PAS 16 PPE

Property, Plant and Equipment

PAS 16 applies to all items of PPE
except to the following for which other
standards apply:
a. assets classified as held for sale(PFRS 5
Non-current Assets Held for Sale
and Discontinued Operations)
b. Biological assets other than bearer plants but it does not apply to
the produce on bearer plants
c. the recognition and measurement of exploration and evaluation
assets (PFRS 6 Exploration for and Evaluation of Mineral
Resources)
d. mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources
It will help us…..
 to know the definition of Property,
Plant and Equipment
 to know the recognition of Property, Plant
and Equipment
 to understand the measurement of Property,
Plant and Equipment
 to identify the methods of depreciating Property,
Plant and Equipment
What is Property,
Plant and Equipment?

Tangible assets (have physical substance)

Used in Business (used in production or
supply of goods or services, for rental, or for
administrative purposes); and
Long-term in nature (expected to be used for
more than one period)
 Examples of PPE

Land Property Equipment

The following are not PPE:
×Assets classified as held for sale under PFRS 5
×Biological assets related to agricultural activity, other
than bearer plants
×Intangible assets
×Minor spare parts and short-lived stand-by equipment
Recognition
-an item of PPE is recognized if:

a. It is probable that future economic

benefits associated with the asset will flow
to the entity; and

b. Cost of the asset can be measured reliably.

Initial Measurement
An item of PPE is initially measured at cost. Cost comprises the
following:
a. Purchase price, including import duties, nonrefundable
purchase taxes, less trade discounts and rebates.
b. Direct costs of bringing the asset to the location and
condition necessary for it to be used in the manner intended be
management
c. Initial estimate of dismantlement, removal and site
restoration costs for which the entity incurs an obligation by
acquiring or using the asset other than to produce inventories
Examples of directly attributable Example costs that are expensed
costs: outright:
• Costs of employee benefits • Costs of opening a new
arising directly from the facility.
construction or acquisition of • Costs of introducing a new
PPE; product or service.
• Costs of site preparation; • Costs of conducting
• Initial delivery and handling business in a new location
costs; or with a new class of
• Installation and assembly customers.
costs; • Administration and other
• Testing costs, net of disposal general overhead costs.
proceeds pf sample generated
during testing; and
• Professional fees
• Illustration:
Entity A acquires equipment on January 1, 20X1 information on
costs is as follows:
Purchase price, gross of the trade discount
1,000,000
Trade discount available 10,000
Freight costs 20,000
Testing costs 30,000
Net Disposal proceeds of samples generated during testing 50,000
Present value of estimated costs of dismantling the equipment at the
end of its useful life 6,209

 The initial cost of the equipment is computed as follows:

Purchase price, net of trade discounts (1M-10K) 9,900,000
Freight Cost 20,000
Testing Cost 30,000
Net Disposal proceeds of samples generated during testing (5000)
Present vale is dismantle costs 6,209
Initial Measurement 1,041,209
Incidental Operations
Incidental operations before or during
the construction of PPE are not
necessary in bringing the PPE to the
location and condition necessary for it to
be capable of operating in the manner
intended by management.

Self Constructed asset

 ‘’The cost of a self-constructed asset is
determined using the same principles
as of for an acquired asset’’
Bearer plants Vs. Biological asset
Measurement of cost
Cost is measured at the cash price
equivalent at the acquisition date.

If payment is deferred beyond normal

credit terms, the difference between the
cash price equivalent and the total
payment is recognized as interest over
the credit period.
 The entries to record the purchase are as follows:

Factory equipment 144,500

Cash 144,500
to record capitalizable cost of equipment

Cash 500
Factory Equipment 500
to record sale of samples generated from testing

General and administrative costs 4,200

Advertising expense 3,800 8,000
Cash
to record non-capitalizable costs
Subsequent expenditure on
recognized PPE
• Capitalization of cost ceases when the PPE is in
the location and condition necessary for it to be
capable of operating in the manner intendend by
management. Therefore, costs incurred in using
or redeploying a PPE are not capitalized.
The following subsequent expenditures on PPE are
recognized as expenses:

A. Costs of day-to-day servicing on a PPE

B. Costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is
operated at less than full capacity
C. Initial operating losses
D. Costs of relocating or reorganizing part or all of the entity’s
operation
Recognition criteria in determining
whether subsequent expenditures can be capitalized
PAS 16 specifically addresses the capitalization of the following
subsequent expenditures:

Replacement costs- Some PPE have parts that need to be

replaced. The cost of replacing a part of an item of PPE is
capitalized if the recognition criteria are met.
Major inspections- Some PPE require regular major inspections
as condition for their continued operation. Major inspections are
accounted for similar to replacement costs, i.e., the cost of a major
inspection is capitalized while the carrying amount of the previous
inspection is derecognized.
Subsequent measurement
• After initial recognition, an entity chooses either the cost model or
the revaluation model as its accounting policy and applies that
policy to ab entire class of PPE.
• Cost model
• Under the cost model, a PPE is carried at its cost less any
accumulated depreciation and any accumulated impairment losses.
• 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 recognized in accordance with the specific requirements of other
PFRSs.”
Depreciation
• Depreciation
• The systematic allocation of the depreciable amount of an asset over its
useful life.
• Depreciable amount
• The cost of an asset, or other amount substituted for cost, less its residual
value.
• Residual value
• 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.
• Useful life
• (a) 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.
Depreciation is recognized as expense (in profit or loss)unless it
is included in the cost of producing another asset.
Depreciation starts when the asset is available for use, in the
manner intended by management
Depreciation stops when the asset is:
Derecognized
Classified as held for sale under PFRS 5; or
Fully depreciated

Depreciation does not cease when the asset becomes idle or is

retired from active use.
Depreciation method
• PAS 16 mentions three examples, namely: straight-line
method, diminishing balance method and units of
production method.
• PAS 16 does not prescribe any specific method. The
choice depends on management‘s judgment.
• PAS 16, prohibits the use of a depreciation method that is
based on revenue
• Revaluation model
• A PPE is carried at its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated
impairment losses.
• Fair value
• 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.
• Revaluations are applied to an entire class of PPE. The following
are examples of separate classes:
• Land
• Land and building
• Machinery
• Furniture and fixture
• Office equipment
• Bearer plant
Accounting for revaluations
• An increase or decrease in the carrying amount of a PPE
resulting from revaluation is recognized in other comprehensive
income and accumulated in equity under the Revaluation surplus
account except for the following:
• An increase that represents a reversal of a previous impairment loss is
recognized in profit or loss as impairment gain.
• A decrease in excess of the credit balance in the Revaluation surplus of
the asset is revognized in profit or loss as impairment loss

Fair value* xx
Less: Carrying amount (xx)
Revaluation Surplus xx
Subsequent accounting for revaluation
surplus
• Revaluation surplus is subsequently accounted for as follows;

• If the revaluated asset is non-depreciable ,the whole of the revaluation

surplus is transferred directly to ratained earnings when the asset is
derecognized.
• If the revaluated asset is depreciable, a portion of the revaluation surplus
may be transferred directly to retained earnings as the asset is used. The
portion transferred each year is equal to the difference between the
depreciation based on the revalued varrying amount and the depreciation
based on n the original cost.
Derecognition
• Is the opposite of recognition
• Refers to the removal of a previously recognized asset
or liability from the entity’s statement of financial
position.

• The carrying amount of PPE is derecognized when

• It is disposed
• No future economic benefits are expected from the asset’s use or
dispossal
Disclosure
• General disclosures for each class of PPE:
• The measurement bases used
• The depreciation method used
• The useful lives or depreciated rates used
• The 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, disposals, and other
changes
• Additional disclosures:
• Restrictions on title and PPE pledged as security for liabilities
• Expenditures to construct PPE during the period
• Contractual commitments for the acquisition of PPE
• Compensation for impairment losses
• Changes in estimates relating to PPE
• Disclosures for revalued PPE:
• Date of revaluation
• Whether an independent valuer was involved
• The carrying amount of each revalued class of PPE if they had
been measured under cost model
• Revaluation surplus, including changes during the period and any
restrictions on its distribution to shareholders.
Encouraged disclosures:
• Carrying amount of temporarily idle PPE
• Gross carrying amount of any fully depreciated PPE
that is still in use
• Carrying amount of PPE retired from active use and
not classified as held for sale in accordance with PFRS
5
• When the cost model is used, the fair value of PPE
when this is materially different from the carrying
amount
Thank You