2025/02/27

IAS 16
LECTURE 1 of 2

• Separate components – Replacement

• Separate components not identified at initial recognition
• Inspection costs identified at initial recognition
• Inspection costs not identified at initial recognition
• Deferred tax effect of revaluations
• IAS 23 – Borrowing Costs

Errata for consistency

IAS 16 – Class examples 1 to 4 (separate document on clickUP with

changes in red) – changes relate to account description in journals

IAS 23 – change relate to IFRS 18 Presentation in SPLOCI on investment

income

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Separate components ‐ replacement

SEPARATE COMPONENTS
Entity should identify significant parts (components) of PPE‐item at initial recognition

• CP of item allocated to significant parts; and

• each part/component depreciated separately

What is a “Significant part / component”?

Each part of PPE‐
item with a cost
that is significant in
relation to total
cost of item

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SEPARATE COMPONENTS – Class example 1

Engine = 6 000 M Frame = 5 000 M Interior = 3 000 M Aircraft = 14 000 M

Useful life: 10 years Useful life: 20 years Useful life: 4 years

DR CR
Aircraft (SFP) 14 000 000
Bank (SFP) 14 000 000

SEPARATE COMPONENTS ‐ PRESENTATION

Engine = 6 000 M Frame = 5 000 M Interior = 3 000 M Aircraft = 14 000 M

Useful life: 10 years Useful life: 20 years Useful life: 4 years

ABC LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2025
ASSETS Rm
Non‐current assets
Property, plant and equipment 9 200’

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SEPARATE COMPONENTS ‐ DISCLOSURE

ABC LIMITED
NOTES FOR THE YEAR ENDED 31 DECEMBER 2025
6. Property, plant and equipment
Do NOT disclose components
Land Buildings Aircraft separately
Carrying amount at beginning of the year XXX XXX 10 800’

Gross carrying amount XXX XXX 14 000’

Accumulated depreciation ‐ (XXX) (3 200’)
Depreciation ‐ XXX (1 600’)
Carrying amount at beginning of the year XXX XXX 9 200’
Gross carrying amount XXX 14 000’
Accumulated depreciation ‐ (4 800’)

Separate components ‐ Replacement

• Some components may require regular replacement

Derecognise the cost

• When replacement takes place and accumulated
depreciation

1) CA of replaced component derecognised

2) CP of replacement part capitalised (provided recognition criteria

met) and depreciated separately

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SEPARATE COMPONENTS

Engine = 6 000 M Frame = 5 000 M Interior = 3 000 M Aircraft = 14 000 M

Useful life: 10 years Useful life: 20 years Useful life: 4 years

R6M / 10yrs = R5M / 20yrs = R3M / 4yrs x

R600’ R250’ 3/12 = R187,5’

DR CR
Depreciation (P/L) 1 037 500
Accumulated depreciation: Aircraft (SFP) 1 037 500

Separate components – Derecognition

Accumulated depreciation: Aircraft (SFP) 2 437,500

[1 500 000 + 750 000 + 187 500]
Derecognition of replaced interior (P/L) 562,500
Aircraft (cost) (SFP) 3 000 000

Aircraft (cost) (SFP) 3 200 000

Bank / Creditor (SFP) 3 200 000

Depreciation (P/L) [3 200 000 / 4yrs x 9/12] 600 000

Accumulated depreciation: Aircraft (SFP) 600 000

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Separate components – not identified at initial

recognition – Class example 2
Use the same information as in class example 1 but assume that the entity did not identify
separate components at initial recognition (1 January 20x23) of the aircraft. The estimated useful
life of the aircraft was determined as 10 years, with an insignificant residual value.

Assume that the interior of the aircraft was in such a deteriorated condition that it needed to be
replaced on 31 March 20X26 at a cost of R3 200 000. You can assume that the new interior has an
estimated useful life of four years from 1 April 20X26, with an insignificant residual value.
3 200 000 / 10yrs
Calculate DEEMED CA: x 3,25yrs
Deemed cost 3 200 000
Deemed accumulated depreciation based on deemed cost (1 040 000)
= Deemed CA 2 160 000

Write off in P/L

(J1 page 12)

Derecognition – class example 2

Accumulated depreciation: Aircraft (SFP) 1 040 000
Derecognition of replaced interior (P/L) 2 160 000
Aircraft (cost) (SFP) 3 200 000

Aircraft (cost) (SFP) 3 200 000

Bank / Creditor (SFP) 3 200 000

Depreciation (P/L) [3 200 000 / 4yrs x 9/12] 600 000

Accumulated depreciation: Aircraft (SFP) 600 000

Depreciation (P/L) 1 080 000

Accumulated depreciation: Aircraft (SFP) 1 080 000

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Day to day servicing

• Examples are labour, consumables and small parts

Expense in P/L

DR CR
Repairs and maintenance (P/L) XXX
Bank / Creditor (SFP) XXX

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Major inspections

Necessary to allow continued use of asset (parts not necessarily

replaced)

If major inspection expected at initial recognition

= part of CP of asset allocated to inspection (based on current market

price of inspection); and

depreciated over expected period to next inspection

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Major inspections

Major
Component inspection
1 component

Component 2

Inspection is incurred on engine component only

Total value of aircraft = R10 000 000 and major inspection with current
estimated cost of R200 000 is expected

Frame Frame Engine

Engine
R4M R4.8M
R4M R5M

Lining Inspection
R1M R0.2M
Lining
R1M

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Inspection is incurred on engine and frame components

Total value of aircraft = R10 000 000 and major inspection with current
estimated cost of R200 000 is expected

Frame Engine
Frame Engine R4M – (4/9 X R5M – (5/9 x
R0.2M) R0.2M)
R4M R5M

Lining Inspection
Lining R1M R0.2M

R1M

Major inspections
When inspection performed:

1)CA of previous inspection costs derecognised

DR CR
Accumulated depreciation: Asset (SFP) XXX
Asset (SFP) XXX
Write‐down of inspection (P/L) XXX

2)Cost of actual inspection capitalised (provided recognition criteria met) and

depreciated over expected period up to next inspection

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Major inspections
If inspection costs not previously identified as
separate component (therefore not separately
depreciated)

= calculate ‘deemed’ CA based on cost of current

inspection

Class example 3 – Inspection costs identified

as a separate component at initial recognition
Cost of asset 1/1/20X1 R500 000
Useful life 1/1/20X1 10 years
Depreciation method Straight‐line
The asset will need to have a major overhaul and inspection done every two years.
On 1 January 20X1, management estimated that the inspection cost component of
the total cost of R500 000 at initial recognition is R30 000.

The asset was available for use as intended by management on 1 January 20X1,
but was only used from 1 February 20X1. The reporting date of the entity is
31 December.

On 31 December 20X2, actual inspection costs incurred amounted to R75 000.

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Class example 3
Derecognise remaining balance (carrying amount) of old inspection
costs recognised as separate component at initial recognition of
asset.

Cost (1/1/20x1) 30 000

Accumulated depreciation (30 000)
[30 000 / 2yrs x 2yrs]
Carrying amount (31/12/20x2) ‐

DR CR
Accumulated depreciation: Asset (SFP) 30 000
Asset (cost) (SFP) 30 000

Class example 3

Capitalise actual major inspection costs incurred 31/12/20X2

DR CR
Asset (SFP) 75 000
Bank / Creditor (SFP) 75 000

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Class example 3

Class example 4 – Inspection costs NOT identified

as a separate component at initial recognition
Cost of asset 1/1/20X1 R500 000
Useful life 1/1/20X1 10 years
Depreciation method Straight‐line
Asset was available for use as intended by management on 1/1/20X1 but only used
from 1/2/20X1. The reporting date of the entity is 31 December.

On 30 June 20X4, major inspection costs were incurred of R50 000. It is not
expected that future inspection costs will differ significantly from this amount.
Major inspections will be carried out every two years in the future (i.e. next
inspection cost will be incurred on 30 June 20X6). Inspection costs were not
identified as a separate component at initial recognition.

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Class example 4
Derecognise remaining balance (carrying amount) of old inspection
costs previously capitalised. Determine the deemed cost and
calculate the deemed accumulated depreciation.

Cost (1/1/20x1) 50 000

Accumulated depreciation (17 500)
[50 000 / 10yrs x 3,5yrs]
Carrying amount (30/06/20x4) 32 500

DR CR
Accumulated depreciation: Asset (SFP) 17 500
Asset (cost) (SFP) 50 000
Loss on derecognition of inspection costs (P/L) 32 500

Class example 4

Capitalise actual major inspection costs incurred 30/06/20X4

DR CR
Asset (cost) (SFP) 50 000
Bank (SFP) 50 000

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IAS 12 for IAS 16

• IAS 16 dealt with in detail in RRP 200
• Detail can (AND WILL) be tested in RRP 300

RRP 300:
• focus on tax implications of:
• Revaluation surplus of non‐depreciable assets (e.g. land)

Revision example of revaluations

Class example 7

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IAS 12 for
IAS 16
Deferred tax effect of revaluation of PPE

Class example 7
Cost FV – 1/1/20X7 FV – 1/1/20X8 Proceeds
21/12/20x8
Land A 100 000 120 000 85 000 75 000

Loss on
sale of
Surplus: Deficit of R35 000 land of
R10 000
R20 000 ‐ OCI
R20 000 – OCI
R15 000 – P/L

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Class example 7
Cost FV – 1/1/20X7 FV – 1/1/20X8 Proceeds
21/12/20x8
Land A 100 000 120 000 85 000 75 000

R20 000 – OCI

R15 000 – P/L

Cost FV – 1/1/20X7 FV – 1/1/20X8

Land A 150 000 110 000 160 000

Deficit of R40 000 Surplus of R50 000:

– include in P/L Include R40 000 in P/L
Include R10 000 in
OCI

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Cost FV – 1/1/20X7 FV – 1/1/20X8

Land A 150 000 110 000 160 000

Surplus of R50 000:

Include R40 000 in P/L
Include R10 000 in
OCI

IAS 12 for IAS 16

Tax implications on revaluation of land

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IAS 12 for IAS 16

Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 380 000 0 380 000 EXEMPT

Sell R450 000

CURRENT TAX CALCULATION Year Year Year Year Year Year Year Year 25 TOTAL
1 2 3 4 5 6 7
Profit R70 000
Accounting profit x x x x x x x x x
Non‐taxable items:
Capital gain on sale of ‐ ‐
Remove ‐20%
‐ ‐ ‐ ‐ ‐
land of capital gain
Temporary differences: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Taxable profit x x x x x x x x x

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Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 400 000

Cost 380 000
Revaluation 20 000

OCI R20 000

CURRENT TAX CALCULATION Year Year Year Year Year Year Year Year 25 TOTAL
1 2 3 4 5 6 7
Acc profit x x x x x x x x x
Non‐taxable items:
‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Temporary differences: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Taxable profit x x x x x x x x x

Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 400 000

Cost 380 000
Revaluation 20 000

Sell R450 000

OCI R20 000
CURRENT TAX CALCULATION Year Year Year Year Year Year Year Year 25 TOTAL
1 2 3 4 5 6 7
Acc profit x x x
Profit R50x 000 x x x x x
Non‐taxable items:
Capital gain on sale of ‐ ‐ ‐Remove‐20% ‐ ‐ ‐ ‐
land of capital gain
Temporary differences: ‐ ‐ ‐ Add 80%
‐ of ‐ ‐ ‐ ‐

Capital gain capital gain

on revaluation
Taxable profit x x x x x x x x x
of R20 000

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Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 400 000 380 000 20 000 4 480

Cost 380 000 [20 000 x 80% x 28%]
Revaluation 20 000 When SOLD, Tax
future deduction consequences of
= recovery through
BASE COST SALE
CURRENT TAX CALCULATION Year Year Year Year Year Year Year Year 25 TOTAL
1 2 3 4 5 6 7
Acc profit x x x x x x x x x
Non‐taxable items:
Capital gain on sale of ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
land
Temporary differences: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Capital gain
Taxable profit x x x x x x x x x

IAS 12 for IAS 16

Use CGT rate

to account for
deferred tax consequences of
revalued non-depreciable asset

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Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 400 000 380 000 20 000 4 480

Cost 380 000 [20 000 x 80% x 28%]
Revaluation 20 000 When SOLD, Tax
future deduction consequences of
= recovery through
BASE COST SALE

Asset / Liability Carrying Tax base Temp diff Deferred tax liability
amount (28%)
(SFP) (CA) (TB) (TD)

Land 380 000 0 380 000 EXEMPT

When USED, Tax
future deduction consequences of
= recovery through
0 wear&tear USE

IAS 12 for IAS 16

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Income tax expense (P/L) 12 296

The tax follows the related transaction

(12 296)

20 000

IAS 12 for IAS 16 Reval surplus (OCI) 4 480

Income tax expense (P/L) 7 816

DEBIT CREDIT
1 Jan X13 Land (SFP) 20 000
Revaluation surplus (OCI) 20 000
Revaluation of land

1 Jan X13 Revaluation surplus (OCI) 4 480

Deferred Tax (SFP) 4 480
Deferred tax on revaluation of land
(20 000 x 80% x 28%)

31 DecX13 Income tax expense (P/L) 7 816

Deferred Tax (SFP) 7 816

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IAS 12 for IAS 16 Reval surplus (OCI) 4 480

Income tax expense (P/L) 7 816

DEBIT CREDIT
1 Jan X13 Land (SFP) 20 000
Revaluation surplus (OCI) 20 000
Revaluation of land

(7 816) 1 Jan X13 Revaluation surplus (OCI) 4 480

Deferred Tax (SFP) 4 480
Deferred tax on revaluation of land
20 000 (20 000 x 80% x 28%)
Tax on asset revaluation (4 480)
31 DecX13 Income tax expense (P/L) 7 816
Deferred Tax (SFP) 7 816

IAS 12 for IAS 16

Revaluation surplus = OCI

Tax = OCI

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CE 8
Cost of building = R1M

Cost (1/1/20X1) FV – 1/1/20X2

Land 190 000 250 000

Surplus of R60 000:

Include in OCI

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1 000’ / 25
1000 x 5%

R1M – R40 000 R1M – R50 000

R1M – R80 000 R1M – R100 000

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Class example 8

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R100 000 recoupment

R1 000 000 cost
–
TB R 900 000 R900 000 TB

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Homework

• Refer to Activity Planner

• Study for CEV

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