IAS 16 — property, plant and equipment

IAS 16

PROPERTY, PLANT AND EQUIPMENT

Presented by :

th
March 8 , 2019


OVERVIEW

Objective and scope
Recognition
Initial Measurement
Subsequent Measurement
Measurement after recognition (CM, RM)
Derecognition
Disclosure


OBJECTIVES

 Timing of the recognition of assets
 Determination of assets carrying amounts using both the cost model and the revaluation model
 Depreciation charges and impairment losses to be recognized
 Disclosure requirements


SCOPE OF THE STANDARD

IAS 16 applies to the accounting for property, plant and equipment, except where another
standard requires or permits differing accounting treatments.


SCOPE OF THE STANDARD

SCOPE OF THE STANDARD

IAS 16 applies to all PPE except



Assets Held for Sale and Discontinued Operations (IFRS 5)



Biological assets (IAS 41)



Exploration and evaluation assets (IFRS 6)



Investment Property (IAS 40)



Mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.

DEFINITION : PROPERTY, PLANT & EQUIPMENT

Property, Plant & Equipment defines Property Plant and Equipment as tangible assets
that -

 Held for use in the production or supply of goods or services for rental to others, or
administrative purposes

 Expected to be utilized in more than one period.


OTHER IMPORTANT DEFINITIONS

Cost:
Cost is the amount of cash and cash equivalent paid to acquire an asset at the time of its acquisition and construction.

Fair Value:
Fair value represents the present market price of an asset.

Carrying amount:
Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation of losses.

Formula:
Carrying amount = Acquisition cost – Accumulated Depreciation


MEASUREMENT of RECOGNITION

An item of Property, Plant & Equipment that qualifies for recognition as an asset shall be measured at its cost

Element of Cost:



Its purchase price and duties paid



Directly attributable costs



Initial estimate of the cost of dismantling and removing the item and restoring the site



Materials, labour and other inputs for sell constructed assets.


MEASUREMENT of RECOGNITION

Items of property, plant, and equipment should be recognised as assets when it is probable that:

 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.


MEASUREMENT at RECOGNITION

COST NEVER TO BE CAPITALIZED



Costs of opening the facility



Costs of introduce new product or service



Costs of conducting business in the new location or with new class of customer



Administration and other general overhead costs



Costs incurred in using or redeveloping an item



Amounts related to certain incidental operations.


MEASUREMENT at RECOGNITION

EXAMPLE of initial measurement
DAF bought a new printing machine. The cost of the machine was $80,000. The costs to delivery from supplier were
$3,000.The installation costs were $5,000 and the employees received training on how to use the machine, at a cost of
$2,000. Before using the machine to print customer’s orders, a test was undertaken and the paper and ink cost $1,000.
What should be the cost of the machine in the company’s statement of financial position?

Solution

Cost of machine:

Cost

: $80,000

= $80,000+$3,000+$5,000+$1,000

Delivery cost

: $3,000

= $89,000

Installation costs: $5,000
Training cost

: $2,000

Test cost

: $1,000

MEASUREMENT at RECOGNITION

Note:
Following elements of cost will not become the part of the cost of asset and will be charged to statement of profit or loss as expense:
- Insurance cost
- Labor training cost
- Rectification cost of an error
- Cost of initial operating losses
- Start up cost
- Relocation cost
- Cost related to opening of new facility
- Any general and administrative overheads


MEASUREMENT at RECOGNITION

Self-constructed



Apply same principles: The cost of a self-constructed asset is determined using the same principles as for an acquired asset.
If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of
constructing an asset for sale (see IAS 2).
It will be the sum of Material, Labour and Overhead cost of such asset.

. Charge abnormal costs to P or L: Any cost of abnormal wasted material, labour or other resources will be charged
to statement of profit or loss as expense.

. Interest costs during construction: IAS 23: «Construction Period Interest should be capitalized (based on
weighted average of accumulated expenditures) as part of the cost of producing PPE.

.

Government assistance: IAS 20


MEASUREMENT at RECOGNITION

Self-constructed
At 1 Jan,2018 DAF started to contruct a new machine for production. The following costs were incurred on the construction:

Materials

$30,000

The machine was completed on 1 Oct 2018 and started producing on 1 Jan,
2019. DAF issued a $50,000 unsecured loan on 1 Jan,2018 to aid construction of

Direct labour costs

$20,000

the new machine (which meets the definition of a qualifying asset per IAS 23).
The loan carried an interest rate of 10% per annum and is repayable on 1 Oct

Installation costs

$7,000

2019.
Required:Calculate the amount to be included as property, plant and

Testing cost

$3,000

General overheads

$6,000

equipment in respect of the new machine.


MEASUREMENT at RECOGNITION

Self-constructed
Solution:
Determine: Expense can be capitalized?
How should we do with interest on the loan?

Materials

$30,000

Direct labour costs

$20,000

Installation costs

$7,000

Testing cost

$3,000

Borrowing costs

$5,000

Total to be capitalized
$65,000


MEASUREMENT at RECOGNITION

Exchange of asset:
If non-monetary transaction, exception to FV principle if:

1.

FV cannot be reliably determined, or

2.

Transaction lacks commercial substance – i.e., transaction has no economic effect on the entity

MEASUREMENT at RECOGNITION

Commercial substance exists if:



Cash flows (amount, timing, risk) of new asset differ from those of old asset(s) transferred; or



After-tax cash flows of part of business taking on new asset (entity specific value) have changed; and



Difference in 1 or 2 is significant


MEASUREMENT at RECOGNITION

Exchange of asset:
Company A exchanged machine A with machine B from Company B.
Machine A’s carrying amount at the date of the exchange was $10,000, and its fair value was $15,000. The manner in which the exchange is
accounted for depends on whether or not the transaction had commercial substance.
Therefore, the Company’s ledger entry for the transaction will be as
Assumption A – Transaction with commercial substance
Dr PPE (machine B)
Cr PPE (machine A)
Cr Gain on disposal of machine

$15,000

$10,000
$ 5,000

Assumption B - Transaction without commercial substance
Dr PPE (machine B)
Cr PPE (machine A)

$10,000
$10,000


SUBSEQUENT RECOGNITION

 Additional costs are incurred after the asset becomes operational is called subsequent costs.
 For example:


Expense day-to-day servicing cost.



Repair and maintenance, overhauling, upgradation, replacement costs.


MEASUREMENT after RECOGNITION

IAS 16 permits two accounting models for measurement of the asset in periods subsequent to its recognition.

Depreciate

Cost model

cost over
useful life

Depreciate
Revaluation
Model

Revaluation

revalued
amount over
useful life


COST MODEL

Carrying amount = at cost – accumulated depreciation – accumulated impairment losses

Notes:
Under the cost model, the impairment is always recognized (debited) as expense
Dr Expense
Cr Accumulated Impairment loss


REVALUATION MODEL

Carrying amount = Fair value – subsequent accumulated depreciation – subsequent accumulated impairment losses

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: 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


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.


MEASUREMENT after RECOGNITION

COST MODEL (CM)

Depreciation (continued):



Depreciate over useful life to entity



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)

Note
Dr Depreciation expense
Cr Accumulated depreciation