Property plant &

equipment
IAS 16
(Chapter 7)
Lecturing cycle
Pre-
reading
Self- Lecture
study

Consult Self-
ation study

Objective
Tutorial test
Property plant & equipment
• Tangible items that are held either for:
• Use in the production or supply of goods or services
• Rental to others
• Administration purpose
• Are expected to be used during more than one
period. Land | Buildings | Plant | Factory Equipment

Recognition criteria: Office Equipment | Furniture | Vehicles

• The inflow of future economic benefits to the entity is
probable.
• The asset’s cost can be reliably measured.
 IAS 16 recognition criteria vs 2018 Conceptual Framework
Recognition of significant parts
Significant in relation to the total cost of the asset.
Criteria:
• Does this part have a different useful life?
• Does it have a different residual value?
Accounting treatment:
• Recognise it separately
• Depreciate separately
Example 1:

A Ltd purchased a ship for R10m cash on 30 June

2018. The ship has 3 parts:
• Marine engine: R3 000 000 (200 000 hours design
life)
• Hull: R5 000 000 (50 years useful life with nil
residual value)
• Other parts: R2 000 000 (individually insignificant)
• Total other PPE has a carrying amount of R30m.
Identify significant parts and prepare related JEs
Example 1 solution
Significant parts:
- Marine engine
WHY??
- Hull
- Other parts

Journal entry:
DR Ship: Marine engine R3m
DR Ship: Engine R5m
DR Ship: Other parts R2m
CR Bank R10m
Initial measurement
• Day 1: @ Cost
Cost is the amount of cash or cash equivalent
paid or
- fair value of the consideration given up at the
time of construction or acquisition or
- the amount recognised per other standard

• Cost include Initial costs and subsequent costs

• Cost when paid for in cash?
Purchase price (cash)
Plus: directly attributable costs
Plus: certain future costs
• Cost …on credit i.e. cash payment is deferred
• Present value (the amount we would have paid in cash on purchase
date)
Initial measurement

Cash or
Credit COST or Present Value

Purchase FAIR VALUE:

Of the asset given up; OR Of the asset
received (more clearly visible)
Use Fair Value if reliably measurable
Asset
exchange
CARRYING AMOUNT: Exchange lacks
commercial substance; If Fair Value
of both assets were unable to be
reliably measurable
Initial measurement

Example 2:
Washy Ltd purchased a machine for R100 000. There were no
individually significant parts. The purchase price is payable
within normal credit terms.
Example 3:
A company purchased a machine for R100 000. There were no
individually significant parts. The purchase price is payable
after one year (being longer than normal credit terms). The
present value of this amount, calculated using an appropriate
interest rate of 10% is R90 909.
Prepare journal entries relating to above
Ex 2 and 3 solution
Example 2:
DR: Machine R100 000
CR Payable R100 000

Example 3:
DR: Machine R90 909
CR Payable R90 909
- Payable outside normal credit terms, therefore use the PV
as the initial cost of the machine
Asset exchange
• The cost of the new asset will be the fair value of
the asset given up.
• Cost is the fair value of the asset received if:
• FV of the asset given up is not available or
• FV of the received asset is ‘more clearly evident’
• Carrying amount of asset given up, if:
• The transaction lacks commercial substance or
• FV of both assets cannot be reliably measured
No commercial substance if exchange:
- Will not change the Future CF – Risk, timing or amount
- Will not change the value of the operation
- Insignificant change to the fair value of assets exchanged
Directly attributable costs
• Cost that are necessary to get the asset into a
location and condition to be used as management
intends.
• Capitalised to the cost of an asset
Examples:
• Site preparation costs
• Initial delivery and handling cost
• Professional fees
• Salaries/wages directly related to acquisition of the
asset
• Borrowing costs
Future cost
Future costs arise as a result of acquisition or usage of an
asset.
• The ownership may come with obligations to dismantle/
restore the location.
Example
Dismantling cost
Restoration/rehabilitation cost
What to do?
• Capitalise the present value of the future cost
Exception
• If the asset is to make inventories, future costs will be
capitalised to the cost of inventory not to PPE.
Future cost, increase over time
If the future cost arise as the asset is being used
• Capitalise the PV of the future cost as a subsequent
cost
• If the asset is being used to produce inventories,
capitalise PV directly to inventory produced
• If the asset has reached its useful life, the PV of
future cost will be recognised directly in P&L.
Example
Dismantling and removal costs
Neville Limited acquired an office building:
Cost of construction as at 1 July 2001 1 090 000
Professional fees 50 000
Labour costs related to construction 120 000
Expected dismantling and removal costs at the end of the useful life of asset
120 000
Applicable discount rate 9%
Useful life of office building 24 years
The building is erected on rented premises, and the rental agreement
requires dismantling of the building at the end of its useful life.
Required
What will be the initial cost of the asset on 1 July 2001 in the books of
Neville Limited.
Example solution
Initial cost:

Cost of construction 1 090 000

Professional fees 50 000
Labour costs 120 000
Dismantling costs (PV of R120k @9% over 24 years) 15 169
Total cost 1 275 169
Subsequent Costs
• Recognised when:
The cost is reliably measured and leads to probable future
economic benefits.
• Recognise by adding to the asset carrying amount.
• Examples:
• Day to day service,
• Replacement parts,
• Performing major inspections
Subsequent Costs
Day-to-day servicing costs (including small parts) =
repairs and maintenance => EXPENSED
Should an asset have a part that must be replaced,
the new part is recognised when the recognition
criteria are met;
Note: the carrying amount of the items being replaced
is derecognised
Major inspection costs must be capitalised when
these are required for the continued use of the asset.
These major inspection costs are depreciated over the
period until the next inspection
Vehicle engine service

The engine is serviced 6 months after acquisition at a

cost of R5000.
• The cost is reliably measured
• Costs will not lead to probable inflow of FB
• Servicing is needed continuously, No certain link
between this cost and FEB
• Recognition criteria not met.
• Expense the cost of service
Replacement of parts
B Ltd owns a car that had a carrying amount of R30
000 on 1 January 2019.
The carrying amount consists of two significant parts:
CA RUL RV Dep
Body R20 000 10 years 0
Engine R10 000 2 years 0 5000

The cost of an engine is R12 000 and the engine was

scrapped and replaced with a new engine at a cost of
R15 000. The new engine is depreciated over 3 years
on straight line basis with a nil residual value.
Major inspections
Example 1
• C Ltd owns a bus with a CA of R80 000 on 1 January 2019.
• It is required by law, effective 01 August 2019, that all
public transport buses undergo a major inspection every
2 years
• The major inspection of this bus was performed on 31
August 2019 at a cost of R20 000
• The bus is depreciated on a straight line method to a nil
residual value over its estimated useful life of 10 years
from acquisition date (1 September 2018).
Prepare the JEs relating to above
Major inspections solution
31/08/19:
DR Bus: major inspection 20k
CR Bank/Payable 20k

31/12/19
DR Depreciation (P/L) 11,5k
CR Bus: accumulated depreciation 8,2k
CR Acc. Depreciation: Major inspection 3,3k
Working:
Remaining useful life: 9,75 (9 years and 8 months)
80 000/9,75 = 8 205
20 000/2*4/12 = 3 333
Major inspections
Example 2
• D Ltd purchased a ship on 01/01/2019 for R1,3million
with an estimated useful life of 10 years
• The ship is required to be inspected for faults every 3
years
• Included in the purchase price is an inspection
performed on 31/12/2018
• The next inspection is due on 31/12/2022, with an
expected cost R400 000 (PV of R300 000 as at
01/01/2019)
Prepare the JEs relating to above
Major inspections solution
01/01/19
DR Ship 1m
DR Ship: major inspection 300k
CR Bank 1,3m

31/12/19:
DR Depreciation (P/L) 200k
CR Acc. Depreciation: Ship 100k
CR Acc. Depreciation: Major inspection 100k
Admin
Self-study quiz:
-Monday, 23 August
-Available 24 hrs
-Write within allocated time (between 0,5 – 1 hr)
-Written in one sitting, i.e. once entered into quiz, students have to
complete
-BB will automatically submit when time ends

Tutorial:
-Question 7.5 in 2020 Graded Questions
-Submission date: Tuesday, 25 August
-Tutorial will be held on Thursday @ 11 via BB collaborate
Subsequent measurement
PPE is subsequently measured using a cost model.
Cost Model
Carrying amount =
Cost (initial + subsequent )
Less: Accumulated depreciation
Less: Accumulated impairment losses

Next
chapter
Subsequent measurement – Depreciation
• Systematic allocation of the depreciable amount over assets
useful life.
• Expensing the portion of an asset that will be lost due to usage.
• Depreciation commences when the asset is available for use
• Depreciation suspended, earlier of:
i. When fully depreciated
ii. Decision to scrap
iii.Decision to dispose
• All PPE assets are depreciable, except for LAND
• Depreciable amount = Cost less residual value
• Depreciation is an expense but can be capitalised if the asset is
used to produce another asset (inventory).
Depreciation Variables
Residual value
• Estimated amount of how much the entity would
obtain from disposal of asset, after deducting
estimated selling costs, if the asset were already at the
age and condition expected at the end of its useful life
• Residual value is an estimate, therefore is assessed
regularly (yearly).
Residual value > Carrying amount = No Depreciation
Carrying amount > Residual Value= Depreciate

The change in residual value is accounted for using

IAS 8 (see chapter 26)

Depreciation = CA amount at BoY – RV (new)

Remaining useful life at BoY
Depreciation Variables
Method of depreciation
• Straight line – asset is expected to be used equally
throughout it’s useful life.
• Diminishing balance – expect that an asset will be
used more in the earlier years of it’s useful life and
diminishes as it ages.
• Units of production – Uses the total expected
output and actual output can be determined.
Method should reflect the pattern in which the FEB from
the asset are expected to be consumed
Depreciation Variables
Useful life
• Period over which on asset is expected to be
available for use or the number of production units
expected to be obtained from the asset.
• Estimate Review yearly
• Change in useful life
Depreciation = Depreciable amount at BoY
Remaining useful life at BoY
Impairment
• Impairment loss is a reduction of carrying amount
as a result of damage, i.e. when CA is greater than
recoverable amount
• PPE must be tested for impairment indicators at the
end of every reporting period:
• Any damage that reduces the value of the asset, can be
physical damage or damage of any kind (e.g. economic
downturn)
• Checking that the carrying amount is not overstated
Impairment
Recoverable amount
• Estimate of the highest possible economic benefits expected
from the asset, use vs sale of
• Higher of Value in use and Fair value less cost of disposal
• RA is compared to the carrying amount:
• CA>RA = impair the asset
• CA<RA = no impairment loss
• Depreciation in future periods based on reduced CA
• RA increase above cost, process reversal of impairment losses
• Limited to:
• Carrying amount; and
• Depreciated cost (historical CA)
Example
• Cost is R100 000 at 1 January 2019
• Carrying amount R80 000
• Depreciation is 20% p.a. straight line method with nil
residual value.
• Value in use on 31 Dec 2019 R60 000
• Fair value R60 000
• Cost of disposalR 1 000

Prepare journal entry

Notes to students
• The full PPE chapter is examinable except few
topics (see learning guide)
• Work through the chapter
• Chapter 26 is also examinable (and integrated with
tax)
Disclosure
STATEMENT OF FINANCIAL POSITION:
One line: Property, Plant & Equipment at Carrying amount
at the end of the year

STATEMENT OF COMPREHENSIVE INCOME:

Profit before tax includes all income and expense items:
• Depreciation
• Impairments losses/reversals
• Profit/Loss on disposal of asset
If function method include under categories of expenses e.g.
Administrative Costs, Other income, etc.
Disclosure
NOTES TO THE FINANCIAL STATEMENTS:
Accounting policy notes:
• Depreciation methods
• Useful lives or depreciation rates
• Measurement model

Property, Plant & Equipment:

• GCA and accumulated depreciation & impairment loss at the beginning and end
of each period
• Reconciliation of net carrying amount at the beginning and the end of the
period
• Restrictions on titles
• PPE pledged as security
• Cost capitalised in respect of construction of PPE
• Contractual commitments to acquire PPE in the future
Disclosure
NOTES TO THE FINANCIAL STATEMENTS:
Included in Profit before tax:
• Depreciation
• Impairment losses
• Reversals of Impairment
• Profit/(Loss) on disposal of asset