PROPERTY, PLANT

AND EQUIPMENT
(MFRS116)
MFRS 116 - PROPERTY, PLANT AND EQUIPMENT
SUB- TOPICS & COVERAGE
Sub-Topics Coverage
1.1 Basic concepts Definition of property, plant and
and definitions : equipment.
1.2 Recognition i. Probable economic benefit and cost
Criteria can be measured reliably.
ii. Revenue expenditure and capital
expenditure.
1.3 Initial i. Initial recognition at cost.
Measurement. ii. Element of cost
iii. Provision for dismantling,
rehabilitation/restoration.
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MFRS 116 - PROPERTY, PLANT AND EQUIPMENT
SUB- TOPICS & COVERAGE
Sub-Topics Coverage
1.4 Subsequent i. Subsequent Expenditure (Qualified)
Measurement. ii. Depreciation : Depreciation Amount and
- Depreciation Period, Depreciation Method
iii.At cost and test for impairment/Cost model.
iv. At revaluation / Revaluation model.
v. Assets revaluation reserve
1.5 Derecognition i. Retirement of PPE
ii. Sale of PPE.
1.6 Disclosure of PPE Movement of non-current asset/PPE.
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 PPE

Tangible items
✓held by an enterprise for use in
the production of goods and
services,
✓Held for rental to others, or
✓Held for administrative or
1.1 Basic concepts and maintenance purposes;
definitions and
✓are expected to be used during
more than one reporting period.
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MFRS116 PPE used in oil exploration
applies for:
Leasehold lands under MFRS117 Leases may be classified
as PPE if they meet the definition of finance lease

Property constructed for future use as an investment

property is a PPE when they are under capital WIP – once
completed, the property is an IP under MFRS140

A hotel property where income generated from the

rooms, kitchens, restaurants of the hotels
Animals used to transport fresh fruit bunches in oil palm
cultivation (not subject to biological transformation)- e.g.
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cows, buffaloes – BEARER PLANTS
MFRS116 A building used for administrative purposes
applies for: may generate some income if non-
significant part of the building is rented out.
The income is called an incidental income.

Example : ABC Bhd owns a 20-storey

building. 1 level is rented out as canteen.
The income from the rental of canteen in an
incidental income.

The whole building is PPE because the level

rented out is not significant – 1 level only.
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Property For building used as an administrative purposes
Machinery For machines used in business operations
Plant assets Group of assets for industrial process – land , factory, workshop

Classes of Land
PPE - Land & Buildings
Machinery
Ships
Aircrafts
Motor vehicles
Furniture and fittings
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Office equipments
 1.2 Recognition of PPE
An item of PPE is recognized when
an entity has control of the item,
that is when the risks and benefits
of the assets pass to the entity or
CONTROL when the entity has the legal title or
physical possession on the assets

For a major asset acquisitions, such as the purchase of ships,

aircrafts; the entity may not legally owned the assets until the
last day of the legal obligation / ownership is transferred. In this
situation, the items are recognized as PPE and the element of
control is there because the risks and benefits have been
transferred to the buyer.

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1.2 Recognition of PPE
1. Some significant items of PPE require major replacements of major components
and other expenditure at regular intervals. MFRS116 requires that the total
expenditure of a significant item of PPE shall be allocated to its component parts and
accounted separately. Especially for components that have different EUL (Estimated
Useful Life) and requires periodic replacements

For examples :
A ship Engine, navigator deck and cabins, are separate units. Engine may need
to be replaced regularly and has its own EUL.

An aircraft Engines, interior seats, airframe are separate units and their
replacements or refurbishment are made at different times and interval.

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1.2 Recognition of PPE

2. Small assets where each has insignificant amount ; may be grouped

together (aggregated) and the aggregated value will be the recognition
amount -→ tools, cutlery, books etc

3. Spare parts & servicing equipment

When a major amounts of spare parts & stand-by equipment for more
than 1 accounting period, they are qualified as PPE
Some large amounts of spare parts & service equipment used only for
PPE, they also can be recognized as a PPE

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1.2 Recognition of PPE

Recognition

Capital Revenue
expenditure expenditure
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1.2 Recognition of PPE
Capital Revenue
expenditure expenditure
Meets the
Does not meet
recognition
the recognition
criteria of an
criteria
asset

The amount is
The amount is
written off to
added to the
SOPL as an
value of PPE
expense
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1.2 Recognition of PPE
Costs that cannot be capitalized

• Administration costs, general overhead unless they

are directly attributed to the acquisition of assets or
bringing the asset to its working condition;
• Cost of opening a new facility, cost of introducing a
new product and cost of conducting business in a new
location or with a new class of customer;
• Initial operating losses, cost of relocating or
reorganising part or all of the entity’s operation

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1.3 INITIAL MEASUREMENT – GENERAL RULES

The purchase price + import duties

+ non-refundable purchase tax –
trade discounts & rebates

Any costs directly attributable in

Initial measurement is at cost bringing the assets to the location
and condition necessary for it to be
used

Any costs of estimates of

dismantling & removing the item,
restoring the site

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1.3 INITIAL MEASUREMENT - POSSIBLE SITUATIONS OF PPE RECOGNITION

DIRECT ACQUISITION

SELF-CONSTRUCTED
INITIAL RECOGNITION

INCIDENTAL OPERATIONS

ASSETS EXCHANGED

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1.3 INITIAL MEASUREMENT – DIRECT ACQUISITION

Purchase price, including import

duties and non-refundable purchase
taxes, after deducting trade
discounts and rebates

Costs of PPE identified via Direct Direct attributable cost

acquisition

Provision for future costs of

dismantling, restoring ,
decommissioning

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1.3 INITIAL MEASUREMENT – SELF-CONSTRUCTED PPE

Borrowing cost- Interest on

Costs of direct materials, loan taken to finance
direct labour, manufacturing construction of PPE can
overhead, borrowing costs only be capitalised during
the period of construction
Costs of PPE up to the period when the
identified via self- PPE constructed is ready for
constructed Direct attributable cost its intended use

Provision for future costs of

dismantling, restoring ,
decommissioning

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 Some operations occur in connection with the construction
or development of an item of property, plant and
equipment, but are not necessary to bring the item to
the location and condition necessary for it to be
1.3 Initial capable of operating in the manner intended by
Measurement management.
- These incidental operations may occur before or during the
INCIDENTAL OPERATIONS construction or development activities. For example,
income may be earned through using a building site as
a car park until construction starts.
Because incidental operations are not necessary to bring
an item to the location and condition necessary for
it to be capable of operating in the manner
intended by management, the income and related
expenses of incidental operations are recognised in
profit or loss and included in their respective
classifications of income and expense

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Capitalisation of self-constructed assets
Incidental cost to be excluded from capitalisation:
➢Internal profits ( savings arising from the construction of the asset)
For example, a company bought direct materials amounting to RM100,000 to construct
an asset, but only RM99,000 of direct material is actually used to construct the asset.
The difference of RM1,000 (RM100,000 less RM99,000) represents an internal profit to
the company which needs to be excluded from the cost of the asset.
➢Inefficiencies arising from wastage of materials or labour in constructing the assets.

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1.3 INITIAL MEASUREMENT – ASSETS EXCHANGED

One or more items of property, plant and equipment may be acquired :

➢ in exchange for a non-monetary asset or assets, or
➢ a combination of monetary and nonmonetary assets.

The cost of such an item of property, plant and equipment is measured

at 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.

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PROVISION FOR FUTURE COSTS
PROVISION FOR FUTURE
COSTS

Decommissioning Dismantling Restoration

costs
costs costs

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PROVISION FOR FUTURE COSTS
Decommissioning costs The costs incurred by an entity in reversing the
modifications made to the landscape when a PPE is
used up

E.g: an oil & gas company modify the landscape of a site

to make an oil well. The oil well is the PPE. Once the oil
well has been used and all oils have been extracted, the
oil well is closed and the site must be returned to its
original landscape. So the cost incurred to get the
landscape back to its original condition is the
decommissioning cost

This is future costs and will only be incurred at the end

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of the use of the PPE – measured at present value
PROVISION FOR FUTURE COSTS
Dismantling costs The costs incurred by an entity in
disassemble/dismantle of the PPE at the end of the
usage or cessation of operations

E.g: the gym equipment need to be dismantle after

some stipulated time, at the end of its EUL.

This is future costs and will only be incurred at the

end of the use of the PPE/cessation of business
operations – measured at present value
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PROVISION FOR FUTURE COSTS
Restoration costs The costs incurred for restoring the PPE to its
original state, at the end of the use of the PPE /
cessation of operations
E.g: a building is under finance leased, at the end of
the lease period, the entity must return the building
at its original state. So the costs incurred to get the
PPE back to its original state is the restoration costs

This is future costs and will only be incurred at the

end of the use of the PPE/cessation of business
operations – measured at present value
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MEASUREMENT OF COSTS AFTER INITIAL
RECOGNITION

Measurement
after initial
recognition

Subsequent Impairment
Subsequent cost Derecognition
measurement Loss

No Expected
Write off to Revaluation
Capitalized Cost Model Disposal future economic
SOPL Model
benefits

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1.3 Subsequent Costs

Subsequent expenditure – any expenditure

incurred after the initial purchase or constructions

To repair the asset, to maintain the asset, to

replace worn out components, to upgrade the
assets or to improve its performance

The expenditure shall either be treated as capital

expenditure or revenue expenditure 26
1.3 Subsequent Costs/Expenditure
Repair & maintenance PPE enhancement expenditure

• Incurred to ensure the • Capitalised if the

assets are operating orderly. expenditure increases the
It is normally a recurrent future economic benefits of
expense the PPE (add the amount to
• Revenue expenditure in Carrying amount of the PPE)
nature • Write off to SOPL as an
• Write off to SOPL expense if does not give
future economic benefits
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1.3 Subsequent Costs – Examples of increase future economic benefits (amount will be
capitalized (added to cv of the ppe)

An extension in Increase in the A substantial A significant

the assets EUL output/production improvement in reduction in
capacity product quality / previously
service potential assessed operating
costs
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1.3 Subsequent Measurement – Accounting treatment
Accounting
treatment

Cost model Revaluation model

PPE is revalued to reflect

PPE is carried at cost the fair value and
less accumulated depreciate if it is a
depreciation less depreciable asset
impairment losses

The entire class of PPE to

which that asset belongs
has to be revalued 29
The FV of PPE
is ignored
1.3 Subsequent Measurement – Accounting treatment
Effect from
revaluation model

Surplus on Deficit on
revaluation revaluation
FV>CV (the diff
amount is credited to FV<CV (the diff
ARR) amount is write off to
SOPL)

JOURNAL ENTRY: JOURNAL ENTRY:

DR PPE DR SOPL : DEFICIT ON 30
REVALUATION
CR ARR
CR PPE
1.3 Subsequent Measurement – depreciation
Definition – the systematic allocation of the depreciable amount of an
asset over its estimated useful life

Disclosure
The gross value of the
The basis of valuation The depreciation Useful life or Total depreciation
asset and the
of each asset method depreciation rates used charge for the period
accumulated

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1.3 Subsequent Measurement – Impairment loss
MFRS116 – sometimes the value of the asset is less than its carrying
amount – (impaired) Value – recoverable value – the fair value less
cost to sell ( FVLCTS) and its Value in Use (VIU)

Asset is impaired due to : physical damages, technological

obsolences, faulty processes that makes the asset incapable of
working at its usual condition

MFRS136 requires a company to assess the indication of assets

impairment, at the end of each reporting period

Impairment loss – the recoverable amount of the asset is less than

the carrying amount of the asset → RA < CA , If RA > CA , No
impairment

RA – the higher value of the assets value in use (VIU) and its Fair 32
value less cost to sell (FVLCTS) : → RA = VIU vs FVLCT (the higher
value is the RA)
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1.3 Subsequent Measurement – Impairment loss

JOURNAL ENTRY:

DR SOPL : IMPAIRMENT LOSS

CR ACCUMULATED IMPAIRMENT LOSS
PRESENTATION IN SOFP
NCA : PPE
CV = COST – ACCUM DEPRECIATION – ACCUM. IMPAIRMENT LOSS

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DERECOGNITION
PPE is derecognised when it is disposed off or when no future
economic benefits are expected from its use or disposal

PPE disposed should be taken out from the SOFP

The gain or loss should be recognised in the statement of

comprehensive income but not as revenue (other income)

If the PPE has been revalued and disposed off, the surplus
on revaluation will be transferred to the retained profit 34

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TRADE-IN TRANSACTIONS

MFRS 116 – the treatment is separated : one

is the sale of old asset, the other one is as a
purchase of new asset

The new purchase The old asset given

asset is recorded at up, is measured at
cost trade-in allowance 35
DISCLOSURE
• Measurement basis used for determining the gross carrying amount (cost or revalued
model)
• Depreciation method used
• Useful lives or depreciation rates
• Gross carrying amount and the accumulated depreciation at the beginning and end of
the period
• A reconciliation of the carrying amount at the beginning and end of the period
showing: additions, disposal, surplus/deficits on revaluation, depreciation charge for
the year etc.

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THE SCHEDULE OF MOVEMENT OF PPE
Land (RM) Plant (RM)

At cost or valuation
As at 1 January 20XX XX xx
Surplus on revaluation XX
Accum. Dep. eliminated (xx)
Disposals (XX) (xx)
Balance as at 31 December 20XX XX xx

Accumulated depreciation
As at 1 January 20XX XX xx
Accum. Dep. eliminated (xx)
Charge for the year xx

Disposals (XX) (xx)

Balance as at 31 December 20XX XX xx
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Carrying amount as at 31 December XXX xxx
20XX