IAS 16

Property, Plant and Equipment

Initial Recognition
An item of PPE should be recognized as an asset when:
• It is probable that the asset future economic benefit will flow to entity
• The cost of asset can be measured reliably
Measurement
PPE should be initially measured at its COST
The cost will include
• Purchase price
• Costs that are directly attributable to bringing asset to location and
condition necessary to operate
• Estimated costs of dismantling and removing asset including any site
restoration costs
• Costs incurred after asset is physically ready for use that will increase
the economic benefit
Measurement
The following costs should NEVER be capitalized:
• Administration and general overhead/costs
• Abnormal costs i.e. repairs, wastage, idle time
• Costs incurred after asset is physically ready for use
• Costs incurred in initial operating period
• Costs of opening new facility, introducing a new product (including
advertisement & promotional costs) and conducting business in new
location also, TRAINING COSTS
• Costs of relocating/reorganizing an entity operations
• During testing, samples may be sold or costs may incurred, they are
recognized in PL
Measurement
IAS 16 allows a choice between:
• Cost model
- Costs less (-) accumulated depreciation and impairment losses

• Revaluation model
- Fair value less (-) subsequent accumulated depreciation and
impairment losses
Revaluation model
• Revaluation should be made ‘sufficient regularity’ to ensure the carrying
amount does not differ materiality
• It an item is revalued, the entire class of that asset MUST be revalued
• If there is revaluation surplus, it will be presented in as other comprehensive
income and in revaluation surplus within other components of equity
• If there is revaluation deficit, it will be presented in profit or loss
• If there is surplus, then deficit, the deficit will be included by that surplus
amount in OCI, then if any remains, it will be in profit or loss
• If there is deficit, then surplus, the surplus will be included by that surplus
amount in profit or loss, then if any remains, it will be in profit or loss
Depreciation
• All PPE with finite useful life should e depreciated i.e. Costs less (-) Residual
value will be the depreciable amount
• Residual value is an estimate of the net selling proceeds to be received if
disposed today
• Depreciation is charged to statement of profit or loss
• Depreciation begins when asset is AVAILABLE for use
• Depreciation is based upon systematic basis, reflecting its pattern based
upon asset future economic benefit. For example, computer will be reducing
balance and for buildings will be straight line
• Depreciation method, residual value and useful life should be reviewed
annually and revised
Componentization
• Replacement parts should be capitalized, with its former part that is being
replaced should be derecognized
• If replacement part costs is now known, it can be estimated from the cost of old
part when acquired

• Some assets, such as aircrafts can only be operated if regular inspections are
carried out. The costs can be capitalized and if any previous inspections costs
being capitalized, it should be derocognized

• Significant component part having different useful life should be charged

separately for its depreciation and same useful life can be grouped together
De-recognition
• IAS 16 says, asset should be derecognized when disposal occurs or if
no further economic benefit are expected from asset use or disposal
• The gain or loss on de-recognition is the difference between the net
disposal proceeds
• When revalued asset is disposed of, any revaluation surplus may be
transferred directly to retained earnings, or it may just be left in
revaluation surplus within other components of equity
Disclosures
IAS 16 requires entities to disclose:
• Measurement based values
• Useful lives and depreciation rates
• Reconciliation of carrying amount at the beginning and the end of a
period
• If revalued assets, information about the revaluation should also be
disclosed
Journal Entries
Debit Credit
PPE bought Dr PPE Cr Cash
Depreciation Dr Depreciation charge Cr PPE
Gain on revaluations Dr PPE Cr OCI
Loss after gain on revaluations Dr OCI Cr PPE
Dr Revaluation loss (PL) (only if
there’s remaining)
Loss on revaluations Dr Revaluation loss (PL) Cr PPE
Gain after loss on revaluations Dr PPE Cr Revaluation loss
Cr OCI (only if there’s remaining
surplus)
Sold for profit Dr Cash Cr Profit
Cr PPE
Sold for loss Dr Cash Cr PPE
Dr Loss
Revaluations gain if want to Dr Equity Cr Retained earnings
transfer after sold
Excess depreciation transfer to Dr Accumulated depreciation Cr Reserves
reserves