IAS 16 STATES that Property, plant and equipment is Initially Measured at its cost, Subsequently Measured either using a ‘cost or revaluation model‘, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life.
Table of Contents
IAS 16 – Key Terms
Property, plant and equipment (PPE) are TANGIBLE items that:
- are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; AND
- are expected to be used during more than one period.
1. Cost
It 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 IFRS.
For example, assets held under finance leases.
2. Carrying Amount
It is the amount at which an asset is recognized after DEDUCTING any accumulated depreciation and accumulated impairment losses.
Net Book Value (NBV) is a term that is often used instead of carrying amount.
3. Useful Life
Useful life is:
- the period over which an asset is expected to be available for use by an entity; OR
- the number of production or similar units expected to be obtained from the asset by an entity.
4. Recoverable Amount
It is the HIGHER of an asset’s net selling price or its value in use.
5. Depreciable Amount
It is the cost of an asset or other amount substituted for cost LESS its residual value.
6. Residual Value
It is the estimated amount that an entity would currently obtain from its disposal, after DEDUCTING the estimated costs of disposal if the asset were already of age and in the condition expected at the end of its useful life.
IAS 16 – Scope
| IAS 16 Does Not Apply to: |
|---|
| PPE classified as held for sale in accordance with IFRS 5: Non-current assets held for sale and discontinued operations; |
| Biological assets related to agricultural activity [IAS 41: Agriculture]; |
| Recognition and measurement of exploration and evaluation assets [IFRS 6: Exploration for and evaluation of mineral resources]; |
| Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. |
IAS 16 Recognition Criteria
Recognize the cost of PPE as per IAS 16 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 reliably measured.
IAS 16 – Initial Measurement
IAS 16 states that PPE is INITIALLY recorded at cost.
| Cost Comprises: |
|---|
| Purchase price PLUS import duties and non-refundable taxes, after DEDUCTING trade discounts and rebates. |
| Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management. e.g, – Employee costs arising directly from the installation or construction of the asset; – Cost of site preparation; – Delivery costs; – Installation and assembly costs; – Testing costs to assess whether the asset is functioning properly (NET of sale proceeds of items produced during the testing phase); – Professional fees directly attributable to the purchase. |
| Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. |
1. Deferred Payment
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 period of credit UNLESS such interest is capitalized in accordance with IAS 23.
2. Not Part of Cost
| Costs of opening a new facility; |
| Costs of introducing a new product or service (INCLUDING costs of advertising and promotional activities); |
| Costs of conducting business in a new location or with a new class of customer (INCLUDING costs of staff training); AND |
| Administration and other general overhead costs. |
IAS 16 – Subsequent Measurement
1. Cost Model
Asset is carried at cost LESS accumulated depreciation and impairment losses.
2. Revaluation Model
Asset is carried at revalued amount being its fair value at the date of revaluation LESS subsequent depreciation, provided that fair value can be measured reliably.
2.1 Rules for Revaluation
| IAS 16 states that if an asset is revalued, the entire class of assets to which that asset belongs is required to be revalued. |
| An increase in value of PPE is CREDITED to revaluation surplus. However, the increase shall be credited in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously debited in profit or loss. |
| A decrease in value of PPE is DEBITED to profit or loss. However, the decrease shall be debited in profit or loss to the extent of any credit balance existing in the revaluation surplus in respect of that asset. |
| The Net Carrying Amount of the asset is adjusted to the revalued amount in one of the following ways: – Restate accumulated depreciation proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount; OR – Eliminate accumulated depreciation against the gross carrying amount and then change the carrying amount of the assets to the revalued amount. |
2.1.1 Depreciation of Revalued Asset
Revalued assets are DEPRECIATED the same way as under the cost model.
However, an amount equal to incremental depreciation must be transferred from ‘Revaluation Surplus’ to accumulated profit/retained earnings through the statement of changes in the equity (SOCIE).
2.1.2 Frequency of Revaluation
| Revaluations should be carried out regularly to ensure that the carrying amount of an asset should not differ materially from its fair value at the reporting date. |
| Revaluation frequency depends upon the changes in fair value of the items measured (annual revaluation for volatile items or intervals between 3-5 years for items with less significant changes). |
Depreciation
Depreciation is the SYSTEMATIC ALLOCATION of the depreciable amount of an asset over its useful life.
- Depreciation Method reflects the pattern in which future economic benefits are expected to be consumed.
- The residual value, the useful life and the depreciation method of an asset are Reviewed Annually at reporting date.
- Changes in residual value, useful life and depreciation method are changes in estimates are Accounted for Prospectively in accordance with IAS 8.
- Significant parts/components are required to be Depreciated Separately over their estimated useful life.
- Depreciation is Charged to Profit or Loss UNLESS it is included in the carrying amount of another asset.
- Depreciation Commences when the asset is available for use.
- Depreciation Ends at EARLIER of when the asset is classified as held for sale in accordance with IFRS 5 and when it is derecognized.
- Revenue-based depreciation is Prohibited.
Exchange Transaction
An asset may be acquired in exchange for another asset. IAS 16 depicts that the cost of acquired asset is MEASURED at:
| The fair value of the asset given up; |
| The fair value of the asset received; |
| The carrying amount of the asset given up, if – the exchange transaction lacks commercial substance; OR – fair value of neither the asset received nor the asset given up is reliably measurable. |
Bearer Plant
IAS 16 defines bearer plant is a living plant that:
- is used in the production or supply of agricultural produce;
- is expected to bear produce for more than one period; AND
- has a remote likelihood of being sold as agricultural produce EXCEPT for incidental scrap sales.
Bearer plants are used solely to grow produce. The only significant future economic benefits from bearer plants arise from selling the agricultural produce that they create.
Therefore, bearer plants meet the definition of [Property, Plant and Equipment] and their operation is similar to that of manufacturing. Accordingly, bearer plants are included within the scope of IAS 16 instead of IAS 41.
Subsequent Expenditure
Subsequent expenditure are recognized as an asset if it meets the recognition criteria.
In practice, subsequent expenditure is CAPITALISED if it:
- Improves the asset (for example, by enhancing its performance or extending its useful life); OR
- Is for a replacement part (provided that the part that it replaces is treated as an item that has been disposed of).
Repairs and maintenance expenditure is ‘Revenue Expenditure‘ thus recognized as an expense as it is incurred.
De-Recognition As Per IAS 16
Carrying amount of an item of property, plant and equipment shall be derecognized:
- On disposal; OR
- When no future economic benefits are expected from its use or disposal.
Gain or loss on disposal is the DIFFERENCE between the proceeds and the carrying amount and is recognized in Profit or Loss (P&L).
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings.
[The transfer to retained earnings is NOT made through Profit or Loss.]
IAS 16 Disclosures
| Disclosures INCLUDE but are Not Limited to: |
|---|
| Measurement basis used for determining the gross carrying amount. |
| Depreciation methods used. |
| Useful lives or the depreciation rates used. |
| 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; – Assets classified as held for sale or included in a disposal group classified as held for sale; – Other disposals; – Acquisitions through business combinations; – Changes resulting from revaluations recognized or reversed; – Impairment losses recognized/reversed in Profit or Loss; – Depreciation; – Exchange differences and other changes. |
| Existence and amounts of restrictions on title and PPE pledged as security for liabilities. |
| Contractual commitments for the acquisition of PPE. |
Synopsis
IAS 16 was REISSUED in December 2003 and applies to annual periods beginning on or after 1 January 2005. ‘Property, plant and equipment’ is Initially Measured at its cost, Subsequently Measured either using a ‘Cost or Revaluation Model‘, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia