IFRS 2023-2024 Week 2 - IAS16 PPE

Amsterdam Business School
MSc Accountancy & Control – 2023-2024
International Financial Reporting Standards

Lecture Week 2 – Property, Plant & Equipment
Réka Felleg
1
Key learning objectives

• Upon completion of Week 2, you should be able to understand and explain:
• Recognition criteria for Initial Recognition for PPE
• Alternatives for Subsequent Measurement for PPE after initial recognition
• Two measurement models for subsequent measurement
• Cost Model
• Revaluation Model
• How two choose between the two models
• Derecognition
• Disclosure requirements
• Accounting issues related to Investment Properties
2
What is PPE?
Property, plant and equipment are tangible items that:
a. are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
b. are expected to be used during more than one period.
• Tangible assets are physical assets, such as land, rather than non-physical, such as patents
and trademarks.
• The assets have specific uses within an entity, namely, for use in production/supply, rental
or administration. Assets that are held for sale, including land, or held for investment are
not included under PPE (use IFRS 5)
• The assets are non-current assets, the expectation being that they will be used for more
than one accounting period
3
Scope
PPE Held-for-Sale Biological assets related to agricultural

(IFRS 5 Non-current Assets Held for Sale and activity
Discontinued Operations) (IAS 41 Agriculture)
IAS 16 applies to all PPE

except:
Mineral rights and mineral reserves such
as oil, gas and similar non-regenerative
resources
(IFRS 6 Exploration for and evaluation of
mineral resources)
4
Property, Plant &

Equipment:
* The key accounting steps

for PPE:
5
[§11.2] INITIAL RECOGNITION

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the entity; and
b) the cost of the item can be measured reliably.
• Asset versus expense:

one test of the existence of future benefits is then to determine whether there exists a market for
the item in question. A problem with some assets is that once items have been acquired and
installed, there is no normal market for them;
• Separate assets — significant parts:
exercise of judgement, the standard does not prescribe the unit of measure for recognition. The
key element is an analysis of what is going to happen in the future to that asset;
• Generation of future benefits:
certain assets may not of themselves generate future benefits, but instead it may be necessary
for the entity itself to generate future benefits.
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[§11.3] INITIAL MEASUREMENT

Three elements of cost, namely:
• purchase price
• directly attributable costs
• initial estimate of the costs of dismantling and removing the item or restoring the site on
which it is located
• Purchase price
‘Purchase price’ is not defined in IAS 16, Cost is determined/measured by reference to
the fair value, except when the exchange lacks commercial substance
• Directly attributable costs
Key: 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
• Initial estimate of the costs of dismantling/removing/restoring
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[§11.3.1] Purchase Price

Example: Purchase price for machine in exchange for assets with Land measured at original cost of
€100,000, but with fair value of €150,000
Machinery 150,000
Gain on Sale of Land 50,000
Land 100,000
Same purchase for machine in exchange for assets measured at fair value: (Acquisition of
machinery by issue of shares)
Machinery 150,000
Share capital 150,000

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[§11.3.1] Multiple Assets

Example: Acquisition of assets for cash: £300 000
Fair Value
Land 40 000
Buildings 200 000
Furniture 80 000
320 000
The total cost of £300 000 is then allocated to each asset on the basis of these fair values as
follows:
Land £40 000/£320 000 × £300 000= 37 500
Buildings £200 000/£320 000 × £300 000= 187 500
Furniture £80 000/£320 000 × £300 000= 75 000
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[§11.3.1] Multiple Assets
The acquisition of the three assets is recorded by the entity as follows:
Land 37 500
Buildings 187 500
Furniture 75 000
Cash 300 000

10
[§11.3.2] Directly attributable costs

11.3.2 Directly attributable costs
The key feature of those costs included in the cost of acquisition is that they are 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
(IAS 16 paragraph 16(b)).
Costs to be included
Paragraph 17 of IAS 16 provides examples of directly attributable costs:
• costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and
equipment
• costs of site preparation
• initial delivery and handling costs
• installation and assembly costs — where buildings are acquired, associated costs could be the costs of renovation
• costs of testing whether the asset is functioning properly
• professional fees
Costs NOT to be included

Paragraphs 19-20 of IAS 16 provide examples of costs NOT to be included in directly attributable costs:
11
[§11.4] MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

At the point of initial recognition of an item of property, plant and equipment, the
asset is measured at cost. After this initial recognition, an entity has a choice on the
measurement basis to be adopted:
• the cost model
• the revaluation model.
• The choice of model is an accounting policy decision

• Not applied to individual assets but to an entire class of PPE
• An entity shall change an accounting policy only if the change:
a) is required by an IFRS; or
b) results in the financial statements providing more reliable and more relevant information
about the effects of transactions, other events or conditions on the entity's financial position,
financial performance or cash flows.
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[§11.5] Cost Model

Paragraph 30 of IAS 16 states:
After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any
accumulated depreciation and any accumulated impairment losses.
• [§11.5.1] Depreciation
• Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
• Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
• The residual value of an asset is the estimated amount that an entity would currently obtain from disposal
of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life.
• Useful life is:

a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production or similar units expected to be obtained from the asset by an entity.
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[§11.5] Cost Model

• [§11.5.1] Methods of depreciation
• Straight-line method. This is used where the benefits are expected to be received evenly
over the useful life of the asset.
• Diminishing-balance method. This method is used where the pattern of benefits is such
that more benefits are received in the earlier years in the life of the asset. As the asset
increases in age, the benefits each year are expected to reduce.
• Units-of-production method. This method is based on the expected use or output of the
asset. Variables used could be production hours or production output.
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[§11.5] Cost Model

• [§11.5.1] Useful life
• Determination of useful life requires estimation by management
• Factors to consider in determining useful life:

a) the expected usage of the asset by the entity;
b) the expected physical wear and tear;
c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output of
the asset;
d) legal or similar limits on the use of the asset, such as expiry dates of related leases.
15
[§11.6] Revaluation Model

After recognition as an asset, an item of property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment
losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does
not differ materially from that which would be determined using fair value at the end of the reporting
period.
• The measurement basis is fair value

• IAS 16 does not specify how often revaluations must take place.
• Note the inputs into the valuation techniques:
• Example: in relation to buildings held and used, it is noted that a Level 2 input would be the price per square meter
for the building derived from observable market data;
• Example: multiples derived from process in observed transactions involving comparable or similar buildings in
similar locations.
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[§11.6.1] Revaluation Model: revaluation increases

If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised
in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
1. Revaluation increases are recognised in other comprehensive income, not profit or loss.
2. Having recognised the gain in other comprehensive income, the gain, net of tax, is transferred to equity under the
heading of revaluation surplus.
Where the item of property, plant and equipment is depreciable, there are two possible accounting
treatments under paragraph 35 of IAS 16
1. restate 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
2. eliminate the accumulated depreciation balance against the gross carrying amount of the asset and
then restate the net amount to the fair value of the asset. This method is applied in the chapter.
17

The initial journal entry for a revaluation increase is:
Revaluation of asset:
Asset xxx
Gain on Revaluation of Non-Current Asset (OCI) xxx
Recognition of tax effect of revaluation gain:

Gain on Revaluation of Asset (OCI) xxx
Deferred Tax Liability xxx
Accumulation of net revaluation gain transferred to equity:

Gain on Revaluation of Non-Current Asset (OCI) xxx
Asset Revaluation Surplus xxx

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Example: On 30 June 2014, an item of plant has a carrying amount of £42 000, being the original cost of
£70 000 on 1 July 2012, less accumulated depreciation of £28 000. The fair value of the asset is £50 000.
Depreciation rates are on a straight-line basis at 20% p.a. for accounting and 35% for tax. The tax rate is 30%.
On 30 June 2013, the carrying amount and the tax base of the asset are as follows:
Accounting Tax
Original cost 70 000 70 000
Accumulated depreciation (14 000) (24 500)
Net amount 56 000 45 500
Hence, the taxable temporary difference at 30 June 2013 is £10 500 (£56 000 − £45 500), with a deferred
tax liability of £3 150 being recognised.
19
On 30 June 2014, the asset has a carrying amount and tax base as follows:
Accounting Tax
Original cost 70 000 70 000
Accumulated depreciation (28 000) (49 000)
Net amount 42 000 21 000
20
The revaluation is done in two steps:
The first step is to write off the accumulated depreciation of the plant, reducing the asset to its carrying
amount of £42 000.
(Write down asset to its carrying amount)
Accumulated Depreciation, Plant 28 000

Plant 28 000
21

The second step is to adjust the carrying amount of £42 000 to the fair value of the asset, £50 000, being an
increase of £8 000. This increase has tax effects, and the net gain accumulated to equity.
(Revaluation of asset to fair value): 30 June 2014
Plant 8 000
Gain on Revaluation of Plant (OCI) 8 000
(Tax effect of revaluation increase)
Deferred Tax Liability 2 400
(Accumulation of net revaluation gain in equity)
Asset Revaluation Surplus 5 600

22
The carrying amount of the asset on 30 June 2014 in the accounting records is now £50 000, but its tax base
is unchanged at £21 000. This gives a taxable temporary difference of £29 000, and a total deferred tax
liability of £8 700 at a 30% tax rate.
As the beginning deferred tax liability for the year is £3 150 and £2 400 of the deferred tax liability is
already recognised in the revaluation entry, the adjustment required in the current year, ending 30 June 2014,
is : £3 150
[(8 700 − 3 150 − 2 400) or (£6 300 − £3 150) or (£24 500 – £14 000)@30%]:
((Recognition of deferred tax liability))
Income Tax Expense 3 150

23
[§11.6.2] Revaluation Model: revaluation decreases

Paragraph 40 of IAS 16 states
If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be
recognised in profit or loss. However, the decrease shall be recognised in other comprehensive
income to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
Three situations:
1. revaluation decrease;
2. revaluation decrease following a previous revaluation increase: the surplus must be eliminated
before any expense is recognised. In adjusting for the previous revaluation increase, both the
asset revaluation surplus and the related deferred tax liability must be reversed;
3. net revaluation increase reversing previous revaluation decrease: where an asset is revalued
upwards, an asset revaluation surplus is credited except where the increase reverses a revaluation
decrease previously recognised as a loss. In this case, the revaluation increase must be
recognised as a gain.
24

The initial journal entry for a revaluation decrease is:
Write down asset to carrying amount:

Accumulated depreciation xxx
Asset xxx
Revaluation of asset from carrying amount to fair value :

Loss – Downward Revaluation of asset (P/L) xxx
Asset xxx
25

Example: Assume an item of plant has a carrying amount of £50 000, being original cost of
£60 000 less accumulated depreciation of £10 000. If the asset is revalued downwards to £24 000, the
appropriate journal entries are:
(Write down asset to its carrying amount of £50 000)

Accumulated Depreciation 10 000
Plant 10 000
(Revaluation of asset from carrying amount of £50 000 to fair value of £24 000)
Loss – Downward Revaluation of Plant (P/L) 26 000
Plant 26 000
If the carrying amount and the tax base in this example were the same immediately before the revaluation, then there
would be a deductible temporary difference of £26 000. A deferred tax asset of £7 800 would be raised via the tax-
effect worksheet analysis at the end of the reporting period.
26
[§11.6.2] Revaluation Model: revaluation decrease reversing previous increase

Example: Assume XYZ Group has a block of land with a carrying amount of £200 000. When the land was
revalued upwards from £100 000, the following entries were passed:
(Revaluation of asset to fair value)

Plant 100 000
(Tax effect of revaluation increase)

(Accumulation of net revaluation gain in equity)


27
If the asset is revalued downwards to £160 000, the £40 000 write-down is a partial reversal of the previous
upward revaluation. The accounting entries then reflect:
• a recognition of the decrease in other comprehensive income, and
• a decrease in accumulated equity, namely, asset revaluation surplus.
(Revaluation downwards of land)

Loss on Revaluation of Land (OCI) 40 000
Land 40 000
(Tax effect of revaluation decrease)

(Reduction in accumulated equity due to revaluation decrease on land)


28
If the asset is revalued downwards to £80 000, which is a reduction of £120 000, the asset is written down to an amount
£20 000 less than the original cost of the asset. The downward revaluation requires a loss to be recognised in profit or
loss, as well as a decrease to be recognised in other comprehensive income. Effectively this will result in the elimination
of the deferred tax liability and the asset revaluation surplus previously raised. The appropriate entries are:
(Revaluation downwards of land)

Loss on Revaluation of Land (P/L) 20 000
Land 120 000
(Tax effect of loss on revaluation of land)



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[§11.6.2] Revaluation Model: net revaluation increase reversing previous revaluation decrease
Assume XYZ Group has an item of plant whose current carrying amount is £200 000 (accumulated
depreciation being £20 000). The asset had cost £300 000. It was revalued downwards from a carrying
amount of £270 000 to £220 000, with the following accounting entries being passed:

Plant 30 000
((Revaluation of asset from carrying amount of £270 000 to fair value of £220 000)
Loss – Downward Revaluation of Plant (P/L) 50 000
Plant 50 000
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[§11.6.2] Revaluation Model: net revaluation increase reversing previous revaluation decrease
If the asset is assessed as having a fair value of £230 000, there is a revaluation increase of £30 000.
However as there was a previous decrease of £50 000, the appropriate revaluation entry must reverse part of
this previously recognised revaluation loss. The entries are:

Plant 20 000
(Revaluation of asset from carrying amount of £200 000 to fair value of £230 000, subsequent to
prior write-down of the assets)
Plant 30 000
Gain on Revaluation of Plant (P/L) 30 000

31
If the asset is assessed as having a fair value of £280 000, the accounting entries recognise the increase of £80 000 as
consisting of two parts:
1. the reversal of the previously recognised write-down loss of £50 000; the reversal is recognised as a gain, and
disclosed in profit or loss
2. the £30 000 increase recognised in other comprehensive income and accumulated in asset revaluation surplus.

Plant 20 000
(Revaluation of plant from carrying amount of £200 000 to fair value of £280 000)
Plant 80 000
Gain on Revaluation of Land (P/L) 50 000
Gain on Revaluation of Land (OCI) 30 000
32
(Tax effect of revaluation decrease)

33
[§11.7] Choosing Between the Cost Model and the Revaluation Model
Given that IAS 16 allows entities a choice between the cost model and the revaluation model, it
is of interest to consider what motivates entities to choose between the two measurement
models.
• Which model has more relevant information?
• Which model is more costly to implement? – The revaluation requires extra record-keeping
associated with the revaluations
• Harmonization with US GAAP
• What is the effect on P/L and OCI? – The revaluation model leads to higher depreciation in
case of an increase
• What is the effect upon disposal?
• What is the effect on equity?
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Summary of Lecture

IFRS 2023-2024 Week 2 - IAS16 PPE

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Amsterdam Business School

MSc Accountancy & Control – 2023-2024

International Financial Reporting Standards

Key learning objectives

PPE Held-for-Sale Biological assets related to agricultural

IAS 16 applies to all PPE

Property, Plant &

* The key accounting steps

[§11.2] INITIAL RECOGNITION

• Asset versus expense:

[§11.3] INITIAL MEASUREMENT

[§11.3.1] Purchase Price

Gain on Sale of Land 50,000

Share capital 150,000

[§11.3.1] Multiple Assets

[§11.3.1] Multiple Assets

The acquisition of the three assets is recorded by the entity as follows:

Buildings 187 500

Cash 300 000

[§11.3.2] Directly attributable costs

Costs NOT to be included

[§11.4] MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION

• The choice of model is an accounting policy decision

[§11.5] Cost Model

• Useful life is:

[§11.5] Cost Model

[§11.5] Cost Model

• Factors to consider in determining useful life:

[§11.6] Revaluation Model

• The measurement basis is fair value

[§11.6.1] Revaluation Model: revaluation increases

[§11.6.1] Revaluation Model: revaluation increases

Recognition of tax effect of revaluation gain:

Accumulation of net revaluation gain transferred to equity:

Asset Revaluation Surplus xxx

[§11.6.1] Revaluation Model: revaluation increases

[§11.6.1] Revaluation Model: revaluation increases

The revaluation is done in two steps:

(Write down asset to its carrying amount)

Accumulated Depreciation, Plant 28 000

[§11.6.1] Revaluation Model: revaluation increases

(Revaluation of asset to fair value): 30 June 2014

Deferred Tax Liability 2 400

(Accumulation of net revaluation gain in equity)

Gain on Revaluation of Plant (OCI) 5 600

Asset Revaluation Surplus 5 600

[§11.6.1] Revaluation Model: revaluation increases

((Recognition of deferred tax liability))

Income Tax Expense 3 150

[§11.6.2] Revaluation Model: revaluation decreases

[§11.6.2] Revaluation Model: revaluation decreases

Write down asset to carrying amount:

Revaluation of asset from carrying amount to fair value :

[§11.6.2] Revaluation Model: revaluation decreases

(Write down asset to its carrying amount of £50 000)

[§11.6.2] Revaluation Model: revaluation decrease reversing previous increase

(Revaluation of asset to fair value)

Gain on Revaluation of Plant (OCI) 100 000

(Tax effect of revaluation increase)

Deferred Tax Liability 30 000

(Accumulation of net revaluation gain in equity)

Asset Revaluation Surplus 70 000

(Revaluation downwards of land)