IAS 16.

Property,Plant & Equipment Page |1

Recognition and initial measurement

1.1Recognition

Property plant and equipment should be recognised as an asset when there is

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1.2 Initial measurement

Property, plant and equipment should initially be measured at cost. Cost should include all directly
attributable costs necessary to bring the asset into use.

Note: Training costs can never be capitalised as an asset.

Include

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Exclude

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1.3 Subsequent expenditure

Subsequent expenditure should only be capitalised if it

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Subsequent expenditure not capitalised should be charged to the statement of profit or loss as revenue
expenditure.

Depreciation

2.1 Definition

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |2

Ex.01

The company bought a motor vehicle for Rs.50 000 on 1st January 2005. Useful life of the asset is 5
years. Calculate the annual depreciation charges.

Ex.02

A Gill, purchased a notebook PC for Rs.260 000. It has an estimated life of 4 years and a scrap value of
Rs.20 000. Calculate annual depreciation charges

Ex.03

A car costs Rs.960 000. Depreciation rate is 10% per annum. Calculate the annual depreciation.

Reducing Balance Method

Under this method the asset is deemed to lose a greater part of its value in the early years of its use
compared to later years.

Ex.04

A machine costs Rs.12 500. Depreciation rate is 20%. Show the calculations of the figures for
depreciation for each of the 5 years using the reducing balance method

Ex.05

A photocopier costs Rs.25 000and rate of depreciation is 25%. Show the calculations of the figures for
depreciation for each year using the reducing balance

Ex.06

The following information relates to the machinery owned by Kandox Manufacturing, for the year
ending 31 December 2008

Purchase of machinery: High speed printer machine (machine number 515)

• Purchased on 31st December 2008 for Rs.60 000 plus Rs.4 000 installation cost

• Estimated economic life 8 years

• Residual value Rs.8 000

• Depreciation is to be charged using the straight line method

A director of Kandox Manufacturing has requested that the calculation for depreciation on machinery be
changed from the present straight line method to the reducing balance method. The reducing balance
method would be calculated at the rate of 25% per annum.

Calculate for the high speed printer (machine no.515) the annual depreciation for the first three years of
ownership,2009,2010 and 2011, using the;

• Straight line method & Reducing balance method

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |3

Revision of useful life

Formula

Ex 07

Senaka Ltd. Purchased a machine from overseas country for Rs.150 000, on the 1st of July 1995. Freight
charges on the machine amounted to Rs.20 000 while customs duty and handling charges were Rs.13
000. Installation costs were Rs.8 000 and a further sum of Rs.9 000 was spent on trial production runs.
The machine has an estimated useful life of five years and a scrap value of Rs.15 000.

On 1st of July 1997, improvements were made to the machine at a cost of Rs.20 000 and it was
estimated that this would increase the useful life of the machine by 2 years.

The residual value is not expected to change. Depreciation is charged using the straight line method.

Calculate cost of the asset at initial measurement

Calculate old depreciation

Calculate new deprecation after revision of useful life

Ex.07

An asset was purchased for $100,000 on 1 January 20X5 and straight-line depreciation of $20,000 per
annum is being charged (five-year life, no residual value). At 1 January 20X7 the annual review of asset
lives was undertaken and for this particular asset, the remaining useful life was estimated at eight years.

What is the depreciation charge for the year ended 31 December 20X7?

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |4

Ex.09

Villa Ltd. Purchased a building for Rs.700 000 and provides depreciation on straight line method based
on a useful life of 30 years. The expected residual value of the building was estimated as Rs.100 000 on
the date of purchase. After using this building for 15 years, the company has realized that the balance
useful life of the building would be 5 years and its estimated residual value would be Rs.175 000.

Ex.09

Alfie purchased a non- current asset for $ 100 000 on 1 January 20X2 and started depreciating it over
five years. Residual value was taken as $ 10 000.

At 1 January 20X3 a review of assets lives was undertaken and the remaining useful life of the asset was
estimated at eight years. Residual value was estimated to be nil.

Calculate the depreciation charge for the year ended 31 December20X3 and subsequent years.

Ex.09

Alberto bought a wood-burning oven for his pizza restaurant for $30 000 on 1 January 20X0. At the time
he believed that the oven’s useful life would be 20 years after which it would have no value.

On 1 January 20X3, Alberto revises his estimations: he now believes that he will use the oven in the
business for another 12 years after which he will be able to sell it second- hand for $ 1 500.

What is the depreciation charge for the year ended 31 December 20X3

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |5

Revaluations

IAS 16 Choices

Cost Model Revaluation

Model
Initial cost less accumulated Revalued amount less depreciation
accumulated depreciation

Impact of revaluation

• All assets in same class to be revalued

• Once revalued, revaluations must be kept up to date
• Subsequent depreciation will be based on the new value and remaining useful life

3.3 Accounting for revaluation

How to calculate revaluation loss or profit?

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Revaluation of Non – Current Assets

Illustration - 1

Vanguard owns land which originally cost $250,000. No depreciation has been charged on the land in
accordance with IAS 16. Vanguard wishes to revalue the land to reflect its current market value, which it
has been advised is $350,000.

How is this reflected in the financial statements?

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |6

Illustration - 2

Hamstrung runs a kilt making business in Scotland. It has run the business for many years from a
building which originally cost $300,000 and on which $100,000 accumulated depreciation has been
charged to date. Hamstrung wishes to revalue the building to $750,000.

How is this reflected in the financial statements?

Test Your Understanding - 3

Max owns a fish finger factory. The premises were purchased on 1 January 20X1 for $450,000 and
depreciation charged at 2% pa on a straight-line basis.

Max now wishes to revalue the factory premises to $800,000 on 1 January 20X7 to reflect the market
value.

What is the balance on the revaluation surplus after accounting for this transaction?

A. $350,000

B. $395,000

C. $404,000

D. $413,000

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |7

How to treat revaluation profit?

Step 1 –

Step 2 –

Step 3 –

Step 4 –

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |8

How to treat revaluation loss ?

Step 1 –

Step 2 –

Step 3 –

Step 4 –

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies

IAS 16.Property,Plant & Equipment Page |9

Annual reserves transfer

IAS 16 permits an annual transfer to be made from the revaluation surplus to retained earnings to offset
the additional depreciation charged as a result of the revaluation. This transfer would be shown on the
statement of changes in equity

Esoteric owns a retail unit in central Springfield. It bought the property 25 years ago for $100,000,
depreciating it over 50 years on a straight-line basis. At the start of 20X6 the company decides to revalue
the unit to $800,000. The unit has a remaining useful life of 25 years at the date of the revaluation. It is
company policy to make the annual transfer of excess depreciation between revaluation surplus and
retained earnings within equity.
What accounting entries should be made in the financial statements for 20X6?

Disposal of a Revalued Asset

Test Your Understanding - 4

Tiger Trees owns and runs a golf club. Some years ago the company purchased land next to the existing
course with the intention of creating a smaller nine-hole course. The cost of the land was $260,000.
Over time the company had the land revalued to $600,000. It has now decided that building the new
course is uneconomical and has sold the land for $695,000.

What accounting entries are required to reflect the disposal?

M.Shafee Ibrahim Financial Accounting-08007 Imperial College of Business Studies