IAS # 16 PROPERTY, PLANT AND EQUIPMENT Steps or Elements in the balance sheet: 1.

Recognition: To be an asset, it has some recognition criteria. 2. Measurement: The value in which I record the asset Subsequent criteria: if I need to do further measurement. Like charge depreciation 3. Valuation: In which value I will show it in balance sheet for user 4. Disclosure: Things to disclose- in notes To be property, plant and equipment, it should be: 1. Tangible and long term in nature 2. Held for use (not for sale, or investment purpose property) Objective of IAS 16 The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the timing of recognition of assets, the determination of their carrying amounts, and the depreciation charges to be recognized in relation to them. Scope While IAS 16 does not apply to biological assets related to agricultural activity (see IAS 41) or mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources, it does apply to property, plant, and equipment used to develop or maintain such assets. Recognition criteria of property, plant, and equipment Items of property, plant, and equipment should be recognized as assets when it is probable that: the future economic benefits associated with the asset will flow to the enterprise; and the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. For many years the issue of replacement of part of an asset (subsequent costs), often involving significant expenditure, was a difficult matter to address. For this we need to recognition criteria of the subsequent cost. IAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met.

Initial Measurement They should be initially recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. Like freight cost, installation fee is the cost of asset. Otherwise assets wont be in condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37, Provisions, Contingent Liabilities and Contingent Assets). If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed.

Exchange If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount (the cost) of the asset given up. Measurement Subsequent to Initial Recognition IAS 16 permits two accounting models: Cost Model. The asset is carried at cost less accumulated depreciation and impairment.
[IAS 16.30]

Revaluation Model: The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be measured reliably. [IAS 16.31] we do revaluation when the value differs significantly with the cost.

The Revaluation Model Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31] If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are depreciated on revalued amount in the same way as under the cost model (see below). If a revaluation results in an increase in value, it should be credited to equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of

the same asset previously recognized as an expense, in which case it should be recognized as income. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement (that is, no "recycling" through profit or loss). [IAS 16.41]

Depreciation (Cost and Revaluation Models) For all depreciable assets: The depreciable amount (cost less prior depreciation, impairment, and residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51] The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the enterprise [IAS 16.60]; The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] If you change the depreciation after one asset, you do not need to change the previous year depreciation, just change for the future years. Depreciation, allowance for doubtful debt is just an estimate not policy.

Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset [IAS 16.48]. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. To prove the existence of the asset you need to show it in some minimum value until it is derecognized.

Recoverability of the Carrying Amount IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65] Derecogniton (Retirements and Disposals) An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognized in the income statement. [IAS 16.67-71] Disclosure For each class of property, plant, and equipment, disclose: [IAS 16.73] basis for measuring carrying amount; depreciation method(s) used; useful lives or depreciation rates; gross carrying amount and accumulated depreciation and impairment losses; reconciliation of the carrying amount at the beginning and the end of the period, showing: additions; disposals; acquisitions through business combinations; revaluation increases; impairment losses; reversals of impairment losses; depreciation; net foreign exchange differences on translation; other movements.

Also disclose: [IAS 16.74] restrictions on title; expenditures to construct property, plant, and equipment during the period; commitments to acquire property, plant, and equipment. compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss. If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77] the effective date of the revaluation; whether an independent valuer was involved; the methods and significant assumptions used in estimating fair values; the extent to which fair values were determined directly by reference to observable prices in an active market or recent market transactions on arm's length terms or were estimated using other valuation techniques; the carrying amount that would have been recognised had the assets been carried under the cost model; the revaluation surplus, including changes during the period and distribution restrictions.

IAS # 23 Borrowing cost Objective of IAS 23 Cost principle: B.C. are directly attributable to the acquisition, construction or production of a qualifying assets form a part of the cost of that assets. Scope IAS 23 applies to accounting for borrowing cost for qualifying assets. qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Borrowing cost may include:

1) Interest on bank O/D or short term or long term borrowings 2) Amortization of discount or premium relating to borrowings 3) Finance charge in respect of finance lease 4) Exchange differences arising from foreign currency borrowings The Standard applies only to borrowing costs relating to external borrowings and not to equity. Therefore, the Standard does not deal with the imputed or actual cost of equity, including preferred capital not classified as equity. On December 1, 20X4, Compassionate Inc. began construction of homes for those families that were hit by the tsunami disaster and were homeless. The construction is expected to take 3.5 years. It is being financed by issuance of bonds for $7 million at 12% per annum. The bonds were issued at the beginning of the construction. The bonds carry a 1.5% issuance cost. The project is also financed by issuance of share capital with a 14% cost of capital. Compassionate Inc. has opted under IAS 23 to capitalize borrowing costs. Required Compute the borrowing costs that need to be capitalized under IAS 23. Since these homes are qualifying assets, borrowing costs can be capitalized and are computed thus: a. Interest on $7 million bond = $7,000,000 12% = $840,000 b. Amortization of issuance costs of the bond (using the straight-line method)= [(0.015 $7,000,000 ) / 3.5 years] =$30,000 Total borrowing to be capitalized = $840,000 + $30,000 = $870,000

Qualifying assets Assets that are ready for their intended use or sale when acquired are not qualifying assets as envisioned by this Standard. Qualifying assets, for the purposes of this Standard, are assets that take a substantial period of time to get ready for their intended use. Examples of qualifying assets include A toll bridge that takes a couple of years to construct before it is ready for use and is opened to the public A power plant that takes a substantial period of time to get ready for its intended use A hydroelectric dam that services the needs of a village and takes a considerable period of time to construct Inventories that are routinely manufactured or are produced on a repetitive basis over a short period of time are obviously not qualifying assets. However, inventories that require a substantial period of time to bring to a salable condition can be regarded as qualifying assets for the purposes of this Standard. Any of the following may be qualifying assets: a) Inventory b) Manufacturing plants c) Power generation facilities d) Intangibles e) Investment properties Recognition Benchmark Treatment Under the benchmark treatment, borrowing costs shall be recognized as an expense in the period in which they are incurred. When the benchmark treatment for recognizing borrowing costs is used, these costs are expensed regardless of how they are applied. Allowed Alternative Treatment Under the allowed alternative treatment, borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset shall be capitalized as part of the cost of that asset. Capitalization of borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of the asset is possible only if both these conditions are met: It is probable that they will result in future economic benefits to the entity. The costs can be measured reliably. (If borrowing costs do not meet these criteria, then they are expensed

Amendments to IAS 23 Effective January 1, 2009 During March 2007, the IASB issued amendments to IAS 23. These amendments eliminate the option available under the existing standard to recognize borrowing costs as an expense. Under the revised standard, to the extent that borrowing costs relate to the acquisition, construction or production of a qualifying asset, they should be capitalized as part of the cost of the asset. All other borrowing costs should be expensed as incurred.

The revised standard is effective for annual periods beginning on or after January 1, 2009. Early application is permitted but retrospective application is not permitted.

Borrowing cost eligible or capitalization -cost that would have been avoided if expenditure of qualifying assets have not been made -any investment income from the temporary investment of that fund should be deducted from B.C. Capitalizations rate Capitalization rate should be the weighted average of the borrowing cost applicable to the borrowings Commencement of capitalization At commencement date is the date when an entity first meet all of the followings:

1. It incurs expenditure 2. In incurs borrowings 3. It undertakes activity to prepare the assets Cessation of capitalization When substantially all of the activities necessary to prepare the qualifying assets for its intended use or sale are complete. Disclosures An entity shall disclose : its accounting policy for the recognition of borrowing costs, the amount of borrowing costs capitalized during the period, and the capitalization rate used to determine the amount of borrowing costs eligible for capitalization