Tangible Non-Current
Assets




IAS 16 Property, Plant and Equipment
Depreciation accounting
IAS 40 Investment Property
IAS 23 Borrowing Costs
Syllabus learning outcomes 1
• Define and compute the initial measurement of a non-current (including a selfconstructed and borrowing costs) asset
• Identify subsequent expenditure that may be capitalised, distinguishing between
capital and revenue items
• Discuss the requirements of relevant accounting standards in relation to the
revaluation of non-current assets
• Account for revaluation and disposal gains and losses for non-current assets
Syllabus learning outcomes 2
• Compute depreciation based on the cost and revaluation models and on assets that
have two or more significant parts (complex assets)
• Discuss why the treatment of investment properties should differ from other
properties
• Apply the requirements of relevant accounting standards for investment property
Chapter summary diagram
Tangible non-current assets
Borrowing Costs
(IAS 23)
Property, Plant and
Equipment (IAS 16)
Definition
Investment Property
(IAS 40)
Recognition
Measurement at
recognition
Measurement
after recognition
Depreciation
Disclosure note
IAS 16 Property, Plant and Equipment 1
Definition
Property, plant and equipment are tangible items that:
• Are held by an entity for use in the production or supply of
goods or services, for rental to others, or for administrative
purposes
• Are expected to be used during more than one period
IAS 16 Property, Plant and Equipment 2
Recognition
Property, plant and equipment should be recognised once the
recognition criteria from the Conceptual Framework have been
met:
• It is probable that future economic benefits that are
attributable to the asset will flow to the entity
• The cost of the asset can be reliably measured
IAS 16 Property, Plant and Equipment 3
Initial measurement at recognition
Initially recognise at cost.
Cost includes:
• Purchase price – including import duties and non-refundable
purchase taxes less trade discounts and rebates
• Directly attributable costs:
– Cost of site preparation
– Initial delivery and handling costs
– Installations and assembly costs
– Costs of testing
– Professional fees
IAS 16 Property, Plant and Equipment 4
Initial measurement at recognition (continued)
Cost includes (continued):
• Estimated cost of dismantling/removing the item
(IAS 37)
• Finance costs (IAS 23)
IAS 16 Property, Plant and Equipment 5
Subsequent expenditure
• Capitalise as a non-current asset if the asset recognition
criteria are met
• Consider:
– Complex assets – assets which are made up of separate
components
– Assets requiring overhauls
IAS 16 Property, Plant and Equipment 6
Subsequent expenditure (continued)
• Examples:
– Furnace
– Aircraft
• Treat each component separately for depreciation purposes
and capitalise the costs when they are replaced/overhauled
IAS 16 Property, Plant and Equipment 7
• Eg airframe, depreciate over 20 years
• Eg seating, depreciate over eight years
• Eg engines, depreciate over six years
IAS 16 Property, Plant and Equipment 8
Subsequent expenditure cont.
• Where subsequent expenditure does not meet the asset
recognition criteria the expenditure should be included as
part of the profit or loss for the period.
• Recognise as an expense
IAS 16 Property, Plant and Equipment 9
Measurement after recognition
• Choice of accounting treatment, the entity can either
maintain the asset at cost or revalue it to fair value.
• Cost model:
– Property, plant and equipment is carried in the financial
statements at cost less accumulated depreciation and
impairment losses.
IAS 16 Property, Plant and Equipment 10
Measurement after recognition (continued)
• Revaluation model:
– Property, plant and equipment is carried in the financial
statements at fair value less accumulated depreciation and
impairment losses.
– Fair value is 'the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the market date'.
IAS 16 Property, Plant and Equipment 11
What is the fair value of an asset?
• Land and buildings  market value where the valuation is
usually carried out by a professionally qualified valuer
• Plant and equipment  market value
• Specialised assets  depreciated replacement cost if the
market value is not available
IAS 16 Property, Plant and Equipment 12
Revaluations
• Where an item of property, plant and equipment is revalued
the whole class of assets to which it belongs should be
revalued.
• Revaluations should be performed sufficiently often so that
the carrying amount of the asset is not materially different
from the fair value of the asset.
• Where an asset has increased in value, the revaluation gain is
reported in other comprehensive income and in the
revaluation surplus in the statement of financial position
unless the gain reverses a previous revaluation loss which was
charged to profit or loss.
IAS 16 Property, Plant and Equipment 13
Revaluations (continued)
• A revaluation loss is charged first to other comprehensive
income (and the revaluation surplus) with any excess reported
in profit or loss.
• Where an asset is revalued depreciation is charged on the
revalued amount.
• If the asset has been revalued upwards the depreciation
charge will be higher than before the revaluation.
• The excess depreciation can be transferred to retained
earnings from the revaluation surplus.
• This adjustment will be shown in the statement of changes in
equity.
Question: Xavier
Xavier has a year end of 30 September and purchased a piece of production equipment on 1 July
20X5 incurring the following costs.
$
List price of machine
Trade discount
Delivery costs
Set-up costs incurred internally
8,550
(855)
105
356
8,156
Question: Xavier (cont'd)
Notes
1 The machine was expected to have a useful life of 12 years and a
residual value of $2,000.
2 Xavier's accounting policy is to charge a full year's depreciation in the
year of purchase and no depreciation is the year of retirement or sale.
3 Xavier has a policy of keeping all equipment at revalued amounts. No
revaluations had been necessary until 30 September 20X8 when one
of the major suppliers of such machines went bankrupt causing a rise
in prices. A specific market value for Xavier's machine was not
available, but an equivalent machine would now cost $15,200
(including relevant disbursements). Xavier treats revaluation
surpluses as being realised through use of the asset and transfers
them to retained earnings over the life of the asset. The remaining
useful life and residual value of the machine remained the same.
Question: Xavier (cont'd)
Required
Show the accounting effect of the above transaction at 30
September 20X5, 20X8 and 20X9.
Answer: Xavier
At 30 September 20X5
Plant and equipment
$
Cost (8,550 – 855 + 105 + 356)
8,156
Accumulated depreciation (8,156 – 2,000) / 12 years
(513)
7,643
At 30 September 20X8
Plant and equipment
$
Revalued amount (W1)
10,800
Accumulated depreciation
0
10,800
Equity
Revaluation surplus (10,800 (W1) – 6,104 (W2))
4,696
Answer: Xavier (cont'd)
Working 1
Revalued amount (depreciated replacement cost)
$
Gross replacement cost
15,200
Depreciation (15,200 – 2,000) × 4/12
(4,400)
10,800
Working 2
Carrying amount before revaluation
$
Cost
8,156
Accumulated depreciation (8,156 – 2,000) × 4/12
(2,052)
6,104
Answer: Xavier (cont'd)
At 30 September 20X9
Plant and equipment
$
Revalued amount
10,800
Accumulated depreciation (10,800 – 2,000) / 8 years
(1,100)
9,700
Equity
Revaluation surplus (4,696 – (4,696 / 8 years))
4,109
Depreciation accounting 1
Definition
• The systematic allocation of the depreciable amount of an
asset over its estimated useful life
• Where the depreciable amount of an asset is its historical cost
(or other amount) less the estimated residual value
• Where the useful life is the period over which a depreciable
asset is expected to be used by the entity or the number of
production or similar units expected to be obtained from the
asset by the entity
Depreciation accounting 2
Definition (continued)
• The useful life, residual value and depreciation method must
be reviewed at least each financial year end and adjusted
where necessary.
IAS 40 Investment Property 1
Definition
• Property (land or buildings – or part of a building – or both)
held (by the owner or by the lessee under a finance lease) to
earn rentals or for capital appreciation or both, rather than for:
– Use in the production or supply of goods or services or for
administrative purposes; or
– Sale in the ordinary course of business.
IAS 40 Investment Property 2
Recognition
• An investment property is recognised when and only when:
– It is probable that the future economic benefits associated
with the investment property will flow to the entity
– The cost of the investment property can be measured
reliably
IAS 40 Investment Property 3
Measurement at recognition
• The investment property is initially recognised at cost.
• Cost comprises:
– Purchase price plus
– Any directly attributable expenditure (for example
professional fees)
• For self-constructed investment properties, cost is the cost at
the date when the construction/development is complete.
IAS 40 Investment Property 4
Measurement after recognition
There is a choice of accounting policy which must be applied to
all investment properties held by the entity.
• Cost model:
– The investment property is carried in the financial
statements at cost less accumulated depreciation and
impairment losses, ie it is treated as a non-current asset
under IAS 16.
IAS 40 Investment Property 5
Measurement after recognition (continued)
• Fair value model:
– The investment property is measured at fair value at the
end of each reporting period.
– Any gain or loss on remeasurement is included in profit or
loss for the period.
– The investment property is not depreciated.
Question: Propex Co
Propex Co has the following properties but is unsure how to account
for them:
(1) Tennant House which cost $150,000 five years ago. The property
is freehold and is let out to private individuals for six monthly
periods. The current market value of the property is $175,000.
(2) Stowe Place which cost $75,000. This is used by Propex Co as its
headquarters. The building was acquired ten years ago.
(3) Crocket Square is a recently started development which is two
thirds complete. Propex Co intends to let this out to a company
called Speedex Co in which it has a controlling interest.
Propex Co depreciates its buildings at 2% per annum on cost.
Required
Describe the most appropriate accounting treatment for each of
these
properties.
Answer: Propex Co
(1) Tennant House
• Held for its investment potential and not for use by
Propex Co
• Treat as investment property in accordance with IAS 40
• Rental income to profit or loss
• If following fair value model – revalue to market value of
$175,000. The difference of $25,000 credited to profit or
loss
• If following cost model – depreciate based on cost and
do not revalue. Depreciation for current period is $3,000
and carrying amount is $135,000 (150,000 – (5  3,000)).
• Need to be consistent and use either fair value or cost
model for all investment properties
Answer: Propex Co (cont'd)
(2) Stowe Place
• Held for use by Propex Co therefore cannot be
an investment property
• Depreciate over useful life $75,000  2% =
$1,500 per annum – charge as an expense to
profit or loss
• Carrying amount of $75,000 – ($1,500  10) =
$60,000 to be shown in statement of financial
position
Answer: Propex Co (cont'd)
(3) Crocket Square
• Not yet complete so accounting treatment relates to the cost
incurred to date.
• Propex Co does not wish to sell the property so no need to treat it
as inventories or work in progress.
• Costs should be capitalised and disclosed under 'Assets in course of
construction' until construction is complete.
• Intention to rent the property out to a group company and so will
not be treated as an investment property in the group financial
statements as it is owner-occupied. However, in the separate
financial statements of Propex Co the property can be classified as
investment property when construction is complete.
• In the group financial statements, it will be depreciated as soon as it
comes into use. This will also apply in Propex Co's separate financial
statements if the cost model of IAS 40 is used.
IAS 23 Borrowing Costs 1
Definition
• Borrowing costs:
– Interest and other costs incurred by an entity in connection
with the borrowing of funds
• Qualifying asset:
– An asset that necessarily takes a substantial period of time
to get ready for its intended use or sale
Accounting treatment
• Borrowing costs that directly relate to the acquisition,
construction or production of a qualifying asset must be
capitalised as part of the cost of that asset.
IAS 23 Borrowing Costs 2
Types of borrowing costs
• Funds borrowed specifically:
– Capitalise actual borrowing costs incurred less investment
income on temporary investment of funds
• Funds borrowed generally:
– Capitalise borrowing costs calculated as the weighted
average cost of borrowings for the period multiplied by the
expenditure on the qualifying asset
– Note that the amount capitalised should not exceed total
borrowing costs incurred in the period
IAS 23 Borrowing Costs 3
Commencement of capitalisation
• Capitalisation of borrowing costs should begin when:
– Expenditures for the asset are being incurred
– Borrowing costs are being incurred
– Activities that are necessary to prepare the asset for its
intended use or sale are in progress
IAS 23 Borrowing Costs 4
Suspension and cessation of capitalisation
• Capitalisation of borrowing costs should be suspended during
extended periods when development is interrupted. For
example due to workforce strikes or inclement weather.
• Capitalisation of borrowing costs should cease when
substantially all of the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
• This is likely to be when the asset is ready for use (even if it is
not being used).