IAS 16 PROPERTY, PLANT & EQUIPMENT

BY

Adeel Saleem
PROPERTY, PLANT & EQUIPMENT

Are tangible items 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.
SCOPE

• Para 2 requires the standard to be applied in accounting for property, plant

& equipment EXCEPT when another standard requires or permits a
different accounting treatment
• Henceforth, the standard doesn’t apply to
 property, plant & equipment classified as held for sale in accordance
with IFRS 5 Non-Current Assets Held For Sale And Discontinued
Operations;
 biological assets related to agriculture activity accounted for in
accordance with IAS 41 Agriculture;
 the recognition and measurement of exploration and evaluation
assets dealt with in accordance with IFRS 6 Exploration for and
Evaluation of Mineral Resources
 mineral rights and mineral reserves such as oil, natural gas and
similar non-generative resources
  Property classified as an investment property in accordance with
IAS 40 Investment Property, unless it is not yet eligible to be
recognised as an investment property

However, the standard is applicable to assets used to develop or

maintain the above assets
 PROPERTY, PLANT & EQUIPMENT

Recognition and Depreciation & Asset Exchange

Measurement Impairment Transactions

Derecognition
Measurement After
Recognition
Recognition Disposal of
Criteria
Depreciable Assets at Cost
Amount
Cost Model Disposal of
Methods Revalued
Initial Assets
Measurement Revaluation
Model Impairment
RECOGNITION CRITERIA

Recognition criteria laid down by IAS 16 in Para 7:

The cost of an item of property, plant and equipment shall be recognised

as an asset if, and only if:

 it is probable that future economic benefits associated with the item

will flow to the entity; and

 the cost of the item can be measured reliably.

Accordingly following conclusions can be drawn:

 No unit of measure for recognition is prescribed. Hence, in applying the

recognition criteria, entity will apply judgement based on specific
circumstances (for example for stores and spares considering whether to
apply the criteria to individual item or to the aggregate of such items)

 As required by the criteria, economic benefits associated with the asset must
flow to the entity in future for it to be recognised. In pursuant to this the
standard provides that the entity may decide to recognize only those items as
PPE which it expects will provide economic benefit for more than one
accounting period. Accordingly, spare parts or day to day servicing of an item
are recognised as an expense unless spare parts constitutes the major part of
the asset. Likewise, major inspections for faults say in aircrafts may be
capitalised in the carrying amount as it increases the useful live of the asset
the benefit of which will be available for more than one period.

 It may be possible, economic benefit associated with the asset may not
directly flow from the asset, but enable an entity to derive economic benefits
from related assets in excess of what could be derived has those items not
been acquired. Say, a plant installed to treat harmful residue of production
process may not generate any economic benefit from its own self but allows
the entity to derive benefits from other assets.
 Legal ownership of an item of PPE is not necessary, as long as the
economic benefits flowing form it are available to the entity for example an
item held under finance lease is treated as belonging to the user of the item.
 Recognition principle can be applied at any time over the life of the item of
PPE when expenditure on it is incurred; it is not applied only on the initial
acquisition or construction of the item
INITIAL MEASUREMENT
An item of property, plant and equipment that qualifies for recognition as an asset shall
be measured at its cost.

ELEMENTS OF COST
PURCHASE PRICE COSTS OF
DISMANTLING &
DIRECTLY ATTRIBUTABLE REMOVING
Cash price COSTS
equivalent at the the initial estimate of such
• costs of employee benefits (as defined in costs, the obligation for
recognition date.
Including IAS 19 Employee Benefits) arising directly which an entity incurs;
from the construction or acquisition of the
• import duties • either when the item is
item of property, plant and equipment;
• non-refundable • costs of site preparation; acquired; or
purchase taxes • initial delivery and handling costs; • as a consequence of
net off trade • installation and assembly costs; having used the item
discounts and rebate • costs of testing whether the asset is during a particular period
functioning properly, after deducting the for purposes other than to
net proceeds from selling any items produce inventories during
produced while bringing the asset to that that period.
location and condition (such as samples
produced when testing equipment); and
• professional fees
 MEASUREMENT AFTER RECOGNITION

COST MODEL REVALUATION MODEL

 RECOGNITION AFTER MEASUREMENT

COST MODEL

After recognition as an asset, an item of property, plant

and equipment shall be carried at its cost less any
accumulated depreciation and any accumulated
impairment losses
 RECOGNITION AFTER MEASUREMENT

REVALUATION MODEL
An item of PPE whose FAIR VALUE CAN BE MEASURED
RELIABLY shall be carried at a revalued amount
 The adoption of revaluation model represents CHANGE IN
ACCOUNTING POLICY and should be adopted when this will result in
more relevant or reliable information about the enterprise's financial
position, performance or cash flows
 Revaluation model requires application to ENTIRE class of PPE to
which the asset belongs
 Revaluations shall be made with sufficient REGULARITY to ensure that
the carrying amount does not differ materially from that which would be
determined using fair value at the balance sheet date.
 Increase in carrying amount of PPE is credited directly to EQUITY
under the heading SURPLUS ON REVALUATION
 Decrease in revaluation is recognised directly in PROFIT AND LOSS or
reversed from the SURPLUS ON REVALUATION
 DEPRECIATION & IMPAIRMENT

DEPRECIATION

 Each part of an item of PPE with a cost that is significant in

relation to the total cost of the item shall be depreciated
separately.

 The depreciation charge for each period shall be recognised in

profit or loss unless it is included in the carrying amount of
another asset.
 DEPRECIATION & IMPAIRMENT

DEPRECIABLE AMOUNT

 The depreciable amount of an asset shall be allocated on a SYSTEMATIC

BASIS over its useful life.

 USEFUL LIFE is evaluated on the basis of

- Expected usage
- Physical wear and tear
- technical and commercial obsolescence
- legal and similar limits

 The residual value and the useful life of an asset shall be REVIEWED AT
LEAST AT EACH FINANCIAL YEAR-END and, if expectations differ from
previous estimates, the change(s) shall be accounted for as a change in an
accounting estimate in accordance with IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors.
 DEPRECIATION & IMPAIRMENT

DEPRECIATION METHOD

 The depreciation method used shall reflect the PATTERN in which the asset’s
FUTURE ECONOMIC BENEFITS are expected to be consumed by the entity.

 The depreciation method applied to an asset shall be REVIEWED AT LEAST

AT EACH FINANCIAL YEAR-END and, if there has been a significant change
in the expected pattern of consumption of the future economic benefits
embodied in the asset, the method shall be changed to reflect the changed
pattern. Such a change shall be accounted for as a change in an accounting
estimate in accordance with IAS 8.
 DEPRECIATION & IMPAIRMENT

IMPAIRMENT

 An IMPAIRMENT LOSS is the amount by which the carrying amount of an

asset exceeds its recoverable amount
 An entity shall assess at EACH REPORTING DATE whether there is any
indication that an asset may be impaired. If any such indication exists, the
entity shall estimate the recoverable amount of the asset.
 DEPRECIATION & IMPAIRMENT

INDICATORS OF IMPAIRMENT

EXTERNAL INDICATORS:
 decline in market value
 significant changes with an adverse effect in the technological,
market, economic or legal environment
 Increase in market interest rates used to calculate an asset’s value in
use
 the carrying amount of the net assets of the entity is more than its
market capitalisation.

INTERNAL INDICATORS
 evidence of obsolescence or physical damage of an asset.
 significant changes for example, asset becoming idle, plans to
discontinue or restructure the operation to which an asset belongs,
plans to dispose of an asset before the previously expected date, and
reassessing the useful life of an asset as finite rather than indefinite.
 economic performance of an asset is, or will be, worse than expected.
 ASSET EXCHANGE TRANSACTION

ASSET EXCHANGE TRANSACTION

In case of asset exchange transactions, the cost of such an item of

property, plant and equipment is measured at FAIR VALUE unless
 the exchange transaction lacks commercial substance, or

 the fair value of neither the asset received nor the asset given up is
reliably measurable.

The acquired item is measured in this way even if an entity cannot

immediately derecognise the asset given up.
 DERECOGNITION

DERECOGNITION

DISPOSAL OF ASSET AT COST

The carrying amount of an item of property, plant and equipment shall be

derecognised:

 on disposal; or
 when no future economic benefits are expected from its use or disposal.

 The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognised.

 Gains shall not be classified as revenue.

 DERECOGNITION

DISPOSAL AT REVALUED AMOUNT

 The revaluation surplus included in equity in respect of an item of

property, plant and equipment may be transferred directly to retained
earnings when the asset is derecognised.