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    Accounting For PPE

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    Maureen Derial Panta
    IAS 16 outlines the accounting treatment for property, plant, and equipment. It requires these assets to be initially measured at cost and subsequently carried either using a cost model where the asset is carried at cost less depreciation, or a revaluation model where the asset is carried at fair value less depreciation. The standard also provides guidance on recognition, measurement, depreciation, and impairment of property, plant, and equipment.

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    Accounting For PPE

    Uploaded by

    Maureen Derial Panta
    109 views4 pages
    IAS 16 outlines the accounting treatment for property, plant, and equipment. It requires these assets to be initially measured at cost and subsequently carried either using a cost model where the asset is carried at cost less depreciation, or a revaluation model where the asset is carried at fair value less depreciation. The standard also provides guidance on recognition, measurement, depreciation, and impairment of property, plant, and equipment.

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    Accounting for PPE

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    Accounting for PPE

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    IAS 16 outlines the accounting treatment for property, plant, and equipment. It requires these assets to be initially measured at cost and subsequently carried either using a cost model where the asset is carried at cost less depreciation, or a revaluation model where the asset is carried at fair value less depreciation. The standard also provides guidance on recognition, measurement, depreciation, and impairment of property, plant, and equipment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    109 views4 pages

    Accounting For PPE

    Uploaded by

    Maureen Derial Panta
    IAS 16 outlines the accounting treatment for property, plant, and equipment. It requires these assets to be initially measured at cost and subsequently carried either using a cost model where the asset is carried at cost less depreciation, or a revaluation model where the asset is carried at fair value less depreciation. The standard also provides guidance on recognition, measurement, depreciation, and impairment of property, plant, and equipment.

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    IAS 16 PROPERTY PLANT AND EQUIPMENT

    Overview
    IAS 16 Property, Plant and Equipment outlines the accounting treatment for most
    types of property, plant and equipment. Property, plant and equipment is initially
    measured at its cost, subsequently measured either using a cost or revaluation
    model, or depreciated so that its depreciable amount is allocated on a systematic
    basis over its useful life.
    Objective of IAS 16
    The objective of IAS 16 is to prescribe the accounting treatment for property, plant,
    and equipment. The principal issues are the recognition of assets, the determination
    of their carrying amounts, and the depreciation charges and impairment losses to
    be recognised in relation to them.
    Scope
    IAS 16 applies to the accounting for property, plant and equipment, except where
    another standard requires or permits differing accounting treatments, for example:

    assets classified as held for sale in accordance with IFRS 5 Non-current Assets
    Held for Sale and Discontinued Operations
    biological assets related to agricultural activity accounted for under IAS 41
    Agriculture
    exploration and evaluation assets recognised in accordance with IFRS 6
    Exploration for and Evaluation of Mineral Resources
    mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources.

    Recognition
    Items of property, plant, and equipment should be recognised as assets when it is
    probable that: [IAS 16.7]

    it is probable that the future economic benefits associated with the asset will
    flow to the entity, and
    the cost of the asset can be measured reliably.

    This recognition principle is applied to all property, plant, and equipment costs at
    the time they are incurred. These costs include costs incurred initially to acquire or
    construct an item of property, plant and equipment and costs incurred subsequently
    to add to, replace part of, or service it.
    IAS 16 does not prescribe the unit of measure for recognition what constitutes an
    item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost
    model is used (see below) each part of an item of property, plant, and equipment
    with a cost that is significant in relation to the total cost of the item must be
    depreciated separately. [IAS 16.43]
    IAS 16 recognises that parts of some items of property, plant, and equipment may
    require replacement at regular intervals. The carrying amount of an item of
    property, plant, and equipment will include the cost of replacing the part of such an
    item when that cost is incurred if the recognition criteria (future benefits and
    measurement reliability) are met. The carrying amount of those parts that are
    replaced is derecognised in accordance with the derecognition provisions of IAS
    16.67-72. [IAS 16.13]
    Also, continued operation of an item of property, plant, and equipment (for
    example, an aircraft) may require regular major inspections for faults regardless of
    whether parts of the item are replaced. When each major inspection is performed,
    its cost is recognised in the carrying amount of the item of property, plant, and

    equipment as a replacement if the recognition criteria are satisfied. If necessary,


    the estimated cost of a future similar inspection may be used as an indication of
    what the cost of the existing inspection component was when the item was acquired
    or constructed. [IAS 16.14]

    Initial measurement
    An item of property, plant and equipment should initially be recorded at cost. [IAS
    16.15] Cost includes all costs necessary to bring the asset to working condition for
    its intended use. This would include not only its original purchase price but also
    costs of site preparation, delivery and handling, installation, related professional
    fees for architects and engineers, and the estimated cost of dismantling and
    removing the asset and restoring the site (see IAS 37 Provisions, Contingent
    Liabilities and Contingent Assets). [IAS 16.16-17]
    If payment for an item of property, plant, and equipment is deferred, interest at a
    market rate must be recognised or imputed. [IAS 16.23]
    If an asset is acquired in exchange for another asset (whether similar or dissimilar in
    nature), the cost will be measured at the fair value unless (a) the exchange
    transaction lacks commercial substance or (b) the fair value of neither the asset
    received nor the asset given up is reliably measurable. If the acquired item is not
    measured at fair value, its cost is measured at the carrying amount of the asset
    given up. [IAS 16.24]
    Measurement subsequent to initial recognition
    IAS 16 permits two accounting models:

    Cost model. The asset is carried at cost less accumulated depreciation and
    impairment. [IAS 16.30]
    Revaluation model. The asset is carried at a revalued amount, being its fair
    value at the date of revaluation less subsequent depreciation and
    impairment, provided that fair value can be measured reliably. [IAS 16.31]

    The revaluation model


    Under the revaluation model, revaluations should be carried out regularly, so that
    the carrying amount of an asset does not differ materially from its fair value at the
    balance sheet date. [IAS 16.31]
    If an item is revalued, the entire class of assets to which that asset belongs should
    be revalued. [IAS 16.36]
    Revalued assets are depreciated in the same way as under the cost model (see
    below).
    If a revaluation results in an increase in value, it should be credited to other
    comprehensive income and accumulated in equity under the heading "revaluation
    surplus" unless it represents the reversal of a revaluation decrease of the same
    asset previously recognised as an expense, in which case it should be recognised in
    profit or loss. [IAS 16.39]
    A decrease arising as a result of a revaluation should be recognised as an expense
    to the extent that it exceeds any amount previously credited to the revaluation
    surplus relating to the same asset. [IAS 16.40]
    When a revalued asset is disposed of, any revaluation surplus may be transferred
    directly to retained earnings, or it may be left in equity under the heading
    revaluation surplus. The transfer to retained earnings should not be made through
    profit or loss. [IAS 16.41]

    Acquisition on a Cash Basis

    The cost of asset acquired is the cash price equivalent at the recognition
    date
    Cash paid plus directly attributable costs

    Acquisition on Account

    Cost of the asset is equal to the invoice price minus the discount, regardless
    of whether then discount is taken or not

    Acquisition on Installment Basis

    The cost is the cash price equivalent


    The excess of the installment price over the cash price is treated as an
    interest to be amortized over the credit period.

    No available cash price

    The asset is recorded at an amount equal to present value of all payments


    using an implied interest rate.

    Issuance of share capital


    Order of priority:

    Fair value of the property received


    Fair value of share capital
    Par value or stated value of share capital

    Issuance of bonds payable


    Order of priority:

    Fair value of bonds payable


    Fair value asset received
    Face amount of bonds payable

    Exchange no cash involved


    Order of priority:

    Fair value of property given


    Fair value of property received
    Carrying amount of property given

    Exchange cash is involved

    Fair value of asset given plus cash payment on the part of the payor
    Fair value of asset given minus cash payment on the part of recipient

    Exchange no commercial substance

    Measured at the carrying amount of the asset given


    No gain or loss is recognized
    Any cash involved is added/deducted from carrying amount

    Exchange w/ commercial substance


    Order of priority:

    Fair value of asset given plus cash payment

    Trade in value of asset given plus cash payment (in effect, this is the FV of
    asset received)

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