IAS 16 Property, Plant and Equipment

IAS 16 Summary Notes
IAS 16 Property, Plant and Equipment
DEFINITION AND RECOGNITION
Property, plant and equipment (PPE) are tangible items that:

(a) are held for use in the production or supply of goods or services, for
Definition
rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.
The cost of an item of PPE shall be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will
Recognition
flow to the entity; and
(b) the cost of the item can be measured reliably.
IMPORTANT The IFRSs are intended to be applied on material items.
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.
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INITIAL MEASUREMENT
The cost of an item of PPE comprises:

(a) its purchase price, including import duties and non-refundable purchase
Initial taxes, after deducting trade discounts and rebates.
Measurement: (b) any costs directly attributable to bringing the asset to the location and
Initial condition necessary for it to be capable of operating in the manner
expenditure intended by management.
(c) the initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located.
Examples of directly attributable costs are:
(a) costs of employee benefits arising directly from the construction or
acquisition of the item of PPE;
Directly
(b) costs of site preparation;
attributable
(c) initial delivery and handling costs;
costs
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly; and
(f) professional fees.
The cost of a self-constructed asset is determined using the same principles as
for an acquired asset. If an entity makes similar assets for sale in the normal
Self- course of business, the cost of the asset is usually the same as the cost of
constructed constructing an asset for sale. However, profit element and abnormal costs
asset should be excluded.
The borrowing costs may be included (see IAS 23 later)

Any subsequent expenditure on PPE should only be capitalised if it results in
increase in total expected economic benefits from the asset. For example,
Subsequent
increase in production, reduction in cost etc.
expenditure
The cost of general repairs should be recognised as expense immediately.
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
The following information is also relevant:

 Material costs were greater than anticipated. On investigation, it was found that materials
costing $10 million had been spoiled and therefore wasted and a further $15 million was
incurred as a result of faulty design work.
 As a result of these problems, work on the building ceased for a fortnight during October
2007 and it is estimated that approximately $9 million of the labour costs relate to this
period.
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.
How this expenditure should be treated?
EXCHANGE OF ASSETS – COST OF ASSET ACQUIRED

Recognise at: The fair value of asset acquired
If fair value of asset The fair value of asset given up + Cash Paid (- received)
acquired is not available
If fair values are not The carrying amount of asset given up + Cash Paid (-received).
available
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.
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?
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?
CHANGE IN DEPRECIATION METHOD

A change from one method of providing depreciation to another method is permissible
When
only on the grounds that the new method will give a fairer presentation of the results
allowed?
and of the financial position.
The change in depreciation method is change in accounting estimate and does not
Nature
constitute change in accounting policy.
The carrying amount should be written off over the remaining useful life, commencing
Treatment
with the period in which the change is made.
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.
REVIEW OF USEFUL LIFE AND RESIDUAL VALUES

Useful life and residual value of PPE should be reviewed at end of each reporting
Requirement period and revised if expectations are significantly different from previous
estimates.
The carrying amount of the asset at the date of revision less any residual value
Treatment
should be depreciated over the revised remaining useful life.
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.
SEPARATE COMPONENTS AND MAJOR OVERHAULS
COMPLEX ASSETS AND SEPARATE COMPONENTS

Some assets are complex assets. These assets contain separate major
ISSUE components within a single asset. For example, an airplane consists of air frame,
engine and interiors (all having different useful life).
TREATMENT Each separate component is depreciated over its respective useful life separately.
INSPECTION OR OVERHAUL COSTS

Routine These costs are generally expensed in the period in which they are incurred.
inspections
and
overhauls
These costs are capitalised if:
Major  These relate to PPE
Inspections  The benefit is expected to last for more than one accounting period.
and
overhauls If above conditions are fulfilled, then these costs are depreciated over their useful
lives.
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.
At start of year 6, the overhaul is done at a cost of $6 million.

The company uses straight line method.
Required:
Calculate the annual depreciation charge for the years 1 to 5, years 6 to 10, years 11- 15 and
years 16 to 20.
SUBSEQUENT MEASUREMENT
IAS 16 allows choice of accounting treatment:

Cost model The PPE are presented at Cost less accumulated depreciation
The PPE are presented at
Revaluation Revalued amount less subsequent accumulated depreciation.
model
Revalued amount is fair value (FV) at the date of revaluation.
CONDITIONS FOR REVALUATION MODEL

If the revaluation model is adopted, the following two conditions need to be fulfilled:
When an item of PPE is revalued, the entire class of assets to which the items
Class wise
belongs must be revalued. For example, if a plant is revalued all the plant and
application
machineries held by entity should be revalued.
After first revaluation, subsequent revaluations muse be made with sufficient
regularity to ensure that the carrying amount does not differ materially from the fair
Sufficient
value at each reporting date.
regularity
Revaluations need not necessarily be made at each year – end.
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)
SPL or OCI – where the gain or loss should be recognised?

Loss SPL
Gain OCI
OCI [up to the balance in revaluation surplus account]
Loss after gain
SPL [Remaining amount]
SPL [up to the amount of loss recognised in previous years]
Gain after loss
OCI [Remaining amount]
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.
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.
DEPRECIATION & DISPOSAL OF REVALUED ASSETS
Depreciation The depreciation is charged on revalued amount.

Incremental The extra depreciation charged on the revalued amount (as compared to cost)
depreciation may be transferred from revaluation surplus to retained earnings (and this is
shown in statement of changes in equity).
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.
DISPOSAL
Gain or loss The gain or loss on disposal of an asset is
= net sale proceeds – carrying amount
The gain or loss is recognised in profit or loss.

Revaluation The revaluation surplus related to the asset disposed of is transferred to
surplus retained earnings.
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.
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
Case A Case B Case C

Dr. Plant $12,000 Dr. Plant $9,200 Dr. Plant $12,500
Dr. Loss $500 Dr. Loss $300 Cr. Cash $2,500
Cr. Cash $2,500 Dr. Cash $500 Cr. Equipment $10,000
Cr.Equipment $10,000 Cr.Equipment $10,000
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
ANSWER 16I
YEAR 1 to 5 (each year) $ million

On aircraft $20m / 20 years 1
On initial estimate of overhaul $5m / 5 years 1
Total 2

On first overhaul $6m / 5 years 1.2
Total 2.2

On second overhaul $8m / 5 years 1.6
Total 2.6

On third overhaul $10m / 5 years 2
Total 3
ANSWER 16J
Date Particulars Dr.$ Cr. $

31.12.02 Accumulated depreciation – building 20,000
Building (cost) 20,000

Gain on revaluation (OCI) 45,000
ANSWER 16K
Date Particulars Dr.$ Cr. $

31.12.02 Accumulated depreciation – building 20,000
Revaluation loss (P&L) 18,000

ANSWER 16L
Date Particulars Dr. $ Cr. $

01.01.01 Building 100,000
Bank 100,000
31.12.01 Depreciation 10,000
Accumulated depreciation 10,000
($100,000 / 10 years) = $10,000
31.12.01 Accumulated depreciation 10,000
Building 10,000
Building 18,000
($108,000 / 9 years) = $12,000
Building 12,000
Loss on revaluation (OCI) 18,000
ANSWER 16M

01.01.01 Building 100,000
Bank 100,000
($100,000 / 10 years) = $10,000
Building 10,000
($63,000 / 9 years) = $7,000
Reversal of revaluation loss (P&L) 27,000
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
Statement of profit or loss and other comprehensive income $

Other comprehensive income
Gain on revaluation W2 2,800,000
Statement of changes in equity Share Revaluation Retained

Total
Capital surplus earnings
$ $ $ $
Balance as at beginning XXX 0 XXX XXX
Total comprehensive income 2,800,000 XXX XXX
Incremental depreciation W4 (70,000) 70,000 XXX
Balance as at end XXX 2,730,000 XXX XXX
Statement of financial position $

Non-current assets
Property, plant and equipment W5 5,850,000
Equity
Retained earnings XXX
Revaluation surplus (SOCE) 2,730,000
W1 Accumulated depreciation at start $4,000,000 / 50 years = $80,000 x 10 years = $800,000

W2 Gain on revaluation = $6,000,000 – [4,000,000 – 800,000] = $2,800,000
W3 Depreciation for the year $6,000,000 / 40 years (remaining life) = $150,000
W4 Extra depreciation = $150,000 – 80,000 = $70,000
W5 Property, plant and equipment $6,000,000 – 150,000 = $5,850,000
ANSWER 16P

XXX Accumulated depreciation 30,000
Cash 95,000
Asset 100,000
Gain on disposal (Other income) 25,000
XXX Revaluation surplus 40,000
Retained earnings 40,000
Dated: 18 August 2016

IAS 16 Property, Plant and Equipment

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IAS 16 Summary Notes

IAS 16 Property, Plant and Equipment

DEFINITION AND RECOGNITION

Property, plant and equipment (PPE) are tangible items that:

The cost of an item of PPE comprises:

The borrowing costs may be included (see IAS 23 later)

The following information is also relevant:

How this expenditure should be treated?

EXCHANGE OF ASSETS – COST OF ASSET ACQUIRED

CHANGE IN DEPRECIATION METHOD

REVIEW OF USEFUL LIFE AND RESIDUAL VALUES

SEPARATE COMPONENTS AND MAJOR OVERHAULS

COMPLEX ASSETS AND SEPARATE COMPONENTS

INSPECTION OR OVERHAUL COSTS

At start of year 6, the overhaul is done at a cost of $6 million.

The company uses straight line method.

IAS 16 allows choice of accounting treatment:

CONDITIONS FOR REVALUATION MODEL

SPL or OCI – where the gain or loss should be recognised?

DEPRECIATION & DISPOSAL OF REVALUED ASSETS

Depreciation The depreciation is charged on revalued amount.

The gain or loss is recognised in profit or loss.

Case A Case B Case C

YEAR 1 to 5 (each year) $ million

YEAR 6 to 10 (each year) $ million

YEAR 11 to 15 (each year) $ million

YEAR 16 to 20 (each year) $ million

Date Particulars Dr.$ Cr. $

Building (cost) 45,000

Date Particulars Dr.$ Cr. $

Revaluation loss (P&L) 18,000

Date Particulars Dr. $ Cr. $

Date Particulars Dr. $ Cr. $

Statement of profit or loss and other comprehensive income $

Statement of changes in equity Share Revaluation Retained

Statement of financial position $

W1 Accumulated depreciation at start $4,000,000 / 50 years = $80,000 x 10 years = $800,000

Date Particulars Dr. $ Cr. $

Dated: 18 August 2016

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