits and so is capital expenditure
and increases the cost of non-current assets in statement of financial position.
ANSWER 16D
Page 13 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16E
Depreciable amount = $100,000 – 40,000 = $60,000
Depreciation = $60,000 / 6 years = $10,000
ANSWER 16F
Commencement of depreciation: 1 July 2008
Cessation of depreciation: 31 December 2015
ANSWER 16G
Year Calculation $
2001 $10,000 / 10 years 1,000
2002 $9,000 / 9 years 1,000
2003 $10,000 – 1,000 – 1,000 = $8,000 x 25% 2,000
2004 $8,000 – 2,000 = $6,000 x 25% 1,500
ANSWER 16H
Year Calculation $
2001 $12,000 – 2,000 = $10,000 / 10 years 1,000
2002 Same as above 1,000
2003 $12,000 – 1,000 – 1,000 = $10,000 - $3,000 = $7,000 / 1,400
5 years
2004 Same as above 1,400
Page 14 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16I
ANSWER 16J
ANSWER 16K
Page 15 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16L
ANSWER 16M
Page 16 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16N
Case 1:
Revaluation surplus $12,000 – [$10,000 – 2,000] = $4,000
Depreciation $12,000 / 8 years = $1,500
Case 2:
Depreciation $80,000 / 8 years = $10,000
Revaluation surplus $120,000 – [$100,000 – 20,000 – 10,000] = $50,000
Case 3:
Depreciation up to June 30, 2011 $40,000 / 5 years x 6/12 months = $4,000
Revaluation $54,000 – [$50,000 – 10,000 – 4,000] = $18,000
Depreciation remaining year $54,000 / 4.5 years x 6/12 months = $6,000
Total depreciation for the year $4,000 + $6,000 = $10,000
ANSWER 16O
Equity
Retained earnings XXX
Revaluation surplus (SOCE) 2,730,000
Page 17 of 18 (kashifadeel.com)
IAS 16 Summary Notes
ANSWER 16P
Page 18 of 18 (kashifadeel.com)