IAS 16- Property, Plant

and Equipment
Nguyễn Thị Thu Hiền
Lê Vũ Ngọc Thanh

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 Goals

After this chapter, you should be able to:

• Understand the recognition principle for tangible
items.
• Determine the carrying amount of a tangible asset.
• Measurement and recognition of depreciation and
impairment losses of tangible assets.
• Comprehend information presented on financial
reports related to tangible assets.
 Contents
1. Scope & definitions
2. Recognition
3. Measurement
4. Derecognition
5. Impairment
6. Disclosure

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 Related standards

• IAS 16 – Property, Plant and Equipment

• IAS 23 – Borrowing costs
• IAS 37 – Provisions, contingent liabilities and
contingent assets
• IAS 36 – Impairment

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1. Scope and Definitions

IAS 16 does not apply to:

• PPE classified as held for sale in accordance with IFRS 5.
• Biological assets related to agricultural activity (IAS 41 –
Agriculture)
•The recognition and measurement of exploration and evaluation
assets (IFRS 6- Exploration for and evaluation of mineral
resource)
• Mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.

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1. PPE – Tangible items
Used for operating purposes Fixed assets
Operating lease
Real estate
Held for capital appreciation investment

Finance lease Receivables

Held for sale (commercial) Inventory

Bất động sản

Thiết bị Nhà xưởng 6

 PPE- Tangible assets
owner-occupied

Entity-Owned Used for more than 1 period

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 Example

A parent company leases a building to its subsidiary on an operating lease contract. The
subsidiary uses this building as a retail shop. Where should this building be recognized
on the company’s financial statement?

Parent company’s separate statement: Real estate investment

Consolidated financial statement: tangible assets (PPE)

( IAS 17.1).

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 Example

Building owned by the PPE

entity

Operating
Land leased to the entity for 50
lease (not
years as per the operating lease
recognized as
contract
asset)

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2. Recognition criteria

PPE is recognized when

Probable future The cost of the item can be

economic benefits measured reliably

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 and different useful life
shall be depreciated separately.

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3. Measurement

Measurement at Historical cost

recognition

Historical cost model

(cost – depreciation–
Measurement after impairment)
recognition
Revaluation model
(fair value)

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3.1 Measurement at recognition When – What

Purchase, Capable of operating Costs incurring after

construction, trading\ in the manner recognition?
intended by
management

Cost = Purchase price + Directly attributable costs + restoration cost

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Historical cost
Historical
Spot purchase: cash and/or cash equivalents payable
cost
Buy on instalment: current price
Non-comparable asset exchange: fair value of asset
given (or residual value of asset traded)
Purchase Including import duties and non-refundable purchase
price taxes

Costs directly attributable to making the asset capable of

operating as intended:
Direct cost - Costs of employee benefits arising directly from the
construction or acquisition of the item; cost of site
preparation; initial delivery and handling costs;
installation and assembly costs; professional fees; costs
of testing for proper functioning of the asset.
Other costs Costs of removing, dismantling and restoring
Notes:
Penalty, impairment cost, advertising, product
placement, business development cost,
administration cost, initial operating losses, cost Eliminated from cost
of relocating or reorganizing part or all of an
entity’s operations,…

Income arising from the bringing of the asset to Historical

the location and condition necessary, such as Eliminated from cost
internal income for self-construction, cost
development of asset; samples sold when testing
equipment;…
Earnings and expense related to the construction
or development of an asset, but are not necessary Eliminated from cost
to bring the item to the location and condition
necessary. Ex: income earned through using a Can be capitalized,
building site as a car park until construction starts on meeting the
requirements for
Cost of borrowing capitalisation 14
 Measurement after recognition

- Current repair Recognize as cost

- Major repair
-Part changing Fixed asset cost
Capitalization

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3.2 Measurement after recognition
Carrying amount

Measurement after recognition

Cost model Revaluation model

Cost – Depreciation - Impairments Fair value

Carrying amount Carrying amount

Applied to each type of asset

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 Revaluation model

Revaluation model
(FV)
affects

Carrying amount
Profit Loss
Deferred tax payable Increase
Decrease Deferred tax asset

Recognization: Recognization: Recognization: Recognization:

Owner’s equity– Other income (to Expense (P/L) Revaluation
Revaluation make up for surplus (deduct
surplus (OCI) previous from previously
revaluation loss) recognized
profit)
Deferred tax Deferred tax Deferred tax Deferred tax
(IAS 12) (IAS 12) (IAS 12) (IAS 12) 17
 Revaluation model

Increase/decrease = deferred amount –

carrying amount
 Deferred tax for revaluation
Calculation

Calculate deferred tax on year-end

Accounting
(1) Clear the cumulative depreciation
entry (2) Write the asset down/up to fair value
(3) Deferred tax.

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Example 1 – Revaluation model

On 1 Jan 20X1 Entity A acquired a plant at a cost of $1800,

without any expected residual value. The asset is expected to have
a 6 year useful life. Under current tax law, the asset is depreciated
over 3 year. The asset is revalued at $1600, $1500, $720, $600,
$500 on the period end of 20X1, 20X2, 20X3, 20X4, 20X5
respectively.
Required
Measuring the asset and prepare accounting journal from 20X1 to
20X5.

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 Carrying Depreciat Carrying Revaluation
Year amount (OB) ed amount (CB) FV gain DTL
1 1800 300 1500 1600 100 20
2 1600 320 1280 1500 220 44
3 1500 375 1125 720 -405 -81
4 720 240 480 600 120 24
5 600 300 300 500 200 40
6 500 500 0 0 0 0

DTL
Carrying related
amount Temporal To be Related to deprecia
Year (FV) Tax base diff DTL adjusted revaluation tion
1 1600 1200 400 80 80 20 60
2 1500 600 900 180 100 44 56
3 720 0 720 144 -36 -81 45
4 600 0 600 120 -24 24 -48
5 500 0 500 100 -20 40 -60
6 0 0 0 0 -100 0 -100
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Solution – 20X1

Cost:
1800 Temporal difference
Accumulated depreciation: 300
Carrying amount: 1500
FV: 1600 FV 1600
Revaluation gain: 100 Due to
Deferred tax liability: 20 revaluation
GTCL.1500
Carrying amount (31 Dec X1): 1600
Due to
Tax base (600 x 2) 1200 depreciation
Temporal differences: 400
TB.1200
Deferred tax liability (CB): 80
Deferred tax liability (OB): 0
Deferred tax liability (incurred): 80

DTL – Due to revaluation: 20

DTL – Due to depreciation 60
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Journal entries 20X1

1. Depreciation
Depreciation expense 300
Accumulated depreciation 300

2. Revaluation
Plant 100
Revaluation gains (OCI) 100

3. Recognize deferred tax

Deferred income tax expense (OCI) 20
Deferred income tax expense (P/L) 60
Deferred tax liability 80

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 Solution 20X2

Cost: 1600 Carrying amount (31/12/X2): 1500

Acc. depreciation (1600:5) 320 Tax base (600 x 1) 600
Carrying amount: 1280 Temporal difference: 900
FV: 1500 Deferred tax liability (CB): 180
Revaluation gains: 220 Deferred tax liability (OB): 80
Deferred tax liability: 44 Deferred tax liability incurred : 100

DTL due do revaluation : 44

DTL due to depreciation (600-320)x20%= 280 56

1. Depreciation. 2. Revaluation
Dep. Exp. 320 Plant 220
Acc. Dep. 320 Revaluation gains 220
3. Recognize deferred tax
Deferred income tax expense (OCI) 44
Deferred income tax expense (P/L) 56
Deferred tax liability 100 23
 Solution 20X3

Cost: 1500 Carrying amount (31/12/X3): 720

Acc. depreciation (1500:4) 375 Tax base (600 x 1) 0
Carrying amount: 1125 Temporal difference: 720
FV: 720 Deferred tax liability (CB): 144
Revaluation gains: Deferred tax liability (OB): 180
(405) Deferred tax liability incurred : (36)
Deferred tax liability: (81)
DTL due do revaluation : (81)
DTL due to depreciation (600-375) x 20% = 45 45
1. Depreciation. 2. Recognize revaluation gains
Dep. Exp 375 Revaluation gains (reversal) 320
Plant 375 Loss 85
Plant 405

3 Recognize deferred tax:

Deferred tax liability 36
Deferred income tax expense (P/L) 45
Deferred income tax expense (OCI) [320 x 0.2] (64)
Deferred income tax expense (P/L) [85x0.2] (17) 24
 Solution 20X4

Revaluation gain 120

P/L (Reversal of loss in previous period) 85
 OCI: 35

Deferred tax liability (CB): 120

Deferred tax liability (OB) 144
Due to revaluation : 24
Adjusted (24)
Due to depreciation: (48)

1. Eliminate depreciation 2. Recognize revaluation gain

Acc.Dep. 240 Plant 120
Plant 240 Revaluation Gain (P/L) 85
Revaluation Gain (OCI) 35

3. Recognize deferred tax

Deferred tax liability 24
Deferred income tax expense (P/L) 17
Deferred income tax expense (OCI) 7
Deferred income tax expense (P/L) 48 25
Classes of PPE:

(a) Land;
(b) Land & buildings;
(c) Machinery;
(d) Ships;
(e) Aircraft;
(f) Motor vehicles;
(g) Furniture amd fixtures;
(h) Office equipment.

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4. PPE depreciation
The depreciable amount of an asset shall be allocated on
a systematic basis over its useful life
Depreciable Useful Systematic
amount life basis

HOW MUCH HOW LONG HOW /IN WHAT MANNER

Depreciation method
Residual Periods Number
Cost of units
value
The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end.
If expectations differ from previous estimates, the
change(s) shall be accounted for as a change in an accounting estimate in
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accordance with IAS 16 & IAS 8
4. PPE – Depreciation method
Applied to both models
• The depreciation method used shall reflect the pattern in
which the asset’s future economic benefits are expected to
be consumed by the entity
• Depreciation methods:
Straight-line method;
Diminishing balance method;
Units of production method.

The depreciation method applied to an asset shall

be reviewed at least at each financial year-end.
Changes shall be accounted for as a change in an
accounting estimate in accordance with IAS 8
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4. PPE – Depreciation amount
Accounting estimates, determined periodically

= Historical cost - Residual amount

Dep. Amount
(estimate)

Annual
Carrying amount consideration

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4. PPE – Recognition

 The depreciation charge for each

period shall be recognized in profit or loss
unless it is included in the carrying
amount of another asset;
 Depreciation of an asset begins when it
is available for use and ceases at the
earlier of the date that the asset is
classified as held for sale and the date the
asset is derecognized. It does not cease
even when the asset becomes idle or
retired from active use unless the asset is
fully depreciated.
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Example 1 – Depreciation of PPE
On Jan 1 20X0, The company acquired a machine with a cost of $200.000.
The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
Required
Calculate the depreciation amount in 20X0.

Cost 200.000
Depreciable amount: 200.000 – 40.000 = 160.000
Depreciated amount for 20X0: 160.000 / 10 = 16.000

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Example 2 – Depreciation of PPE
On Jan 1 20X0, The company acquired a machine with a cost of $200.000.
The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
The company applies revaluation model. At the end of 20X0, the asset is
revalued at $210.000. There was no change in residual value and
depreciation method.
Required
Calculate the depreciation amount in 20X1

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Example 2 – Solution

Depreciated amount in 20X0 = 160.000 : 10 = 16.000

Carrying amount (01/01/20X1): 210.000

Residual value : 40.000
Depreciation method: straight line
Useful life: 9 years
Depreciated amount in 20X1: (210.000 – 40.000)/9 = 18.888

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Example 3 – Depreciation of PPE
On Jan 1 20X0, The company acquired a machine with a cost of $200.000.
The machine’s useful life was 10 years. The company depreciate the
machine under straight line method. At the date of acquisition, the
machine’s residual value was expected at $40.000.
The company applies cost model. In 20X5, the machine’s residual value
was estimated at $50,000
Required
Calculate depreciated amount in 20X5.

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Example 3 – Solution

Cost $200.000
Acc.Dep (31/12/20X4): 5 x16.000 = 80.000
Carrying amount (01/01/X5): 200.000 – 80.000 = 120.000
Depreciable amount: 120.000 -50.000 = 70.000
Remaining useful life: 5 years
Depreciated amount in 20X5: 70.000 : 5 = 14.000

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Example 4 – Depreciation of PPE
On Jan 1 20X0, The company acquired a machine with a cost of $200.000. The
machine’s useful life was 10 years. The company depreciate the machine under
straight line method. At the date of acquisition, the machine’s residual value was
expected at $40.000.
The company applies revaluation model. 31/12/20X0, the machine was revalued
at $210,000. There was no change in residual value and depreciation method.
31/12/20X1, the machine had the fair value of $180,000. Its residual value was
estimated at $50,000. The remaining useful life remained.
Required
Calculate depreciated amount in 20X2

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Example 4 – Depreciation of PPE
Depreciated amount in X0 = 160.000 : 10 = 16.000
Carrying amount (01/01/X1) 210.000,
Residual value: 40.000
Depreciated amount in X1: (210.000 – 40.000)/9 = 18.888

Carrying amount (01/01/X2): 210.000 – 18.888= 191.112

Residual value: 50.000
Depreciated amouni in X2: (191.112 – 50.000)/8 =

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5. PPE Impairment
• IAS 36 requires recognition of impairment
loss when necessary.
• PPE determined on B/S cannot exceed its
recoverable amount, the higher of an asset’s
fair value less costs to sell and its value in use.
• Impairment loss is the amount by which the
carrying amount of an asset exceeds its
recoverable amount.
• Carrying amount is the basis for depreciation
for the following year

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6. PPE Derecognition
• The carrying amount of PPE shall be
derecognized on disposal or when no future
economic benefits are expected from its use
or disposal.
• The gain or loss arising from the
derecognition shall be determined as the
difference between the net disposal
proceeds, if any, and the carrying amount of
the item.
• If the revaluation model is used when
derecognizing an asset, the balance on OCI
will be transferred to retained
(readjustments of income tax will follow).
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 Derecognition of PPE

On Disposal When no future economic

benefits are expected

Gain/Loss
= Net disposal proceeds – Carrying amount

Gain or loss are included in P/L, but not as revenue

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7. Disclosure
For each class of PPE, disclose:

1.the measurement bases used for

determining the gross carrying amount
2.the depreciation methods used
3.the useful lives or the depreciation rates
used
4.the gross carrying amount and the
accumulated depreciation (aggregated with
accumulated impairment losses).
5.a reconciliation of the carrying amount at
the beginning and end of the period.
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7. Disclosure
6. Also disclose:
o the existence and amounts of
restrictions on PPE
o the amount of expenditures recognised
in the carrying amount in the course of its
construction
o the amount of contractual commitments
for the acquisition of PPE
o the amount of compensation from third
parties for items of property, plant and
equipment that were impaired, lost or
given up that is included in profit or loss
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7. Disclosure
7. At revalued amounts, the following shall be disclosed:
o The methods and significant assumptions applied in
estimating the items’ fair values
o The effective date of the revaluation
o Whether an independent valuer was involved;
o The nature of every modifiers used in different valuation
techniques in order to determine the revalued amount
o The carrying amount that would have been recognized had
the assets been carried under the cost model
o The revaluation surplus, indicating the change for the period
and any restrictions on the distribution of the balance to
shareholders

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Example 5:
On 01 Jan X1, company A acquired a plant at a cost of
$1800, residual value is estimated at 0. The asset’s useful life
was 6 years, in accordance with the current tax law. The plant
was revalued at $1600, 1500, 720, 600, 500 at the end of
20X1, 20X2, 20X3, 20X4, 20X5 respectively.
Required
Prepare journal entries for 20X1 til 20X5