IAS 16: Property, plant and equipment

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

This Standard does not apply to:

(a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations;
(b) biological assets related to agricultural activity (see IAS 41 Agriculture);
(c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and
Evaluation of Mineral Resources); or
(d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

However, the standard applies to property, plant and equipment used to develop and maintain the assets
described in (b) to (d) above

Definitions
 Property, plant and equipment are tangible items that:
(a) are held 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.
 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 or, where applicable, the amount attributed
to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg
IFRS 2 Share-based Payment.
 Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses.
 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. (See IFRS 13 Fair Value
Measurement.)
 An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.
 Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.
 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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 Useful life is:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.
 Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
 The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
Recognition
An item of property, plant and equipment should be recognized as an asset when:

 It is probable that future economic benefits associated with the asset will flow to the entity; and
 The cost of the asset can be measured reliably.

Separate items
Most of the time assets will be identified individually, but this will not be the case for smaller items, such
as tools, dies and moulds, which are sometimes classified as inventory and written off as an expense.

Major components or spare parts, however, should be recognised as property, plant and equipment.

For very large and specialised items, an apparently single asset should be broken down into its composite
parts. This occurs where the different parts have different useful lives and different depreciation rates are
applied to each part, e.g. an aircraft, where the body and engines are separated as they have different useful
lives.

Initial measurement
An item of property, plant and equipment should initially be measured at cost:

Component of cost
The standard lists the components of the cost of an item of property, plant and equipment.
• 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)

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• Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring the site on
which it is located
Income and related expenses of operations that are incidental to the construction or development of an item
of property, plant and equipment should be recognised in profit or loss.

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
All of these will be recognised as an expense rather than an asset.

Exchanges of assets
The standard specifies that exchange of items of property, plant and equipment, regardless of whether the
assets are similar, are measured at fair value, unless the exchange transaction lacks commercial substance
or the fair value of neither of the assets exchanged can be measured reliably. If the acquired item is not
measured at fair value, its cost is measured at the carrying amount of the asset given up.
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. A similar approach is also applied when a separate component of an item
of property, plant and equipment is identified in respect of a major inspection to enable the continued use
of the item.

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 e.g. 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 statement of
profit or loss, because it merely maintains the economic benefits originally expected e.g. the cost of general
repairs should be written off immediately (revenue expenditure).

Measurement subsequent to initial recognition

The standard offers two possible treatments here, essentially a choice between keeping an asset recorded
at cost or revaluing it to fair value.

Cost model
Property, plant and equipment should be valued at cost less accumulated depreciation.

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Revaluation model
Property, plant and equipment may be carried at a revalued amount less any subsequent accumulated
depreciation. If the revaluation alternative is adopted, two conditions must be complied with:

• 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.
• When an item of property, plant and equipment is revalued, the entire class of assets to which the asset
belongs must be revalued.

Accounting for a revaluation

Steps:
(1) Restate asset from cost to revaluation
(2) Remove any existing accumulated depreciation provision
(3) Include increase in carrying value in revaluation reserve (part of other components of equity within the
statement of financial position).
Journal entrie
Dr Non-current assets cost/revaluation x
Dr Accumulated depreciation (eliminate all of existing provisions) x
Cr Revaluation reserve (valuation less previous CV) x

Recognizing revaluation gains and losses

Revaluation gains are recorded in the revaluation reserve and reported as a component of other
comprehensive income either within the statement of profit or loss and other comprehensive income or in
a separate statement (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).

Revaluation losses which represent impairment are recognized in the statement of profit or loss. When a
revaluation loss arises on a previously revalued asset it should be deducted against the previous revaluation
gain. Any surplus impairment will be recorded as an impairment expense in the statement of profit or loss.

Depreciation on non-current assets

Commencement of depreciation
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 when staff needs to be trained
to use it. Depreciation is continued even if the asset is idle.

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Change in method of depreciation
The depreciation method used should reflect as fairly as possible the pattern in which the asset’s economic
benefits are consumed by the entity. Possible methods include:

• Straight line
• Reducing balance
• Machine hours

A change from one method of providing depreciation to another:

• Is permissible only on the ground 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 or residual value

Useful life and residual value should be reviewed at the end of each reporting period and revised if
expectations are significantly different from previous estimates.

The carrying amount of the asset at the date of revision less any residual value should be depreciated over
the revised remaining useful life.

Separate components
A complex asset is an asset that may be thought of as having separate components within a single asset e.g.
an engine with a piece of plant.

Each separate part of the asset should be depreciated over their useful life.

Depreciation of revalued assets

Once an asset has been revalued the following treatment is required:
• Depreciation must be charged based on revaluation less residual value over remaining useful
life.
• The whole charge must go to the statement of profit or loss for the year.
• An annual reserves transfer may be made (revaluation reserve to retained earnings) for extra
depreciation on the revalued amount compared to cost (measured as the difference between
depreciation charge based on revalued amount and the charge based on historic cost).
• Transfer disclosed in the statement of changes in equity.

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Journal entries

Dr Statement of profit or loss-depreciation charge x

Cr Accumulated depreciation x

And:

Dr Revaluation reserve (depreciation on valuation-depreciation on original cost) x

Cr Retained earnings x

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.

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.
When a reval ued ass et is dispos ed of, any reval uation s urpl us may be tr ans ferred direc tl y to r etained ear nings, or it may be l eft in equi ty under the headi ng revaluati on sur plus. T he tr ans fer to retai ned ear nings shoul d not be made through pr ofit or l oss

Disclosure
The standard has a long list of disclosure requirements, for each class of property, plant and equipment.
(a) Measurement bases for determining the gross carrying amount (if more than one, the gross carrying
amount for that basis in each category)
(b) Depreciation methods used
(c) Useful lives or depreciation rates used
(d) Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses)
at the beginning and end of the period
(e) Reconciliation of the carrying amount at the beginning and end of the period showing:
(i) Additions
(ii) Disposals
(iii) Acquisitions through business combinations
(iv) Increases/decreases during the period from revaluations and from impairment losses
(v) Impairment losses recognised in profit or loss
(vi) Impairment losses reversed in profit or loss
(vii) Depreciation
(viii) Net exchange differences (from translation of statements of foreign entity)
(ix) Any other movements.

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The financial statements should also disclose the following:
(a) Any recoverable amounts of property, plant and equipment
(b) Existence and amounts of restrictions on title, and items pledged as security for liabilities
(c) Accounting policy for the estimated costs of restoring the site
(d) Amount of expenditures on account of items in the course of construction
(e) Amount of commitments to acquisitions
Revalued assets require further disclosures.
(a) Basis used to revalue the assets
(b) Effective date of the revaluation
(c) Whether an independent valuer was involved
(d) Nature of any indices used to determine replacement cost
(e) Carrying amount of each class of property, plant and equipment that would have been included in the
financial statements had the assets been carried at cost less accumulated depreciation and accumulated
impairment losses.
(f) Revaluation surplus, indicating the movement for the period and any restrictions on the distribution of
the balance to shareholders.

The standard also encourages disclosure of additional information, which the users of financial statements
may find useful.

(a) The carrying amount of temporarily idle property, plant and equipment
(b) The gross carrying amount of any fully depreciated property, plant and equipment that is still in use
(c) The carrying amount of property, plant and equipment retired from active use and held for disposal
(d) The fair value of property, plant and equipment when this is materially different from the carrying
amount
Example 1
A company revalues its buildings and decides to incorporate the revaluation into its financial statements.
Extract from the statement of financial position at 31st December 2007 N’000
Buildings:
Cost 1,200
Depreciation (144)
1,056
st
The building is revalued at 1 January 2008 at N1,400,000. Its useful life is 40 years at that date.
Show the relevant extracts from the final accounts at 31st December 2008.

Example 2
On 1st April 2008 the fair value of AB’s leasehold property was N100,000 with a remaining life of 20 years.
The company’s policy is to revalue its property at each year end. At 31st March 2009 the property was

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valued at N86,000. The balance on the revaluation reserve at 1st April 2008 was N20,000 which relates
entirely to the leasehold property.
AB does not make a transfer to realized profit in respect of excess depreciation.
Required:
(1) Prepare extracts of AB’s financial statements for the year ended 31st March 2009 reflecting the above
information.
(2) State how the accounting would be different if the opening revaluation reserve did not exist.
Example 3
On 1 March 2008 Yucca acquired a machine from Plant under the following terms

List price of machine 82,000

Import duty 1,500

Delivery fees 2,050

Electrical installation costs 9,500

Pre-production testing 4,900

Purchase of a five-year maintenance contract with Plant 7,000

In addition to the above information Yucca was granted a trade discount of 10% on the initial list price of
the asset and a settlement discount of 5% if payment for the machine was received within one month of
purchase. Yucca paid for the plant on 25 March 2008.

How should the above information be accounted for in the financial statements?

Example 4
On 1 March 2010 Yucca purchased an upgrade package from Plant at a cost of N18,000 for the machine it
originally purchased in 2008 (Example 1). The upgrade took a total of two days where new components
were added to the machine. Yucca agreed to purchase the package as the new components would lead to a
reduction in production time per unit of 15%. This will enable Yucca to increase production without the
need to purchase a new machine.
Should the additional expenditure be capitalised or expensed?

Example 5
A company purchased a property with an overall cost of N100m on 1 April 2009. The property elements
are made up as follows:

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 N

Land and buildings

(Land element $20,000) 65,000 50 years

Fixtures and fittings 24,000 10 years

Lifts 11,000 20 years

100,000

Calculate the annual depreciation charge for the property for the year ended 31 March 2010
Example 6
The carrying value of Zen’s property at the end of the year amounted to N108,000. On this date the property
was revalued and was deemed to have a fair value of N95,000. The balance on the revaluation reserve
relating to the original gain of the property was N10,000.

What is the double entry to record the revaluation?

Example 7
A company revalued its property on 1 April 2009 to N20m (N8m for the land). The property originally cost
N10m (N2m for the land) 10 years ago. The original useful economic life of 40 years is unchanged. The
company’s policy is to make a transfer to realised profits in respect of excess depreciation.
How will the property be accounted for in the year ended 31 March 2010?
Example 8
An asset that originally cost N16,000 and had accumulated depreciation on it of N8,000 was disposed of
during the year for N5,000 cash.

How should the disposal be accounted for in the financial statements?