Lecture 6 Property, Plant and

Equipment
Reference:
Picker et al (2012). Chapter 12
IAS 16 Property, Plant and Equipment
Learning Objectives
1. Understand the nature of property, plant and equipment
2. Understand initial measurement and recognition criteria
3. Alternative measurement subsequent to initial recognition
4. The cost model
5. The revaluation model
6. Understand the factors to consider when selecting measurement
models
7. Accounting for derecognition
8. Implement the disclosure requirements of IAS 16
The Nature of Property, Plant &
Equipment
 IAS 16 defines property, plant & equipment as:
 Tangible items
 Assets held specifically for production and other business activities.
 They are expected to be used during more than one period (non-current)
 Excludes assets held for sale

 Normally divided into classes:

 Land
 Buildings,
 Machinery,
 Motor vehicles
Initial Recognition of Property, Plant &
Equipment
 The principles of recognition are contained in IAS 16, para. 7:
 Cost of an item is recognised as an asset if:
 It is probable that future economic benefits will flow to the
entity and
 The cost can be reliably measured
 Where future economic benefits are not expected to flow to the
entity, costs incurred should be expensed
 Significant parts (with different useful lives) are required to be
separately accounted for
 Aircraft - engine may last twice as long as other parts.
Initial Measurement of Property, Plant
& Equipment
 Initially measured at cost which includes:
 Purchase Price
No definition provided in IAS 16, but para. 16 (a) includes import
duties, and non-refundable purchase taxes after trade discounts
and rebates.
 Directly attributable costs
 Initial estimate of the costs of dismantling and removing the
item or restoring the location site
Purchase price
 Cost is determined by the fair value of the item given up
rather than the fair value of the item acquired.
 Cost is measured by reference to fair value (para 24).
 ‘The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date’ (IAS 16, para. 6).
Illustrative Example 1
 Konakai Limited acquires a piece of machinery and gives in
exchange a block of land. The land is carried by the entity at
the original cost of K100,000 and has a fair value of
K150,000.
Machinery 150,000
Gain on Sale of Land 50,000
Land 100,000

Machinery 150,000
Gain on Sale of Land 150,000
(Sale of land in exchange of machinery)

Carrying amount of Land sold 100,000

Land 100,000
(Carrying amount of Land sold)
Illustrative Example 2
 Tsak Valley Limited acquired Land, Building and furniture at
a total cost of K300,000 cash. The fair values are set out as
follows:
Land K40,000
Buildings 200,000
Furniture 80,000
K320,000

Land K40,000/K320,000 x K300,000 K37,500

Buildings K200,000/K320,000 x K300,000 187,500
Furniture K80,000/K320,000 x K300,000 75,000
K300,000
Measurement Subsequent to Initial
Recognition
 IAS 16 (para. 29) allows a choice of two possible
measurement models:
 Cost model
 Revaluation model
 The choice of model is an accounting policy decision
 The policy that is chosen must be applied to a whole class of assets
 May change policy, but only if results in more relevant or reliable
information
 An entity may change the policy only if the change is:
a) Required by an IFRS; or
b) Resulting in providing more reliable and more relevant information
in the financial statement.
The Cost Model
 IAS 16 requires that assets are carried at cost less any
accumulated:
 Depreciation
 Impairment losses
 Repair and maintenance costs are expensed as incurred, not
capitalised
 Capitalisation requires increased probable future economic benefit
(at time of expenditure)
Depreciation
 IAS 16 includes the following definitions:

 Depreciation – the systematic allocation of the depreciable amount of an

asset over its useful life
 Depreciable amount – the cost of an asset less its residual value
 Residual value – the estimated value that an entity would currently obtain
from disposal if the asset were at the end of it’s useful life
 Useful life – the period over which an asset is expected to be available for
use by an entity or number of production in units an asset is expected to
produce.
Depreciation
 Depreciation is a process of allocation designed to reflect the fall
in the value of the asset in a pattern consistent with the
consumption of economic benefits by the entity
 IAS 16 does not specify how this allocation process should be
undertaken
 Various depreciation methods are used in practice:
 Straight line method
 Diminishing-balance method
 Units-of-production method
The Revaluation Model
 As an alternative to the cost model IAS 16 allows the revaluation
model to be used for classes of assets
 Measurement basis is fair value (FV)
 Frequency of revaluations is not specified, but must be performed with
sufficient regularity such that the carrying amount of assets is not materially
different from their FV
 Revaluation performed on a class basis
 Accounting performed on an asset-by-asset basis
Applying the Revaluation Model:
Revaluation Increases
 IAS 16 para 39 outlines principles:
 An increase is recognised in comprehensive income
 The gain is transferred to equity (revaluation surplus)
Illustrative Example 3
On the 1 January 2014, an entity carries an item of land at a
costs of K100,000, this amount also being the tax base of the
asset. The land is revalued to K120,000. The tax rate is 30%.
The tax base of the asset is K100,000 and the new carrying
amount is K120,000, giving rise to a taxable temporary
difference of K20,000. A deferred tax liability of K6,000 must
be raised to account for the expected tax to be paid in relation
to the increase in expected benefits from the asset. The asset
revaluation surplus raised will be the net after-tax increase in
the asset (K20,000 – K6,000 = K14,000)
Land 20,000
Gain on revaluation of Land 20,000
(Recognition of revaluation increase
K120,000 – K100,000)

Income tax expense 6,000

Deferred tax liability 6,000
(Tax effect of revaluation of land)

Gain on revaluation of Land 20,000

Income tax expense 6,000
Asset revaluation surplus 14,000
(Accumulation of net revaluation gain in
equity)
Illustrative Example 3
On 30 June 2013, an item of plant has a carrying amount of
K42,000, being the original cost of K70,000 less accumulated
depreciation of K28,000. The fair value of the asset is K50,000.
The tax rate is 30%.
Accumulated Depreciation 28,000
Plant 28,000
(Write down asset to its carrying amount)

Plant 8,000
Gain on Revaluation of Plant 8,000
(Revaluation of asset to fair value)

Income Tax Expense 2,400

Deferred Tax Liability 2,400
(Tax effect of revaluation increase)

Gain on Revaluation of Plant 8,000

Income Tax Expense 2,000
Asset Revaluation Surplus 5,600
(Accumulation of net revaluation gain in equity)
Applying the Revaluation Model:
Revaluation Decreases
 IAS 16 para 40 outlines principles:
 A revaluation decrease
 Recognition in P & L (Loss)
 A revaluation decrease following a previous increase
 Elimination of revaluation surplus
 Recognition in P & L
 Reversal of DTL
The Revaluation Model:
Transfers from Asset Revaluation Surplus (ARS)
 Transfers may be made from the Asset Revaluation Surplus in the
following circumstances:
 When a revalued asset is derecognised the balance in the ARS may be
transferred to retained earnings
 When a revalued asset is being depreciated the ARS may be progressively
transferred to retained earnings over the useful life of the asset

 Bonus share issues may be made from the ARS

Illustrative Example 4
Assume an entity has an item of plant that was previously
revalued from K100,000 to K200,000, giving rise to an asset
revaluation surplus of K70,000 and deferred tax liability of
K30,000. The entity then used K30,000 of the asset revaluation
surplus to issue bonus shares, leaving a balance of K40,000 in
the asset revaluation surplus. The plant was subsequently
written down from a carrying amount of K150,000 to
K70,000, a reduction of K80,000.
Accumulated Depreciation 50,000
Plant 50,000
(Write off accumulated depreciation on revaluation of plant)

Loss on Revaluation of Plant 80,000

Plant 80,000
(Write down of plant from K150,000 to K70,000)

Deferred Tax Liability 24,000

Income Tax Expense 24,000
(Tax effect of loss on revaluation of plant)

Asset Revaluation Surplus 40,000

Income Tax Expense 24,000
Loss on Revaluation of Plant (P/L) 16,000
Loss on Revaluation of Plant 80,000
(Accumulation of revaluation loss to equity
Assume of plant has a carrying amount of K50,000, being original
cost of K60,000 less accumulated depreciation of K10,000. If the
asset is revalued downwards to K24,000.

Accumulated Depreciation 10,000

Plant 10,000
(Write down asset to its carrying amount of K50,000)

Loss – Downward Revaluation of Plant (P/L) 26,000

Plant 26,000
(Revaluation of asset from carrying amount of
K50,000 to fair value of K24,000)

In relation to the tax-effect worksheet, if the carrying amount and the tax base in
this example were the same immediately before he revaluation, then there would
be a deductible temporary difference of K26,000. A deferred tax asset of K7,800
would be raised via the tax effect worksheet analysis at the end of the reporting
period
Derecognition
 IAS 16 para 67 identifies two occasions where
derecognition should occur:
 On disposal
 Where no future economic benefits are expected
 When items are sold a gain or loss is recognised, and
included in the profit or loss for the period
Disclosure
 IAS 16 para 73 - 79 outline requirements:
 Information on a class-by-class-basis
 Measurement bases
 Any restrictions on title
 Selection of depreciation methods
 Revaluation information