3 Property, plant and equipment (IAS 16)

Objective, scope & definition

IAS 16 Property, plant and equipment is used in accounting for property, plant and equipment (PPE)
except:
 PPE classified as held for sale in IFRS 5.
 Biological assets (except bearer plants) in IAS 41.
 Exploration and evaluation assets in IFRS 6.

PPE are tangible assets:

 Held by an entity for use in the production or supply of goods or services, for rental to others or for
administrative purposes.
 Expected to be used for more than one accounting period.

A bearer plant is a living plant that:

 Is used in the production or supply of agricultural produce
 Is expected to bear produce for more than one accounting period; and
 Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales

Recognition
 PPE is recognized if:
- It is probable that future economic benefits from the asset will flow to the entity, and
- The cost of the asset can be measured reliably.

 Major components or spare parts are recognized as PPE if they are held for more than one year.
 Component parts of a complex assets (e.g. an aircraft) with diferrent lives are accounted for separately.
 Safety and environmental equipment used to obtain economic benefits from other assets (e.g. product
quality monitoring equipment) are recognized as PPE.
 Smaller items like cutlery in a hotel or tools used for more than year such are capitalized if their total cost
is material to the financial statements.

Measurement at initial recognition

 PPE are initially measured at cost incurred to acquire or construct them.
 Cost of PPE includes:
- Purchase price less any trade discounts and rebates
- Import duties and non-refundable purchase taxes
- Directly attributable costs of bringing the asset to the location and condition for its intended use e.g.
 Cost of site preparation
 Initial delivery and handling costs
 Installation and assembly costs
 Costs of testing the asset net of proceeds from the sale of items produced)*
 Professional fees e.g. for architects, engineers and lawyers
- Borrowing costs during the construction phase only for self-constructed assets
- Estimated costs of dismantling and removing the asset and restoring the site e.g. decommissioning
costs of an oil rig when oil is exhausted.

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 *With effect from 1.1.2022, proceeds before intended use (e.g. oil from testing wells before starting
production) is not deducted from the cost of PPE but recognized in profit or loss.This complies with the
recognition of revenue and expenses in IFRS 15.

Subsequent expenditure
 Subsequent expenditure is capitalized only if it improves the asset’s performance through:
 Expenditure incurred in replacing a large component of PPE like the aircraft interior is capitalised. The
carrying amount of the replaced or renewed component is derecognised.
 The cost of regular major inspections of assets like an aircraft are recognized as PPE.

 Costs not recognised in PPE that is revenue expenditure in profit or loss include:
- Individual immaterial small assets like tools and spare parts.
- Repairs and maintenance costs as they maintain and not enhance the asset’s capacity.
- Administration and other general overhead costs (e.g. staff training, marketing, asset insurance).
- Cost of relocating PPE to new locations.
- Costs that are incidental to the construction or development of PPE like putting aggregate to an area
to be used temporarily as a car park before construction begins.
- The cost of abnormal amounts of wasted resources incurred in self-constructing an asset.
- Costs incurred after the asset is ready for use.

Example 1
Broadway recently purchased a plant and the following is the information about the transaction.
Shs 000
Basic price list of the plant 240,000
Trade discount to Broadway 12.5% on the price list
Ancillary costs: Shipping and handling costs 2,750
Estimated pre-production testing 12,500
Maintenance contract for three years 24,000
Site preparation costs: Electrical cable installation 14,000
Concrete reinforcement 4,500
Own labour costs 7,500

a) The company paid for the plant (excluding the ancillary costs) within four weeks of placing the order and
therefore obtained a cash discount of 3%.
b) Broadway had incorrectly specified the power loading of the original electrical cable to be installed by the
contractor. The cost of correcting this error of Shs 6 million is included in Shs 14 million.
c) The plant is expected to last 10 years. At the end of this period, Broadway shall incur Shs 15m to
dismantle the plant and Shs 3m (in present value terms) to restore the site to its original condition.

Required:
Calculate the amount at which the initial cost of the plant should be measured (Ignore discounting).

Solution
The initial measurement of cost for the plant is calculated as follows:
Shs 000
Basic list price of the plant 240,000
Less: Trade discount of 12.5% on price (240,000 x 12.5%) (30,000)
210,000
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Add: Shipping handling & installation 2,750
Pre-production testing 12,500
Site preparation costs:
Electrical cable installation (14,000 – 6,000) 8,000
Concrete reinforcement 4,500
Own labour costs 7,500
Dismantling & restoration costs (15,000 + 3,000) 18,000
Initial cost of plant 263,250

Note:
 The maintenance contract of Shs 24m is an expense that should be taken to profit or loss over the three-
year period. If the Shs 24m has been paid in full, then some of this cost is a prepayment.
 Cash discount received of Shs 6.3m (Shs 210m x 3%) is shown as other income in profit or loss.
 The specification error is profit or loss expense item.

Subsequent measurement
IAS 16 allows an entity to choose either the cost model or revaluation model for an entire class of PPE:
 Cost model – PPE are carried at cost less accumulated depreciation and impairment losses.
 Revaluation model:
- PPE are carried at a revalued amount, being the fair value (FV) at the revaluation date, less any
accumulated depreciation and impairment losses.
- The revaluation model is used if FV can be measured reliably as in the case of land and buildings.
- Where the market value is not available as the case of plant and equipment that is rarely sold,
depreciated replacement cost should be used.

- Revaluations should be carried out regularly so that the carrying amount (CA) of an asset does not
differ materially from its FV at the reporting date.
 PPE with significant changes in FV should be revalued annually.
 PPE with insignificant changes in FV may be revalued at intervals of of 3 to 5 years.
- The entire class of the asset (assets of similar nature and use) should be revalued at the same time to
avoid selective revaluation of assets.

- A change from cost to revaluation model is a change in accounting policy but is accounted for
prospectively from the revaluation date in accordance with IAS 16.

Depreciation (Mainly Financial Accounting Revision)

 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation matches the cost of an asset with benefits generated.
 Depreciable amount is the asset cost or revalued amount less its residual value.
 Residual value is the net amount expected to be obtained from the disposal of the asset after deducting
the estimated disposal costs.
 Useful life as either:
- The period over which an asset is expected to be available for use by an entity, or
- The number of production or similar units expected to be obtained from the asset by an entity.

 All PPE should be depreciated except land that has an unlimited useful life.

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 Depreciation is recognised even if the FV of the asset exceeds its CA as long as the residual value does
not exceed its carrying amount.

 Depreciation begins when an asset is available for use and ceases when it is classified as held for sale
under IFRS 5 and when it is derecognised. Depreciation does not cease when the asset becomes idle.
Under the units of production method of depreciation, the charge can be zero while there is no production.

 The depreciation charge is recognised in profit or loss unless it is included in the CA of another asset e.g.
the depreciation of a manufacturing plant is included in the cost of production of inventories.

 Factors considered in determining the useful life of an asset include:

- Expected physical wear and tear – consider factors such as the number of shifts.
- Obsolescence arising from technological and market developments.
- Legal or other limits on the use of the asset, such as the expiry dates of related leases.
- The asset management policy based on the experience of the entity with similar assets.

Commonly used useful lives: buildings 40 – 50 years, plant & machinery 10 years, furniture 5 – 10 years,
office equipment 8 – 10 years, motor vehicles 5 years, personal computers 3 years.

 Depreciation methods include:

- Straight-line: Depreciation = (Cost/Revalued amount – Residual value)/Useful life of asset.
The same depreciation is charged over the useful life of the asset.
It is the most commonly used as it is easy to use (assumes same benefis from the asset annually).

- Reducing balance: Depreciation = Depreciation % x CA of the asset as at the end of the previous
accounting period.
 The residual value is not deducted from the cost before depreciating the asset.
 Results in a decreasing charge over the asset’s useful life and is appropriate for assets like
machines where productivity declines as they get old i.e. higher benefits are matched with higher
depreciation charge in the earlier periods.

- Units of production or usage: Depreciation = Cost/Revalued amount x (Units produced (or hours
used)/Total expected use of or production by the asset.

 Ledger accounting entries for depreciation:

- There is an accumulated depreciation account for each category of assets e.g. plant, buildings.
- The depreciation charge for the period is accounted for as follows.
Dr Depreciation expense (Profit or loss)
Cr Accumulated depreciation account (SOFP)
- Total accumulated depreciation is deducted from cost or revalued amount in the non-current asset
account to compute the CA to be included in the SOFP.

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Example 2
Kampala Transporters bought a pick-up on January 1 2021 at Shs 17 million. It is expected to last for five
years and sold at Shs 2 million. Usage over the five years is expected to be:
2021 200 days
2022 100 days
2023 100 days
2024 150 days
2025 40 days

Compute the depreciation to be charged each year under:

a) The straight line method
b) The reducing balance method (using a rate of 35% per annum)
c) The machine hour method

Solution:
a) Straight line method: annual depreciation for each of the five years = (17m – 2m)/5 years = Shs 3m.

b) Reducing balance method: annual depreciation for each of the five years:
Year Depreciation
2021 35% x 17,000,000 = Shs 5,950,000
2022 35% x(17,000,000 – 5,950,000) = 35% x 11,050,000 = Shs 3,867,500
2023 35% x(11,050,000 – 3,867,500) = 35% x 7,182,500 = Shs 2,513,875
2024 35% x(7,182,500 – 2,513,875) = 35% x 4,668,625 = Shs 1,634,018
2025 Balance to bring carrying amount down to 2m = 4,668,625 – 1,634,018 – 2m) = 1,034,607

c) Machine hour method:

Total usage (days) = 200 + 100 + 100 + 150 + 40 = 590 days
Depreciation per day = (17,000,000 – 2,000,000) = Shs 25, 424
590 days

Year Usage (days) Depreciation (Shs) (Days x Shs 25, 424)

2021 200 5,084,800
2022 100 2,542,400
2023 100 2,542,400
2024 150 3,813,600
2025 40 1,016,800 (rounded up)
15,000,000

 Various depreciation methods may be used for different classes of PPE.

- The same method should be used for all assets in the same class e.g. straight line for all cars and
reducing balance for all computers.
- The selected method is applied consistently annually to ensure comparability from period to period.

 The depreciation method, useful life and residual value should be reviewed annually. A change in any of
the above is a change in accounting estimate accounted for prospectively.

 For assets bought/disposed of during the year, depreciation is calculated on a pro-rata basis.
Some entities charge a full year's depreciation in the year of purchase and none in the year of disposal.

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 Where an asset requires regular overhauls, the cost of the overhaul is capitalized and is depreciated over
its useful life to the next overhaul.

 For a complex asset, each significant item is depreciated separately over its useful life (e.g. the frame and
engines of an aircraft). If a company purchased property at Shs 1,000m on 1 January 2020 composed of
the following elements:
Shs 000 Estimated life
Land and buildings (Land element Shs 200m) 650,000 50 years
Fittings 240,000 10 years
Lifts 110,000 20 years
1,000,000

The annual depreciation charge for the property for the year ended 31 December 2020 is as follows:
Shs 000
Land and buildings (650m – 200m)/50 years) 9,000
Fittings (240m/10 years) 24,000
Lifts (110m/20 years) 5,500
Total property depreciation 38,500

Accounting for revaluations

 When an item of PPE is revalued, the CA of the asset is adjusted to the revalued amount.
 CA = Asset cost – Accumulated depreciation up to the revaluation date.
 Revaluation gain or loss = Revalued amount – CA at the revaluation date.

 When an asset is revalued, depreciation is charged on the revalued amount.

 If the revaluation takes place at the start of the year, the revaluation is accounted for immediately and
depreciation is charged on the revalued amount at the end of the year.
 If the revaluation takes place at the year-end, the asset is first depreciated for the whole year based
on cost or earlier valuation.

 First time increase in an asset’s CA is is debited to the asset account and credited to OCI and revaluation
surplus under equity.
Dr PPE (SOFP) (With the difference between revaluation and original cost/valuation )
Dr Accumulated depreciation (With accumulated depreciation to the revaluation date )
Cr Other comprehensive income (OCI)/Revaluation surplus (SOCE/SOFP)

 The revaluation gain is not recognized in profit or loss as it has not been realised.
 If the asset is later sold for the revalued amount, profit is realized and may be taken directly to retained
earnings.

 First time decrease in an asset’s CA is an impairment loss debited to profit or loss and credited to PPE.
Dr Impairment loss (P/L) (With the revaluation loss)
Dr Accumulated depreciation ( With accumulated depreciation todate )
Cr PPE (SOFP) (With revaluation loss)

 A revaluation decrease following a revaluation increase is first debited to OCI and revaluation surplus
under equity of the same asset and any balance is debited to profit or loss as an impairment loss.
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 Dr OCI/Revaluation surplus (With the balance in revaluation surplus)
Dr Acccumulated depreciation (With accumulated depreciation to the revaluation date )
Dr Impairment loss (P/L) ( With revaluation decrease less amount debited to revaluation
surplus)
Cr PPE (With the revaluation decrease)

Example 3
Meera Ltd purchased a building at Shs 400 million on 1 January 2013 with an estimated useful life of 20
years. On 31 December 2017 the building was revalued at Shs 450 million with no change in its useful life.
Following the outbreak of Covid 19, the building was revalued at Shs 200 million on 31 December 2020
with no change in its useful life. Account for property in the financial statements of Meera Ltd for the year
ended 31.12.2020 in accordance with IAS 16 Property, Plant and Equipment. Ignore deferred tax.

Solution
Accumulated depreciation on 31.12.2017 = (400m/20 years) x 5 = Shs 100m.
Carrying amount (CA) of property on 31.12.2017 = (400m – 100m) = Shs 300m.
As the building is revalued to Shs 450m, its CA is increased by (450m – 300m) = Shs 150m.
The revaluation increase of Shs 150m is recognized as OCI and revaluation surplus.
CA for property in the SOFP on 31.12.2017 is Shs 450 (i.e. asset cost of 400m + 50m).
Accumulated depreciation todate is eliminated.

The revaluation increase of Shs 150m is recognized as OCI in the SOPLOCI and revaluation surplus/
reserve under equity in the SOCE and SOFP. The following accounting entries are made on 31.12.2017.
Dr Property 50m
Dr Accumulated depreciation 100m
Cr OCI/Revaluation surplus 150m

Depreciation in 2018 up to the next revaluation is on the revalued amount of Shs 450m.
Accumulated depreciation on 31.12.2020 = (450m/15 years) x 3 = Shs 90m.
CA on 31.12.2020 = 450m – 90m = Shs 360m.

As the asset is revalued at 200m on 31.12.2020, the revaluation decrease = (360m – 200m) = Shs 160m.
As the revaluation decrease is a reversal of a previous revaluation increase, the decrease is first offset
from the revaluation surplus for the same asset and any excess of Shs 10m (160m – 150m) is recognised
as an impairment loss in profit or loss on 31.12.2020. The CA of the asset on 31.12.2020 is Shs 200m and
accumulated depreciation todate is eliminated.

The following accounting entries are made on 31.12.2020.

Dr OCI/Revaluation surplus 150m
Dr Acccumulated depreciation 90m
Dr Impairment loss 10m
Cr Property 250m

Assuming profit for period before the revaluation is Shs 640m, the SOPLOCI appears as follows:
SOPLOCI for the period ended 31.12.2020 (Extract)
Shs 000
Profit before adjstments 640,000
Impairment Loss (10,000)
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 Profit for the year 630,000

Other comprehensive income

Revaluation loss on property (150,000)
Total comprehensive income for the period 480,000

Total comprehensive income of Shs 480m is taken to the equity in the SOFP, Shs 630m is credited to
retained earnings and Shs 150m revaluation loss is debited to the revaluation surplus brought forward.

Prepare the necessary ledger accounts for the above property transactions.

 A revaluation increase following revaluation decrease is first credited to profit or loss as a reversal of
impairment loss if it reverses previously recognized revaluation decrease of the same asset and any
balance is credited to OCI and the revaluation surplus under equity.
Dr PPE (SOFP) (With the revaluation increase)
Dr Accumulated depreciation (With accumulated depreciation to the revaluation
date)
Cr Reversal of impairment loss (P/L) (With the reversal of revaluation decrease )
Cr Revaluation surplus (OCI/SOCE) (With the revaluation surplus less the reversal )

Example 4
A 15-year leased property was acquired on 1 January 2019 at a cost of Shs 30,000,000 by Candi Ltd. The
company policy is to revalue the property at market value at each year end. The property was valued at
Shs 25,200,000 at 31 December 2019 and led to an impairment charge of Shs 2,800,000 which was
included in profit or loss. At 31 December 2020, the property was valued at Shs 24,900,000. Ignore
deferred tax on the revaluation. Account for property in the financial statements of Candi Ltd for the year
ended 31.12.2020.

Solution
Shs 000
Cost on 1.1.2019 30,000
Depreciation on 31.12.2019 (30m/15 years) (2,000)
Carrying amount on 31.12.2019 28,000
Impairment loss to profit or loss on 31.12.2019 (2,800)
Revaluation amount in the SOFP on 31.12.2019 25,200
Depreciation to profit or loss on 31.12.2020 (25,200/14 years) (1,800)
Carrying amount at revaluation date 23,400
Reversal of impairment loss to profit or loss on 31.12.2020 1,500
Carrying amount of property in the SOFP at 31.12.2020 24,900

Journal entry on 31.12.2020: Dr Accumulated depreciation 1,800,000

Cr PPE (SOFP) 300,000
Cr Reversal of impairment loss (P/L) 1,500,000

 Revaluation surplus is realized when an asset is derecognized (when retired or disposed of) or as the
asset is used. The revaluation surplus realised is the difference between depreciation charged on the
revalued amount and the (lower) depreciation which would have been charged on the asset's original cost

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(or the revaluation surplus divided by the remaining useful life). The realized surplus may be transferred to
retained earnings in the SOCE but NOT through profit or loss using the following journal entry:
Dr Revaluation surplus
Cr Retained earnings
The revaluation of PPE results in deferred taxation (covered on IAS 12).

Example 5
Bata Ltd acquired property at a cost of Shs 50 million (10 million for the land) on 1.1.2014. The land and
buildings were revalued at the start of 2019 to Shs 75 million (30 million for the land). The total expected
useful life of 50 years for the building remains unchanged as at the time of purchase. The policy of the
company is to transfer realized depreciation to retained earnings annually. Account for property in the
financial statements of Bata Ltd for the year ended 31.12.2019 in accordance with IAS 16 Property, Plant
and Equipment. Ignore deferred tax.

Solution (in Shs 000)

Land Building Total
Shs 000 Shs 000 Shs 000
Cost on acquisition 10,000 40,000 50,000
Accum dep on 31.12.2018 (40m/50 x 5 years) - (4,000) (4,000)
Carrying amount on 31.12.2018 10,000 36,000 46,000
Revaluation surplus on 1.1.2019 20,000 9,000 29,000
Carrying amount after revaluation 30,000 45,000 75,000
Depreciation on 31.12.2019 (45,000/45 years) - (1,000) 1,000)
Carrying amount on 31.12.2019 30,000 44,000 74,000

Journal entries for the revaluation on 1.1.2019:

Shs
Dr Land 20,000,000
Cr Revaluation surplus – land 20,000,000

Dr Buildings 5,000,000
Accumulated Dep – Buildings 4,000,000
CR Revaluation surplus – Buildings 9,000,000

Revaluation surplus realized each year (excess depreciation) = Depreciation on the revalued amount
(45m/45 years = 1,000,000) – Depreciation on cost (40m/50 years = 800,000) = Shs 200,000. This can
also be computed by dividing the revaluation surplus by the remaining useful life = 9m/45 years = Shs
200,000. Realized surplus is transferred directly to retained earnings in the SOCE.

Bata Ltd – Statement of profit or loss and other comprehensive income for the year ended 31.12.2019
(extract)
Shs 000
Depreciation (1,000)
Other comprehensive income
Revaluation gain on property 29,000
Bata Ltd – Statement of changes in equity (extract)
Revaluation surplus Retained earnings
Shs 000 Shs 000
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 Balance b/f on 1.1.2019 0 0
Total comprehensive income for the year 29,000
Transfer to retained earnings (9m/45 years) (200) 200
Balance on 31.12.2010 28,800 200

Bata Ltd – Statement of financial position as at 31.12.2019 (extract)

Shs 000
Non-current assets
Property, plant & equipment 74,000
Equity
Revaluation surplus 28,800

Retirements, disposals and derecognition

 When an asset is permanently withdrawn from use, or sold or scrapped, it is derecognised from the SOFP.
 Gain or loss on disposal is the difference between net disposal proceeds (if any) and the CA of PPE and is
recognized as income or expenses in profit or loss.
 The sale of PPE cannot be classified as revenue under IFRS 15.

 Ledger accounting entries on disposal of PPE:

Dr Disposal of non-current asset account (With the cost/valuatuon of the asset disposed of )
Cr Non-current asset account

Dr Accumulated depreciation account (With accumulated depreciation at the date of sale )

Cr Disposal of non-current asset account

Dr Receivable account or Cash/Bank account (With the sale price of the asset)
Cr Disposal of non-current asset account

The balance on the disposal account is profit or loss on disposal and the corresponding double entry is
recorded in the profit or loss account. The sale is not recorded in a sales account as this is not revenue as
per IFRS 15.

Example 5
Pearl Ltd purchased a machine at Shs 95 million on 1 January 2016 that was estimated to have a useful
life of five years with a residual value of Shs 5 million. On 1 January 2018 Shs 11 million was spent on an
upgrade to the machine. This extended its remaining useful life to 5 years with the same residual value.
During 2018 the market for the product produced by the machine declined and the machine was sold on 1
January 2019 for Shs 27 million. Compute the profit or loss on disposal of the machine to be reported in
the statement of profit or loss of Pearl Ltd for the year ended 31 December 2019.

Solution
Shs 000
Balance 1.1.2016 95,000
Depreciation up to 31.12.2017: ((95m – 5m)/5 yrs) x 2 (36,000)
Carrying amount on 1.1.2018 59,000
Upgrade on 1.1.2018 11,000
70,000

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 Depreciation on 31.12.2018 (70m – 5m/5 yrs) (13,000)
Carrying amount on 1.1.2019 57,000
Disposal proceeds (27,000)
Loss on disposal to P/L on 31.12.2019 (30,000)

 The cost of PPE obtained through exchange or part exchange is the fair value of the asset received. If fair
value cannot be measured reliably, its cost is measured at the carrying amount of the asset given up.
- The cost and accumulated depreciation for the old asset are derecognized through the disposal
account.
- The cost of the new asset is the trade in value for the old asset plus cash paid or the payable.

Example 6
Link Bus Ltd purchased a van on 1 st May 2018 at Shs 100 million. The van is depreciated at 25% per
annum using the reducing balance method. The van was traded in on 31 st March 2020 at an agreed value
of Shs 55 million for a new van at Shs 120 million and the balance was paid by mobile money. Account for
the above transactions in the financial statements of Link Bus Ltd for the year ended 31 December 2020.

Solution
Shs
Cost of motor vehicle on 1.5.2018 100,000,000
Depreciation to P/L on 31.12.2018 (100m x 25% x 8/12) (15,000,000)
Carrying amount on 31.12.2018 85,000,000
Depreciation to P/L on 31.12.2019 (85m x 25%) (21,250,000)
Carrying amount on 31.12.2019 63,750,000
Depreciation to P/L on 31.12.2020 (63.75m x 25% x 3/12) (3,985,375)
Carrying amount on 31.3.2020 59,765,625
Part exchange for old motor vehicle on 31.3.2020 (55,000,000)
Loss on part exchange to profit or loss on 31.12.2020 4,765,625

Part exchange for old motor vehicle 55,000,000

Cash payment (120m – 55m) 65,000,000
Cost of new motor vehicle on 30.4.2020 120,000,000
Depreciation to P/L on 31.12.2020 (120m x 25% x 9/12) (22,500,000)
Carrying amount of plant in SOFP at 31.12.2020 97,500,000

Accumulated depreciation on 31.3.2000 = 15,000,000 + 21,250,000 + 3,985,375 = Shs 40,235,375.

SOPLOCI for the year ended 31.12.2020 ( Extract in Shs)

Depreciation (3,985,375 + 22,500,000) (26,485,375)
Loss on disposal of plant (4,765,625)

SOFP as at 31.12.2020 (Extract)

Non-current assets
Property plant & equipment 97,500,000

Journal entries on 31.3.2020 (not required by the question):

Dr Disposal of motor vehicle account 100,000,000
Cr Motor vehicle account 100,000,000

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 Dr Accumlated depreciation – MV 40,235,375
Cr Disposal of motor vehicle account 40,235,375

Dr Motor vehicle account 55,000,000

Cr Disposal of motor vehicle a/c (part exchange) 55,000,000

Dr Profit or loss (loss on part exchange) 4,765,625

Cr Disposal of motor vehicle account 4,765,625

Dr Motor vehicle account 65,000,000

Cr Cash account 65,000,000

Ledger accounts for the van (not required by the question):

Motor vehicle account
Shs Shs
1.1. 2020 Balance b/f 100,000 000 31.3.2020 Disposal of MV a/c 100,000,000
31.3.2020 Disposal of MV a/c 55,000,000
Cash 65,000,000 31.12.2020 Balance c/f 120,000,000
220,000,000 220,000,000

1.1.2021 Balance b/f 120,000,000

Accumulated depreciation of motor vehicle account

Shs Shs
31.3.2020 Disposal of MV a/c 40,235,375 1.1.2020 Balance b/f 36,250,000
31.3.2020 Profit or loss 3,985,375
31.12.2020 Balance c/f 22,500,000 31.12.2020 Profit or loss 22,500,000
62,735,375 62,735,375

1.1.2021 Balance b/f 22,500,000

Disposal of motor vehicle account

Shs Shs
31.3.2020 Motor vehicle account 100,000,000 31.3.2020 Acc depreciation of MV a/c 40,235,375
Motor vehicle a/c (Part exc) 55,000,000
Profit or loss (Loss on disposal)
4,765,625
100,000,000 100,000,000

Disclosure
Disclosures for each class of PPE include:
 Measurement bases used for determining the gross carrying amount.
 Depreciation methods used.
 Useful lives or the depreciation rates used.
 Total depreciation allocated for the period
 Gross CA and the accumulated depreciation at the beginning and end of the period.

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 A reconciliation of the carrying amount at the beginning and end of the period showing (See an example of
the schedule in the Appendix):
- Additions, disposals, impairments & depreciation.
- Assets classified as held for sale or included in a disposal group classified as held for sale.
- Changes resulting from revaluations shown in OCI and impairment losses recognised in profit or loss
or reversed in OCI.
 If items of PPE are stated at revalued amounts, the following shall be disclosed:
- The effective date of the revaluation;
- Whether an independent valuer was involved;
- The methods and significant assumptions applied in estimating the items’ fair values;
- The extent to which the items’ 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;
- For each revalued class of PPE, the CA that would have been recognised had the assets been carried
under the cost model; and
- The revaluation surplus, indicating the change for the period and any restrictions on the distribution of
the balance to shareholders.
 The existence and amounts of restrictions on title and PPE pledged as security for liabilities.
 Contractual commitments for the acquisition of PPE.
 If it is not disclosed separately in the SOPLOCI, the amount of compensation from third parties for items of
PPE impaired, lost or given up that is included in profit or loss.
 Entities are encouraged to disclose these amounts:
- The carrying amount of temporarily idle PPE;
- The gross carrying amount of any fully depreciated PPE that is still in use
- The CA of PPE retired from active use & not classified as held for sale in accordance with IFRS 5
- When the cost model is used, the fair value of PPE when this is materially different from the CA.

 The following is an example of the note on PPE movements required by IAS 16.
Land and Plant and Office Motor Total
buildings machinery equipment vehicles
Shs 000 Shs 000 Shs 000 Shs 000 Shs 000
Cost or valuation
At start of year x x x x x
Additions x x x x x
Disposals (x) (x) (x) (x) (x)
Revaluation surplus x x x x x
At end of year x x x x x
Depreciation & impairment
At start of year x x x x x
Depreciation charge for year x x x x x
Impairment loss x x x x x
Depreciation on disposals (x) (x) (x) (x) (x)
At end of year x x x x x
Carrying amount
At end of year x x x x x

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Discussion questions
a) IAS 16 Property, Plant and Equipment sets out the requirements for the recognition, measurement and
disclosures of tangible property, plant and equipment in financial statements.

Required:
i) Explain how the initial cost tangible property, plant and equipment is measured and the circumstances in
which subsequent expenditure on those assets should be capitalized.

ii) Explain the requirements for the revaluation model for property, plant and equipment under IAS 16,
clearly showing how the revaluation surpluses and deficits and the gains and losses on disposals are
accounted for under the standard.

b) The carrying amount of property for Abacus Ltd at 1 January 2020 was Shs 180m. The property had
previously been revalued upwards and had a revaluation surplus of Shs 8m at 1 January 2020. The
property had a remaining life of 25 years at 1 January 2020. At 31 December 2020, the property was
valued at Shs 160m. No entries have yet been made to account for the current year’s depreciation charge
or the property valuation at 31 December 2020. Abacus Ltd does not make an annual transfer from the
revaluation surplus in respect of excess depreciation. Account for the property in the financial statements
of Abacus Ltd for the year ended 31 December 2020.

c) Tendo purchased property for Shs 600 million on 1 January 2017. The land element of was Shs 100
million. The expected economic life of the building was 50 years and its residual value nil. On 31
December 2018 the property was revalued to Shs 700 million, of which the land element was Shs 124
million and the buildings Shs 576 million. On 31 December 2020, the property was sold for Shs 680
million. Compute the gain or loss on disposal of property in the statement of profit or loss of Tendo for the
year ended 31.12.2018.

Solutions
b)
Shs 000
Carrying amount of property at 1.1.2020 180,000
Depreciation to profit or loss at 31.12.2020 (180m/25) (7,200)
Carrying amount at 31.12.2020 172,800
Revaluation decrease* (12,800)
Carrying amount of property in SOFP at 31.12.2020 160,000

*The revaluation decrease is first offset from the revaluation surplus of Shs 8m and the balance of Shs
4.8m is debited to impairment loss in profit or loss for the year.
Shs 000
Dr OCI/Revaluation surplus 8,000
Dr Impairment loss 4,800
Cr Property 12,800

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c)
Land Buildings Total
Shs m Shs m Shs m
Cost 1.1.2017 100 500 600
Acc depreciation 31.12.2018 (20) (20)
(500m/50 years) x 2)
Carrying amount on 31.12.2018 100 480 580
Revaluation gain to OCI/SOCE 24 96 120
Revalued amount 124 576 700
Acc depreciation on 31.12.2020
(576m/48 years) × 2) (24) (24)
Carrying amount on 31.12.2020 124 552 676
Disposal proceeds 680
Gain on disposal 4

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