Kaplan Chapter 2: IAS 16 Property, Plant and Equipment 
 

IAS  or IFRS 

‐ Definition 
‐ Recognition criteria : Asset? / Liability? / Equity? / Income? / Expense? 
‐ Measurement: Cost? / Fair value? 
 Initial measurement 
 Subsequent measurement 
‐ Disclosure 

Probable – More likely than not 
IAS 16 Property, Plant and Equipment
Property, plant and equipment: Definition
Property, plant and equipment are tangible assets held by an entity for more than one
accounting period for use in the production or supply of goods or services, for
rental to others, or for administrative purposes.

Recognition
An item of property, plant and equipment should be recognised as an asset 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 measured reliably' (IAS 16, para 7).

 
 
 
Initial measurement: 
‐ Property, Plant and Equipment (PPE) should intially be recognised at cost.  
 
‐ Costs include ‘Purchase price less trade discounts or rebates plus  directly 
attributable costs’ (to bring the PPE or asset to its working conditon) 
 
‐ Directly attributable costs:  
The following costs can be capitalised or added to the cost of PPE or asset. 
 
1) Costs of site preparation or site overheads: 
 Electric cable installation 
 Clearance of the site prior to commencement of construction 
 Labour cost etc. 
 
2) Initial delivery or freight, packaging and handling costs 
 
3) Professional fees: 
 Legal fees (e.g import duties, stamp duties etc.) 
 Architect fees 
 Surveyor’s fees 
4)  Cost of testing 
5)  Installation and assembly costs 
6) Borrowing costs (in accrodance with IAS 23) 
7) Labour costs (deduct abnormal costs such as idle time if any) 
8) Material costs (deduct abnormal costs such as repair, rework if any) 
9) Present value of ‘dismantling and restoration costs’ 
Class 3 
The following items must be expensed or charged to statement of profit or loss, 
should never be capitalised: (Revenue expenditure or running expenditure) 
1) Administration costs 
2) General overheads (e.g. rent and rates, heating, lighting of business) 
3) Abnormal costs (e.g. repairs, wastage, idle time, repainting and servicing costs) 
 4) Training costs 
5) Advertising or promotional costs 
6) Initial operating losses 
7) Cost of opening new product or facility 
8) Maintanence or cleaning costs 
 
Kaplan Exam Kit: Initial measurement 
Q1.  
Capitalise, Capitalise, Capitalise and Expense 
 
Q9.   
A and B 
 
 
BPP Exam kit: Initial measurement 
24.  B 
  Capitalised  Expense to P/L 
  $’000  $’000 
Land  1200  ‐ 
Materials  2400  ‐ 
Labour  3000  ‐ 
Architect’s fees (professional fees)  25  ‐ 
Surveyor’s fees (professional fees)  15  ‐ 
Site overheads (Directly attributable costs)  300  ‐ 
Apportioned administrative overheads  ‐  150 
(revenue expenditure) 
Testing  10  ‐ 
Business rate (revenue expenditure)    12 
Total  6950  162 
 
 
Kaplan Test your understanding 1: Initial measurement   H.W 
 
 
Review of useful life and residual value  
Useful life and residual value should be reviewed at the end of each reporting period
and revised if expectations are significantly different from previous estimates.
The carrying amount of the asset at the date of revision less any resiual value should be
depreciated over the revised remaining useful life.

 
Illustration 4: Revision of useful life 
An entity purchased an asset for $20,000 on 1 January 20X3. Straight- line depreciation
of $5,000 per annum has been charged, assuming a four-year useful life with no
residual value. On 1 January 20X5 the annual review of asset lives was undertaken
and the remaining useful life for this asset was estimated at four years.
The financial statements for the year ended 31 December 20X5 are being
prepared.
What is the depreciation charge for the year ended 31 December 20X5?
 
  $ 
Balance b/d: Cost at 1 Jan 20X3  20,000 
Less: Accumulated depreciation (20,000/4  x 2) or 5,000 x 2  (10000) 
Carrying amount at 1 Jan 20X5  10000 
Revised depreciation ($10000/4)  2500 
 
 
Major inspection or overhaul costs
 
 Inspection and overhaul costs are generally expensed as they are incurred.
They are, however, capitalised as a non-current asset to the extent that they satisfy
the IAS 16 rules for separate components.
Where this is the case they are then depreciated over their useful lives, i.e. until the next
inspection or overhaul is due
 
 
 
 
Revaluation of non‐current assets 
Kaplan Exam Kit: Revaluation 
8. True, false 
 
Accounting for revaluation 
  $ 
PPE‐ Balance b/d at date  X 
Less: Accumulated depreciation at the date of revaluation  (X) 
(Depreciation charge for the year x No. of years) 
Carrying amount at the date of revaluation  X 
Revaluation surplus (gain) or deficit (loss) (balancing figure)  X/(X) 
SOFP under equity 
and OCI 
Revalued amount or Value of PPE at the date of revaluation  X 
(given) 
Less: Depreciation on revalued PPE at reporting date or year end  (X) 
date over the remaining useful life  Note 1  SOPL as 
‘depreciation 
expense’ 
Carrying amount at reporting date  X 
SOFP under ‘Non‐
current asset’ 
 
Note: 
(1) Reamining useful life =Original useful life – accumulated life up to revaluation 
 
(2) Revaluation surplus (SOFP under ‘Equity’ or Gain on revaluation (OCI) 
= Revalued amount or Value of PPE at the date of revaluation  
– Carrying amount at the date of revaluation 
Test your understanding 3: Revaluation Full 

An entity revalued its land and buildings at the start of the year to $10 million ($4 million
for the land). The property cost $5 million ($1 million for the land) ten years prior to the
revaluation. The total expected useful life of 50 years is unchanged. The entity's policy is
to make an annual transfer of realised amounts to retained earnings.

Show the effects of the above on the financial statements for the year.

Statement of profit or loss and other comprehensive income (extracts)

$’000

Depreciation 150

Other comprehensive income:

Gain on revaluation 5,800

Statement of financial position (extracts)

$’000

Non-current assets

Property 9,850

Equity

Revaluation surplus 5,800

Statement of changes in equity (extracts)

Revaluation surplus or reserve Retained earning

$’000 $’000
b/d –––– ––––

Gain on revaluation 5,800 ––––

Transfer to retained earnings (70) 70

–––––– –––––
5,730 70
–––––– –––––
Transfer to retained earnings
= difference in depreciation for the year
= 150,000 – 800,000/10
= 150,000 – 80,000
= 70,000
OR
= Revalued amount excluding land / remaining useful life – 800,000/10
= (10,000,000 – 4,000,000) / 40 – 80,000
= 150,000 -80,000
= 70,000

Working:

  $’000 
Property‐ balance b/d at date  5,000 
Less: Accumulated depreciation at the date of revaluation  (800) 
(Depreciation charge for the year x No. of years)  
(5,000 – 1,000 land)/50 x 10 years 
Carrying amount at the date of revaluation  4,200 
Revaluation surplus (gain on revaluation)  (balancing figure)  5,800 
(10,000 – 4,200)  SOFP under equity 
and OCI 
Revalued amount or Value of PPE at the date of revaluation  10,000 
(given) 
Less: Depreciation on revalued PPE at reporting date or year end  (150) 
date over the remaining useful life  Note 1   SOPL as 
(10,000 – 4,000 land) / 40 remaining Useful life x 1 year  ‘depreciation 
expense’ 
Carrying amount at reporting date or year end date  9,850 
SOFP under ‘Non‐
current asset’ 
Note: 
(1) Reamining useful life 
 =Original useful life – accumulated life up to revaluation 
= 50 – 10  
= 40 
 
 
(2) Revaluation surplus or gain on revaluation  
= Revalued amount – Carrying amount at the date of  revaluation 
= 10,000,000 – (5000 – 1000 land) / 50 UL x 10 
= 10,000,000 – 4,200,000 
= $5,800,000 
 
 
BPP Exam Kit 31: Depreciation on revalued PPE 
Auckland Co purchased a machine for $60,000 on 1 January 20X7 and assigned it a useful life of 
15 years. On 31 March 20X9 it was revalued to $64,000 with no change in useful life.  
 
What  will  be  depreciation  charge  in  relation  to  this  machine  in  the  financial  statements  of 
Auckland Co for the year ending 31 December 20X9?  
 
Depreciation for the year on revalued PPE (machine) 
 
=  (Revalued PPE / Remaining useful life) x Time from revaluation date to reporting 
date  (a) 
+  
   (Cost – residual value)/ Original useful life x (12 ‐ a)/12 
 
= 64,000 revalued amounts / 12.75   x 9/12   +   60000 cost / 15   x 3/12 
 
= 3765 + 1000 
 
= $4,765 
 
Reamining useful life 
 =Original useful life – accumulated life up to revaluation 
= 15 years – 27 months or 2.25 years 
= 12.75 years 
BPP Exam Kit 32: Revaluation surplus
Carter Co vacated its head office building and let it out to a third party on 30 June 20X8. The 
building had an original cost of $900,000 on 1 January 20X0 and was being depreciated over 50 
years. It was judged to have a fair value on 30 June 20X8 of $950,000. At the year‐end date of 31 
December 20X8 the fair value of the building was estimated at $1.2 million. Carter Co uses the 
fair value model for investment property. 
 
What amount will be shown in revaluation surplus at 31 December 20X8 in respect of this 
building?   $203,000 
 
Revaluation surplus 
 
= Revalued amount at the date of revaluation – Carrying amount at the date of  
revaluation (30 June 20X8) 
= 950,000 – (900,000 cost – 900,000 /50 x 8.5 accumulated depreciation) 
= 950,000 – (900,000 – 153,000) 
= 950,000 – 747,000 
= $203,000          or 
  $ 
PPE‐ Balance b/d at date 1 January 20X0  900,000 
Less: Accumulated depreciation at the date of revaluation 30 June  (153,000) 
20X8(Depreciation charge for the year x No. of years)  
900,000/ 50 x 8.5 
Carrying amount at the date of revaluation (30 June 20X8)  747,000 
Revaluation surplus (gain) (balancing figure)  203,000 
SOFP under equity 
and OCI 
Revalued amount or Value of PPE at the date of revaluation (30  950,000 
June 20X8) (given) 
Less: Depreciation on revalued PPE at reporting date or year end  (X)(11446) 
date over the remaining useful life  Note 1  SOPL as 
950,000/41.5 x 6/12  depreciation 
expense 
Carrying amount at reporting date 31 December 20X8  X 938554 
SOFP under Non‐
current asset 
Additional practice 
What is the depreciation charge for the year ended 31 December 20X8? 
=   (Revalued PPE / Remaining useful life) x Time from revaluation date to 
reporting date  (a) 
+ (Cost – residual value)/ Original useful life x (12 ‐ a)/12 
=  (950000 / 41.5 x 6/12) + (900,000/50 x 6/12) 
=   11446 + 9000 
=   20,446 
 

Complex asset
BPP Exam kit 30

Disposal of revalued non-current assets

Gain or (loss) on revalued non-current asset
= Sales proceeds (given) – Carrying amount at the date of disposal (W1)
= X / (X)

Working 1
$
Revalued amount (1) or Balance b/d (2) X
Less: accumulated depreciation at the (X)
date of disposal over remaining useful
life
Carrying amount at the date of disposal X

Kaplan Exam kit 3 A

An entity purchased property for $6 million on 1 July 20X3. The land element of the
purchase was $1 million. The expected life of the building was 50 years and its residual
value nil. On 30 June 20X5 the property was revalued to $7 million, of which the land
element was $1.24 million and the buildings $5.76 million On 30 June 20X7, the property
was sold for $6.8 million.
What is the gain on disposal of the property that would be reported in the statement
of profit or loss for the year to 30 June 20X7?

Gain on disposal of revalued non-current asset

= Sales proceeds – Carrying amount at the date of disposal 30 June 20X7 (W1)
= 6,800,000 (given) – 6,760,000 (W1)
= 40,000

Working 1
$
Revalued amount at 30 June 20X5 7,000,000
Less: accumulated depreciation at the (240,000)
date of disposal over remaining useful
life (7,000,000 – 1,240,000)/ 48 x 2
Carrying amount at the date of disposal 6,760,000
30 June 20X7 (W1)

Remaining useful life

=Original useful life – accumulated life up to revaluation (1 July 20X3 to 30 June
20X5)
= 50 – 2
= 48