IAS 16 Property Plant Equipment
1. Non-Current Assets
Statement of Financial Position
• The recognition of assets (Cost)
• The determination of their carrying amounts
(NBV)
• The depreciation charges and any losses
relating to them.
2. Accounts
•
•
•
•
•
NCA Cost Account
Disposals Account
Depreciation Account
Revaluation Reserve Account
Bank Account
3. IAS 16
• Consistent principles applied to the initial
measurement of the asset
• Determination of their carrying value is
consistent
• Depreciation is calculated consistently and
recognised
• Sufficient disclosure for users
4. Initial Recognition - Cost
• 2 Condition for recognition
– Future economic benefit will flow from the item to
the business
– The cost can be measured reliably
Purchase Price – import
duties, tax, construction,
professional fees
Cost of Purchase –
delivery, installation,
assembly
COST
Cost of dismantle –
disposal, site restoration
Borrowing Cost –
interest on purchase,
construction
Expenses rather than cost
• Cannot include
– cost of storage while waiting to use NCA
– Initial operating losses as a result of asset output
– Cost of business relocation
– Design errors
– Wastage
– Industrial disputes
5. Capitalisation
• Including items other than purchase price of
the asset
• Don’t debit the expense account (SP&L)
• Debit the asset account (SFP)
• If they were to be written off as an expense in
one year it would not reflect the substance of
the transaction
Paul Boyle incurs the following costs in relation to the
construction of a new factory and the introduction of its
products to the local market.
How much of the costs should be capitalised?
COSTS
CAPITALISED - ANSWER
€’000
Site preparation costs
240
€’000
Site preparation costs
240
Materials used
1,500
Materials used
1,500
Labour costs, including €90,000
incurred during an industrial
dispute. No construction occurred
during the period of the dispute.
3,190
Labour costs, 3190 – 90
3,100
Testing of various processes in
factory
150
Testing of various processes in
factory
150
Consultancy fees re installation of
equipment
220
Consultancy fees re installation of
equipment
220
Relocation of staff to new factory
110
Relocation of staff to new factory
-
General overheads
500
General overheads
-
Costs to dismantle the factory at
end of its useful life in 10 years
time
100
Costs to dismantle the factory at
end of its useful life in 10 years
time
100
Enhancement costs
• Enhancement costs which significantly enhance the economic
benefits by increasing the capacity, improving the quality of output,
extending the economic life of the asset or by reducing the operating
costs of the assets can be capitalised.
• The replacement costs of major components and overhaul costs
which improve the economic benefit that can be generated can also
be capitalised.
• Where NCA consists of a number of assets of different economic lives,
it may be appropriate to recognise and account for each component
separately for depreciation and inclusion of subsequent expenses.
• The component approach is also applied where regular major
inspections of an asset are a condition of continuing to use it. The
cost of each inspection is treated as a separate item (replacement),
provided recognition criteria are satisfied. Any remaining carrying
amount in respect of the previous inspection is derecognised.
6 Measurement subsequent to initial
recognition
• IAS 16 sets out two models for measuring PPE subsequent to
its initial recognition as an asset. These are the ‘cost model’
and the ‘revaluation model’
Cost
Revaluation
• Cost less any accumulated depreciation
and any accumulated impairment losses.
• Revalued amount, being fair value less
accumulated depreciation and impairment
losses.
• IAS 16 defines fair value as ‘the amount for
which an asset could be exchanged
between knowledgeable, willing parties in
an arm’s length transaction’.
• Where an item is revalued, all other assets
in the same class should also be revalued.
• Revaluations should be carried out
regularly
7 Depreciation
• Depreciation begins when the asset is available
for use and continues until the asset is
derecognised – even if idle
• The depreciation amount should be allocated
systematically over its useful economic life
• Depreciation method should reflect the patter in
which the economic benefits of the assets are
consumed.
• Depreciation for accounting period = expense
• Depreciation for the period + Accumulated Dep
Depreciation Methods
• Straight line
• Reducing balance
8 De-recognition
• When an asset is removed from the books
– Disposal
– No further economic benefit
• Gain or loss on disposal = Net sale – NBV
Recognised in Stmt of P&L
9. Disclosure
For each class of property, plant and equipment the
following should be disclosed:
–
–
–
–
Basis for measuring the carrying amount (cost)
Depreciation method used
Useful life or depreciation rate
Reconciliation of the carrying amount at the beginning and
end of the period
•
•
•
•
•
Additions
Disposals
Revaluation Movement
Depreciation
Any other Movements
– Restrictions on title
– Expenditures to construct
– Commitments to acquire
Disclosure on Revaluation
• Additional disclosure requirements for
revaluation
– Date of revaluation
– Independent valuer involved
– Methods and assumptions used
– Carrying amount under the cost model
– The revaluation surplus
10 Impairment
• IAS 36
• An asset is impaired when its carrying amount
exceeds its recoverable amount
2. Accounts
•
•
•
•
•
NCA Cost Account
Disposals Account
Depreciation Account
Revaluation Reserve Account
Bank Account
Disposal
1.
2.
3.
4.
5.
Credit Cost A/C
Debit Acc Depreciation A/C
Post Sale Price to Debit Bank A/C
Double entries in Disposals A/C
Balance on Disposal = Profit & Loss
Q
•
•
•
•
Bank balance
120,000
Plant & Equip cost 840,000
Acc Dep
370,000
Plant cost 100,000 with a NBV 40,000 sold for
45,000 on 1/12/xx
• New plant purchased 180,000 on 1/10/xx
• 10% depreciation PA straight line with
proportionate charge on year of acquisition and
none on year of disposal
Depreciation
• 840,000 – 100,000 = 740,000 x 10% =
• 180,00 x 10% 18,000 pa / 2 =
74,000
9,000
83,000
Plant & Equipment Cost A/C
1/4/xx
Balance
840,000 1/12/xx
1/10/xx
Bank
180,000
Disposals
100,000
Plant & Equipment Acc Depreciation A/C
1/12/xx
Disposals
60,000 1/4/xx
31/12/xx
Balance
370,000
P&L (10%)
83,000
Acc Dep
60,000
Bank
45,000
Disposal A/C
1/4/xx
Cost
31/12/xx
P&L (profit)
100,000 1/12/xx
5,000 1/12/xx
Bank A/C
1/4/xx
Balance
1/12/xx
Disposal
200,000 1/10/xx
45,000
P&Equip
180,000
Revaluation
1.
2.
3.
4.
Debit/Credit Cost A/C Giving it current value
Debit Acc Dep A/C Reducing Dep to zero
Double entry in Revaluation Reserve A/C
Balance =
SFP Equity: Revaluation Reserve
SCI Profit/Loss on Revaluation
Upward Revaluation
• Cost
500,000
• Depreciation 100,000
• Revaluation 700,000
• Dr Cost
• Dr Dep
• Cr Rev Res
Plant & Equipment Cost A/C
31/12/xx
Balance
500,000 31/12/xx
31/12/xx
Revaluation
Reserve
200,000
Balance c/d
700,00
Plant & Equipment Acc Depreciation A/C
31/12/xx
Revaluation
Reserve
100,000 31/12/xx
Balance c/d
100,000
Buildings
200,000
Acc Dep
100,000
Revaluation Reserve A/C
31/12/xx
Balance c/d
300,000 31/12/xx
31/12/xx
Statement of Comprehensive Income (extract) Statement of financial position (extract)
Property, plant and equipment
700,000
Other Incomes
Gain on Revaluation
300,000
Equity: Revaluation Surplus
300,000
Downward Revaluation
• Buildings cost 500,000
• Depreciation 100,000
• Revaluation 460,000
• Cr Cost
• Dr Dep
• Dr/Cr Rev Res
Plant & Equipment Cost A/C
31/12/xx
Balance
500,000 31/12/xx
Revaluation
Reserve
40,000
31/12/xx
Balance c/d
460,000
Plant & Equipment Acc Depreciation A/C
31/12/xx
Revaluation
Reserve
100,000 31/12/xx
Balance c/d
100,000
Acc Dep
100,000
Revaluation Reserve A/C
31/12/xx
Building
40,000 31/12/xx
31/12/xx
Balance c/d
60,000
Statement of Comprehensive Income (extract) Statement of financial position (extract)
Property, plant and equipment
460,000
Other Incomes:
Gain on Revaluation
60,000
Equity: Revaluation balance
60,000