IAS 16: Property, Plant and Equipment (PPE)

Areas of concern?
 Learning Outcomes

By the end of this presentation, learners must be able to:

1) Define Property, Plant and Equipment (PPE)

2) Recognise costs that are capitalised to form cost of PPE
3) Present in the Financial Statements, items of PPE
4) Evaluate subsequent costs for possible capitalisation
5) Apply subsequent measurement of PPE
 Definition PPE

Property, plant and equipment, as defined in IAS 16 refers to

tangible non-current assets (physical, movable and immovable)
that are:

a) Held for use in the production or supply of goods or

services, or for administrative purposes; and
b) Expected to be used during more than one accounting
period.
 Underlying Principle (PPE)

Key principles that are reflected in IAS 16 - PPE:

Recognition criteria; and (initial measurement and recording

in the books of accounts)
Measurement criteria (Subsequent).
 Recognition

Recognition
IAS 16para7 PPE is recognised as an asset only when it
satisfies the definition and recognition criteria for assets as
stipulated in the Conceptual Framework, i.e:

A resource controlled (enjoyment of full, majority of benefits,

including the power to change use of that asset) by an entity
as a result of past events. Past event refers to the historical
transaction (the purchase, construction, manufacture etc)
that caused the item to be owned and controlled by the
reporting entity.
 Example

A Company took out a loan amounting to $120 000 from CBZ

bank (ltd) to finance the acquisition of a brand new Mazda
BT50 truck.

Explain what is meant by the term recognition [3

marks]

Explain with reasons whether the company has to recognise:

 Asset? [4 marks]
 Liability? [3 marks]
 Cost of PPE (Initial Recognition)

The cost of an asset will comprise of:

1) The purchase price, including all non-refundable purchase
taxes, import duty, customs duty. Less any trade and
settlement discounts, including rebates;
2) Other directly attributable costs - Any costs directly
attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the
manner intended by management.
3) Initial estimate of dismantling & removal of the item and
restoration costs to the site on which it is located.
 Cost of PPE at Recognition

Other directly attributable costs:

I. Direct labour (including share-based payments) arising directly from the
construction or acquisition of the asset;
II. Site preparation costs (including the costs of demolishing existing
buildings on newly acquired land in order to construct new buildings);
III. Delivery costs, including initial handling costs;

IV. Installation and assembly costs;

V. Costs of testing whether the asset is functioning properly, Net of any
proceeds realised from selling any items produced during testing, and
VI. Professional fees (e.g. architects and engineers); and
 Disqualified costs

Certain expenditures are disqualified by IAS 16 from

being capitalised and includes:
costs of opening a new facility;
Advertisement costs
Costs of conducting business in a new location or with a new
class of customers (cost of training staff); and
Administration and other general overhead costs.
 Activity: Purchased item of PPE (10minutes, lets solve this problem)

ABC Ltd bought a machine at a cost of $575 000 (inclusive of 15% VAT) before
taking into account a trade discount of 5%. The machine was transported to
ABC Ltd's premises at a cost of $5 000, after which it was installed by an
independent engineer, who charged $500 per hour - installation took five hours
to complete. After installation, the machine was tested at a cost of $10 000.
Fortunately the samples manufactured during testing could be sold for $6 000.
Once management was satisfied that the machine was functioning properly,
they spent $50 000 on advertising the product to be manufactured by the
machine and then commenced manufacturing activities. Initially the demand for
the product was very low, resulting in operating losses of $30000 during the
first three months. Thereafter the machine was operating at a profitable level.
Required:
To compute the Cost of the PPE (8)
 Example: self constructed PPE

Paul ltd incurred the following costs in relation to the construction of a new
factory and the introduction of its products to the local market. $000
i. Site preparation costs 240
ii. Materials used 1,500
iii. Labour costs, including 90 incurred during an industrial dispute. No
construction occurred during the period of the dispute. 3,190
iv. Testing of various processes in factory 150
v. Consultancy fees on installation of equipment 220
vi. Relocation of staff to new factory 110
vii. General overheads 500
viii. Costs to dismantle the factory at end of its useful life in 10 years time 100
Required: determine the cost of PPE to be recognized in the books of the entity.
 Subsequent costs incurred on PPE
(improvements)

Subsequent costs
Once an item of PPE has been recognised and capitalised in fin
stats, a company may incur further costs on that asset in the
future. IAS 16 requires that subsequent costs should be
capitalized if:
a) It is probable that future economic benefits associated with
the extra costs will flow into the entity; and that
b) The cost can be reliably measured.

All other subsequent costs should be recognised as an expense in

the income statement in the period that they are incurred.
 Activity (EXAMPLE 3) Subsequent costs

On 1 March 2002 Yucca Co purchased an upgrade package

from Plant Co at a cost of $18,000 for the machine it
originally purchased in 2000 (Example 1). The upgrade lasted
for 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?
 Solution: Example 3

The $18,000 should be capitalised as part of the cost of the

asset. This is because:
1. The revenue earning capacity of the machine has
significantly increased; which could in turn lead to the
inflow of additional economic benefits; and
2. The cost of the upgrade can be measured reliably.
 Subsequent measurement

Initial Measurement
Property, Plant and Equipment should initially be measured at cost,
in accordance with the specific requirements IAS16.

Subsequent Measurement bases

Generally, there are two measurement bases (Historical and
Current Value)
Historical cost uses information derived, at least in part, from the
price of the initial recognition transaction or other event that gave
rise to the item being measured. The historical cost of assets is
reduced (measurement) through impairment and depreciation)
 Current value measurement bases

Current value measurement bases

Current value measurement bases provide information that is updated to reflect
conditions prevailing at the measurement date, e.g:

1) Fair Value measurement - the price that would be obtained on the sale of an asset,
or paid to transfer a liability, in an orderly transaction between market participants at
the measurement date and price reflects market’s current expectations about the
amount, timing and uncertainty of future cash flows from that asset.

2) Value in use (assets) or fulfilment value (for liabilities) – This reflects entity-specific
current expectations about the amount, timing and uncertainty of future cash flows.

3) Current cost - reflects the current amount that would be paid to acquire an
equivalent asset, received to transfer an equivalent liability (Replacement value)
 Activity: EXAMPLE 4

An item of plant was purchased on 1 April 2010 for $200,000

and is being depreciated at 25% on a reducing balance basis.

Required
Prepare the extracts of the financial statements for the year
ended 31 March 2012.
 Solution 4: measurement and recognition of PPE

Income statement extract

Depreciation expense (W1) $37,500

Statement of financial position extract

Non-current Assets:
Property, Plant and Equipment (W1) $112,500
 Working 1: PPE Schedule

Date Description Amount ($)

31/03/11 Cost 200,000

Acc depreciation – 25% (50,000)

Carrying Amount 150,000

Additions during the year -

Disposals during the year -

31/03/12 Depreciation for the year – (25% of (37,500)

150,000)
Carrying Amount 112,50
 Interrelated areas: Areas that link with IAS16

Candidates presenting themselves for examinations in

corporate reporting should be aware that IAS 16 is
interrelated with several other key IFRS’s including: IAS 20
Accounting for Government Grants, IAS 23, Borrowing Costs,
IAS 40 Investment Properties, and IAS 36 Impairment of
Assets, IFRS 16 Leases (most of these not examinable
individually in this module),
Accounting issues in relation to these standards are often
included in examination questions which require the
preparation of financial statements.
 Government grants

Summary
IAS 20 distinguishes between two main types of grants,
grants relating to income and grants relating to assets.
Government grants should only be recognised in the financial
statements if there is reasonable assurance that the entity
will comply with all relevant conditions in relation to grant.
Grants relating to income are credited in the SCI or deducted
from the related expense. Grants in relation to assets can be
treated as deferred income and a transfer made (on a
systematic basis) to the SCI over the useful life of the asset.
 Activity: EXAMPLE 7

Munoz company ltd purchased a building on 1 April 2011 for

$100,000. The asset had a useful life at that date of 40 years.
On 1 April 2013 the company revalued the building to its
current fair value of $120,000.

Required
What is the double entry to record the revaluation in the books
of Munoz company ltd?
 Activity: EXAMPLE 8

The carrying amount of Zidane Co’s item of PPE 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.
The balance on the revaluation surplus relating to the original
gain of the property was $10,000.

Required
What is the double entry to record the revaluation of the PPE?
 Q&A

The end