Accounting standards

IAS 16: Property, Plant and Equipment This standard determines which assets
may be accounted as property, plant and equipment, under which conditions their
recognition is carried out, how they are to be measured, and which depreciation
method should be chosen. In addition it describes, what the financial statement
should disclose.

IAS 17: Leases IAS 17 distinguishes between finance and operating leases. The
respective assignment has considerable consequences for the way in which the
leased asset is balanced. In addition, it establishes how to deal with any excess of
sales proceeds and leaseback transactions.

IAS 18: Revenue The date at which revenue is recognized is important for the
accurate determination of the enterprise's success. According to IAS 18 the revenue
should be recognized "when it is probable that future economic benefits will flow to
the enterprise and these benefits can be measured reliably". There are
requirements for the measurement of revenue, for the identification of the
transactions and for recognizing revenue from different business

Summary of IAS 16
Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and
equipment. The principal issues are the recognition of assets, the determination of their carrying
amounts, and the depreciation charges and impairment losses to be recognised in relation to
them.

Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another
standards requires or permits differing accounting treatments, for example:
o

assets 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 accounted for under IAS 41 Agriculture

exploration and evaluation assets recognised in accordance with IFRS 6 Exploration

for and Evaluation of Mineral Resources

mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

 The standard does apply to property, plant, and equipment used to develop or maintain
the last three categories of assets. [IAS 16.3]
The cost model in IAS 16 also applies to investment property accounted for using the
cost model under IAS 40 Investment Property. [IAS 16.5]
The standard does apply to bearer plants but it does not apply to the produce on bearer
plants. [IAS 16.3]

Recognition
Items of property, plant, and equipment should be recognised as assets when it is probable that:
[IAS 16.7]
o

it is probable that the future economic benefits associated with the asset will flow to
the entity, and

the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they
are incurred. These costs include costs incurred initially to acquire or construct an item of
property, plant and equipment and costs incurred subsequently to add to, replace part of, or
service it.
IAS 16 does not prescribe the unit of measure for recognition what constitutes an item
of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is
used (see below) each part of an item of property, plant, and equipment with a cost that
is significant in relation to the total cost of the item must be depreciated separately. [IAS
16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may
require replacement at regular intervals. The carrying amount of an item of property,
plant, and equipment will include the cost of replacing the part of such an item when that
cost is incurred if the recognition criteria (future benefits and measurement reliability) are
met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]
Also, continued operation of an item of property, plant, and equipment (for example, an
aircraft) may require regular major inspections for faults regardless of whether parts of
the item are replaced. When each major inspection is performed, its cost is recognised in
the carrying amount of the item of property, plant, and equipment as a replacement if the
recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection
component was when the item was acquired or constructed. [IAS 16.14]

Initial measurement

 An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15]
Cost includes all costs necessary to bring the asset to working condition for its intended
use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and
engineers, and the estimated cost of dismantling and removing the asset and restoring
the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS
16.16-17
If payment for an item of property, plant, and equipment is deferred, interest at a market
rate must be recognised or imputed. [IAS 16.23]
If an asset is acquired in exchange for another asset (whether similar or dissimilar in
nature), the cost will be measured at the fair value unless (a) the exchange transaction
lacks commercial substance or (b) the fair value of neither the asset received nor the
asset given up is reliably measurable. If the acquired item is not measured at fair value,
its cost is measured at the carrying amount of the asset given up. [IAS 16.24]
Measurement subsequent to initial recognition
IAS 16 permits two accounting models:
Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS
16.30]
Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be
measured reliably. [IAS 16.31]
The revaluation model:

Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance
sheet date. [IAS 16.31]
If an item is revalued, the entire class of assets to which that asset belongs should be
revalued. [IAS 16.36]
Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to other
comprehensive income and accumulated in equity under the heading "revaluation
surplus" unless it represents the reversal of a revaluation decrease of the same asset
previously recognised as an expense, in which case it should be recognised in profit or
loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to

the extent that it exceeds any amount previously credited to the revaluation surplus
relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings, or it may be left in equity under the heading revaluation
surplus. The transfer to retained earnings should not be made through profit or loss. [IAS
16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis
over the asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial
year-end and, if expectations differ from previous estimates, any change is accounted for
prospectively as a change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits
are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is
generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]
The depreciation method should be reviewed at least annually and, if the pattern of consumption
of benefits has changed, the depreciation method should be changed prospectively as a change
in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be
indicative of a higher rate of consumption of the future economic benefits embodied in an asset.
[IAS 16.56]
Depreciation should be charged to profit or loss, unless it is included in the carrying amount of
another asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is
derecognised, even if it is idle. [IAS 16.55]
Recoverability of the carrying amount
IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition
for property, plant, and equipment. An item of property, plant, or equipment shall not be carried

at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less
costs to sell and its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss when
the claim becomes receivable. [IAS 16.65]
Derecognition (retirements and disposals)
An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or
loss on disposal is the difference between the proceeds and the carrying amount and should be
recognised in profit and loss. [IAS 16.67-71]
If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of
business. [IAS 16.68A]
Revalued property, plant and equipment
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures
are required: [IAS 16.77]
the effective date of the revaluation
whether an independent valuer was involved
for each revalued class of property, the carrying amount that would have been
recognised had the assets been carried under the cost model
the revaluation surplus, including changes during the period and any restrictions on the
distribution of the balance to shareholders.
Entities with property, plant and equipment stated at revalued amounts are also required to
make disclosures under IFRS 13 Fair Value measurement.

Summary of IAS 17

Objective of IAS 17
The objective of IAS 17 (1997) is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosures to apply in relation to
finance and operating leases.
Scope
IAS 17 applies to all leases other than lease agreements for minerals, oil,
natural gas, and similar regenerative resources and licensing agreements
for films, videos, plays, manuscripts, patents, copyrights, and similar items.
[IAS 17.2]
However, IAS 17 does not apply as the basis of measurement for the
following leased assets: [IAS 17.2]
the property held by lessees that is accounted for as investment property for which the lessee
uses the fair value model set out in IAS 40
investment property provided by lessors under operating leases (see IAS 40)
biological assets held by lessees under finance leases (see IAS 41)
biological assets provided by lessors under operating leases
Classification of leases
A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incident to ownership. All other leases are classified as operating leases. Classification is made
at the inception of the lease. [IAS 17.4]
Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than the form. Situations that would normally lead to a lease being classified
as a finance lease include the following: [IAS 17.10]

the lease transfers ownership of the asset to the lessee by the end of the lease term
the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than fair value at the date the option becomes exercisable that, at the
inception of the lease, it is reasonably certain that the option will be exercised

the lease term is for the major part of the economic life of the asset, even if title is not
transferred at the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased asset
the lease assets are of a specialised nature such that only the lessee can use them
without major modifications being made
Other situations that might also lead to classification as a finance lease are: [IAS 17.11]

if the lessee is entitled to cancel the lease, the lessor's losses associated with the
cancellation are borne by the lessee
gains or losses from fluctuations in the fair value of the residual fall to the lessee (for
example, by means of a rebate of lease payments)
the lessee has the ability to continue to lease for a secondary period at a rent that is
substantially lower than market rent.
When a lease includes both land and buildings elements, an entity assesses the classification of
each element as a finance or an operating lease separately. In determining whether the land
element is an operating or a finance lease, an important consideration is that land normally has
an indefinite economic life [IAS 17.15A]. Whenever necessary in order to classify and account
for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront
payments) are allocated between the land and the buildings elements in proportion to the
relative fair values of the leasehold interests in the land element and buildings element of the
lease at the inception of the lease. [IAS 17.16] For a lease of land and buildings in which the
amount that would initially be recognised for the land element is immaterial, the land and
buildings may be treated as a single unit for the purpose of lease classification and classified as
a finance or operating lease. [IAS 17.17] However, separate measurement of the land and
buildings elements is not required if the lessee's interest in both land and buildings is classified
as an investment property in accordance with IAS 40 and the fair value model is adopted. [IAS
17.18]
Accounting by lessees

The following principles should be applied in the financial statements of lessees:

at commencement of the lease term, finance leases should be recorded as an asset and
a liability at the lower of the fair value of the asset and the present value of the minimum
lease payments (discounted at the interest rate implicit in the lease, if practicable, or else
at the entity's incremental borrowing rate) [IAS 17.20]
finance lease payments should be apportioned between the finance charge and the
reduction of the outstanding liability (the finance charge to be allocated so as to produce
a constant periodic rate of interest on the remaining balance of the liability) [IAS 17.25]
the depreciation policy for assets held under finance leases should be consistent with
that for owned assets. If there is no reasonable certainty that the lessee will obtain

ownership at the end of the lease the asset should be depreciated over the shorter of
the lease term or the life of the asset [IAS 17.27]
for operating leases, the lease payments should be recognised as an expense in the
income statement over the lease term on a straight-line basis, unless another systematic
basis is more representative of the time pattern of the user's benefit [IAS 17.33]
Incentives for the agreement of a new or renewed operating lease should be recognised by the
lessee as a reduction of the rental expense over the lease term, irrespective of the incentive's
nature or form, or the timing of payments.
Accounting by lessors
The following principles should be applied in the financial statements of lessors:
at commencement of the lease term, the lessor should record a finance lease in the
balance sheet as a receivable, at an amount equal to the net investment in the lease
[IAS 17.36]
the lessor should recognise finance income based on a pattern reflecting a constant
periodic rate of return on the lessor's net investment outstanding in respect of the finance
lease [IAS 17.39]
assets held for operating leases should be presented in the balance sheet of the lessor
according to the nature of the asset. [IAS 17.49]
Lease income should be recognised over the lease term on a straight-line basis, unless
another systematic basis is more representative of the time pattern in which use benefit
is derived from the leased asset is diminished [IAS 17.50]
Incentives for the agreement of a new or renewed operating lease should be recognised by the
lessor as a reduction of the rental income over the lease term, irrespective of the incentive's
nature or form, or the timing of payments. [SIC-15]

Manufacturers or dealer lessors should include selling profit or loss in the same period as they
would for an outright sale. If artificially low rates of interest are charged, selling profit should be
restricted to that which would apply if a commercial rate of interest were charged. [IAS 17.42]
Under the 2003 revisions to IAS 17, initial direct and incremental costs incurred by lessors in
negotiating leases must be recognised over the lease term. They may no longer be charged to
expense when incurred. This treatment does not apply to manufacturer or dealer lessors where
such cost recognition is as an expense when the selling profit is recognized.
Sale and leaseback transactions
For a sale and leaseback transaction that results in a finance lease, any excess of proceeds
over the carrying amount is deferred and amortised over the lease term. [IAS 17.59]

For a transaction that results in an operating lease: [IAS 17.61]

if the transaction is clearly carried out at fair value - the profit or loss should be
recognised immediately
if the sale price is below fair value - profit or loss should be recognised immediately,
except if a loss is compensated for by future rentals at below market price, the loss it
should be amortised over the period of use
if the sale price is above fair value - the excess over fair value should be deferred and
amortised over the period of use
if the fair value at the time of the transaction is less than the carrying amount a loss
equal to the difference should be recognised immediately [IAS 17.63]
Disclosure: lessees finance leases [IAS 17.31]

carrying amount of asset

reconciliation between total minimum lease payments and their present value
amounts of minimum lease payments at balance sheet date and the present value
thereof, for:
the next year
years 2 through 5 combined
beyond five years

contingent rent recognised as an expense

total future minimum sublease income under noncancellable subleases

general description of significant leasing arrangements, including contingent rent

provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing
Disclosure: lessees operating leases [IAS 17.35]

amounts of minimum lease payments at balance sheet date under noncancellable operating
leases for:
the next year
years 2 through 5 combined
beyond five years
total future minimum sublease income under noncancellable subleases
lease and sublease payments recognised in income for the period
contingent rent recognised as an expense
general description of significant leasing arrangements, including contingent rent
provisions, renewal or purchase options, and restrictions imposed on dividends,
borrowings, or further leasing

Disclosure: lessors finance leases [IAS 17.47]

1. reconciliation between gross investment in the lease and the present value of minimum
lease payments;
2. gross investment and present value of minimum lease payments receivable for:
the next year
years 2 through 5 combined
beyond five years
unearned finance income
unguaranteed residual values
accumulated allowance for uncollectible lease payments receivable
contingent rent recognised in income
general description of significant leasing arrangements.
Disclosure: lessors operating leases [IAS 17.56]

amounts of minimum lease payments at balance sheet date under noncancellable

operating leases in the aggregate and for:
the next year
years 2 through 5 combined
beyond five years
contingent rent recognised as in income
general description of significant leasing arrangements.

Summary of IAS 18
Objective of IAS 18
The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from
certain types of transactions and events.
Key definition
Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising
from the ordinary operating activities of an entity (such as sales of goods, sales of
services, interest, royalties, and dividends). [IAS 18.7]

Measurement of revenue
Revenue should be measured at the fair value of the consideration received or
receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is
not regarded as a transaction that generates revenue. However, exchanges for
dissimilar items are regarded as generating revenue. [IAS 18.12]
If the inflow of cash or cash equivalents is deferred, the fair value of the consideration
receivable is less than the nominal amount of cash and cash equivalents to be received,
and discounting is appropriate. This would occur, for instance, if the seller is providing
interest-free credit to the buyer or is charging a below-market rate of interest. Interest
must be imputed based on market rates. [IAS 18.11]
Recognition of revenue
Recognition, as defined in the IASB Framework, means incorporating an item that
meets the definition of revenue (above) in the income statement when it meets the
following criteria:
it is probable that any future economic benefit associated with the item of
revenue will flow to the entity, and
the amount of revenue can be measured with reliability
IAS 18 provides guidance for recognising the following specific categories of revenue:

Sale of goods
Revenue arising from the sale of goods should be recognised when all of the following
criteria have been satisfied: [IAS 18.14]

the seller has transferred to the buyer the significant risks and rewards of
ownership
the seller retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold
the amount of revenue can be measured reliably
it is probable that the economic benefits associated with the transaction will flow
to the seller, and the costs incurred or to be incurred in respect of the transaction
can be measured reliably

Rendering of services
For revenue arising from the rendering of services, provided that all of the following criteria are
met, revenue should be recognised by reference to the stage of completion of the transaction at
the balance sheet date (the percentage-of-completion method): [IAS 18.20]
the amount of revenue can be measured reliably;
it is probable that the economic benefits will flow to the seller;
the stage of completion at the balance sheet date can be measured reliably; and
the costs incurred, or to be incurred, in respect of the transaction can be measured
reliably.
When the above criteria are not met, revenue arising from the rendering of services should be
recognised only to the extent of the expenses recognised that are recoverable (a "cost-recovery
approach". [IAS 18.26]

Interest, royalties, and dividends

For interest, royalties and dividends, provided that it is probable that the economic benefits will
flow to the enterprise and the amount of revenue can be measured reliably, revenue should be
recognised as follows: [IAS 18.29-30]
interest: using the effective interest method as set out in IAS 39
royalties: on an accruals basis in accordance with the substance of the relevant agreement
dividends: when the shareholder's right to receive payment is established