IAS 16

PROPERTY, PLANT & EQUIPMENT

BY
ARSHAD BHUTTA
 IAS 16 PROPERTY, PLANT & EQUIPMENT
OBJECTIVE
The objective of IAS 16 is to prescribe the
accounting treatment for property, plant, and
equipment. The principal issues are the recognition
of assets, the determination of their carrying
amounts, and the depreciation charges and
impairment losses to be recognized in relation to
them.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
SCOPE
IAS 16 applies to the accounting for property, plant and equipment, except where
another standard requires or permits differing accounting treatments, for
example:
 Assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for
Sale and Discontinued Operations
 Biological assets related to agricultural activity accounted for under IAS 41 Agriculture
 Exploration and evaluation assets recognized in accordance with IFRS 6 Exploration for
and Evaluation of Mineral Resources
 Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
DEFINITIONS
 Property, plant and equipment are tangible assets held by an entity for
more than one accounting period for use in the production or supply of
goods or services, for rental to others, or for administrative purposes.
 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.
 Residual value is the amount that a company expects to receive for an
asset at the end of its useful life less any anticipated disposal costs.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT - RECOGNITION
Items of property, plant, and equipment should be recognized as assets
when
 it is probable that the future economic benefits associated with the
asset will flow to the entity
 the cost of the asset can be measured reliably.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – INITIAL MEASUREMENT
An item of property, plant and equipment should initially be measured at its cost:
 include all costs involved in bringing the asset into working condition.
 Purchase price ( list price – trade discount )
 include in this initial cost, capital costs such as the cost of site preparation, delivery costs,
installation costs, borrowing costs (in accordance with IAS 23)
 dismantling costs – the present value of these costs should be capitalized, with an
equivalent liability set up.

Revenue costs should be written off as incurred – DON’T CAPITALIZE

EXAM ALERT Abnormal losses should be written of as incurred – DON’T CAPITALIZE
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – INITIAL MEASUREMENT
COST DETERMINATION OF PART EXCHANGE:
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature),
the cost will be measured at the fair value unless
 the exchange transaction lacks commercial substance (or)
 the fair value of neither the asset received nor the asset given up is reliably measurable.

 If the acquired item is not measured at fair value, its cost is measured at the carrying
amount of the asset given up.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – SUBSEQUENT EXPENDITURE
Subsequent expenditure on property, plant and equipment should only be capitalized if:
 it enhances the economic benefits provided by the asset (this could be extending the asset's
life, an expansion or increasing the productivity of the asset)
 it relates to an overhaul or required major inspection of the asset – the costs associated
with this should be capitalized and depreciated over the time until the next overhaul or
safety inspection
 it is replacing a component of a complex asset. The replaced component will be
derecognized. A complex asset is an asset made up of a number of components, which each
depreciate at different rates, e.g. an aircraft would comprise body, engines and interior.
All other subsequent expenditure should be recognized in the statement of profit or
EXAM ALERT loss, because it merely maintains the economic benefits originally expected e.g. the
cost of general repairs (revenue expenditure).
IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – DEPRICIATION
DEPRICIAION METHODS

MACHINE
STRAIGHT LINE WDV
HOURS

Cost * % age Rate Dep. Amount * No of

or Machine Hours During
CV * % age Rate
Dep. Amount /Useful Life Period / Total Machine
Hours
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – DEPRICIATION
 Depreciation begins when the asset is available for use and continues until the asset is
derecognized, even if it is idle.
 The depreciation method used should reflect the pattern in which the asset's economic
benefits are consumed by the entity MATCHING PRINCIPLE.
 The residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, any change is
accounted for prospectively as a change in estimate under IAS 8.
 For every component of complex asset, depreciation rate and method would be different.

EXAM ALERT Depreciation after change = CV at change date – RV / Remaining useful life
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – SUBSEQUENT MEASUREMENT
IAS 16 permits two accounting models:
 Cost model – The asset is carried at cost less accumulated depreciation and impairment.
 Revaluation model – The asset is carried at a revalued amount, being its fair value at the
date of revaluation less subsequent depreciation and impairment, provided that fair value
can be measured reliably.
 If an item is revalued, the entire class of assets to which that asset belongs should be revalued.
 Revalued assets are depreciated in the same way as under the cost model.
 Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of
an asset does not differ materially from its fair value at the balance sheet date.
 If a revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a
revaluation decrease of the same asset previously recognized as an expense, in which case it should be
recognized in profit or loss. Continue
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – SUBSEQUENT MEASUREMENT
 A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset.
 When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
ACCOUNTING TREATMENT – DECOGNITION
An asset will be derecognized from the statement of financial position on
 disposal or sale of asset or
 when it is withdrawn from use and no future economic benefits are expected from its
disposal.
Disposal of PPE: When asset disposed of must calculate the accounting profit or loss on disposal
and remove the asset cost and accumulated depreciation from the statement of financial
position.
Compare disposal proceed with CV if:
EXAM ALERT  Disposal proceed > CV, difference is gain on disposal
 Disposal proceed < CV, difference is loss on disposal
 IAS 16 PROPERTY, PLANT & EQUIPMENT
DISCLOSURE
For each class of property, plant, and equipment, disclose:
 Basis for measuring carrying amount
 Depreciation method(s) used
 Useful lives or depreciation rates
 Gross carrying amount and accumulated depreciation and impairment losses
 Reconciliation of the carrying amount at the beginning and the end of the period, showing:
 Additions
 Disposals
 Acquisitions through business combinations
 Revaluation increases or decreases
 Impairment losses
 Reversals of impairment losses
 Depreciation
 Net foreign exchange differences on translation
 Other movements
 IAS 16 PROPERTY, PLANT & EQUIPMENT
DISCLOSURE
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures
are required:
 The effective date of the revaluation
 Whether an independent valuer was involved
 For each revalued class of property, the carrying amount that would have been recognized
had the assets been carried under the cost model
 The revaluation surplus, including changes during the period and any restrictions on the
distribution of the balance to shareholders.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Question
IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its original
recognition in the financial statements. EW used its own staff, assisted by contractors when
required, to construct a new warehouse for its own use.
Identify whether the costs listed below should be capitalized or expensed?
Capitalize Expense
Clearance of the site prior to commencement of construction
Professional surveyor fees for managing the construction work
EW’s own staff wages for time spent working on construction
A proportion of EW’s administration costs, based on staff time spent
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Questions - Scenario
Flightline is an airline which treats its aircraft as complex non-current assets, accounted for under
the historical cost model. The cost and other details of an aircraft are:
$000 Estimated life
Interior cabin fittings – installed 1 April 20X5 25,000 5 years
Engine - installed 1 April 20X5 9,000 36,000 flying hours
In the year ended 31 March 20X9, the aircraft flew for 1,200 hours for the six months to 30
September 20X8.
On 1 October 20X8 the aircraft suffered a ‘bird strike’ accident which damaged the engine
beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $10.8
million. Flightline’s year end is 31 March 20X9.
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Questions
What is the depreciation to be charged in respect of the engine for the 6 month period to 1
October 20X8?
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Questions
Which of the following explains the correct accounting treatment of the engine?
A Write off the damaged engine, capitalize the new engine and depreciate over 24,000 hours
B Treat the $10.8 million as a repair to the damaged engine and continue to depreciate the
engine as in the first 6 months
C Capitalize $6 million to replace the damaged engine, expense the other $4.8 million
D Write off the damaged engine, capitalize the new engine and depreciate over 36,000
hours
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Questions
A wing was also damaged, but was repaired at a cost of $3 million. The accident also caused
cosmetic damage to the exterior of the aircraft which required repainting at a cost of $2 million.
Identify the correct treatment for the $3 million repair costs to the wing and the $2 million
repainting of the aircraft
Capitalize Expense
$3 million repair of the wing
$2 million repainting of the exterior
 IAS 16 PROPERTY, PLANT & EQUIPMENT
Exam Questions
As the aircraft was out of service for some weeks due to the accident, Flightline took the
opportunity to upgrade its cabin facilities at a cost of $4.5 million. This did not increase the
estimated remaining life of the cabin fittings, but the improved facilities enabled Flightline to
substantially increase the air fares on this aircraft.
What is the carrying amount of the cabin fittings as at 31 March 20X9?
A $8,600,000
B $8,000,000
C $5,000,000
D $7,250,000