PAS 16: PROPERTY PLANT AND EQUIPMENT

PART 1: Acquisition and Subsequent Expenditures

Criteria for Recognition
An item of property, plant, and equipment should be recognized as an asset if and
only if it is probable that future economic benefits associated with the asset will
flow to the entity and the cost of the item can be measured reliably.

Any expenditure incurred that meets these recognition criteria must be accounted
for as an asset. The Standard makes reference to individually insignificant items
that can be aggregated. However, very often, in practice, entities adopt an
accounting policy to expense items that are below a predetermined de minimis level
in order to avoid undue cost in maintaining the relevant records, which includes
tracking the whereabouts of the asset.

The definition and recognition criteria can also be applied to spare parts,
although these are often carried as inventory and expensed as and when utilized.
However, major spare parts are usually recognized as property, plant, and
equipment.

For many years the issue of replacement of part of an asset (“subsequent costs”),
often involving significant expenditure, was a difficult matter to address; merely
adding the cost of the replacement part to the cost of the original asset posed
certain logical flaws vis-à-vis the preexisting and the replaced, part. This was
particularly the case when the replaced part was not separately identified in the
overall cost of the original asset. This problem also existed for major inspection
costs, such as those for ships and aircraft, which were usually required to retain
sea- or airworthiness. The matter was further exacerbated by an additional
recognition criterion that subsequent costs should add to the utility or useful
life of the asset; in some circumstances, this criterion resulted in day-to-day
repairs being capitalized. This issue was partly addressed by an interpretation of
the Standing Interpretations Committee (SIC) that permitted adding major overhaul
or inspection costs to the original asset if an amount representing the major
overhaul or inspection component of the original cost of the asset was separately
identified on initial recognition and was separately depreciated, and thereby could
be written out of the asset records.

The current Standard applies the two basic recognition criteria referred to
previously, to all expenditures (and dispenses with the increased utility or
increased useful life criteria). If the two basic criteria are satisfied, then the
cost should be recognized as an asset. If the cost of the replaced asset was not
separately identifiable, then the cost of the replacement can be used as an
indication of the cost of the replaced item, which should be removed from the asset
record.

Measurement at Recognition
An item of property, plant, and equipment that satisfies the recognition criteria
should be recognized initially at its cost.
The Standard specifies that cost comprises
• Purchase price, including import duties, nonrefundable purchase taxes, less trade
discounts and rebates • Costs directly attributable to bringing the asset to the
location and condition necessary for it to be used in a manner intended by the
entity
• Initial estimates of dismantling, removing, and site restoration if the entity
has an obligation that it incurs on acquisition of the asset or as a result of
using the asset other than to produce inventories

Examples of directly attributable costs include

• Employee benefits of those involved in the construction or acquisition of an
asset
• Cost of site preparation
• Initial delivery and handling costs
• Installation and assembly costs of testing, less the net proceeds from the sale
of any product arising from test production
• Borrowing costs to the extent permitted by PAS 23, Borrowing Costs
• Professional fees

Examples of costs that are not directly attributable costs and therefore must be
expensed in the income statement include
• Costs of opening a new facility (often referred to as preoperative expenses)
• Costs of introducing a new product or service
• Advertising and promotional costs
• Costs of conducting business in a new location or with a new class of customer
• Training costs
• Administration and other general overheads
• Costs incurred while an asset, capable of being used as intended, is yet to be
brought into use, is left idle, or is operating at below full capacity
• Initial operating losses
• Costs of relocating or reorganizing part or all of an entity’s operations

Measurement of Cost
The cost of an asset is measured at the cash price equivalent at the date of
acquisition. If payment is “deferred” beyond normal credit terms, then the
difference between the cash price and the total price is recognized as a finance
cost and treated accordingly.

If an asset is acquired in exchange for another asset, then the acquired asset is
measured at its fair value unless the exchange lacks commercial substance or the
fair value cannot be reliably measured, in which case the acquired asset should be
measured at the carrying amount of the asset given up, where carrying amount is
equal to cost less accumulated depreciation and impairment losses. For impairment
losses, reference should be made to PAS 36. In this context, any compensation
received for impairment or loss of an asset shall be included in the income
statement.

Measurement after Recognition

After initial recognition of an item of property, plant, and equipment, the asset
should be measured using either the cost model or the revaluation model. Once
selected, the policy shall apply to an entire class of property, plant, and
equipment. This means that an entity cannot “cherry-pick” those assets to measure
at cost or at revaluation, which would result in like assets having different
measurement bases.

The cost model requires an asset, after initial recognition, to be carried at cost
less accumulated depreciation and impairment losses.

The revaluation model requires an asset, after initial recognition, to be measured

at a revalued amount, which is its fair value less subsequent depreciation and
impairment losses. In this case, fair value must be reliably measurable.
Revaluations must be made with sufficient regularity to ensure that the carrying
amount is not materially different from fair value. However, if an asset is
revalued, then the entire class of asset must be revalued, again to avoid “cherry-
picking” and a mixture of valuation bases.
When an asset is revalued, any increase in carrying amount should be recognized in
other comprehensive income and accumulated in equity under the heading of
revaluation surplus. Any reduction in value arising from a revaluation should first
be recognized in other comprehensive income to the extent of any credit balance
existing in the revaluation surplus relating to the same asset.
The revaluation reserve may be released to retained earnings in one of two ways:
1. When the asset is disposed of or otherwise derecognized, the surplus can be
transferred to retained earnings. The difference between the depreciation charged
on the revalued amount and that based on cost can be transferred from the
revaluation reserve to retained earnings. Under no circumstances can the
revaluation surplus be credited back to the profit or loss.

PPE acquisitions - Determination of purchase price summary:

Cash
Amount paid

On account subject to cash discount

Net of cash discounts whether taken or not

Installment/Deferred payment
Interest bearing:
Realistic/Market rate = Face value Unrealistic/Below market rate:
1) Cash price
2) PV of payments
Non-Interest bearing:
1) Cash price
2) PV of payments

Issuance of own securities Equity (e.g. Ordinary shares) – PFRS 2

1) FV of consideration received
2) FV of shares issued
3) Par value of shares issued

Debt (e.g. Bonds payable) – PFRS 9

1) FV of bonds payable (FL)
2) FV of consideration received
3) Face value of bonds payable

Exchange – No Boot (No cash involved)

With commercial substance
1) FV of asset given up (AGU)
2) FV of asset received
3) Carrying amount of asset given up
Gain (loss) = FV of asset given – CA of asset given

No commercial substance
Carrying amount of asset given up
No gain or loss

Exchange – With Boot (with cash payment)

With commercial substance
Payor = FV of AGU + cash paid = FV of AR
Recipient = FV of AGU - cash received = FV of AR
No commercial substance
Payor = CA of AGU + cash paid
Recipient = CA of AGU – cash received

Trade-in
Same with exchange with boot/cash involved

Donation
Fair value of asset received
Government grant
Fair value of asset received

Self-construction DM + DL + Overhead
If appropriate, plus borrowing costs