Chapter 4: Tangible Asset

IAS 16 Property, Plant and Equipment

Property, plant and equipment are tangible assets held by an entity for more than one accounting period
for use in the production or supply of goods or services, for rental to others, or for administrative
purposes.

Scope
IAS 16 should be followed when accounting for property, plant and equipment unless another
international accounting standard requires a different treatment. Acquaint

IAS 16 does not apply to the following.

➢ Biological assets related to agricultural activity, apart from bearer biological assets
➢ Mineral rights and mineral reserves, such as oil, gas and other non-regenerative resources

However, the standard applies to property, plant and equipment used to develop these assets.

Definition of key terms

The standard gives a large number of definitions

❖ Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction.

❖ Residual value is the net amount which the entity expects to obtain for an asset at the end of its
useful life after deducting the expected costs of disposal.

❖ Entity specific value is the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life, or expects to incur
when settling a liability.

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 ❖ Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. (IFRS 13)

❖ Carrying amount is the amount at which an asset is recognised in the statement of financial
position after deducting any accumulated depreciation and accumulated impairment losses.An

❖ Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.

Recognition
Recognition simply means incorporation of the item in the business's accounts, in this case as a non-
current asset. An item of property, plant and equipment should be recognised as an asset when the
following criteria’s are met:
❖ It is probable that future economic benefits associated with the asset will flow to the entity
❖ The cost of the asset to the entity can be measured reliably

These recognition criteria apply to subsequent expenditure as well as costs incurred initially. There are
no separate criteria for recognising subsequent expenditure.

First criterion: future economic benefits

The degree of certainty attached to the flow of future economic benefits must be assessed. This should
be based on the evidence available at the date of initial recognition (usually the date of purchase). The
entity should be assured that it will receive the rewards attached to the asset and it will incur the
associated risks, which will only generally be the case when the rewards and risks have actually passed to
the entity. Until then, the asset should not be recognised.

Second criterion: cost measured reliably

It is generally easy to measure the cost of an asset as the transfer amount on purchase, ie what was paid
for it. Self-constructed assets can also be measured easily by adding together the purchase price of all the
constituent parts (labour, material etc) paid to external parties.

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Initial measurement
Once an item of property, plant and equipment qualifies for recognition as an asset, it will initially be
measured at cost. The cost of an asset includes:
❖ Purchase price, less any trade discount or rebate
❖ Import duties and non-refundable purchase taxes
❖ Directly attributable costs of bringing the asset to working condition for its intended use, eg:
 The cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Testing
 Professional fees (architects, engineers)
❖ Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring the
site on which it is located.

Additional information on dismantling cost

The present value of these costs should be capitalised, with an equivalent liability set up. The discount on
this liability would then be unwound over the period until the dismantling costs are paid. This means that
the liability increases by the interest rate each year, with the increase taken to finance costs in the
statement of profit or loss.

You may need to use the interest rate given and apply the discount fraction where r is the interest rate
and n the number of years to settlement.

The following costs will not be part of the cost of property, plant or equipment unless they can be
attributed directly to the asset's acquisition, or bringing it into its working condition.
➢ Administration and other general overhead costs
➢ Start-up and similar pre-production costs
➢ Initial operating losses before the asset reaches planned performance
➢ Wastage
All of these will be recognised as an expense rather than an asset.

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 Test your understanding 1
An entity started construction on a building for its own use on 1 April 20X7 and incurred the following
costs:

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 on materials as a result of faulty design work.
❖ As a result of these problems, work on the building ceased for a fortnight during October 20X7
and it is estimated that approximately $9 million of the labour costs relate to this period.
❖ The building was completed on 1 July 20X8 and occupied on 1 September 20X8.

Required: calculate the cost of the building that will be included in tangible NCA additions.

Subsequent expenditure
Parts of some items of property, plant and equipment may require replacement at regular intervals. This
cost is recognised in full when it is incurred and added to the carrying amount of the asset. It will be
depreciated over its expected life, which may be different from the expected life of the other components
of the asset.

Subsequent expenditure on property, plant and equipment should only be capitalised if:
❖ it enhances the economic benefits provided by the asset (this could be extending the asset's life,
an expansion or increasing the productivity of the asset)

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 ❖ it relates to an overhaul or required major inspection of the asset the costs associated with this
should be capitalised and depreciated over the time until the next overhaul or safety inspection
❖ it is replacing a component of a complex asset. The replaced component will be derecognised. A
complex asset is an asset made up of a number of components, which each depreciate at different
rates, e.g. an aircraft would comprise body, engines and interior. Expenditure incurred in
replacing or renewing a component of an item of property, plant and equipment must be
recognised in the carrying amount of the item. The carrying amount of the replaced or renewed
component must be derecognised.

Illustration on Subsequent expenditure

A piece of machinery has an annual service costing $10,000. During the most recent service it was
decided to replace part of the engineering meaning that it will work faster and produce more units of
product per hour. The cost of the replacement part is $20,000.

Would this expenditure be treated as capital or revenue expenditure?

Solution
 $10,000 servicing cost is revenue expenditure, written off to the statement of profit or loss.
 $20,000 replacement part enhances future economic benefits and so is capital expenditure and
increases the cost of non-current assets in the statement of financial position.

Depreciation
'Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life' (IAS
16, para 6). 'Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value' (IAS 16, para 6)

The standard states:

❖ The depreciable amount of an item of property, plant and equipment should be allocated on a
systematic basis over its useful life.
❖ The depreciation method used should reflect the pattern in which the asset's economic benefits
are consumed by the entity. Possible methods include: straight line, reducing balance, and
machine hours.
❖ The depreciation charge for each period should be recognised as an expense unless it is included
in the carrying amount of another asset.

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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. This may be earlier than the date it is actually brought into use,
for example if staff need to be trained to use it. Depreciation is continued even if the asset is idle.

Land and buildings are dealt with separately even when they are acquired together because land normally
has an unlimited life and is therefore not depreciated. In contrast buildings do have a limited life and must
be depreciated. Any increase in the value of land on which a building is standing will have no impact on
the determination of the building's useful life.

A change from one method of providing depreciation to another:

❖ is permissible only on the grounds that the new method will give a fairer presentation of
the results and of the financial position
❖ does not constitute a change of accounting policy
❖ is a change in accounting estimate.

The carrying amount should be written off over the remaining useful life, commencing with the period in
which the change is made.

Review of useful life

A review of the useful life of property, plant and equipment should be carried out at least at each financial
year end and the depreciation charge for the current and future periods should be adjusted if expectations
have changed significantly from previous estimates. Changes are changes in accounting estimates and are
accounted for prospectively as adjustments to future depreciation.

Test your understanding 2

B Co acquired a non-current asset on 1 January 2007 for $80,000. It had no residual value and a useful
life of ten years. On 1 January 2010 the remaining useful life was reviewed and revised to four years.

What will be the depreciation charge for 2010?

Test your understanding 3

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 An asset was purchased for $100,000 on 1 January 2015 and straight- line depreciation of $20,000 pa
is being charged (five-year life, no residual value). The annual review of asset lives is undertaken and
for this particular asset, the remaining useful life as at 1 January 2017 is eight years. The financial
statements for the year ended 31 December 2017 are being prepared.

What is the depreciation charge for the year ended 31 December 2017?

Review of depreciation method

The depreciation method should also be reviewed at least at each financial year end and, if there has been
a significant change in the expected pattern of economic benefits from those assets, the method should
be changed to suit this changed pattern. When such a change in depreciation method takes place the
change should be accounted for as a change in accounting estimate and the depreciation charge for the
current and future periods should be adjusted.

Subsequent measurement
The standard offers two possible treatments here, essentially a choice between keeping an asset recorded
at:
a. Cost model: Carry the asset at its cost less depreciation and any accumulated impairment loss.
b. Revaluation model: Carry the asset at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment losses. The revised IAS 16 makes clear that the revaluation model is available only if
the fair value of the item can be measured reliably. If the revaluation alternative is adopted, two
conditions must be complied with:

I. Revaluations must subsequently be made with sufficient regularity to ensure that the
carrying amount does not differ materially from the fair value at each reporting date.
II. When an item of property, plant and equipment is revalued, the entire class of assets to
which the item belongs must be revalued.

Recognising revaluation gains and losses

Revaluation gains are recorded as a component of other comprehensive income either within the
statement of profit or loss and other comprehensive income or in a separate statement. This gain is then

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carried in a revaluation surplus within equity. This revaluation surplus is a capital reserve and is therefore
not permitted to be distributed to the shareholders.

Revaluation losses, which represent an impairment of the asset value, are recognised in the statement of
profit or loss. When a revaluation loss arises on a previously revalued asset it should be deducted first
against the previous revaluation gain and can therefore be taken to other comprehensive income in the
year. Any excess impairment will then be recorded as an impairment expense in the statement of profit
or loss.

Note that offset of gains and losses between different properties is not permitted.

Test your understanding 4

Binkie Co has an item of land carried in its books at $13,000. Two years ago a slump in land values led
the company to reduce the carrying value from $15,000. This was taken as an expense in profit or loss.
There has been a surge in land prices in the current year, however, and the land is now worth $20,000.

Required: Account for the revaluation in the current year.

There is a further complication when a revalued asset is being depreciated. As we have seen, an upward
revaluation means that the depreciation charge will increase. Normally, a revaluation surplus is only
realised when the asset is sold, but when it is being depreciated, part of that surplus is being realised as
the asset is used. The amount of the surplus realised is the difference between depreciation charged on
the revalued amount and the (lower) depreciation which would have been charged on the asset's original
cost. This amount can be transferred to retained (ie realised) earnings but NOT through profit or loss.

Test your understanding 5

Crinckle Co bought an asset for $10,000 at the beginning of 20X6. It had a useful life of five years. On 1
January 20X8 the asset was revalued to $12,000. The expected useful life has remained unchanged (ie
three years remain).

Required: Account for the revaluation and state the treatment for depreciation from 20X8 onwards.

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 Test your understanding 6
On 1 April 20X8 the fair value of Xu's property was $100,000 with a remaining life of 20 years. Xu’s
policy is to revalue its property at each year end. At 31 March 20X9 the property was valued at $86,000.
The balance on the revaluation surplus at 1 April 20X8 was $20,000 which relates entirely to the
property. Xu does not make a transfer to realised profit in respect of excess depreciation.

Required:
1. Prepare extracts of Xu's financial statements for the year ended 31 March 20X9 reflecting the
above information.
2. State how the accounting would be different if the opening revaluation surplus did not exist.

Test your understanding 7

An entity revalued its land and buildings at the start of the year to $10 million ($4 million for the land).
The property cost $5 million ($1 million for the land) ten years prior to the revaluation. The total
expected useful life of 50 years is unchanged. The entity's 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.

Retirements and disposals

When an asset is permanently withdrawn from use, or sold or scrapped, and no future economic benefits
are expected from its disposal, it should be withdrawn from the statement of financial position.

Gains or losses are the difference between the estimated net disposal proceeds and the carrying amount
of the asset. They should be recognised as income or expense in profit or loss.

Disposal of Revalued Assets

The profit or loss on disposal of a revalued non-current asset should be calculated as the difference
between the net sale proceeds and the carrying amount.
There are two steps to disposing of a revalued asset:
1. It should be accounted for in the statement of profit or loss of the period in which the disposal
occurs.

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 2. Any balance on the revaluation surplus relating to this asset should now be transferred to retained
earnings.

Note: This does not affect other comprehensive income, which is only altered when the asset is actually
revalued upwards or downwards.

Test your understanding 8

Derek purchased a property costing $750,000 on 1 January 20X4 with a useful economic life of 10 years.
It has no residual value. At 31 December 20X4 the property was valued at $810,000 resulting in a gain on
revaluation being recorded in other comprehensive income of $135,000. There was no change to its
useful life. Derek does not make a transfer to realised profits in respect of excess depreciation on
revalued assets. On 31 December 20X6 the property was sold for $900,000.

Required: How should the disposal on the previously revalued asset be treated in the financial
statements for the year ended 31 December 20X6?

IAS 20 Accounting for Government Grants and Disclosure of

Government Assistance
Governments often provide money or incentives to companies to export their goods or to promote local
employment. Government grants could be:
• revenue grants, e.g. contribution towards payroll costs
• capital grants, e.g. contribution towards purchase of non-current assets.

General principles
IAS 20 follows two general principles when determining the treatment of grants:
❖ Prudence: grants should not be recognised until the conditions for receipt have been complied
with and there is reasonable assurance the grant will be received.
❖ Accruals: grants should be matched with the expenditure towards which they were intended to
contribute.

Types of Grants
Revenue grants: The recognition of the grant will depend upon the circumstances.

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  If the grant is paid when evidence is produced that certain expenditure has been incurred, the
grant should be matched with that expenditure.
 If the grant is paid on a different basis, e.g. achievement of a non- financial objective, such as the
creation of a specified number of new jobs, the grant should be matched with the identifiable
costs of achieving that objective.

Presentation of revenue grants

IAS 20 allows such grants to either be:
 presented as a credit in the statement of profit or loss, or
 deducted from the related expense.

Illustration on revenue grant

An entity is given $300,000 on 1 January 20X1 to keep staff employed within a deprived area. The entity
must not make redundancies for the next three years, or the grant will need to be repaid. By 31 December,
20X1, no redundancies have taken place and none are planned.

The grant should be released over three years, meaning that $100,000 is taken to the statement of profit
or loss each year.

This can be shown as a separate line in the statement of profit or loss or deducted from administrative
expenses (or wherever the staff costs are charged).

As $100,000 has been released to the statement of profit or loss, the remaining $200,000 will be held in
deferred income, to be recognised over the next two years.

Of this, $100,000 will be released within the next year, so will be held within current liabilities. The
remaining $100,000 will be held as a non- current liability.

Capital grants: IAS 20 permits two treatments:

Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher
depreciation charge on the original cost.

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Treatment of capital grants
Grants for purchases of non-current assets should be recognised over the expected useful lives of the
related assets. IAS 20 permits two treatments. Both treatments are equally acceptable and capable of
giving a fair presentation.

Method 1
On initial recognition, deduct the grant from the cost of the non-current asset and depreciate the reduced
cost.

Method 2
Recognise the grant initially as deferred income and transfer a portion to revenue each year, so offsetting
the higher depreciation charge based on the original cost.

Method 1 is obviously far simpler to operate. Method 2, however, has the advantage of ensuring that
assets acquired at different times and in different locations are recorded on a uniform basis, regardless of
changes in government policy.

In some countries, legislation requires that non-current assets should be stated by companies at purchase
price and this is defined as actual price paid plus any additional expenses. Legal opinion on this matter is
that enterprises subject to such legislation should not deduct grants from cost. In such countries Method
1 may only be adopted by unincorporated bodies.

Test your understanding 9

An entity opens a new factory and receives a government grant of $15,000 in respect of capital
equipment costing $100,000. It depreciates all plant and machinery at 20% pa straight-line.

Show the statement of profit or loss and statement of financial position extracts in respect of the
grant in the first year under both methods.

Repayment of grants
In some cases grants may need to be repaid if the conditions of the grant are breached. If there is an
obligation to repay the grant and the repayment is probable, then it should be provided for in accordance
with the requirements of IAS 37.

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If the deferred income method for capital grants has been used, then the remaining grant would be repaid
to the government. Any amounts released to profit or loss may also need to be reversed, depending on
the level of repayment required.

If the netting-off method for capital grants has been used, then the cost of the asset must be increased to
recognise the full cost of the asset without the grant. A liability will be set up for the grant repayment.

IAS 23 Borrowing Costs

IAS 23 Borrowing Costs regulates the extent to which entities are allowed to capitalise borrowing costs
incurred on money borrowed to finance the acquisition of certain assets.

Only two definitions are given by the standard:

❖ Borrowing costs. Interest and other costs incurred by an entity in connection with the borrowing
of funds.
❖ Qualifying asset. An asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

IAS 23 treatment
Borrowing costs must be capitalised as part of the cost of an asset if that asset is a qualifying asset (one
which 'necessarily takes a substantial period of time to get ready for its intended use or sale' (IAS 23,
para 5)).

IAS 23 Borrowing costs was revised in March 2007. Previously it gave a choice of methods in dealing with
borrowing costs: capitalisation or expense. The revised standard requires capitalisation.

Borrowing costs eligible for capitalisation

Those borrowing costs directly attributable to the acquisition, construction or production of a qualifying
asset must be identified. These are the borrowing costs that would have been avoided had the
expenditure on the qualifying asset not been made. This is obviously straightforward where funds have
been borrowed for the financing of one particular asset.

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Difficulties arise, however, where the entity uses a range of debt instruments to finance a wide range of
assets, so that there is no direct relationship between particular borrowings and a specific asset. For
example, all borrowings may be made centrally and then lent to different parts of the group or entity.
Judgement is therefore required, particularly where further complications can arise (eg foreign currency
loans).

Once the relevant borrowings are identified, which relate to a specific asset, then the amount of
borrowing costs available for capitalisation will be the actual borrowing costs incurred on those
borrowings during the period, less any investment income on the temporary investment of those
borrowings. It would not be unusual for some or all of the funds to be invested before they are actually
used on the qualifying asset.

Commencement of capitalisation
IAS 23 states that capitalisation of borrowing costs should commence when all of the following conditions
are met:
❖ expenditure for the asset is being incurred
❖ borrowing costs are being incurred
❖ activities that are necessary to prepare the asset for its intended use or sale are in progress.

The rate of interest to be taken

Where funds are borrowed specifically to acquire a qualifying asset, borrowing costs which may be
capitalised are those actually incurred, less any investment income on the temporary investment of the
borrowings during the capitalization period.

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 Test your understanding 10
On 1 January 20X6 Stremans Co borrowed $1.5m to finance the production of two assets, both of
which were expected to take a year to build. Work started during 20X6. The loan facility was drawn
down and incurred on 1 January 20X6, and was utilised as follows, with the remaining funds
invested temporarily.
Asset A Asset B
$'000 $'000
1 January 20X6 250 500
1 July 20X6 250 500

The loan rate was 9% and Stremans Co can invest surplus funds at 7%.

Required: Calculate the borrowing costs which may be capitalised for each of the assets and
consequently the cost of each asset as at 31 December 20X6.

Test your understanding 11

Grimtown took out a $10 million 6% loan on 1 January 20X1 to build a new football stadium. Not all of
the funds were immediately required so $2 million was invested in 3% bonds until 30 June 20X1.

Construction of the stadium began on 1 February 20X1 and was completed on 31 December 20X1.

Required: Calculate the amount of interest to be capitalised in respect of the football stadium as at
31 December 20X1.

Where funds for the project are taken from general borrowings the weighted average cost of general
borrowings is taken. The amount of borrowing costs eligible for capitalisation is found by applying the
'capitalisation rate' to the expenditure on the asset.

The capitalisation rate is the weighted average of the borrowing costs applicable to the entity's
borrowings that are outstanding during the period, excluding borrowings made specifically to obtain a
qualifying asset. However, there is a cap on the amount of borrowing costs calculated in this way: it must
not exceed actual borrowing costs incurred.

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Sometimes one overall weighted average can be calculated for a group or entity, but in some situations it
may be more appropriate to use a weighted average for borrowing costs for individual parts of the group
or entity.

Test your understanding 12

Acruni Co had the following loans in place at the beginning and end of 20X6.
1 January 20X6 31 December 20X6
$m $m
10% Bank loan repayable 20X8 120 120
9.5% Bank loan repayable 20X9 80 80
8.9% debenture repayable 20X7 – 150

The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining
equipment), construction of which began on 1 July 20X6.

On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a
hydroelectric plant, using existing borrowings. Expenditure drawn down for the construction was:
$30m on 1 January 20X6, $20m on 1 October 20X6.

Required: Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.

Suspension of capitalisation
If active development is interrupted for any extended periods, capitalisation of borrowing costs should be
suspended for those periods.

Suspension of capitalisation of borrowing costs is not necessary for temporary delays or for periods when
substantial technical or administrative work is taking place.

Cessation of capitalisation
Once substantially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete, then capitalisation of borrowing costs should cease. This will normally be when physical
construction of the asset is completed, although minor modifications may still be outstanding.

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The asset may be completed in parts or stages, where each part can be used while construction is still
taking place on the other parts. Capitalisation of borrowing costs should cease for each part as it is
completed. The example given by the standard is a business park consisting of several buildings.

Test your understanding 13

On 1 January 20X5, an entity began to construct a supermarket which had an estimated useful life of
40 years. It purchased the site for $25 million. The construction of the building cost $9 million and
the fixtures and fittings cost $6 million. The construction of the supermarket was completed on 30
September 20X5 and it was brought into use on 1 January 20X6.

The entity borrowed $40 million on 1 January 20X5 in order to finance this project. The loan carried
interest at 10% pa. It was repaid on 30 June 20X6.

Required: Calculate the total amount to be included at cost in property, plant and equipment in
respect of the development at 31 December 20X5.

IAS 40 Investment Property

Definition
Investment property is land or a building ‘held to earn rentals or for capital appreciation or both’ (IAS
40, para 5), rather than for use by the entity or for sale in the ordinary course of business.

Examples of investment property are:

❖ land held for capital appreciation
❖ land held for undecided future use
❖ buildings leased out under an operating lease
❖ vacant buildings held to be leased out under an operating lease.

The following are not investment property:

❖ property held for use in the production or supply of goods or services or for administrative
purposes (IAS 16 Property, Plant and Equipment applies)

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 ❖ property held for sale in the ordinary course of business or in the process of construction of
development for such sale (IAS 2 Inventories applies)
❖ property being constructed or developed on behalf of third parties (IFRS 15 Revenue from
Contracts with Customers applies)
❖ owner-occupied property (IAS 16 applies)
❖ property that is being constructed or developed for use as an investment property (IAS 16
currently applies until the property is ready for use, at which time IAS 40 starts to apply)
❖ property leased to another entity under a finance lease (IFRS 16 Leases applies).

There could be a situation where a building can be accounted for in two different ways. If an entity
occupies a premises but rents out certain floors to other companies, then the part occupied will be classed
as property, plant and equipment per IAS 16, with the floors rented out classed as investment property
per IAS 40.

If a building is rented by a subsidiary of the entity, then the building will be classed as an investment
property in the individual accounts, but will be classed as property, plant and equipment per IAS 16 in the
consolidated financial statements. This is because the asset will be used by the group, so must be
accounted for in accordance with IAS 16.

Measurement
On recognition, investment property is recognised at cost. After recognition an entity may choose either:
❖ cost model
❖ fair value model.

The policy chosen must be applied to all investment properties.

Cost model
Under the cost model the asset should be accounted for in line with the cost model laid out in IAS 16.

Fair value model

Under the fair value model:
❖ the asset is revalued to fair value at the end of each year

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 ❖ the gain or loss is shown directly in the statement of profit or loss (not other comprehensive
income)
❖ no depreciation is charged on the asset.

Fair value is normally established by reference to current prices on an active market for properties in the
same location and condition.

Test your understanding 8

Celine, a manufacturing entity, purchases a property for $1 million on 1 January 20X1 for its investment
potential. The land element of the cost is believed to be $400,000, and the buildings element is
expected to have a useful life of 50 years. At 31 December 20X1, local property indices suggest that the
fair value of the property has risen to $1.1 million.

Required: Show how the property would be presented in the financial statements as at 31 December
20X1 if Celine adopts:
(a) the cost model
(b) the fair value model.

Transfer of Asset between PPE and Investment Property

If an asset is transferred from property, plant and equipment to investment property and the fair value
model for investment property is used:
❖ The asset must first be revalued per IAS 16 (creating a revaluation surplus in equity) and then
transferred into investment property at fair value.

If the cost model is used for investment properties:

❖ The asset is transferred into investment properties at the current carrying amount and continues
to be depreciated.

If an asset is transferred from investment property to property, plant and equipment and the fair value
model for investment property is used:
❖ Revalue the property first per IAS 40 (taking the gain or loss to the statement of profit or loss)
and then transfer to property, plant and equipment at fair value.

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If the cost model is used for investment properties:
❖ The asset is transferred into property, plant and equipment at the current carrying amount and
continues to be depreciated.

Test your understanding 9

Kyle Co purchased an investment property some year ago and carries it under the fair value model. At
1 January 20X1, the property had a fair value in Kyle Co's financial statements of $12 million. On 1 July
20X1 Kyle Co decided to move into the property and use it for its own business.

At this date the asset had a fair value of $14 million and a remaining useful life of 14 years.

Required: What amount should be recorded in Kyle Co's statement of profit or loss for the year ended
31 December 20X1?

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