Property, Plant and Equipment:
IAS 16
Wiecek and Young
IFRS Primer
Chapter 10
Property, Plant and Equipment
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Related standards
IAS 16
Current GAAP comparisons
IFRS financial statement examples
Looking ahead
End-of-chapter practice
Related Standards
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FAS 153 Exchanges of non-monetary
assets
APB 29 Accounting for non-monetary
transactions
FAS 146 Accounting for costs associated
with exit or disposal activities
FAS 144 Accounting for the impairment or
disposal of long-lived assets
FAS 34 Capitalization of interest cost
Related Standards
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IAS 17 Leases
IAS 20 Accounting for government grants
and disclosure of government
assistance
IAS 23 Borrowing costs
IAS 36 Impairment of assets
IAS 40 Investment property
IFRS 2 Share-based payment
IFRS 5 Non-current assets held for sale and
discontinued operations
IAS 16 - Overview
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Objective and scope
Recognition
Measurement at recognition
Measurement after recognition (CM, RM)
Derecognition
Disclosure
IAS 16 - Objective and Scope
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IAS 16 objective: standards for the
recognition and derecognition of PP&E
assets, measurement at and after
acquisition, and disclosures
Scoped out: assets held for sale, agricultural
biological assets, non-renewable natural
resource rights and reserves
Includes investment property under
construction and when ready, if cost model
applied
IAS 16 - Objective and Scope
Property, plant and equipment (IAS 16.6):
“Tangible items that:
(a) are held for use in the production or supply
of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than
one period”
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IAS 16 - Recognition
Costs are recognized as PP&E only if:
1. probable that future economic benefits
associated with the item will flow to the
entity, and
2. the cost can be measured reliably.
Applies to costs at acquisition and after
acquisition.
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IAS 16 - Recognition
The government requires HTY Ltd. to affix
new pollution reduction equipment to
existing equipment. Is this a PP&E cost…or
an expense?
Apply general principle:
1.
2.
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Future economic benefits
Reliable measure
IAS 16 - Recognition
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Meets the future economic benefits criterion
if costs are incurred to obtain the economic
benefits or to increase the economic benefits
from other assets
Cost of pollution reduction equipment =
PP&E asset cost
Same criteria apply to major repairs and
overhauls
IAS 16 - Recognition
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Works in combination with a “components
approach”
Recognize major components as separate
PP&E assets and depreciate separately
When major overhaul or replacement takes
place, remove old component’s remaining
undepreciated cost
Recognize new component as PP&E asset
Gain/loss to income statement
IAS 16 - Measurement at Recognition
Need to know:
1. What elements of cost are included
2. How to measure cost
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IAS 16 - Measurement at Recognition
Cost elements to include:
1. Purchase price net of discounts, rebates,
and add non-recoverable taxes, duties
2. Costs to get in place and ready to use as
management intended
3. Costs of obligation to decommission asset
and restore site as a result of acquiring the
asset
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IAS 16 - Measurement at Recognition
Cost elements to exclude:
1. Costs after asset in place and ready for use
as management intended
2. Costs to open a new facility, introduce a
product, move to new location
3. General and administrative overhead type
costs
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IAS 16 - Measurement at Recognition
If self-constructed:
1. Apply same principles
2. Charge abnormal costs to P or L
3. Interest costs during construction: IAS 23
4. Government assistance: IAS 20
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IAS 16 - Measurement at Recognition
Situation-equipment:
 $100 cost, 7% sales tax
 $10 to transport to plant, $5 storage cost (plant not
ready)
 $3 labor, $2 materials to calibrate machine. $4
recovered from trial run production
 Used at 50% of capacity: costs = $50, sales = $55
 $11 to consultant for services related to choice of
machine and calibration
 $1 interest cost during one month storage
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IAS 16 - Measurement at Recognition
Equipment cost:
Invoice and tax: 100 + 7 =
Transportation
Calibration: 3 + 2 – 4 =
Professional fees
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$107
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1
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$129
IAS 16 - Measurement at Recognition
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How to measure cost?
“Cost” is defined (IAS 16.6) as:
Cash or cash equivalents paid or the FV
of other consideration given to acquire
asset when acquired or constructed…
Other IFRS such as IFRS 2: Share-based
payment may have other specific
requirements
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IAS 16 - Measurement at Recognition
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If non-monetary transaction, exception to
FV principle if:
FV cannot be reliably determined, or
Transaction lacks commercial substance –
i.e., transaction has no economic effect on
the entity
IAS 16 - Measurement at Recognition
Commercial substance exists if:
1. Cash flows (amount, timing, risk) of new
asset differ from those of old asset(s)
transferred; or
2. After-tax cash flows of part of business
taking on new asset (entity specific value)
have changed; and
3. Difference in 1 or 2 is significant
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IAS 16 - Measurement after
Recognition
Choice of two models:
1. Cost model
2. Revaluation model
Separate decision for each class of PP&E
assets. Examples of a class: land, office
equipment, machinery, buildings
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IAS 16 - Measurement after
Recognition
Cost Model (CM):
PP&E are carried after acquisition at cost, less
accumulated depreciation and accumulated
impairment losses
Revaluation Model (RM):
PP&E are carried after acquisition at fair value at
date of revaluation, less any accumulated depreciation
and impairment losses after revaluation
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IAS 16 - Measurement after
Recognition: Cost Model (CM)
Depreciation:
 Each major component may have a different
depreciation policy
 Depreciable amount: carrying amount less residual
value
 Residual value defined:
- estimate of net amount entity would receive now
from asset’s disposal, if asset was as old and in
same condition as expected at end of its useful life
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IAS 16 - Measurement after
Recognition: Cost Model (CM)
Depreciation (continued):
 Depreciation period begins when PP&E is in
place and ready to use, continues even if not
used or is retired from active use
 Depreciation period ends when PP&E is
derecognized or classified as held for sale
(IFRS 5)
 Depreciate over useful life to entity
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IAS 16 - Measurement after
Recognition: Cost Model (CM)
Depreciation (continued):
 Useful life – consider capacity, wear and tear,
technology changes, changes in product demand,
contractual or legal limits
 Choose method based on pattern that asset’s
economic benefits are expected to be received: SL,
DB, or activity-based
 If change in pattern, change method prospectively
(change in estimate)
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
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Apply only to assets whose FV can be
reliably measured
Revalue often enough that carrying amount
is close to FV
Depreciate revalued amount using same
principles as for CM
IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
RM accounting - what happens if an
increase in asset’s carrying amount?
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
RM accounting - what happens if a decrease
in asset’s carrying amount?
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
Debits and credits to Revaluation Surplus
are reported in OCI
Choice of entries to revalue assets and
accumulated depreciation:
 Proportionately, or
 Eliminate existing accumulated depreciation
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
Situation:
On January 1, Year 1, ABC Co. acquires a building at a cost of $1,000.
The building is expected to have a 25-year life and no residual value.
The asset is accounted for under the revaluation model and
revaluations are carried out every three years.
On December 31, Year 3, the fair value of the building is appraised at
$900. Prepare the entries required on December 31, Year 3
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
New depreciation rate is needed as of
January 1, Year 4:
$900 carrying amount = $41 per year
25 – 3 years
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IAS 16 - Measurement after
Recognition: Revaluation Model (RM)
Revaluation Surplus account?
 As asset is used, transfer difference between
depreciation taken using RM and amount if
CM had been used - directly to Retained
Earnings, OR
 Transfer directly to Retained Earnings when
asset derecognized
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IAS 16 - Measurement after
Recognition
Note - Revaluation Model is not widely used.
KPMG : The Application of IFRS: Choices
in Practice – International Financial
Reporting Standards, December
2006
http://www.kpmg.co.uk/pubs/304574_ifrg.pdf
: see page 16 of 44
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IAS 16 - Derecognition
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When disposed of, or when no future
economic benefits to be received from use or
disposal
Remove carrying amount from statement of
financial position
Gain or loss = difference between carrying
amount of asset (or part of asset if a
replacement) and net proceeds on disposal
IAS 16 - Disclosure
Whether CM or RM :
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Depreciation methods used
Depreciation rate or useful lives
Beginning and ending balances and
reconciliation of the two for gross amount
and total of accumulated depreciation and
impairment losses
IAS 16 - Disclosure
If RM used:
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Date of revaluation
Independent valuation?
Methods, techniques used
Assumptions made in determining FV
Amounts if CM had been used
Details of changes in Revaluation Surplus
Current GAAP Comparisons
Pages 43-45/144
of
http://www.kpmg.co.uk/pubs/2007%20IFRS%20compared%20to%2
0US%20GAAP%20-%20An%20overview.pdf
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IFRS Financial Statement Disclosures CM
BHP Billiton Ltd.
http://www.bhpbilliton.com/bbContentRepository/bhpbfinstatements07.pdf
Business and geographic segments:
Consolidated balance sheet:
Basis of measurement:
Accounting policies for PP&E:
Property, plant and equipment Note 16:
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page 16 of 108
page 5 of 108
page 8 of 108
page 10 of 108
page 35 of 108
Looking Ahead
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No significant changes are expected to IAS
16 in the foreseeable future
End-of-Chapter Practice
10-1 The following assets have been recognized as items of property, plant, and
equipment.
1. Headquarter office boardroom table and executive chairs
2. A landfill site
3. Wooden pallets in a warehouse
4. Forklift vehicles in a manufacturing plant
5. Stand-alone training facility for pilot training, including a flight simulator,
classrooms equipped with desks, whiteboards and electronic instructional aids
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Instructions
For each of the items listed:
a) Identify what specific costs are likely to be included in acquisition cost.
b) Explain whether any components of this asset should be given separate
recognition, and why.
c) Suggest what should be taken into consideration in determining each
component’s depreciable amount and depreciation period.
d) Suggest and explain what depreciation method might be most appropriate for
each component separately identified.
e) Identify whether the periodic depreciation is recognized as an expense on the
income statement, or whether another accounting treatment is more
appropriate. Explain.
End-of-Chapter Practice
10-2 Vedat Corporation acquires new equipment with a list price of
$100 to expand its product line, paying $50 on delivery and
agreeing to pay $25 in one year’s time and the remaining $25 in
two years’ time. The company extends a portion of its factory
wall in order to fit the new machine in place and then rearranges
existing equipment into a more efficient layout. The new
equipment is dropped on installation requiring repairs prior to
use. At the end of the equipment’s useful life, Vedat Corporation
is required to dismantle and dispose of it, paying a special
environmental tax due to hazardous materials in its construction.
Vedat is licensed to manufacture products with this equipment,
and is required to pay a royalty for each unit produced.
Instructions
Discuss how the cost of the new equipment should be
determined.
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End-of-Chapter Practice
10-3 Teyal Limited has just finished the construction of its new office
building. About the same time, one of Teyal’s major suppliers,
Layet Corporation, also moved into its new office building. Layet
Corporation did not construct its own building, but contracted it
out in a fixed price total contract. The total expenditures were
approximately the same for both buildings.
Instructions
a) Assume you are a co-op student in the accounting department
of Teyal Limited. You are asked to write a short report on what
the chief accountant needs to consider in accounting for the cost
of the new building and its subsequent depreciation policy. Write
the report.
b) Assume you are a co-op student in the accounting department
of Layet Corporation. If you were asked to write a report similar
to the one required in part (a) above, identify in what respect it
might differ, and why.
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End-of-Chapter Practice
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10-4 Resorts Ltd. has occupied its plant facility for 15 years, about onethird of its expected useful life. Although still very functional,
numerous repairs have been required in recent months. The
accounts indicate the original cost of the plant building was $500.
The entire inside of the plant was painted at a cost of $2; the old
wooden roof was replaced with a new one at a cost of $45; and
part of the plumbing system was upgraded at a cost of $25 due to
a change in the manufacturing process used. The plant was
closed down while the roof was replaced, but overhead and
administrative costs of $10 continued to be incurred even though
production was at a standstill. The original roof had been identified
as a separate component of the building when it was constructed
with a cost of $30 and a useful life of 20 years. No separate
records were kept of the original cost of the plumbing or painting.
Instructions
Prepare entries to record the recent repairs.
End-of-Chapter Practice
10-5 In this chapter, flag icons identify areas where there are
GAAP differences between IFRS requirements and national
standards.
Instructions
Access the website(s) identified on the inside back cover of this
book, and prepare a concise summary of the differences that
are flagged throughout the chapter material.
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