Advanced Financial Accounting

AQ054-3-2

IAS 16 Property, Plant and

Equipment (PPE)
 Learning outcomes

After you have studied this chapter, you

should be able to:
• define property, plant and equipment
• identify recognition criteria
• compute the initial measurement of PPE
• identify subsequent expenditure

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 Learning outcomes

After you have studied this chapter, you

should be able to:
• account for revaluation for PPE
• compute depreciation based on the cost
and revaluation models
• disclose the disclosure requirements as
per IAS 16

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 Definition

Property, plant and equipment (PPE) are

tangible assets that:
• are held for use in the production or supply
of goods or services, for rental to others,
or for administrative purposes; and
• are expected to be used during more than
one reporting period.

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 Recognition

The recognition of property, plant and

equipment depends on two criteria:
1) It is probable that future economic
benefits associated with the asset will
flow to the entity and
2) The cost of the asset to the entity can be
measured reliably.

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 Recognition

First criterion: Future economic benefit

The entity should be assured that it will receive
the rewards attached to the asset and it will
incur associated risks, which will only be the
case when the rewards and risks have actually
passed to the entity. Until then, the asset should
not be recognised.

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 Recognition

Second criterion: cost measured reliably

It is generally easy to measure the cost of an
asset:
a) Cost of asset purchased i.e. what was paid for
it.
b) Cost of self-constructed assets i.e. costs for
material, labour etc. paid to external parties.

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 Initial measurement

Once an item of property, plant and

equipment qualifies for recognition as an
asset, it will initially be measured at cost.

Initial cost Initial cost of

of assets self-constructed
purchased assets

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 Initial measurement

Initial cost of
assets
purchased

Purchase Any costs directly Initial estimate of

price attributable to bringing the
asset to the location and
condition necessary for it to
be capable of operating in the
manner intended by
management.
unavoidable cost of
dismantling and
removing the asset
and restoring the site
on which it is located.

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 Initial cost of assets purchased

Purchase price
• including import duties and non-
refundable purchase taxes, after
deducting trade discounts and rebates.

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 Initial cost of assets purchased
Any costs directly attributable
Including :
• Cost of site preparation
• Initial delivery and handling costs
• Installation and assembling costs
• Professional fees
• Costs of testing (e.g. pre-production testing) whether
the asset is functioning properly, after deducting the
net proceeds from selling any items produced while
bringing the asset to that location and condition (such
as samples produced when testing equipment)
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 Initial cost of assets purchased

Initial estimate of dismantling and removing

• The capitalised amount is the present
value of the dismantling, removal and
restoration costs.
• The provision for the dismantling, removal
and restoration costs is built up over each
period by applying the interest rate used to
discount the initial amount capitalised. This
“unwinding” of interest is charged as a
finance cost in profit or loss.
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 Initial cost of self-constructed
assets
• They refer to any tangible non-current assets
constructed or developed by the entity for its use
instead of buying a ready-made assets, e.g. when a
building company builds its own head office.
• The costs incurred will be:
 Material
 Labour
 Directly attributable overhead
 Other resources that are directly attributable
(e.g. borrowing costs capitalised as IAS 23).
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 Illustration 1

Sunshine Sdn Bhd imported a machinery for own

use. It was delivered on 1 January 20x8 and the
breakdown of the costs incurred was:
RM
Invoice price of machinery 600,000
Trade discount 60,000
Insurance on shipment 8,000
Import duties and taxes 500,000
Delivery costs 100,000
Installation charges 12,000
General administrative costs 5,000

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 Illustration 1
• Dismantling costs after 5 years amounted to
RM21,697
(Discount rate = 5% i.e. the present value of RM1
received in five years’ time is RM0.783526, using a
discount rate of 5%.)

Required:
a) Calculate the initial cost of the machinery.
b) Prepare journal entries for finance costs in respect
of provision for the dismantling, removal and
restoration costs for the year ended 31 December
20x8 and 20x9.
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 Solution for Illustration 1

(a) RM
Invoice price of machinery 600,000
Trade discount (60,000)
540,000
Insurance on shipment 8,000
Import duties and taxes 500,000
Delivery costs 100,000
Installation charges 12,000
Dismantling costs [PV= 21,697 x0.783526) 17,000
Initial cost of the machinery 1,177,000

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 Solution for Illustration 1

(b)
RM RM
31.12.20x8
Dr Finance costs (SOPL) 17,000 x 5% 850
Cr Provisions (Non-current liability) 850
31.12.20x9
Dr Finance costs (SOPL ） (17,000+850) x 5% 893
Cr Provisions (Non-current liability) 893

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 Illustration 2

High Here Bhd built a factory building. The

works manager has furnished you with the
following information:
RM
Purchase of land 1,000,000
Stamp duty and legal fees on the purchase of the land 80,000
Direct materials and labor for construction of building 800,000
Contractors’ costs 1,000,000
Overhead – directly attributable 200,000
Architect’s fees 400,000
General administrative costs 100,000
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 Illustration 2

• 25% of the architect’s fees are for work done on

another project.
• Direct material and labor costs include
excessive wastage of material of RM100,000.

Required:
Calculate cost of the land and building separately.

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 Solution for Illustration 2
RM
Land
Purchase cost of land 1,000,000
Stamp duty and legal fee 80,000
1,080,000

Building
Direct material and labours 800,000
Wasted material (100,000)
700,000
Constractors' costs 1,000,000
Directly attributable overhead 200,000
Architect's (75% x 400,000) 300,000
2,200,000
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 Subsequent costs

Subsequent costs

Capitalisation Expensed
Replacement off
Major
of major parts Inspection
or
Overhauls

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 Capitalisation

Subsequent cost can only be capitalised if:

a) It represents a modification that enhances
the economic benefits of an asset. This could
be an increase in its life or production
capacity;
b) It upgrades an asset with the effect of
improving the quality of the outputs; or
c) It is on a new production process that
reduces operating loss.

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 Capitalisation

The following costs can be capitalised:

1) Modification costs;
2) Upgrade or improvement of machine;
3) Adoption of a new production process;
4) Replacement of major part;

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 Replacement of major parts

• Parts of some items of property, plant and

equipment may require replacement at regular
intervals or on a less frequent basis.
• For example, an aircraft may require its seats to
be replaced on a regular basis.
• The replacement costs can be added to the
carrying amount of the asset if they meet
recognition criteria. At the same time, the
remaining carrying value of the items
replaced should be derecognised.
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 Major Inspection or Overhauls

• Certain assets, such as aircrafts and nuclear

plants, may need regular major inspection for fault
or overhauls with or without replacement of parts
as a condition to continue to operate them.
• The cost of the inspection/overhaul is added to
the carrying amount of the asset provided it
meets the recognition criteria.
• The remaining carrying amount of the cost of
the previous inspection/overhaul was
derecognised.

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 Expensed off

• Normal repairs, maintenance and

purchase of small spare parts without
enhancing the future economic benefits
on property, plant and equipment are
recognised as an expense when incurred.

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 Illustration 3
On 1 Jan 20x8, Raymond Enterprise acquired a plant
costing RM170,000. The economic life of the plant was
estimated to be 10 years with no scrap value. The
plant is depreciated on the straight-line basis. On 1
Jan 20x8, the business incurred the following costs:
RM
Repairs and annual overhaul of the plant 25,000
Purchase of spare parts 4,000
Replacement of a major part of the plant which 120,000
reduced the operating costs
The carrying value of the part being replaced 15,000

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 Illustration 3

Required:
Calculate the carrying value as at 1 Jan
20x8 and depreciation charge for the year
20x8.

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 Solution for Illustration 3
RM
Initial cost of plant 170,000
Accumulated depreciation for 4 years (68,000)
(170,000/10 x 4 years)
Carrying value at 1.1.20x8 before 102,000
subsequent costs
Subsequent costs
Replacement of major part of the plant 120,000
Carrying value of the part being replaced
derecognised (15,000)
Carrying value at 1.1.20x8 207,000
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 Solution for Illustration 3

Carrying value as at 1.1.x8

Depreciation charge = -------------------------------------
for 20x6 Remaining useful life
 
207,000
= ----------------------
  6 years

= RM34,500

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 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.

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 Measurement subsequent to
initial recognition (Cost Model)
Carry the asset at its cost less accumulated
depreciation and any accumulated
impairment loss.

Carrying Amount of PPE

= Cost – Accumulated depreciation –
accumulated impairment loss

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 Measurement subsequent to initial
recognition (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 any
accumulated impairment loss.

Carrying Amount of PPE

= Revalued amount – Subsequent
accumulated depreciation – Subsequent
impairment loss

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 Measurement subsequent to initial
recognition (Revaluation Model)
• Revaluation model is available only where the fair value
of the asset can be measured reliably.
• When an item of PPE is revalued, the whole class of
assets to which it belongs should be revalued.
• Examples of separate classes are:
– Land and building
– Machinery
– Ships
– Aircrafts
– Motor vehicles
– Furniture & fittings
– Office equipment
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 Accounting treatment for
revaluation increase
• If an asset’s carrying amount is increased as a
result of a revaluation (fair value exceeds
carrying amount), the increase shall be
recognised in other comprehensive income
and accumulated in equity under the heading
of revaluation surplus.
• However, the increase shall be recognised in
profit or loss to the extent that it reverses a
revaluation decrease of the same asset
previously recognised in profit or loss.

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 Illustration 4

ABC Co. has an item of land carried in its

books at RM15,000 at 31.12.x2. Due to a
slump in land values, the carrying value of
the land was revalued to RM13,000 on
31.12.x3. This was taken as an expense in
the income statement in the year x3. Due to
a surge in land prices, on 31.12.x4, the land
was revalued to RM20,000.

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 Illustration 4

Required:
Prepare the journal entries for the year x4
and the extract of statement of profit or loss
and other comprehensive income for the
year ended 31.12.x3 and 31.12.x4 and
SOFP on those dates.

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 Solution for Illustration 4

Working: RM
Carrying amount at 31.12.x2 15,000
Revaluation decrease (2,000) - expense
Fair value at 31.12.x3 13,000
Revaluation increase 7,000 2,000 to reverse
-income
5,000 OCI/RS
Fair value at 31.12.x4 20,000

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 Solution for Illustration 4

General Journal (31.12.x4) RM RM

DR Land 7,000
CR Profit or loss 2,000
CR Revaluation surplus 5,000 (bal)

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 Solution for Illustration 4
SOPL &OCI (Extract) for the year ended
31.12.x3 31.12.x4

Other income
Gain on property revaluation 2,000
(Reversal of revaluation decrease on property)  
Expense
Loss on property revaluation (2,000)
 
Other comprehensive income
Gain on property revaluation 5,000

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 Solution for Illustration 4

SOFP (Extract) at
 
NCA
PPE 20,000
 
Equity
Revaluation surplus/reserve 5,000

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 Accounting treatment for
revaluation decrease
• If an asset’s carrying amount is decreased as a
result of a revaluation (carrying amount exceeds
fair value), 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. The decrease
recognised in other comprehensive income
reduces the amount accumulated in equity
under the heading of revaluation surplus.
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 Illustration 5

XYZ Co. has an item of land carried in its

books at RM15,000 at 31.12.x2. Due to a
surge in land values, the land was revalued
to RM20,000 on 31.12.x3. This was taken as
a revaluation reserve in the year x3. Due to
a slump in land prices, the land was
revalued to RM13,000 on 31.12.x4.

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 Illustration 5

Required:
Prepare the journal entries for the year x4
and the extract of statement of profit or loss
and other comprehensive income for the
year ended 31.12.x4 and SOFP as at
31.12.x4.

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 Solution for Illustration 5

Working: RM
CA as at 31.12.x2 15,000
Revaluation increase/surplus 5,000 – OCI&RS
FV at 31.12.x3 20,000
Revaluation decrease (7,000) 5,000 OCI&RS

2,000 - expense
FV at 31.12.x4 13,000

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 Solution for Illustration 5

Solution:
General Journal
 
DR Revaluation surplus RM5,000
DR Profit or loss RM2,000
CR PPE RM7,000

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 Solution for Illustration 5
SOPL &OCI (Extract) FTYE 31.12.x4

Expense
Loss on property revaluation (2,000)
Other comprehensive income
Loss on property revaluation (5,000)

SOFP (Extract) as at 31.12.x4)

NCA
PPE 13,000
 
Equity
Revaluation surplus -

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 Depreciation

• Depreciation is the result of systematic

allocation of the depreciable amount (cost or
revalued amount less its residual value) of an
asset over its estimated useful life. Every 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. Depreciation charges are an
example of the application of the accrual
assumption to calculate profits.

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 Depreciation

• As the economic benefits embodied in the asset

are being consumed by the entity, the carrying
amount of the asset is reduced by charging
depreciation to reflect consumption.
• Depreciation charge should still be charged to
each accounting period, based on the
depreciable amount even if the market
value/fair value of the asset exceeds its
carrying amount as long as the asset’s
residual value does not exceed its carrying
amount.
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 Depreciation

• The entity can choose to revalue the PPE as

permitted by the standard. The subsequent
depreciation will be determined based on the fair
value of the asset at the date of revaluation, its
new estimate of useful life and residual value at
that date.

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 Depreciation

• An entity is required to begin depreciating

an item of property, plant and equipment
when it is available for use and to continue
depreciating it until it is derecognised even
it is idle during the period.

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 Depreciation

• The only grounds for not charging

depreciation when:
a) the asset is a freehold land or
b) depreciation charge of the asset is
immaterial. Depreciation may be
immaterial because the asset has
very long useful economic life or
high residual value (or both).

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 Depreciation

• If the residual value exceeds the

carrying amount, then the depreciation
charge is zero.
• Freehold land has an unlimited useful life
and therefore is not depreciated.

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 Depreciation method

• The depreciation method used shall reflect the

pattern in which the asset’s future economic
benefits are expected to be consumed by the
entity.
• These methods include the straight-line method,
the diminishing balance method and the units of
production method. That method is applied
consistently from period to period unless
there is a change in the expected pattern of
consumption of those future economic benefits.

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 Accounting treatment for
depreciation
• Depreciation for the accounting period is
charged to the net profit or loss for the
period directly unless it is included in the
carrying amount of another asset.

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 Determination of useful life

• The following factors should be considered when

estimating the useful life of a depreciable asset.
a) Expected usage of the asset. Usage is
assessed by reference to the asset’s
expected capacity or physical output.
b) Expected physical wear & tear
c) Technical/commercial obsolescence
d) Legal/similar limits

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 Review of useful life

• IAS 16 Property, plant and equipment

requires that the useful lives of the non-
current assets should be reviewed at least
at each financial year-end and changed
if appropriate.
• Depreciation rates should be adjusted for
the current and future periods if
expectations vary significantly from the
original estimates.
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 Illustration 6

Tall Bhd acquired a motor vehicle at a cost

of RM85000 on 1/4/20x2 and its estimated
useful life was determined to be 10 years
and residual value was RM5000. However,
on 1/4/20x6 Tall Bhd reviewed the useful life
of the motor vehicle and found that its
remaining useful life is 4 years. Its residual
value remains unchanged. Tall Bhd’s year
end is 31 March.
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 Illustration 6

Required:
Calculate the depreciation charge for the
year ended 31/3/20x7

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 Solution for Illustration 6

RM
Cost at 1.4.x2 85,000
Depreciation (1.4.x2-31.3.x6) (32,000)
(RM85,000-5,000)/10 x 4
CA at 1.4.x6 53,000
Depreciation (1.4.x6-31.3.x7) (12,000)
(RM53,000-5,000)/4
CA at 31.3.x7 41,000

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 Disclosure

The standard has a long list of disclosure requirements,

for each class of property, plant and equipment.
1. Measurement bases for determining the gross
carrying amount (if more than one, the gross
carrying amount for that basis in each category)
2. Depreciation methods used
3. Useful lives or depreciation rates used
4. Gross carrying amount and accumulated
depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the
period
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 Disclosure
5. 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
(v) Impairment losses recognised in profit or loss
(vi) Impairment losses reversed in profit or loss
(vii) Depreciation
(viii) Net exchange differences (from translation of statements
of a foreign entity)
(ix) Any other movements

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 Disclosure

6. The financial statements should also disclose the

following.
(a) Any recoverable amounts of property, plant and
equipment
(b) Existence and amounts of restrictions on title,
and items pledged as security for liabilities
(c) Accounting policy for the estimated costs of
restoring the site
(d) Amount of expenditures on account of items in
the course of construction
(e) Amount of commitments to acquisitions
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 Disclosure
7. Revalued assets require further disclosures.
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
f) Revaluation surplus, indicating the movement for the
period and any restrictions on the distribution of the
balance to shareholders

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 Disclosure
8. The standard also encourages disclosure of additional
information, which the users of financial statements
may find useful.
a) The carrying amount of temporarily idle property,
plant and equipment
b) The gross carrying amount of any fully depreciated
property, plant and equipment that is still in use
c) The carrying amount of property, plant and
equipment retired from active use and held for
disposal
d) The fair value of property, plant and equipment when
this is materially different from the carrying amount
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 References

• Kaplan Publishing UK, 2018. Tangible

non-current assets. In: ACCA Financial
Reporting (FR). Berkshire: Kaplan
Publishing UK, p. 23 to 35.
• The Board, 2017. IAS 16 Property, Plant
and Equipment. London: IFRS
Foundation.

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