2.1. IAS 16 - Lecture Notes

IAS
16: Property, Plant and Equipment
Property, Plant
and Equipment
IAS 16
Dr. Trinh Hiep Thien, MPAcc, MBA, ACMA, CGMA
Learning objectives
Identify the various costs included in

the initial cost of PP&E.
Understand the recognition and

measurement of PP&E.
Determine the depreciation and

revaluation of PP&E.
Discuss the information of PPEs that is

presented and disclosed in financial statements.
@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 1

IAS 16: Property, Plant and Equipment
01
Scope and Definitions
Contents 02
Initial recognition and measurement
03
Subsequent measurement
04
Borrowing cost capitalization
05
Derecognition
06
Disclosure
Sources of IFRS
IAS 23 IAS 37
IAS 16 02 IAS 36 04 Amend-

ment
01 03 05
Property, Plant and Borrowing costs Impairment Provisions, contingent Amendment to IAS 16

Equipment liabilities and contingent and 38
assets

Scope
IAS 16 does not apply to:
1. 2. 3. 4.
Property, plant and The recognition and
equipment classified as Biological assets measurement of Mineral rights and
related to agricultural mineral reserves
held for sale in exploration and
such as oil, natural
accordance with IFRS 5 activity other than evaluation assets (see gas and similar
Non‐current Assets Held bearer plants (see IAS IFRS 6 Exploration for non‐regenerative
41 Agriculture). and Evaluation of resources.
for Sale and Discontinued
Operations. Mineral Resources).
PP&E - Definition
Property, plant, and equipment are assets of a durable nature. Other terms commonly used
are plant assets and fixed assets.
► “Used in operations” and not for resale.
► Long-term in nature and usually depreciated.
► Possess physical substance.
Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period. IAS 16.6

PP&E – Tangible items

Tangible items
Classified
Used for operating purposes (held for

1
use)
A Property, Plant and Equipment
2 Operating lease (Lessor)

B Investment property
3 Held for capital appraisal or for rent

C Receivables
4 Finance lease (Lessor)

D Inventory
5 Held for sales (Commercial)
Recognition
An item of PP&E should be

recognized as an asset only if two
conditions are met:
(1) It is probable that future

economic benefits associated
with this item will flow to the
entity;
(2) The cost of this item can be

determined reliably.

Measurement
Measurement at
Historical cost
recognition
Cost model
(cost – depreciation – impairment)
Measurement
after recognition
Revaluation model
(fair value model)
Measurement
Initial measurement
Purchase Directly Estimated costs of

Cost dismantlement,
price attributable costs
removal &
restoration
These costs bring an asset into working condition
These costs are capitalized and are not to be expensed in the period in
which they are incurred.
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Measurement
 Spot purchase: cash and/or cash equivalents payable
Historical  Buy on instalment: present value.
cost  Non-comparable asset exchange: fair value of asset received (or residual
value of asset traded) / carrying amount of the asset given up [IAS 16.24]
 Including import duties and non-refundable purchase taxes
Purchase
price
Costs directly attributable to making the asset capable of operating as intended:
 Costs of employee benefits arising directly from the construction or
acquisition of the item;
 cost of site preparation;
Direct cost  initial delivery and handling costs;
 installation and assembly costs;
 professional fees;
 costs of testing for proper functioning of the asset.
Other costs Costs of removing, dismantling and restoring 11
11
Cost of Land
All expenditures made to acquire land and ready it
for use. Costs typically include:
(1) purchase price;

(2) closing costs, such as title to the land, attorney’s
fees, and recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or
encumbrances on the property; and
(5) additional land improvements that have an
indefinite life.
 Improvements with limited lives, such as private

driveways, walks, fences, and parking lots, are
recorded as Land Improvements and depreciated.
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12

Cost of Buildings
Includes all expenditures related directly to
acquisition or construction. Costs include:
 materials, labor, and overhead costs incurred

during construction and
 professional fees and building permits.
Companies consider all costs incurred, from

excavation to completion, as part of the building
costs.
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13
Cost of Equipment
Include all expenditures incurred in acquiring the
equipment and preparing it for use. Costs include:
 purchase price,
 freight and handling charges,
 insurance on the equipment while in transit,
 cost of special foundations if required,
 assembling and installation costs, and
 costs of conducting trial runs.
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14

Acquisition of PP&E - Example

The expenditures and receipts below are related to land, land improvements, and buildings acquired
for use in a business enterprise. Determine how the following should be classified:
a. Money borrowed to pay building contractor (signed a note)

b. Payment for construction from note proceeds
c. Cost of land fill and clearing
d. Delinquent real estate taxes on property assumed by purchaser
e. Premium on 6-month insurance policy during construction
f. Refund of 1-month insurance premium because construction
completed early
g. Architect’s fee on building
h. Cost of real estate purchased as a plant site (land €200,000 and
building €50,000)
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15
Acquisition of PP&E – Example (cont.)

Determine how the following should be classified:
f. Commission fee paid to real estate agency

g. Cost of razing and removing building
h. Installation of fences around property
l. Proceeds from residual value of demolished building
m. Interest paid during construction on money borrowed for construction
n. Cost of parking lots and driveways
o. Cost of trees and shrubbery planted (permanent in nature)
p. Excavation costs for new building
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16

Classification of items as inventory or PP&E

In our view, an item of inventory is accounted for as an item of PP&E if it:
 is not held for sale or consumed in a production process or during the process of
rendering services;
 is necessary to operate or benefit from an asset during more than one operating cycle;
and
 cannot be recouped through sale (or is significantly impaired after it has been used to
operate the asset or benefit from that asset).
To be capitalized
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17
Classification of items as inventory or PP&E
Gas filled in the cave

An entity acquires the right to use an underground cave for gas storage
purposes for a period of 50 years. The cave is filled with gas, but a substantial
part of that gas will only be used to keep the cave under pressure in order to
be able to get gas out of the cave. It is not possible to distinguish the gas that
will be used to keep the cave under pressure and the rest of the gas.
Oil in an oil refining plant

An entity operates an oil refining plant. In order for the refining process to
take place, the plant must contain a certain minimum quantity of oil. This can
only be taken out once the plant is abandoned and would then be polluted to
such an extent that the oil’s value is significantly reduced.
Gas in its gas distribution network

An entity sells gas and has at any one time a certain quantity of gas in its gas
distribution network.
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Exchanges of Non-Monetary Assets

General Valuation Principle (GVP): Cost of asset acquired is:
• fair value of asset given up plus cash paid or minus cash received or
• fair value of asset acquired if it is more clearly evident
In the exchange of assets fair value is used except in rare situations in which the fair value cannot be
determined or the exchange lacks commercial substance.
Exchange has commercial substance if the future cash flows change as a result of the transaction. That is,
if the two parties’ economic positions change, the transaction has commercial substance.
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Matrix Inc. exchanged new equipment and $10,000 cash for equipment
owned by Float Inc.
Below is information about the asset exchanged by Matrix. Record the
transaction assuming the exchange has commercial substance.
Accumulated Book Fair

Cost Depreciation Value Value
Matrix's
Equipment $ 500,000 $ 300,000 $ 200,000 $ 205,000
Gain = Fair Value – Book Value

Gain = $205,000 – $200,000 = $5,000
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20


$205,000 fair value + $10,000 cash
Equipment ............................................... 215,000
Accumulated depreciation………............. 300,000
Equipment ……………………… 500,000 When fair value cannot
Cash ……………………………. 10,000 be determined or the
Gain on exchange …………….. 5,000 exchange lacks
To record the exchange of equipment.
commercial substance,
the asset(s) acquired
Record the same transaction assuming the are valued at the net
exchange lacks commercial substance. book value of the
asset(s) given up, plus
$200,000 book value + $10,000 cash
(or minus) any cash
Equipment ............................................... 210,000 exchanged. No gain/
Accumulated depreciation………............. 300,000 loss is recognized.
Equipment ……………………… 500,000
Cash …………………………….. 10,000
To record the exchange of equipment.
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Costs incurred subsequent to purchase or self-construction

Type of Expenditure Definition Usual Accounting Treatment
Repairs and Costs of day-to-day servicing to maintain a

Expense in the period incurred
Maintenance given level of Benefits
Regular major Expenditure required for continuing Capitalize and amortize over the period
inspections operation of the Asset between major Inspections
Capitalize and depreciate over the remaining

The addition of a new major component to
Additions useful life of the original asset or its own useful
an existing asset
life, whichever is shorter
The replacement of Capitalize and depreciate over the useful life of

Improvements
a major component the improved asset
Expenditures to restructure If expenditures are material and clearly

Rearrangements an asset without addition, replacement, or increase future benefits, capitalize and
improvement depreciate over the future periods benefited
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22

Depreciation
Depreciation is the accounting process of allocating the cost of tangible assets to
expense in a systematic and rational manner to those periods expected to benefit from
the use of the asset.
Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense
 Intangibles = Amortization expense
 Mineral resources = Depletion expense
Three basic questions:

1. What depreciable base is to be used?
2. What is the asset’s useful life?
3. What method of cost apportionment is best?

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Depreciable base
Depreciable Base for the Asset
Residual value or Scrap value

• Also called salvage value or terminal value;
• Estimated amount that an entity would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in the condition expected at
the end of its useful life.
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24

Methods of Depreciation
Time-based Methods
Straight-line method
Sum-of-the-years’ digits
Diminishing balance
(Declining Balance (DB))
DEP’N Method based on

actual physical use
Defined as output of the asset
Defined as service quantity

of the asset
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25
Activity Method
Data for
Stanley Coal
Mines
Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:
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26

Straight-line Method
Data for
Stanley Coal
Mines
Illustration: Stanley computes depreciation as follows:
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27
Sum-of-the-Years’-Digits Method
Data for
Stanley Coal
Mines
Sum-of-the-Years’-Digits. Each fraction uses the sum of the years as a denominator (5 + 4 + 3 +

2 + 1 = 15). The numerator is the number of years of estimated life remaining as of the beginning of
the year.
Alternate sum-of-the- n (n+1) 5 (5+1)
= = 15
years’ calculation 2 2
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Diminishing Balance Method
Data for
Stanley Coal
Mines
 Utilizes a depreciation rate (percentage) that is some multiple of the straight-line method.
 Does not deduct the salvage value in computing the depreciation base.
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Other depreciation issues

Component Depreciation
IFRS requires that each part of an item of property, plant, and equipment that is significant to
the total cost of the asset must be depreciated separately.
Illustration: EuroAsia Airlines purchases an airplane for €100,000,000 on January 1, 2020. The
airplane has a useful life of 20 years and a residual value of €0. EuroAsia uses the straight-line
method of depreciation for all its airplanes. EuroAsia identifies the following components, amounts,
and useful lives.
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Component Depreciation
Computation of depreciation expense for EuroAsia for 2020.
Depreciation journal entry for 2020.

Depreciation Expense 8,600,000
Accumulated Depreciation—Equipment 8,600,000
On the statement of
financial position at the
end of 2020, EuroAsia
reports the airplane as a
single amount.
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Revision of Depreciation Rates
How should companies handle revisions in depreciation rates?
 Accounted for in the current and prospective periods
 Not handled retrospectively
 Not considered errors or extraordinary items
Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years
with a residual value of $10,000 at the end of that time. Depreciation has been recorded for 7 years
on a straight-line basis. In 2019 (year 8), it is determined that the total estimated life should be 15
years with a residual value of $5,000 at the end of that time.
Questions:
 What is the journal entry to correct the prior years’ No Entry
Required
depreciation?
 Calculate the depreciation expense for 2019.
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After 7
Revision of Depreciation Rates years
Instruction
Equipment cost $510,000 First, establish NBV
Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2018)

Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000
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After 7
Revision of Depreciation Rates years
Instruction
Net book value $160,000 Depreciation

Salvage value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2019.
Useful life remaining 8 years
Annual depreciation $ 19,375
Journal entry for 2019
Depreciation Expense 19,375

Accumulated Depreciation 19,375
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Subsequent measurement of PP&E
Subsequent measurement of PP&E
Cost model Revaluation model
Cost Fair value
Accumulated depreciation Subsequent

Accumulated depreciation
Accumulated
Subsequent accumulated
impairment loss
Impairment loss
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Revaluation model
All assets within a class of property, plant and equipment must be
revalued on a regular basis. Records the difference between
(1) the book value of a revalued asset and
(2) its fair value at the end of each financial period.
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36

Revaluation model
Revaluations shall be made with sufficient regularity to ensure
When? that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet
date.
The price that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market
Fair participants at the measurement date.
(IFRS 13 – Fair value measurement)
value? For property, plant and equipment’s fair value can be determined
with reference to an active market, or it can be estimated using
an income or a depreciated replacement cost approach.
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Revaluation model
A revaluation surplus is Revaluation deficit is

reported as other recognized as an expense in
comprehensive income and the income statement unless
accumulated in a revaluation there is a balance in the
surplus account in equity revaluation surplus account.
unless a revaluation deficit
has been charged to the
income statement previously.
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Revaluation model
Increase in an Credit to other

Initial revaluation
asset’s carrying comprehensive income

amount: (gain on revaluation)
Decrease in an
asset’s carrying Charge to profit or loss
amount:
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Revaluation model
Subsequent revaluation:
Previous Period / Current
Net Revaluation Deficit Net Revaluation Surplus
Period
• Balance in the revaluation

reserve is eliminated before
• Loss is recognized as an
Revaluation Loss charging the revaluation deficit
expense
as an expense to the income
statement
• Part of the current revaluation

gain is directly credited to the
income statement, up to the • revaluation surplus is reported
total amount of revaluation as other comprehensive income
Revaluation Gain
deficit previously recognized as and accumulated in a
an expense revaluation reserve
• The rest is will be as per...
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Revaluation model
If an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset
belongs shall be revalued.
A class of property, plant and equipment is a grouping of assets
of a similar nature and use in an entity’s operations. The
following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.
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Assume H Corporation acquired a plot of land
with a cost of €100,000. After one year the
land is appraised as having a current fair value
of €110,000.
Example
Land €10,000
OCI—Gain on revaluation €10,000
Rules
At the end of the fiscal
period, the increase in the
carrying amount of the land is
accumulated in the
“revaluation surplus” in the
OCI—Gain on revaluation €10,000
Revaluation Surplus €10,000
shareholders’ equity section
of the statement of financial
position.
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In the following year, H Corporation determine that the

fair value of the land is no longer €110,000. Assumed
the fair value decreased to €95,000
Example
Revaluation Surplus €10,000
Impairment loss (expense) €5,000
Land €15,000
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Revaluation model
Depreciation has to be recognized in the current financial year before computing revaluation
surplus or deficit
How will accumulated depreciation be treated in the revaluation of PP&E accounted for under
revaluation model?
Accumulated depreciation is eliminated against the gross carrying Net

amount of the asset at the date of revaluation method
Restated proportionally with the gross carrying amount of the asset Gross
so that the difference between the restated accumulated up
depreciation and the restated carrying amount is equal to the
revalued amount
Method
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Net method:
Example
K Corporation owns
Applying the “netting” approach, K would eliminate buildings with a cost of
accumulated depreciation of €80,000 and then increase €200,000 and estimated
the building account by €180,000 so the net carrying useful life of 5 years.
Accordingly, depreciation of
amount is €300,000 (= €200,000 – €80,000 +
€40,000 per year is
€180,000): anticipated. After two years,
K obtains market
Accumulated depreciation €80,000 information suggesting that
a current fair value of the
Buildings €80,000
buildings is €300,000 and
decides to write the
Buildings €180,000 buildings up to a fair value
OCI — Gain on revaluation €180,000 of €300,000.
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Gross up method:
Example
K Corporation owns
buildings with a cost of
€200,000 and estimated
The gross fair value (gross carrying amount) calculated useful life of 5 years.
proportionally is 5/3 × €300,000 = €500,000. Accordingly, depreciation of
Consequently, the buildings and accumulated depreciation
anticipated. After two years,
accounts need to be restated upward as follows: buildings up
K obtains market
€300,000 (€500,000 – €200,000) and accumulated
information suggesting that
depreciation €120,000 (€200,000 – €80,000).
buildings up to a fair value
of €300,000.
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Gross up method:
Example
The buildings account and the accumulated depreciation K Corporation owns
buildings with a cost of
account so that the ratio of net carrying amount to gross
€200,000 and estimated
carrying amount is 60% (€120,000/€200,000) and the net
useful life of 5 years.
carrying amount is $300,000. New gross carrying amount is
calculated €300,000/.60 = €500,000.
K obtains market
information suggesting that
of €300,000.
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Gross up method:
Example
Applying the “gross up” approach where the gross fair value K Corporation owns
had separately been valued at €450,000 then both the buildings with a cost of
Buildings and Accumulated depreciation entry would be €200,000 and estimated
reduced by €50,000 from the example above. useful life of 5 years.
Buildings €250,000
K obtains market
Accumulated depreciation €70,000 information suggesting that
OCI — Gain on revaluation €180,000 a current fair value of the
of €300,000.
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Derecognition
Derecognition
• Asset’s carrying amount, accumulated depreciation or amortization and
accumulated impairment are written off
• Any gain or loss on disposal is recognized
Realizing revaluation surplus as the relating asset is
being used
• The realized amount is the difference between (1) the depreciation or
amortization based on the revalued amount and (2) the depreciation and
amortization based on the asset’s original historical cost;
• The realized surplus is transferred directly from the assets revaluation
reserve account to the retained earnings;
• It is not compulsory for companies to realized the revaluation surplus as
the relating asset is being used.
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Derecognition
Derecognition of PP&E
On disposal No future economic

benefits expected
Gain or loss
Net disposal proceeds Carrying amount
Gain or loss are included in P/L, but not as revenue

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Disposition
 Update depreciation to date of disposal.
 Remove original cost of asset and accumulated depreciation from the
books.
 The difference between book value of the asset and the amount
received is recorded as a gain or loss.
On June 30, 2013, MeLo, Inc. sold equipment for $6,350 cash. The
equipment was purchased on January 1, 2008 at a cost of $15,000. The
equipment was depreciated using the straight-line method over an
estimated ten-year life with zero salvage value. MeLo last recorded
depreciation on the equipment on December 31, 2012, its year-end.
Prepare the journal entries necessary to record the disposition of this
equipment.
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Disposition
 Update depreciation to date of sale.
June 30, 2013:

Depreciation expense ($15,000 ÷ 10 years) × ½) ....... 750
Accumulated depreciation ………………........ 750
To update depreciation to date of sale.
 Remove original asset cost and accumulated depreciation.

 Record the gain or loss.
June 30, 2013:

Accumulated depreciation ............................................ 8,250
Cash ………………………….……………...................... 6,350
Loss on sale …………………………………………….… 400
Equipment …………………………...............… 15,000
To record sale of equipment.
($15,000 ÷ 10 years) × 5½ = $8,250

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Example of revalued asset disposal

1/1/20x0:
On January 1, 20x0, Z Corp.
Machinery..................................................................... €12,000
acquired a machine at a Cash ………………........................................ €12,000
cost of €12,000; it had an
estimated life of 6 years, no 31/12/20x0:
residual value, and was Depreciation expense.................................................. €2,000
Accumulated Depreciation………………...... €2,000
expected to provide a level
pattern of utility to the entity. 31/12/20x1:
Thus, straight-line Depreciation expense.................................................. €2,000
depreciation in the amount Accumulated Depreciation………………...... €2,000
of €2,000 was charged to
31/12/20x2:
operations.
Depreciation expense.................................................. €2,000
At the beginning of year four Accumulated Depreciation………………...... €2,000
20x3, the asset is revalued
Original cost Revaluation Total
at a gross replacement cost
of €15,000. At the end of Gross carrying amount 12,000 +3,000 15,000
four years, the asset was Accumulated Depreciation 6,000 +1,500 7,500
sold for €5,000. Net carrying amount 6,000 1,500 7,500
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Example of revalued asset disposal

1/1/20x3:
On January 1, 20x0, Z Corp.
Machinery..................................................................... €3,000
acquired a machine at a Accumulated Depreciation............................. €1,500
cost of €12,000; it had an OCI – Revaluation Surplus............................ €1,500
estimated life of 6 years, no
residual value, and was 31/12/20x3:
Depreciation expense (15,000 : 6)................................... €2,500
expected to provide a level
Accumulated Depreciation............................. €2,500
pattern of utility to the entity. Revaluation Surplus..................................................... €500
Thus, straight-line Retained earnings.......................................... €500
depreciation in the amount
of €2,000 was charged to 1/12/20x4:
Cash................................... €5,000
operations.
Accumulated Depreciation (6,000 + 1,500 + 2,500)............. €10,000
At the beginning of year four Revaluation Surplus..................................................... €1,000
20x3, the asset is revalued Machinery...................................................... €15,000
Gain on disposal of asset.............................. €1,000
at a gross replacement cost
of €15,000. At the end of
four years, the asset was
sold for €5,000.
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Self-constructed assets
When self-constructing an asset, two accounting issues must
be addressed:
 overhead allocation to the self-constructed asset.
• incremental overhead only
• full-cost approach
 proper treatment of interest incurred during construction
Under certain conditions, borrowing costs

incurred on qualifying assets is capitalized.
Asset that necessarily Interest and other costs that are incurred
takes a substantial period in connection with the borrowing of funds
of time to get ready for its that are directly attributable to the
intended use. acquisition, construction or production of
the qualifying asset
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Borrowing Cost Capitalization

ISA 23 – Borrowing
costs
Capitalization begins when:

• construction begins
• Borrowing cost is incurred, and
• qualifying expenses are incurred.
Capitalization ends when:
• the asset is substantially complete and ready for
its intended use, or
• when borrowing costs no longer are being
incurred.
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Borrowing Cost Capitalization
General borrowings
• Entity uses funds borrowed generally to fund the acquisition
or production of the qualifying asset
Specific borrowings
• Entity uses funds borrowed specifically for the purpose of
purchasing or producing the qualifying asset
• Specific borrowing cost = actual borrowing costs incurred –
investment income (earned on temporary investment of
surplus specific borrowings)
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Interest Capitalization
Borrowing Cost is capitalized based on
Average Accumulated Expenditures (AAE).
Qualifying expenditures (construction labor, material, and

overhead) weighted for the number of months outstanding
during the current accounting period.
If the qualifying asset is If there is no specific new

financed through a borrowing, and the
specific new borrowing company has other debt
. . . use the specific rate . . . use the weighted

of the new borrowing as average cost of other debt
the capitalization rate. as the capitalization rate.
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Welling, Inc. is constructing a building for its own use. Construction activities
started on May 1 and have continued through Dec. 31. Welling made the
following qualifying expenditures: May 1, $125,000; July 31, $160,000, Oct. 1,
$200,000; and Dec. 1, $300,000. Welling borrowed $1,000,000 on May 1, from
Bub’s Bank for 10 years at 10 percent to finance the construction. The loan is
related to the construction project and the company uses the specific interest
method to compute the amount of interest to capitalize.
Average Accumulated Expenditures
Fraction of
Construction
Date Expenditure Period AAE
5/1 $ 125,000 8/8 $ 125,000
7/31 160,000 5/8 100,000
10/1 200,000 3/8 75,000
12/1 300,000 1/8 37,500
$ 785,000 $ 337,500
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Since the $1,000,000 of specific borrowing is sufficient to

cover the $337,500 of average accumulated expenditures
for the year, use the specific borrowing rate of 10 percent to
determine the amount of interest to capitalize.
Interest = AAE × Specific Borrowing Rate × Time

Interest = $337,500 × 10% × 8/12 = $22,500
The loan, initiated on May 1, is

outstanding for 8 months of the year.
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If Welling had not borrowed specifically for this construction project, it would
have used the weighted-average interest method. The weighted average
interest rate on other debt would have been used to compute the amount of
interest to capitalize. For example, if the weighted-average interest rate on
other debt is 12 percent, the amount of interest capitalized would be:
Interest = AAE × Weighted-average Rate × Time

Interest = $337,500 × 12% × 8/12 = $27,000
61
61
Disclosure
For each class of tangible asset, disclosure is required of:
1. The measurement basis used (cost or revaluation approaches).
2. The depreciation method(s) used.
3. Useful lives or depreciation rates used.
4. The gross carrying amounts and accumulated depreciation at the
beginning and at the end of the period.
5. A reconciliation of the carrying amount from the beginning to the end of the
period, showing additions, disposals and/or assets included in disposal
groups or classified as held-for-sale, acquisitions by means of business
combinations, increases or decreases resulting from revaluations,
reductions to recognised impairments, depreciation, the net effect of
translation of foreign entities’ financial statements and any other material
items.
62
62

Disclosure
In addition, the financial statements should also disclose the
following facts:
1. Any restrictions on titles and any assets pledged as security for debt.
2. The accounting policy regarding restoration costs for items of property,
plant and equipment.
3. The expenditures made for property, plant and equipment, including any
construction in progress.
4. The amount of outstanding commitments for property, plant and
equipment acquisitions.
5. The amount received from any third parties as compensation for any
impaired, lost or given-up asset. This is only applicable if the amount
received was not separately disclosed in the statement of
comprehensive income.
63
63
Disclosure
64
64

65
Disclosure
65
The end! Address

University of Economics,
HCMC
Contact:
School of Accounting
Email Address:
trinhhiepthien@ueh.edu.vn
66
66

2.1. IAS 16 - Lecture Notes

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2.1. IAS 16 - Lecture Notes

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IAS

Identify the various costs included in

Understand the recognition and

Determine the depreciation and

Discuss the information of PPEs that is

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 1

IAS 16 02 IAS 36 04 Amend-

Property, Plant and Borrowing costs Impairment Provisions, contingent Amendment to IAS 16

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 2

Property, plant and equipment are tangible items that:

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 3

PP&E – Tangible items

Used for operating purposes (held for

2 Operating lease (Lessor)

3 Held for capital appraisal or for rent

4 Finance lease (Lessor)

5 Held for sales (Commercial)

An item of PP&E should be

(1) It is probable that future

(2) The cost of this item can be

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 4

Purchase Directly Estimated costs of

These costs bring an asset into working condition

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 5

Other costs Costs of removing, dismantling and restoring 11

(1) purchase price;

 Improvements with limited lives, such as private

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 6

 materials, labor, and overhead costs incurred

 professional fees and building permits.

Companies consider all costs incurred, from

 freight and handling charges,

 insurance on the equipment while in transit,

 cost of special foundations if required,

 assembling and installation costs, and

 costs of conducting trial runs.

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 7

Acquisition of PP&E - Example

a. Money borrowed to pay building contractor (signed a note)

Acquisition of PP&E – Example (cont.)

f. Commission fee paid to real estate agency

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 8

Classification of items as inventory or PP&E

Classification of items as inventory or PP&E

Gas filled in the cave

Oil in an oil refining plant

Gas in its gas distribution network

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 9

Exchanges of Non-Monetary Assets

Exchanges of Non-Monetary Assets

Accumulated Book Fair

Gain = Fair Value – Book Value

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 10

Exchanges of Non-Monetary Assets

Costs incurred subsequent to purchase or self-construction

Repairs and Costs of day-to-day servicing to maintain a

Capitalize and depreciate over the remaining

The replacement of Capitalize and depreciate over the useful life of

Expenditures to restructure If expenditures are material and clearly

@Dr. Trịnh Hiệp Thiện, MPAcc, MBA, ACMA, CGMA 11

Allocating costs of long-lived assets:

 Intangibles = Amortization expense

 Mineral resources = Depletion expense