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IAS 16, Property, Plant and Equipment Overview

This document provides an overview of IAS 16, which establishes the accounting treatment for property, plant and equipment. There are four key areas: initial recognition at cost, subsequent expenditure capitalized if benefits increase, depreciation using various methods over useful life, and optional revaluation model to remeasure assets to fair value with adjustments to asset/equity accounts. Revaluation gains increase equity reserves while losses first reduce reserves then charge income if excess over reserves.

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614 views3 pages

IAS 16, Property, Plant and Equipment Overview

This document provides an overview of IAS 16, which establishes the accounting treatment for property, plant and equipment. There are four key areas: initial recognition at cost, subsequent expenditure capitalized if benefits increase, depreciation using various methods over useful life, and optional revaluation model to remeasure assets to fair value with adjustments to asset/equity accounts. Revaluation gains increase equity reserves while losses first reduce reserves then charge income if excess over reserves.

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IAS 16 PROPERTY PLANT&EQUIPMENT (PPE)

IAS 16, Property, Plant and Equipment overview


There are essentially four key areas when accounting for Property, plant and
equipment These are:
 initial recognition
 revaluation
 depreciation
 Revaluation derecognition (disposals).

Initial recognition
The basic principle of IAS 16 is that items of property, plant and equipment that
qualify for recognition should initially be measured at cost. all costs incurred to bring
an asset to its present location and condition for its intended use should be
capitalized.
Commonly used examples of cost include:
1) purchase price of an asset (less any trade discount)
2) directly attributable costs such as:
– cost of site preparation
– Initial delivery and handling costs
– Installation and testing costs
– Professional fees
3) the initial estimate of dismantling and removing the asset and restoring the
site on which it is located, to its original condition
4) borrowing costs

Subsequent expenditure
Subsequent expenditure on property plant and equipment should only be capitalized
if it results in the total economic benefits expected from the asset to increase above
those expected on original recognition eg the cost of an extension to a building
should be capitalized(capital expenditure) as economic benefits will increase with
greater space.

All other subsequent expenditure should be recognized in the income statement


because it merely maintains the economic benefits originally expected eg the cost of
general repairs should be written off immediately (revenue expenditure)

Depreciation
Depreciation is defined in IAS 16 as being the systematic allocation of the
depreciable amount of an asset over its useful economic life. In other words,
depreciation applies the accruals concept to the capitalized cost of a non-current
asset and matches this cost to the period that it relates to.
Depreciation methods
There are many methods of depreciating a non-current asset with the most common
being:
1. Straight line
2. Reducing balance
3. Sum of digits
4. Machine hours
Useful economic lives and residual values
IAS 16 requires that these estimates be reviewed at the end of each reporting
period. If either changes significantly, the change should be accounted for over the
useful economic life remaining.
The carrying amount of the asset at the date of revision less any residual value
should be depreciated over the revised remaining useful life.

REVALUATION
IAS 16 permits the choice of two possible treatments in respect of property, plant
and equipment:
 The cost model (carry an asset at cost less accumulated
depreciation/impairments).
 The revaluation model (carry an asset at its fair value at the revaluation date
less subsequent accumulated depreciation impairment).
If the revaluation policy is adopted this should be applied to all assets in the entire
category, ie if you revalue a building, you must revalue all land and buildings in that
class of asset. Revaluations must also be carried out with sufficient regularity so that
the carrying amount does not differ materially from that which would be determined
using fair value at the reporting date.
Accounting for a revaluation
There are a series of accounting adjustments that must be undertaken when
revaluing a non-current asset. These adjustments are indicated below.
The initial revaluation
Calculate the revaluation gain or loss as follows:
Carrying value of non-current asset at revaluation date X
Valuation of non-current asset X
Difference = gain or loss on revaluation X

Revaluation gains
A gain on revaluation is always recognised in equity, under a revaluation reserve
(unless the gain reverse’s revaluation losses on the same asset that were previously
recognised in the income statement – in this instance the gain is to be shown in the
income statement).
The revaluation gain is known as an unrealised gain which later becomes realized
when the asset is disposed of (derecognised).

Double entry:
Dr Non-current asset cost
Cr Revaluation reserve
(Gain on revaluation)

Example 5
A company purchased a building on 1 April 2007 for $100,000. The asset had a
useful economic life at that date of 40 years. On 1 April 2009 the company revalued
the building to its current fair value of $120,000.
What is the double entry to record the revaluation?

Answer
Dr Buildings account 20,000
Cr Revaluation reserve 20,000
To record increase in value of asset value from 100,000 to 120,000
Revaluation losses
A revaluation loss should be charged against any related revaluation surplus to the
extent that the decrease does not exceed the amount held in the revaluation reserve
in respect of the same asset. Any additional loss must be charged as an expense in
the
Income statement.

Double entry:
Dr Income statement (with the loss)
Cr Non-current asset (loss on revaluation)

Example 6
The carrying value of Zen’s property at the end of the year amounted to $108,000.
On this date the property was revalued and was deemed to have a fair value of
$95,000. What is the double entry to record the revaluation?
Dr Income statement 17,000
Cr Property account 17,000

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