1

IAS 16- Property, Plant and Equipment

(PPE)

Nguyễn Đình Hoàng Uyên

Objectives
2

After this chapter, you should be able to:

Understand the recognition principle for tangible
items.
Determine the carrying amount of a tangible asset.
Measurement and recognition of depreciation and
impairment losses of tangible assets.
Comprehend information presented on financial
reports related to tangible assets.
Contents
3

1. Scope & definitions

2. Recognition
3. Measurement
4. Depreciation
5. Impairment
6. Derecognition
7. Disclosure
Related standards
4

 IAS 16 – Property, Plant and Equipment

 IAS 23 – Borrowing costs
 IAS 37 – Provisions, contingent liabilities and contingent assets
 IAS 36 – Impairment
1. Scope and Definitions
5

IAS 16 does not apply to:

• PPE classified as held for sale in accordance with IFRS 5.
• Biological assets related to agricultural activity (IAS 41 –
Agriculture)
•The recognition and measurement of exploration and evaluation
assets (IFRS 6- Exploration for and evaluation of mineral
resource)
• Mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
1.1 Scope
6
Used for operating purposes (held for use) PPE
Operating lease (lessor)
Investment
Property
Held for capital appreciation or for rent

Finance lease (lessor) Receivables

Held for sale (commercial) Inventory

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1.2 Definitions
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Property, plant and equipment are tangible items that:

(a) are held by an entity for use in the production or supply of

goods or services, for rental to others, or for administrative
purposes; and
(b) are expected to be used during more than one period.

IAS 16.6
 PPE- Tangible assets
8 owner-occupied

Entity-Owned Used for more than 1 period

 Example
9
A parent company leases a building to its subsidiary on an
operating lease contract. The subsidiary uses this building as a
retail shop. Where should this building be recognized on the
consolidated financial statement and the separate financial
statement?
2. Recognition criteria
10

PPE is recognized when

Probable future The cost of the item can be

economic benefits measure reliably
Items such as spare parts, stand-by equipment and servicing
equipment are recognised in accordance with this IFRS when
they meet the definition of property, plant and equipment.
Otherwise, such items are classified as inventory. [8]

Separately
Each part of an item of property, plant and equipment with a
Or cost that is significant in relation to the total cost of the item
aggregate and different useful life shall be depreciated separately. [43]
 Example 1

Building owned by the

entity

Land is leased for 50 years as

per the operating lease
contract

11
 Example 2

Building owned by the

entity

Land are acquired by entity

12
 Example 3

Building owned by the

entity

Air conditioner

13
 Example 4

PPE (airplane)

may be appropriate to depreciate separately: airframe and aircraft

14
 Initial cost
15 ➢ The acquisition of equipment A,
although not directly increasing
Equipment A may be the future economic benefits of
acquired for safety or any particular existing item of
property, plant and equipment,
environmental reasons, not
may be necessary for an entity to
directly increasing the
obtain the future economic
future economic benefits. benefits from its other assets.→
qualify for recognition as assets
because they enable an entity to
derive future economic benefits
from related assets in excess of
what could be derived had those
items not been acquired.

IAS 16. 11
 Subsequent costs
16

the costs of the day-to-day profit or loss

servicing of the item.

the costs of the repairs & PPE

maintenance

PPE
the costs of replacing part of PPE (+ replacing cost – carrying
amount of part)

IAS 16. 12, 13, 14

3. Measurement
17

Measurement at Historical cost

recognition

Historical cost model

(cost – accumulated depreciation–
accumulated impairment)
Measurement after
recognition
Revaluation model
(fair value)

IAS 16. 15, 29

3.1 Measurement at recognition When – What
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When

Purchase, Capable of operating Costs incurring after

construction, trading (the location and recognition?
condition)

Cost = Purchase price + Directly attributable costs + restoration cost

Dismantling, removing & restoring

Estimate in present
Obligation
Historical cost
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➢ Spot purchase: cash and/or cash equivalents payable
Historical ➢ Buy on instalment: present value.
cost ➢ Non-comparable asset exchange: fair value of asset
received (or residual value of asset traded)/ carrying
amount of the asset given up [IAS 16.24]
Purchase ➢ Including import duties and non-refundable purchase
price taxes

Costs directly attributable to making the asset capable of

operating as intended:
✓ Costs of employee benefits arising directly from the
construction or acquisition of the item;
Direct cost ✓ cost of site preparation;
✓ initial delivery and handling costs;
✓ installation and assembly costs;
✓ professional fees;
✓ costs of testing for proper functioning of the asset.
Other costs Costs of removing, dismantling and restoring
Notes:
20
Penalty, impairment cost, advertising, product
placement, business development cost,
Eliminated from cost
administration cost, initial operating losses, cost
of relocating or reorganizing part or all of an
entity’s operations,…
Income arising from the bringing of the asset to Historical
the location and condition necessary, such as Eliminated from cost
internal income for self-construction, cost
development of asset; samples sold when testing
equipment;…
Earnings and expense related to the construction
or development of an asset, but are not necessary Eliminated from cost
to bring the item to the location and condition
necessary. Ex: income earned through using a Can be capitalized,
building site as a car park until construction starts on meeting the
requirements for
Cost of borrowing capitalisation
3.2 Measurement after recognition
21

- Current repair Recognize as expenses

- Major repair
- Part changing Fixed asset cost
Capitalization
3.2 Measurement after recognition
22
Carrying amount

Measurement after recognition

Cost model Revaluation model

Cost – Depreciation - Impairments Fair value

Carrying amount Carrying amount

Applied to each type of asset

22
 Revaluation model
23
Revaluation model
(FV)
Adjustment

Carrying amount
Profit Increase Loss
Deferred tax liability Decrease Deferred tax asset

Recognization: Recognization: Recognization: Recognization:

In Equity– Other income Expense (P/L) Equity -
Revaluation (P/L) (to Revaluation surplus
surplus (OCI) reverses for (deduct from
previous previously recognized
revaluation loss) profit)
Deferred tax Deferred tax Deferred tax Deferred tax
(IAS 12) (IAS 12) (IAS 12) (IAS 12)
 Revaluation model
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Increase/decrease = Fair value – carrying

amount
➔ Deferred tax for revaluation
Calculation

Calculate deferred tax on year-end

Accounting
(1) Clear the cumulative depreciation
entry (2) Write the asset down/up to fair value
(3) Deferred tax.
Example 1 – Revaluation model
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On 1 Jan 20X1 Entity A acquired a plant at a cost of $1800,

without any expected residual value. The asset is expected to have
a 6 year useful life. Under current tax law, the asset is depreciated
over 3 year. The asset is revalued at $1600, $1500, $720, $600,
$500 on the period end of 20X1, 20X2, 20X3, 20X4, 20X5
respectively. Tax rate 20%.
Required
Measuring the asset and prepare accounting journal from 20X1 to
20X5.
 Deferral
Carrying Carrying Revaluation Tax
26 amount (OB)
Year Depreciated amount (CB) FV gain Liability
1 1800 300 1500 1600 100 20
2 1600 320 1280 1500 220 44
3 1500 375 1125 720 -405 -81
4 720 240 480 600 120 24
5 600 300 300 500 200 40
6 500 500 0 0 0 0
Deferral
Deferral tax
Carrying Taxable Tax expense
DTL DTL
amount Temporal Liability (To be Related to related
Year (FV) Tax base diff (ending) adjusted) revaluation depreciation
1 1600 1200 400 80 80 20 60
2 1500 600 900 180 100 44 56
3 720 0 720 144 -36 -81 45
4 600 0 600 120 -24 24 -48
5 500 0 500 100 -20 40 -60
6 0 0 0 0 -100 0 -100
Solution – 20X1
27

Cost: 1800
Accumulated depreciation: 300 Temporal difference
Carrying amount: 1500
FV: 1600
Revaluation gain: 100 FV 1600
Deferred tax liability: 20 Due to
revaluation
GTCL.1500
Carrying amount (31 Dec X1): 1600
Due to
Tax base (1800-600) 1200 depreciation
Temporal differences: 400
TB.1200
Deferred tax liability (CB): 80
Deferred tax liability (OB): 0
Deferred tax liability (incurred): 80

DTL – Due to revaluation: 20

DTL – Due to depreciation 60
20X1
Journal entries 20X1
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1. Eliminate depreciation
Accumulated depreciation 300
Plant 300

2. Recognize revaluation gain

Plant 100
Revaluation surplus(OCI) 100

3. Recognize deferred tax

Revaluation surplus (OCI) 20
Deferred income tax expense 60
Deferred tax liability 80
20X2
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Carrying amount (31/12/X2): 1500
Cost: 1600 Tax base (600 x 1) 600
Acc. depreciation (1600:5) 320 Temporal difference: 900
Carrying amount: 1280 Deferred tax liability (CB): 180
FV: 1500 Deferred tax liability (OB): 80
Revaluation gains: 220 Deferred tax liability incurred : 100
Deferred tax liability: 44

DTL due do revaluation : 44

DTL due to depreciation (600-320)x20% 56

1. Eliminate Acc.Dep. 2. Recognize revaluation gains

Acc. Dep. 320 Plant 220
Plant 320 Revaluation surplus 220
3. Recognize deferred tax
Revaluation surplus 44
Deferred income tax expense 56
Deferred tax liability 100
20X3
30
Carrying amount (31/12/X3): 720
Cost: 1500 Tax base (600 x 1) 0
Acc. depreciation (1500:4) 375 Temporal difference: 720
Carrying amount: 1125 Deferred tax liability (CB): 144
FV: 720 Deferred tax liability (OB): 180
Revaluation gains: (405) Deferred tax liability incurred : (36)
Deferred tax liability: (81)
DTL due do revaluation : (81)
DTL due to depreciation (375-0) x 20% = 45 45
1. Eliminate Acc.Dep. 2. Recognize revaluation gains
Acc. Dep. 375 Revaluation surplus(reversal) 320
Plant 375 Loss (P/L) 85
Plant 405

3 Recognize deferred tax:

Deferred tax liability 36
Deferred income tax expense (P/L) 45
Revaluation surplus(OCI) [320 x 0.2] 64
Deferred income tax expense (P/L) [85x0.2] 17
20X4
31
Revaluation gain 120
P/L (Reversal of loss in previous period) 85
➔ OCI: 35
Deferred tax liability (CB): 120
Deferred tax liability (OB) 144
Due to revaluation : 24
➔ Adjusted (24)
Due to depreciation: (48)

1. Eliminate depreciation 2. Recognize revaluation gain

Acc.Dep. 240 Plant 120
Plant 240 Gain (P/L) 85
Revaluation gain (OCI) 35

3. Recognize deferred tax

Deferred tax liability 24
Deferred income tax (P/L) 17
Revaluation gain: 7
Deferred income tax expense 48
Classes of PPE
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(a) Land;
(b) Land & buildings;
(c) Machinery;
(d) Ships;
(e) Aircraft;
(f) Motor vehicles;
(g) Furniture and fixtures;
(h) Office equipment
(i) Bearer plants.
4. PPE depreciation
33 The depreciable amount of an asset shall be
allocated on a systematic basis over its useful life
Depreciable Useful Systematic
amount life basis

HOW MUCH HOW LONG HOW /IN WHAT MANNER

Depreciation method
Residual Number
Cost Periods
value of units
The residual value and the useful life of an asset, depreciation method shall
be reviewed at least at each financial year-end.
If expectations differ from previous estimates, the change(s) shall be
accounted for as a change in an accounting estimate in accordance with
IAS 16 & IAS 8
4. PPE – Depreciation method
34
Applied to both models

• The depreciation method used shall reflect the pattern in

which the asset’s future economic benefits are expected to
be consumed by the entity
• Depreciation methods:
➢ Straight-line method;
➢ Diminishing balance method;
➢ Units of production method.
4. PPE – Depreciation amount
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Accounting estimates, determined periodically

= Historical cost Residual amount

Dep. Amount -
(estimate)

Revalued on
Carrying amount
each year-end
4. PPE – Depreciation
36
➢ The depreciation charge for each
period shall be recognized in profit or loss
unless it is included in the carrying
amount of another asset;
➢ Depreciation of an asset begins when it
is available for use and ceases at the
earlier of the date that the asset is
classified as held for sale and the date the
asset is derecognized.
➢It does not cease even when the asset
becomes idle or retired from active use
unless the asset is fully depreciated.
Example 1 – Depreciation of PPE
37

On Jan 1 20X0, the company acquired a machine with a cost of $200.000.

The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
Required
Calculate the depreciation amount in 20X0.
Example 2 – Depreciation of PPE
38
On Jan 1 20X0, The company acquired a machine with a cost of $200.000.
The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
The company applies revaluation model. At the end of 20X0, the asset is
revalued at $210.000. There was no change in residual value and
depreciation method.
Required
Calculate the depreciation amount in 20X1
Example 3 – Depreciation of PPE
39
On Jan 1 20X0, The company acquired a machine with a cost of $200.000.
The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
The company applies cost model. In 20X5, the machine’s residual value
was estimated at $50,000
Required
Calculate depreciation amount in 20X5.
Example 4 – Depreciation of PPE
40

On Jan 1 20X0, The company acquired a machine with a cost of $200.000. The
machine’s useful life was 10 years. The company depreciate the machine under
straight line method. At the date of acquisition, the machine’s residual value was
expected at $40.000.
The company applies revaluation model. 31/12/20X0, the machine was revalued at
$210,000. There was no change in residual value and depreciation method.
31/12/20X1, the machine had the fair value of $180,000. Its residual value was
estimated at $50,000. The remaining useful life remained.
Required
Calculate depreciation amount in 20X2
5. PPE Impairment
41 Applied to cost model

IAS 36 requires recognition of impairment loss when

necessary.
PPE determined on B/S cannot exceed its recoverable
amount,
Recoverable amount = the higher of an asset’s fair value
less costs to sell and its value in use.
Impairment loss = carrying amount - recoverable amount.
New carrying amount is the basis for depreciation for the
following year
6. PPE Derecognition
42
➢ The carrying amount of PPE shall be derecognized on disposal
or when no future economic benefits are expected from its use
or disposal.

➢ The gain or loss arising from the derecognition = the net

disposal proceeds - carrying amount.

➢ The gain or loss arising from the derecognition ➔ P/L

➢ If the revaluation model is used when derecognizing an asset,

the balance on OCI will be transferred to retained earnings (&
readjustments of income tax will follow).
6. PPE Derecognition
43 Derecognition of PPE

On Disposal When no future economic

benefits are expected

Gain/Loss
= Net disposal proceeds – Carrying amount

Gain or loss are included in P/L, but not as revenue

7. Disclosure
44
For each class of PPE, disclose:

1. the measurement bases used for

determining the gross carrying amount
2. the depreciation methods used
3. the useful lives or the depreciation rates
used
4. the gross carrying amount and the
accumulated depreciation (aggregated
with accumulated impairment losses).
5. a reconciliation of the carrying amount
at the beginning and end of the period.
7. Disclosure
45
6. Also disclose:
o the existence and amounts of
restrictions on PPE
o the amount of expenditures recognised
in the carrying amount in the course of its
construction
o the amount of contractual commitments
for the acquisition of PPE
o the amount of compensation from third
parties for items of property, plant and
equipment that were impaired, lost or
given up that is included in profit or loss
7. Disclosure
46
7. At revalued amounts, the following shall be disclosed:
o The methods and significant assumptions applied in
estimating the items’ fair values
o The effective date of the revaluation
o Whether an independent valuer was involved;
o The nature of every modifiers used in different
valuation techniques in order to determine the revalued
amount
o The carrying amount that would have been recognized
had the assets been carried under the cost model
o The revaluation surplus, indicating the change for the
period and any restrictions on the distribution of the
balance to shareholders
Example 5:
On 01 Jan X1, company A acquired a plant at a cost of
$1800, residual value is estimated at 0. The asset’s useful life
was 6 years, in accordance with the current tax law. The plant
was revalued at $1600, 1500, 720, 600, 500 at the end of
20X1, 20X2, 20X3, 20X4, 20X5 respectively.
Required
Prepare journal entries for 20X1 til 20X5