IAS 16 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are tangible assets with the following properties.

-Held by an entity for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.

-Expected to be used during more than one period.

Recognition
The recognition of property, plant and equipment depends on two criteria:

(a) It is probable that future economic benefits associated with the asset will flow to the
entity.

(b) The cost of the asset to the entity can be measured reliably.

These recognition criteria apply to subsequent expenditure as well as costs incurred initially.
There are no longer any separate criteria for recognizing subsequent expenditure.

Initial measurement
Once an item of property, plant and equipment qualifies for recognition as an asset, it will
initially be measured at cost.

Components of cost

The standard lists the components of the cost of an item of property, plant and equipment.

(a) Purchase price, less any trade discount or rebate.

(b) Import duties and non-refundable purchase taxes.

(c) Directly attributable costs of bringing the asset to working condition for its intended
use, e.g.-

- The cost of site preparation

- Initial delivery and handling costs
- Installation costs
- Testing
- Professional fees (architects, engineers)

(d) Initial estimate of the unavoidable cost of dismantling and removing the asset and

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 restoring the site on which it is located.

The revised IAS 16 provides additional guidance on directly attributable costs included in the
cost of an item of property, plant and equipment.

(a) These costs bring the asset to the location and working conditions necessary for it to be
capable of operating in the manner intended by management, including those costs to
test whether the asset is functioning property.

(b) They are determined after deducting the net proceeds from selling any items produced
when bringing the asset to its location and condition.

The following costs will not be part of the cost of property, plant or equipment unless they can
be attributed directly to the asset’s acquisition, or bringing it into its working condition.

- Administration and other general overhead costs

- Start-up and similar pre-production costs
- Initial operating losses before the asset reaches planned performance

All of these will be recognised as an expense rather than an asset.

Exchange of assets
The revised IAS 16 specifies that exchange of items of property, plant and equipment,
regardless of whether the assets are similar, are measured at fair value, unless the exchange
transaction lacks commercial substance or the fair value of neither of the assets exchanged can
be measured reliably. If the acquired item is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.

Expenditure incurred in replacing or renewing a component of an item of property, plant and

equipment must be recognized in the carrying amount of the item. The carrying amount of the
replaced or renewed component must be derecognized.

Measurement subsequent to initial recognition

The standard offers two possible treatments here, essentially a choice between keeping an
asset recorded at cost or revaluing it to fair value.

(a) Cost model. Carry the asset at its cost less depreciation and any accumulated
impairment loss.

(b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated depreciation and subsequent

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accumulated impairment losses. The revised IAS 16 makes clear that the revaluation model is
available only if the fair value of the item can be measured reliably.

Revaluation
The market value of land and buildings usually represents fair value, assuming existing use and
line of business. Such valuations are usually carried out by professionally qualified valuers.

In the case of plant and equipment, fair value can also be taken as market value. Where a
market value is not available, however, depreciated replacement cost should be used.

Most importantly, when an item of property, plant and equipment is revalued, the whole class
of assets to which it belongs should be revalued.

IAS 16 requires the increase to be credited to a revaluation surplus unless the increase is
reversing a previous decrease which was recognised as an expense. To the extent that this
offset is made, the increase is recognized as income; any excess is then taken to the revaluation
reserve.

Example: revaluation surplus

Bonke Co has an item of land carried in its books at $13,000. Two years ago a slump in land
values led the company to reduce the carrying value from $15,000. This was taken as an
expense in profit or loss for the year. There has been a surge in land prices in the current year,
however, and the land is now worth $20,000.

Account for the revaluation in the current year.

Solution

The double entry is:

DEBIT Asset value (statement of financial position) $7,000

CREDIT Profit or loss for the year $2,000

CREDIT Revaluation surplus $5,000

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Example: revaluation decrease

Let us simply swap round the example given above. The original cost was $15,000, revalued
upwards to $20,000 two years ago. The value has now fallen to $13,000.

Account for the decrease in value.

Solution

The double entry is:

DEBIT Revaluation surplus $5,000

DEBIT Profit or loss for the year $2,000

CREDIT Asset value (statement of financial position) $7,000

There is a further complication when a revalued asset is being depreciated. Normally, a

revaluation surplus is only realized when the asset is sold, but when it is being depreciated, part
of that surplus is being realized as the asset is used. The amount of the surplus realized is the
difference between depreciation charged on the revalued amount and the (lower) depreciation
which would have been charged on the asset’s original cost. This amount can be transferred to
retained (i.e. realized) earnings but not through the statement of profit or loss.

Example: revaluation and depreciation

Crinkle Co bought an asset for $10,000 at the beginning of 20X6. It had a useful life of five
years. On 1 January 20X8 the asset was revalued to $12,000. The expected useful life has
remained unchanged (i.e. three years remain)

Account for the revaluation and state the treatment for depreciation from 20X8 own wards.

Solution

On 1 January 20X8 the carrying value of the asset is $10,000 – (2 x $10,000 ÷ 5) = $6,000. For
the revaluation:

DEBIT Accumulated depreciation $4,000

DEBIT Asset value $2,000

CREDIT Revaluation surplus $6,000

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The depreciation for the next three years will be $12,000 ÷ 3 = $4,000, compared to
depreciation on cost of $10,000 ÷ 5 =$2,000. So each year, the extra $2,000 can be treated as
part of the surplus which has become realized:

DEBIT Revaluation surplus $2,000

CREDIT Retained earnings $2,000

This is a movement on owners’ equity only, not through profit or loss.

Review of useful life

A review of the useful life of property, plant and equipment should be carried out at least at
each financial year end and the depreciation charge for the current and future periods should
be adjusted if expectations have changed significantly from previous estimates. Changes are in
accounting estimates and are accounted for prospectively as adjustments to future
depreciation.

Review of depreciation method

The depreciation method should also be reviewed at least at each financial year end, if there
has been a significant change in the expected pattern of economic benefits from those assets,
the method should be changed to suit changed pattern. When such a change in depreciation
method takes place the change should be accounted for as a change in accounting estimate and
the depreciation charge for the current and future periods should be adjusted.

On disposal
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to
retained earnings.

Alternatively, it may be left in equity under the heading revaluation surplus.

The transfer to retained earnings should not be made through profit or loss for the year. In
other words it must not be made as a reclassification adjustment.

Impairment of asset values

An impairment loss should be treated in the same way as a revaluation decrease i.e. the
decrease should be recognized as an expense. However, a revaluation decrease (or impairment
loss) should be charged directly against any related revaluation surplus to the extent that the
decrease does not exceed the amount held in the revaluation surplus in respect of that same
asset.

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A reversal of an impairment loss should be treated in the same way as a revaluation increase,
i.e. a revaluation increase should be recognized as income to the extent that it reverses a
revaluation decrease or an impairment loss of the same asset previously recognized as an
expense.

Retirements and disposals

When an asset is permanently withdrawn from use, or sold or scrapped, and no future
economic benefits are expected from its disposal, it should be withdrawn from the statement
of financial position.

Gains or losses are difference between the estimated net disposal proceeds and the carrying
amount of the asset. They should be recognized as income or expense in the statement of
profit or loss.

De-recognition
An entity is required to derecognize the carrying amount of an item of property, plant and
equipment that it disposes of on the date the criteria for the sale of goods in IFRS 15 would be
met.

Disclosure
The standard has a long list of disclosure requirements, for each class of property, plant and
equipment.

(a) Measurement bases for determining the gross carrying amount (if more than one, the
gross carrying amount for that basis in each category)

(b) Depreciation methods used

(c) Useful lives or depreciation rates used

(d) Gross carrying amount and accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period

(e) Reconciliation of the carrying amount at the beginning and end of the period showing:

(i) Additions
(ii) Disposals
(iii) Acquisitions through business combinations
(iv) Increases/decreases during the period from revaluations and from impairment
losses

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 (v) Impairment losses recognized in the statement of profit or loss.
(vi) Impairment losses reversed in the statement of profit or loss.
(vii) Depreciation
(viii) Net exchange differences (from translation of statements of foreign entity)
(ix) Any other movements

Revalued assets require further discloses.

(a) Basis used to revalue the assets

(b) Effective date of the revaluation

(c) Whether an independent valuer was involved

(d) Nature of any indices used to determine replacement cost

(e) Carrying amount of each class of property, plant and equipment that would have been
included in the financial statements had the assets been carried at cost less
accumulated depreciation and accumulated impairment losses.