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IAS 16


Property, plant and equipment
IAS 16 was first issued in 1993. It was revised in 1998 and again in 2003. IAS 16 should be followed when accounting for propert ! plant and e"uip#ent unless another international accounting standard re"uires a different treat#ent. IAS 16 does not appl to the following. a) $iological assets related to agricultural activit b) %ineral rights and #ineral reserves! such as oil! gas and other non& regenerative resources 'owever! it does appl assets. (efinitions )he standard gives a large nu#ber of definitions. *ote that the definition if +fair value+ has now been a#ended b I,-S 13. Property, plant and equipment are tangible that: • Are held for use in the production or suppl for good or services! for rental to other or for ad#inistrative purpose and • Are e.pected to be used during #ore than one period. Cost is the a#ount of cash or cash e"uivalent paid or the fair value of the other consideration given to ac"uire asset at the ti#e of its ac"uisition or construction Residual value is the net a#ount which the entit e.pects to obtain for the asset at the end its useful life after deduction the e.pected cost of disposal. Entity spe i!i value is the present value of the cash flows an entit e.pects to arise fro# the continuing use of an asset and fro# its disposal at the end of its useful life! or e.pects to incur when setting a liabilit . "air value is the price that would be received to sell an asset or paid to transfer a to propert ! plant and e"uip#ent used to develop these

liabilit in an orderl date.

transaction between #ar/et participant at the #easure#ent

Carrying amount is the a#ount at which an asset is recognised in the state#ent financial position after deducting an accu#ulated depreciation and accu#ulated i#pair#ent losses. An i#pair#ent loss is the a#ount b which the carr ing a#ount of an asset e.ceeds its recoverable a#ount. #epre iation is the result of s ste# allocation of the depreciable a#ount of an asset over its esti#ated useful life. (epreciation for the accounting period is charged to net profit or loss for the period either directl or indirectl . $se!ul li!e is one o! t%o things& • )he period over which a depreciable asset is e.pected to be used b the entit ! or • )he nu#ber of production or si#ilar units e.pected units e.pected to be obtained fro# the asset b the entit . Re ognition In this conte.t! recognition si#pl #eans incorporation of the ite# in the entit +s accounts! in this case as a non&current asset. )he recognition of propert ! plant and e"uip#ent depends on two criteria. a) It is probable that future econo#ic benefits associated with the asset will flow to the entit b) )he cost of the asset to the entit can be #easured reliabl )hese recognition criteria appl to subse"uent e.penditure as well as costs incurred initiall . )here are no longer an separate criteria for recognising subse"uent e.penditure. 'a(or omponents or spare parts! should also be recognised as propert ! plant and e"uip#ent. ,or ver large and spe ialised items ! an apparentl single asset should be bro/en down into its co#posite parts. )his occurs where the different parts have different useful lives and different depreciation rates are applied to each part! eg an aircraft! where the bod and engines are separated as the have different useful lives. 0nce an ite# of propert ! plant and e"uip#ent "ualifies for recognition as an asset! it will initiall be #easured at cost. Components o! ost )he standard lists the co#ponents of the cost of an ite# of propert ! plant and e"uip#ent. • Pur hase pri e! less an trade discount or rebate • Import duties and non&refundable purchase • #ire tly attributable osts of bringing the asset to wor/ing condition for its

intended use! eg1 ⁻ ⁻ ⁻ ⁻ • • )he cost of site preparation Initial deliver and handling costs Installation costs )esting 2rofessional fees 3architects! engineers4 Initial esti#ate of the unavoidable cost of dis#antling and re#oving the asset and restoring the site on which it is located

)he revised IAS 16 provides additional guidan e on dire tly attributable costs included in the cost of an ite# of propert ! plant and e"uip#ent. a) )hese costs bring the asset to the location and wor/ing conditions necessar for it to be capable of operating in the #anner intended b #anage#ent! including those costs to test whether the asset is functioning properl . b) )he are deter#ined after deducting the net proceeds fro# selling an ite#s produced when bringing the asset to its location and condition. )he revised standard also states that inco#e and related e.penses of operations that are incidental to the construction or develop#ent of an ite# of propert ! plant and e"uip#ent should be recognised in profit or loss. )he following costs %ill not be part o! the ost of propert ! plant or e"uip#ent unless the can be attributed directl to the asset+s ac"uisition! or bringing it into its wor/ing condition. • • • Ad#inistration and other general overhead costs Start&up and si#ilar pre&production costs Initial operating losses before the asset reaches planned perfor#ance

All of these will be recognised as an e)pense rather than an asset. In the case of sel!* onstru ted assets! the sa#e principles are applied as for ac"uired assets. If the entit #a/es si#ilar assets during the nor#al course of business for sale e.ternall ! then the cost of the asset will be the cost of its production under IAS 2 Inventories. )his also #eans that abnor#al costs 3wasted #aterial! labour or other resources4 are e.cluded fro# the cost of the asset. An e.a#ple of a self&constructed asset is when a building co#pan builds its own head office. E)penditure in urred in repla ing or rene%ing a omponent of an ite# of propert ! plant and e"uip#ent #ust be re ognised in the arrying amount o! the item. )he carr ing a#ount of the replaced or renewed co#ponent #ust be derecogni5ed. A si#ilar approach is also applied when a separate co#ponent of an ite# of propert ! plant and e"uip#ent is identified in respect of a #a6or inspection to enable the continued use of the ite#. 'easurement subsequent to initial re ognition

)he standard offers two possible treat#ents here! essentiall /eeping an asset recorded at cost or revaluing it to fair value.

a choice between

Revaluation 'odel
• • 7arr the asset at a revalued a#ount! being its fair value at the date of the revaluation less an subse"uent accu#ulated i#pair#ent losses. -evaluation shall be #ade regularl enough so that the carr ing a#ount appro.i#ates to fair value at the reporting date.

Cost 'odel
7arr the asset at its cost less an accu#ulated depreciation and an accu#ulated i#pair#ent loss.

IAS 16 spe i!ies that the revaluation model is available only i! the !air value o! the asset an be measured reliably& Revaluation model )he mar+et value of land and buildings usuall represents fair value! assu#ing e.isting use and line of business. Such valuations are usuall carried out b professionall "ualified valuers. In the case of plant and equipment! fair value can also be ta/en as #ar/et value. 8here a #ar/et value is not available! however! depreciated replace#ent cost should be used. )here #a be no #ar/et value where t pes of plant and e"uip#ent are sold onl rarel or because of their specialised nature 3ie the would nor#all onl be sold as part of an ongoing business4. )he fre"uenc of valuation depends on the volatilit of the fair values of individual ite#s of propert ! plant and e"uip#ent. )he #ore volatile the fair value! the #ore fre"uentl revaluations should be carried out. 8here the current fair value is ver different fro# the carr ing value then a revaluation should be carried out. %ost i#portantl ! when an ite# of propert ! plant and e"uip#ent is revalued! the whole class of assets to which it belongs should be revalued. All the ite#s within a class should be revalued at the sa#e ti#e! to prevent selective revaluation of certain assets and to avoid disclosing a #i.ture of costs and values fro# different dates in the financial state#ents. A rolling basis of revaluation is allowed if the revaluations are /ept up to date and the revaluation of the whole class

is co#pleted in a short period of ti#e. 'ow should an increase in value be treated when a revaluation ta/es place9 )he debit will be the increase in value in the state#ent of financial position! but what about the credit9 IAS 16 re"uires the increase to be credited to a revaluation surplus 3ie part of owners+ e"uit 4! unless the increase is reversing a previous decrease which was recognised as an e.pense. )o the e.tent that this offset is #ade! the increase is recognised as inco#e: an e.cess is then ta/en to the revaluation surplus.

E)ample: revaluation gain
$ 7o has an ite# of land carried in its boo/s at ;13!000. )wo ears ago a slu#p in land values led the co#pan to reduce the carr ing value fro# ;1<!000. )his was ta/en as an e.pense in profit or loss. )here has been a surge in land prices in the current ear! however! and the land is now worth ;20!000. 'ow do we account for the revaluation in the current ear9 )he double entr is1 (=$I)Asset value 3state#ent of financial ;>!000 position4 7-=(I) 2rofit or loss ;2!000 -evaluation surplus ;<!000 )he case is si#ilar for a decrease in value on revaluation. An decrease should be recognised as an e.pense! e.cept where it offsets a previous increase ta/en as a revaluation surplus in owners+ e"uit . An decrease greater than the previous upwards increase in value #ust be ta/en as an e.pense in profit or loss.

E)ample: revaluation and depre iation
A co#pan bought an asset for ;10!000 at the beginning of &20?6. It had a useful life of five ears. 0n 1 @anuar 20?8 the asset was revalued to ;1<!000. )he e.pected useful life has re#ained unchanged 3ie three ears re#ain4. 'ow is this accounted for9 0n 1 @anuar 20?8 the carr ing value of the asset is ;10!000 & 32 . 3;10:dAB3fc <44 C ;6!000. ,or the revaluation.& (=$I) Asset value ;9!000 7-=(I) -evaluation surplus ;9!000 )he depreciation for the ne.t three ears will be ;1<!000 3 C ;<!000! co#pareD to depreciation on cost of ;10!000 E < C ;2!000. So each ear! the e.tra ;3!000 can be treated as part of the surplus which has beco#e realised1 (=$I) -evaluation surplus ;3!000 7-=(I) -etained earnings ;3!000 )his is a #ove#ent on owners+ e"uit ! not a profit or loss ite#.

Cost model: #epre iation
)he standard states that1 • • • )he depreciable a#ount of an ite# of propert ! plant and e"uip#ent should be allocated on a s ste#atic basis over its useful life. )he depreciation #ethod used should reflect the pattern in which the asset+s econo#ic benefits are consu#ed b the entit . )he depreciation charge for each period should be recognised as an e.pense unless it is included in the carr ing a#ount of another asset.

,and and buildings are dealt with separatel even when the are ac"uired together because land nor#all has an unli#ited life and is therefore not depreciated. In contrast buildings do have a li#ited life and #ust be depreciated. An increase in the value of land on which a building is standing will have no i#pact on the deter#ination of the building+s useful life. (epreciation is usuall treated as an e.pense! but not where it is absorbed b the entit in the process of producing other assets. ,or e.a#ple! depreciation of plant and #achiner can be incurred in the production of goods for sale 3inventor ite#s4. In such circu#stances! the depreciation is included in the cost of the new assets produced.

Revie% o! use!ul li!e
)he following factors should be considered when esti#ating the useful life of a depreciable asset. • • • =.pected ph sical wear and tear 0bsolescence Fegal or other li#its on the use of the assets

0nce decided! the useful life should be reviewed at least ever financial ear end and depreciation rates ad6usted for the current and future periods if e.pectations var significantl fro# the original esti#ates. )he effect of the change should be disclosed in the accounting period in which the change ta/es place. )he assess#ent of useful life re"uires 6udge#ent based on previous e.perience with si#ilar assets or classes of asset. 8hen a co#pletel new t pe of asset is ac"uired 3ie through technological advance#ent or through use in producing a brand new product or service4 it is still necessar to esti#ate useful life! even though the e.ercise will be #uch #ore difficult. )he standard also points out that the ph sical life of the asset #ight be longer than its useful life to the entit in "uestion. 0ne of the #ain factors to be ta/en into consideration is the ph sical wear and tear the asset is li/el to endure. )his will depend on various circu#stances! including the nu#ber of shifts for which the asset

will be used! the entit +s repair and #aintenance progra##e and so on. 0ther factors to be considered include obsolescence 3due to technological advances in production or due to a reduction in de#and for the product the asset produces4 and legal restrictions! eg length of a related lease.

Revie% o! depre iation method
)he depre iation method should also be reviewed at least at each financial ear end and! if there has been a significant change in the e.pected pattern of econo#ic benefits fro# those assets! the #ethod should be changed to suit this changed pattern. 8hen such a change in depreciation #ethod ta/es place the change should be accounted for as a change in accounting esti#ate and the depreciation charge for the current and future periods should be ad6usted.

Impairment o! asset values
An i#pair#ent loss should be treated in the sa#e wa as a revaluation decrease ie the decrease should be recognised as an e.pense. 'owever! a revaluation decrease 3or i#pair#ent loss4 should be charged directl against an related revaluation surplus to the e.tent that the decrease does not e.ceed the a#ount held in the revaluation surplus in respect of that sa#e asset. A reversal o! an impairment loss should be treated in the sa#e wa as a revaluation increase! ie a revaluation increase should be recognisedGas inco#e to the e.tent that it reverses a revaluation decrease or an i#pair#ent loss of the sa#e asset previousl recognised as an e.pense. Retirements and disposals 8hen an asset is per#anentl withdrawn fro# use! or sold or scrapped! and no future econo#ic benefits are e.pected fro# its disposal! it should be withdrawn fro# the state#ent of financial position. Hains or losses are the difference between the esti#ated net disposal proceeds and the carr ing a#ount of the asset. )he should be recognised as inco#e or e.pense in the profit or loss. An entit is re"uired to derecognise the carr ing a#ount of an ite# of propert ! plant or e"uip#ent that it disposes of on the date the criteria for the sale of goods ill IAS 18 -evenue would be #et. )his also applies to parts of an asset. An entity annot lassi!y as revenue -ie in pro!it or loss. a gain it realises on the disposal o! an item o! property, plant and equipment& #is losure )he standard has a long list of disclosure re"uire#ents! for each class of propert ! plant and e"uip#ent. a) 'easurement bases for deter#ining the gross carr ing a#ount 3if #ore than

b) c) d) e) 3i4 3ii4 3iii4 3iv4 3v4 3vi4 3vii4 3viii4 3i.4

one! the gross carr ing a#ount for that basis in each categor 4 #epre iation methods used $se!ul lives or depreciation rates used /ross arrying amount and accu#ulated depreciation 3aggregated with accu#ulated i#pair#ent losses4 at the beginning and end of the period Re on iliation of the carr ing a#ount at the beginning and end of the period showing1 Additions (isposals Ac"uisitions through business co#binations 3see 7hapter 1>4 IncreasesIdecreases during the period fro# revaluations and fro# i#pair#ent losses I#pair#ent losses recognised in profit or loss I#pair#ent losses reversed in profit or loss (epreciation *et e.change differences 3fro# translation of state#ents of foreign entit 4 An other #ove#ents.