FINANCIAL ACCOUNTING & REPORTING 1

1
Property, Plant and Equipment (Part 5)

Module 026 Property, Plant and Equipment

(Part 5)

IAS 16 Property, Plant, and Equipment outline the accounting treatment for
most types of property, plant, and equipment.
The objective of this Standard is to prescribe the accounting treatment for
property, plant, and equipment so that users of the financial statements can
discern information about an entity's investment in its property, plant, and
equipment and the changes in such investment. The principal issues in
accounting for property, plant, and equipment are the recognition of the
assets, the determination of their carrying amounts, and the depreciation
charges and impairment losses to be recognized in relation to them.
At the end of this module, you are expected to:
1. Know what impairment of assets are and how they are recognized;
2. Understand and apply the de-recognition and disposal treatment of PPE;
3. Enumerate the important Financial statement presentation and
disclosures; and
4. Be familiar with the internal control and management of property, plant,
and equipment.

Impairment of assets
When an item of property, plant, and equipment has suffered an impairment in value, the
enterprise should write down the carrying value of such an asset to its recoverable amount.
This reduction is recognized as an impairment loss in the income statement in the period
when the impairment occurs.
The recoverable amount of an asset should be measured as the higher value of
✓ the asset’s net selling price; and
✓ the asset’s value in use.
The net selling price of an asset is the amount obtainable from the sale of an asset in an
arm's length transaction between knowledgeable, willing parties, with fewer costs of
disposal.
The value in use of an asset is measured as the present value of the discounted value of
estimated future cash flows (inflows minus outflows) expected to arise from the continuing
use of an asset and from its disposal at the end of its useful life.

Course Module
 If the asset impaired is recorded at a revalued amount, the impairment is treated as a
reduction of revaluation surplus pertaining to that asset, and any excess is charged to profit
and loss.

When an asset's value recovers after recording the initial impairment, recovery of the
impairment loss is taken up as income to the extent of the impairment loss previously
recorded minus the amount recovered through lower depreciation charges. Any further
increase, using the revaluation model, is credited to the revaluation surplus.
Reversal of impairment loss
If there is a reversal of previous impairment loss, the reversal should be recognized
immediately as income in the statement of comprehensive income and the carrying
amount. However, under the cost model, the new recoverable amount should not exceed its
carrying value as if no impairment loss has been previously recorded. Under the
revaluation model, the amount taken to profit or loss is similar to the amount recognized
under the cost model. Any further increase in the asset's revalued amount, however, is
credited to the revaluation surplus.

Derecognition and Disposal

The accounting treatment for the disposal of assets is normally straightforward. Assets
should be eliminated from the statement of financial position on disposal, or when no
future economic benefits are expected from their use or on disposal, and gains and losses
on derecognition are taken to the income statement, being the difference between the
asset’s carrying value and the net disposal proceeds, if any.
The date of disposal will be determined by reference to IAS 18 Revenue for recognizing
revenue from the sale of goods, such as when:
(a) The entity has transferred to the buyer the significant risks and rewards of ownership
of the asset
(b) The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the asset
(c) The amount of the disposal proceeds can be measured reliably
(d) It is probable that the economic benefits associated with the transaction will flow to the
entity
(e) The costs incurred or to be incurred in respect of the transaction can be measured
reliably
In practice, the first two of these rules likely will be the most relevant. IAS 16 also stresses,
however, that gains on the disposal of assets should not be classified as revenue. These
amounts are reported as gains in profit or loss.
Sometimes an asset is disposed of or impaired because of events outside the entity's
control. For example, an asset could be compulsorily acquired by a government agency, or
it could be destroyed by fire. In such cases, the entity could receive compensating payments
from the government agency or from an insurance company, which enable it to replace the
 FINANCIAL ACCOUNTING & REPORTING 1
3
Property, Plant and Equipment (Part 5)

asset. These are treated in the same way as any other disposal -- a gain or loss on disposal
would be recorded based on the difference between the carrying value of the asset and the
compensating proceeds, and any replacement asset would be capitalized at its cost in the
usual way. Disclosure of compensation from third parties is needed if not separately
presented in the income statement.

Financial statement presentation and disclosures

The main disclosure requirements of IAS 16 are set out below, but it should be noted that
the related disclosure requirements in other standards such as IFRS 13, IAS 1 –
Presentation of Financial Statements – and IAS 36 may also be relevant.
General disclosures
For each class of property plant and equipment, the following should be disclosed in the
financial statements:
(a) the measurement bases used for determining the gross carrying amount (e.g., cost or
revaluation). When more than one basis has been used, the gross carrying amount for that
basis in each category will have to be disclosed (however, the standard requires that if
revaluation is adopted, the entire class of PPE must be revalued);
(b) the depreciation methods used. Selection of the depreciation method used is a matter of
judgment, and the disclosure should provide information to allow users to review the
policies selected by management and to compare with other entities;
(c) the useful lives or the depreciation rates used. Selection of the useful lives or
depreciation rates used is a matter of judgment, and the disclosure should provide
information to allow users to review the policies selected by management and to compare
with other entities;
(d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) disposals and assets classified as held for sale or included in a disposal group held
for sale;
(iii)acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations and from impairment losses
recognized or reversed directly in other comprehensive income under IAS 36;
(v)impairment losses recognized in profit or loss during the period under IAS 36;
(vi)impairment losses reversed in profit or loss during the period under IAS 36;
(vii)depreciation;

Course Module
 (viii)the net exchange differences arising from the translation of the financial
statements from the functional currency into a different presentation currency,
including the translation of a foreign operation into the presentation currency of the
reporting entity; and
(ix) other changes.

IAS 16 also requires the disclosure of the following information, which is useful to gain a
fuller understanding of the entire position of the entity's holdings and its commitments to
purchase property plants and equipment:
(a) the existence and amounts of restrictions on title, property, plant, and equipment
pledged as security for liabilities;
(b)the number of expenditures recognized in the carrying amount of property, plant, and
equipment in the course of construction;
(c) the number of contractual commitments for the acquisition of property, plant, and
equipment; and
(d) if it is not disclosed separately on the face of profit or loss, the amount of compensation
from third parties for items of property, plant, and equipment that were impaired, lost, or
given up is included in profit or loss.
In addition, there is a reminder in the standard that, in accordance with IAS 8, any changes
in accounting estimate (e.g., depreciation methods, useful lives, residual values, estimated
cost of dismantling, removing, or restoring items of PPE) that have a material effect on the
current or future periods must be disclosed.

Additional disclosures for revalued assets

The additional requirements in IAS 16 if the revaluation method is adopted are:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) for each revalued class of property, plant, and equipment, the carrying amount that
would have been recognized had the assets been carried under the cost model; and
(d) the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.

Other disclosures
The standard emphasizes that entities are also required to disclose information about
impairment in accordance with IAS 36, [IAS 16.78], in addition to the disclosures required
by IAS 1, IAS 16, and IFRS 13.
The standard encourages but does not require entities to disclose other additional
information such as the carrying amount of any idle assets, the gross amount of any fully
 FINANCIAL ACCOUNTING & REPORTING 1
5
Property, Plant and Equipment (Part 5)

depreciated assets in use, and the carrying amount of any assets retired from active use but
not classified as held for disposal under IFRS 5. For any property plant and equipment held
at cost less depreciation, the disclosure of its fair value is also encouraged if it is materially
different from the carrying amount.
IFRS 5 introduced a category of assets 'held for sale, and PPE within this category is outside
the scope of IAS 16, although IAS 16 requires certain disclosures about assets held for sale
to be made.

Internal control and management of property, plant, and equipment

One of the most important internal controls over the non-current operating asset is the
system of authorization for the acquisition of, expenditures for, and disposals of these
assets. A method that achieves this control is capital budgeting, which does not merely
authorize acquisition, expenditures, and disposals but also compares actual peso amounts
incurred and realized with budgeted figures. Implementing capital budgeting requires a
reporting procedure for prompt disclosure and analysis of variances between authorized
expenditures and actual costs.
Fixing accountability and responsibility for units of operating assets leads to proper usage
and maintenance of the assets. Once accountability is established, appropriate records for
custody of the assets are likewise maintained. This also facilitates asset evaluation by
management.
An enterprise shall likewise establish and maintain a subsidiary ledger of each class of non-
current operating assets. This ensures that reliable information exists for calculating
depreciation, recording gains and losses on disposals of assets, preparing tax returns, filing
insurance claims, monitoring expenditures for repairs and maintenance, and review of
estimated useful life.
Physical transfers of fixed assets (say, from one department to another or transfer from the
enterprise for use in special projects) shall be documented. It is the responsibility of the
department to ensure that all members of the company personnel under his supervision
adhere to policies and procedures regarding off-campus use of fixed assets and transfer of
fixed assets from one department to another.
An enterprise shall also establish and implement an appropriate policy requiring that
purchases of long-lived assets be made through normal purchasing procedures. This
ensures that the enterprise considers prices quoted by different suppliers, quality, and
other features of the asset being purchased.
Each department head shall submit an annual fixed asset report to the company's property
custodian. The report shall contain, among others, a list of a full inventory of fixed assets
maintained by the department at the end of the period, major and minor acquisitions,
interdepartmental transfers, disposals made during the year, and recommendations for
repairs or replacements.

Course Module
Insurance and warranties must likewise be maintained on assets with a very high cost of
acquisition. A system of serially numbered retirement decisions and actions must likewise
be in place.
 FINANCIAL ACCOUNTING & REPORTING 1
7
Property, Plant and Equipment (Part 5)

Glossary
Carrying amount: Amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.
Impairment loss: The amount by which the carrying amount of an asset exceeds its
recoverable amount.
Net selling price: Amount obtainable from the sale of an asset in an arm's length
transaction between knowledgeable, willing parties, fewer costs of disposal.
Recoverable amount: The higher an asset's fair value, the fewer costs to sell and its
value in use.
Residual value: The estimated amount that an entity would currently obtain from the
disposal of the asset, 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.
Useful life:
(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.
Value in use: Measured as the present value of the discounted value of estimated future
cash flows (inflows minus outflows) expected to arise from the continuing use of an asset
and from its disposal at the end of its useful life.

References and Supplementary Materials

Books and Journals
IAS 16, Property, Plant and Equipment
Cabrera, M. B., & Ocampo, R. R. (n.d.). Financial Accounting & Reporting - Standards &
Application (2014-2015 ed., Vol. 2). Manila, Philippines.
Robles, N. S., & Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1). Manila,
Philippines.
Valix, C. T., Peralta, J. F., & Valix, C. M. (2017). Financial Accounting (2017 ed., Vol. 2).Manila,
Philippines.

Online Supplementary Reading Materials

1. IAS 16 — Property, Plant, and Equipment
http://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-
equipment/; October 10, 2017

Course Module
2. The Reporting of Property and Equipment;
http://open.lib.umn.edu/financialaccounting/chapter/10-1-the-reporting-of-property-
and-equipment/; October 23, 2017

3. Reporting Land Improvements and Impairments in the Value of Property and

Equipment; http://open.lib.umn.edu/financialaccounting/chapter/10-6-reporting-
land-improvements-and-impairments-in-the-value-of-property-and-equipment/;
October 23, 2017

4. Depreciation, impairments and depletion;

https://www.accountingformanagement.org/explanation/depreciation-impairments-
and-depletion/; October 23, 2017

Online Instructional Videos

1. IAS 16 Property, Plant and Equipment - Summary;
https://www.youtube.com/watch/VgP1kakxmB4; 23 October 2017
2. Introduction to PPE: http://www.investopedia.com/video/play/property-plant-and-
equipment-ppe/; October 10, 2017
3. In a Set of Financial Statements, What Information Is Conveyed about Property and
Equipment?; http://open.lib.umn.edu/financialaccounting/part/chapter-10-in-a-set-of-
financial-statements-what-information-is-conveyed-about-property-and-equipment/;
October 10, 2017