IAS 16 – Property, Plant and Equipment

Financial Accounting 22B2

Semester 2 – Learning Unit 2 (Chapter 7)
Lecture 1 of 3
Introduction
IAS 16 – CORE PRINCIPLE

To prescribe the accounting

treatment for property, plant,
and equipment i.e., recognition
of assets, determination of
carrying amount, and the
depreciation charges and
impairment losses (IAS 16:1)
OVERVIEW OF UNIT 2
✓ Objective of IAS 16
✓ Scope
✓ Definitions
✓ Recognition criteria
✓ Measurement at recognition – initial measurement
✓ Elements of cost
✓ Measurement after recognition – subsequent measurement
✓ Cost model
✓ Depreciation
✓ Subsequent expenditure
✓ Derecognition
✓ Presentation and disclosure

4
RECAP FROM FAC 1
❑ Definition of PPE

❑ Measurement at recognition –initial measurement

❑ Acquisition cost
▪ Purchase price
▪ Excluding VAT (if recoverable)
▪ Including import duties
▪ Less trade discounts
▪ Less volume rebates
▪ Plus, directly attributable costs to bring asset to condition and location ready
for use (costs includes and excluded)
❑ Acquisition date

❑ Measurement after recognition – subsequent measurement

❑ Cost model
▪ Cost – Accumulated depreciation
❑ Depreciation
▪ Straight Line Method
▪ Diminishing or Reducing Balance Method

5
Learning Outcomes – Week 1
 Learning Objectives – Week 1
1. Definition: Distinguish items of property, plant and equipment from other assets of an entity
❑ Define Property, Plant and Equipment (PPE)

2. Recognition: Identify when items of property, plant and equipment qualify for recognition in the
financial statements.
❑ Meeting the recognition criteria
❑ Recognise significant parts/Apply component approach

3. Initial measurement: Account for property, plant and equipment at acquisition date
❑Calculate the initial cost of PPE :
• Identify all initial costs to be included in calculating the cost of PPE
❑Identify the method of acquisition and its effect
• If acquired by way of cash or cash equivalent
• If acquired via an asset exchange
4. Subsequent measurement: Measure property, plant and equipment subsequent to acquisition
❑ Cost model
❑ Depreciation (Straight-line method and Units of Production)
❑ Impairment (unit 3)

7
Learning Objectives – Week 2
4. Subsequent measurement: Measure property, plant and equipment subsequent to
acquisition
❑ Cost model
❑ Depreciation (Diminishing balance method)
❑ Impairment (unit 3)

5. Subsequent expenditure: Account for subsequent costs

❑ Capitalise subsequent costs – Improvement costs
❑ Expense subsequent costs –Servicing costs
❑ Replacement of parts (out of scope)

6. Derecognition of PPE
❑ Disposal; or
❑ When no future economic benefits are expected from its use

8
Learning Objectives – Week 3

7. Presentation and Disclosure: of PPE

❑ Statement of comprehensive income
❑ Statement of financial position
❑ Notes to the financial statements

8. Summary: Be able to complete the Practice Question

9
Learning Objective 1 – Identify PPE

Chapter 7 - Section 2.2

Learning Objective 1 – Definition of PPE (FAC1)
Property, Plant and Equipment (PPE):

1. Tangible assets
2. Held for use in:
• Production or supply of goods / services
• For rental to others, or
• For administrative purposes, and
3. Expected to be used for more than one period

Note: All 3 conditions listed above need to be met

Gripping GAAP reference: Section 2.2 (Chapter 7) 11

IAS 16 - SCOPE

What is in the scope?

✓ Non–current assets (Fixed assets) – Property, Plant and Equipment.

What is not in the scope?

X Investment property whose fair value can be reliably measured – IAS 40
X Property, plant and equipment classified as held for sale –IFRS 5
X Biological assets – IAS 41
X Mineral rights and reserves such as oil, natural gas and similar non-
regenerative resources.

IAS 16.2 - 3 12
Learning Objective 1 – Definition of PPE
Examples
Is this PPE
Scenario
(Yes/No)
An entity owns a factory building where its products
are manufactured. The entity has been using the
Yes
building for ten years and has another ten years
left.
An entity owns a fleet of motor vehicles. The
vehicles are used by the sales staff in the
Yes
performance of their duties. The vehicles will be
used for at least another two years.
An entity owns and sells motor vehicles. No
An entity acquired a license to operate a taxi in a
No
major city.
An entity owns a herd of cattle that form the
breeding stock of its agricultural activities. The
entity also owns a tractor and trailer used to
It depends on
transport feed to the cattle. The tractor and trailer
the asset???
will be used for 5 years before the entity can
consider replacing them.
Reason
The building is classified as an item of property, plant and
equipment. It is a physical/ tangible asset used in the production of
goods that is expected to be used during more than one reporting
period
The motor vehicles are classified as items of property, plant and
equipment. They are physical assets used in the supply of services
during more than one reporting period
The motor vehicles are inventory because they are held for sale.
The taxi license is not an item of property, plant and equipment. It is
an intangible asset
The herd of cattle are tangible assets used in the production of
calves in more than one accounting period—they are accounted for
as biological assets thus excluded from the scope of IAS 16.
The tractor and trailer are classified as items of property, plant and
equipment. They are physical assets used in the supply of goods
during more than one reporting period.
13
Learning Objective 2 – Recognition

Chapter 7 - Section 2
Learning Objective 2 – Recognition of PPE
The acquisition of an item can be recognised as ‘PPE’ if, and only if

The recognition criteria per IAS 16 (not per conceptual framework) is met
o It is probable that future economic benefits associated with the item will flow to the entity, and
o The cost of the item can be measured reliably.

• Recognition criteria: Note the conflict between IAS 16 and Conceptual framework.

• Recognition criteria per conceptual framework: an item should only be recognised if it provides
relevant information and would be a faithful representation of the phenomena it purports to
present

• The two recognition criteria are different but still achieve the same outcome

Gripping GAAP reference: Section 2.3 (Chapter 7) 15

Learning Objective 2 – Recognition criteria
Example – Does the asset meet the recognition criteria?
Focus Eye Limited acquired an advanced optical lens-making machine (asset) to produce lenses.
The machine was paid for in cash for R52 000 on delivery. The machine is expected to be used for
five years before being scrapped.

Required:

1. Is the item PPE? Provide a reason for your answer.

2. Should the item be recognised as PPE in the financial statements of Focus Eye Limited?

16
Learning Objective 2 – Significant parts
When recognising an item of PPE,
• We must consider whether it has significant parts.

oA part of an asset is significant if the cost of that part is

significant in relation to the total cost of the asset.

• Separating them allows the company to make more accurate

estimates of depreciation because we will then be able to
depreciate each part separately

• Significant parts often have different useful lives and residual

values to the remaining parts of the item of property, plant and
equipment.

Note: Students will be asked a maximum of 2 significant parts

Gripping GAAP reference: Section 2.4 (Chapter 7) 17

Learning Objective 2 – Recognition – Significant parts
Example - Identifying if an item of PPE has significant parts

BaAgi Limited bought a ship for R1 000 000 cash on 30 June 2019. The ship has two parts:
• Engine: R300 000 (a significant part)
• Main body (Hull) R700 000 (a significant part)

Required:

a) When should an entity recognise assets separately?

b) Why should entities recognise assets separately?
c) Show the journal entry to record the purchase of the ship.

18
Learning Objective 3 – Initial Measurement

Chapter 7 - Section 3
Learning Objective 3 – Initial recognition
Once the item has been recognised as PPE (meets the definition and recognition criteria):

• It must be measured at COST.

• How an item of PPE is acquired could affect the measurement of the initial cost
• There are 3 ways that the cost can be measured depending on HOW the item was acquired

1. Cash: Amount of cash or cash equivalent paid; or

2. Exchange: The fair value of the consideration given (if it is not cash) at the time of acquisition,
production , construction ; or

3. Government Grant: OUT OF SCOPE

Gripping GAAP reference: Section 3.2 (Chapter 7) 20

Learning objective 3.1: Initial Costs (FAC 1)

Chapter 7: Section 3.3

Learning Objective 3 – Initial Measurement

Initial measurement
• Calculate the initial cost of PPE :
✓ Identify all initial costs to be included in calculating the
cost of PPE

22
Learning Objective 3 – Initial costs
The cost of the asset on date it is initially recognised is called the INITIAL COST.
Initial cost INCLUDES:
1. Purchase price
✓ Excluding VAT if the entity is a VAT vendor
✓ Includes VAT if the entity is not a VAT vendor
✓ Includes import duties
✓ Non-refundable taxes
✓ Reduced by trade discounts and rebates received
✓ Any settlement discount forfeited, the cost of the asset and payable must be increased

2. Directly attributable costs

✓ All other costs incurred to get the asset to the location and condition that enabled it to be used as intended by management
(refer to the next slide)

3. Borrowing costs
✓ If borrowing costs incurred are directly attributable to the acquisition, construction or production of an item of property,
plant and equipment that meets the definition of a qualifying asset (FAC22A2)

Gripping GAAP reference: Section 3.3 (Chapter 7) 23

Learning Objective 3– Initial recognition
The cost of the asset on date it is initially recognised is called the INITIAL COST.

Initial Costs Include Initial Costs Exclude

Directly attributable costs X Administration costs
✓ Costs of preparing site X General overheads
✓ Initial delivery and handling costs X Advertising and other costs relating to
✓ Installation and assembly costs introduction of a new product or service
✓ Professional and legal fees X Training costs
✓ Employee benefits (e.g. salaries, wages etc.) X Wastage
relating directly to construction or acquisition X Unnecessary storage
of the asset
✓ Costs of testing that the asset is functioning
correctly (net of any proceeds earned from
sale of items produced during testing
✓ Borrowing cots capitalised

OUT OF SCOPE: Section 3.3.4 Future costs dismantling, removal, and restoration costs

Gripping GAAP reference: Section 3.3.3 (Chapter 7) 24

Learning Objective 3 – Initial cost
Example 1 – Calculation of initial cost of PPE with directly attributable costs

• In January 2011, an entity (a registered VAT vendor) acquired a machine (NOT A QUALIFYING ASSET) with a marked price of
R500 000. Included in the price is refundable purchase taxes of R50 000.
• The purchase price was funded by raising a loan of R505 000 (including R5,000 loan raising fees). The loan is secured against
the machine.
• In January 2011, the entity incurred costs of R20 000 in transporting the machine to the entity’s site and R75 000 in installing
the machine at the site.
• In January 2011 the entity’s production staff were trained in how to operate the new machine. Training costs included:
❑Cost of an expert external instructor – R7 000
❑Labour – R3 000
• The entity tested the machine to ensure the machine was fully operational before the start of production. The following costs
were incurred in the testing phase: Materials of R15 000 and labour of R10 000
NB: All other costs excludes VAT!!

Required: What is the cost of the machine at initial recognition?

25
Learning Objective 3 – Initial cost
Example 2 – Calculation of initial cost of PPE with directly attributable costs

Nala Limited (‘Nala’) bought a machine. The purchase invoice showed the marked price of R100 000
• Nala qualified for a trade discount (on the basis that Nala is a long-standing customer) of R15 000
• Nala also qualified for a volume rebate of R5 000
• If Nala settled the invoice in cash, the supplier offered them a R2 000 cash discount.
• VAT is added at 15% on the final amount (assume Nala is a registered VAT vendor and settled the
invoice on transaction date).

Required:
1. Calculate the total amount that Nala paid for the machine.
2. Calculate the cost of the machine at initial recognition.
3. Show the journal entry for the acquisition of this machine

26
Learning objective 3.2: IM for an item acquired for CASH

Chapter 7: Section 3.2.1

Learning Objective 3 – Initial cost and effect of acquisition
1. If the acquisition is paid for in cash or cash equivalent:
• Initial cost is based on the cash price on the acquisition date if payment occurs immediately
(normal credit terms).

• If the payment is delayed beyond normal credit terms, the cash price equivalent is the present
value of the future cash payment/s measured at the acquisition date

➢Therefore, the purchase price consists of two separate elements: cash price equivalent and financing
component.

➢The difference between this cash price equivalent (the present value of the future cash payments)
and the total future cash payments (the nominal amount) is interest.

Normal credit term:

➢This interest is generally recognised as an interest expense. The terms which indicate when payment is due for sales made on
credit. For example, the credit terms might be that an amount is
due in 30 days; however, if the amount is paid in 10 days a
discount of 2% will be permitted.

28
Learning Objective 3 – Initial cost and effect of acquisition

29
Learning Objective 3 – Initial cost and effect of acquisition
Example – Calculation of initial cost of PPE with payment within normal /beyond credit terms.

An entity acquired a plant for R1 000 000 on 1 January 2019. The purchase price is payable on 31 December
2019. The present value of the cash payment at acquisition date is R909 100. An appropriate discount rate is
10 per cent per year.

Required:
1. What is the cost of the plant at the acquisition date assuming:
A. Payment within one year is considered to be within normal credit terms.
B. Payment within one year is considered to be beyond normal credit terms.

2. Show the journals relating to the purchase and payment of the plant assuming:
A. Payment within one year is considered to be within normal credit terms.
B. Payment within one year is considered to be beyond normal credit terms

30
Learning objective 3.3: IM of an item acquired via an ASSET EXCHANGE

Chapter 7: Section 3.2.2

 Learning Objective 3.1 - Acquired via an asset exchange

Account for property, plant and equipment at acquisition date – Initial

measurement
❑Identify the method of acquisition and its effect
• If acquired via an asset exchange

Out of Scope

Gripping GAAP reference: Section 3.2.2 (Chapter 7) 32

Learning Objective 3 – Initial cost and effect of acquisition

How an item of PPE is acquired could affect the

measurement of the initial cost
1 2
The acquisition is paid via an asset exchange:
1. The cost of the asset bought is the fair value of the
asset given up (sold)

• A profit or loss on exchange is recognised if this

amount differs from the carrying value of this asset

Fair value: 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
33
measurement date
Learning Objective 3 – Initial recognition
Example – Asset exchange
Ron Limited exchanged a machine (asset given up) for a vehicle (asset acquired):

Asset Scenario 1
Machine: Carrying value (with cost of R18 000) R10 000
Machine: Fair value R11 000
Vehicle: Fair value R12 000 (a)

Additional information:
a) In Scenario 1 the difference in fair values is considered to be immaterial

Required: Provide journal entries for the exchange and explain your answer.

34
Learning Objective 4 – Subsequent Measurement

Chapter 7 - Section 4
Learning Objective 4 – Subsequent measurement

After initial recognition, items of PPE

1. Must be measured using either:

a. the cost model or
b. revaluation model (out of scope)
2. Must be depreciated
3. Must be impaired (Unit 3)

Gripping GAAP reference: Section 4.1 (Chapter 7) 36

Learning Objective 4 – Subsequent measurement
After initial recognition, items of PPE should be subsequently measured

Cost model measures PPE as:

Initial cost (LO2)

Plus: Capitalised subsequent expenditure [LO5: week 2]
Less: Subsequent accumulated depreciation [LO4]
Less: Subsequent accumulated impairment losses [Unit 3]

= Carrying amount

NB: No adjustments are made for any increase in the value of the asset

Gripping GAAP reference: Section 4.2 (Chapter 7) 37

Learning Objective 4 – Subsequent measurement
Depreciation
What is depreciation?

• A systematic allocation of the depreciable amount of the asset over the

asset’s useful life.

• It reflects the extent to which the asset’s carrying value has decreased
because of having used the asset.

• Selecting a Depreciation Method: Depreciation method should reflect the

pattern of the consumption/usage of the asset’s expected future economic
benefits over its useful life.

In simple terms: Depreciation spreads the cost of the asset over the period in
which it is used

Gripping GAAP reference: Section 4.3 (Chapter 7) 38

Learning Objective 4 – Subsequent measurement
Depreciation

All items of PPE are depreciated, with exception of land…why??

• Land cannot be used up, it always remain there, ready to be used again and again.

• Unless the land is used as a quarry or landfill site – then the land will have a limited
useful life thus need to be depreciated.

Item of PPE with significant parts

• If the significant parts have significantly different patterns of consumption of economic
benefits (depreciation method), different useful lives and residual value;

• an entity shall allocate the initial cost of the asset to the different significant parts,

• and depreciate each part separately over its useful life

Gripping GAAP reference: Section 4.3.1 and 4.3.5 (Chapter 7) 39

Learning Objective 4 – Subsequent measurement
Depreciation
In order to determine the depreciation expense, we need to determine and estimate the following variables:
1. Depreciable amount (Section 4.3.2)
o The cost of the asset (or other amount, for example its fair value) less its residual value
✓ Simple terms: The portion of the cost of the asset that will be lost due to usage

2. Residual value (Section 4.3.2)

o the 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.
✓ Simple terms: Residual value – is the portion of the cost that will not be lost through usage

3. The method of depreciation (Section 4.3.3)

o The pattern in which the future economic benefits from the asset, are expected to be consumed. There are 3 methods

4. Useful life (Section 4.3.4)

o The estimated number of years during which the entity will use the asset

Gripping GAAP reference: Chapter 7 – Section 4.3 40

Learning Objective 4 – Subsequent measurement
Methods of Depreciation
• The depreciation method applied to an asset should reflect the pattern in which the assets future economic
benefits are expected to be consumed (IAS 16. 60)
The diminishing balance
Straight line method
The method assumes that the
pattern of usage of an asset is
consistent (the same)
throughout its useful life.
Dep exp = (Cost – Residual Value)
/useful life
Or
Dep exp = (cost – Residual value)
* depreciation rate
#Dep exp is the same each year
Gripping GAAP reference: Chapter 7 – Section 4.3.3
Units of production method
method
The method assumes that the
asset is used the most during
the earlier years of its useful life,
and that the usage thereof
diminishes as the asset ages
Dep exp = (cost - Accumulated
depreciation)* depreciation rate for
diminishing balance
#Dep exp decrease each year
Depreciation expense is based
on the number of units an asset
produces in the year, not the
age /useful life of the asset
Dep exp = (Cost - Residual value)
* (Actual output in the period/Total
estimated output over the useful
life)
#Dep exp depends on yearly
production
41
Learning Objective 4 – Subsequent measurement
Useful life
When does depreciation begin?
• when an asset first becomes available for use
o This is not necessarily the same date that the asset is brought into use/acquired (acquisition date)
o This is not necessarily the same date that the entity starts using the asset

When does depreciation cease?

• When the asset is classified as held for sale
• When the asset is derecognised
• When the asset is fully depreciated (carrying value = residual value or carrying value =0)
• Depreciation does not cease if an asset is idle (unless the units of production method is used to calculate the depreciation)

• How is the useful life determined?

• The following factors are considered:
• Expected usage of the asset (capacity /total production)
• Expected physical wear and tear of the asset
• Technical or commercial obsolescence -Expected reduction in the selling price of output produced by the asset
• Any other limits on the asset's useful life , including legal limits
Gripping GAAP reference: Chapter 7 – Section 4.3.4
Acquisition date - The date on which the risks and rewards of ownership pass to the buyer 42
Learning Objective 4 – Subsequent measurement
Depreciation
Which element is depreciation as per the conceptual framework?
• Depreciation is an expense
o The debit for depreciation can:
• Be recognised as expense in profit or loss
• Be capitalised to the cost of another asset if the asset is used
to produce another asset
• Be allocated to another asset like inventory, e.g., when it is
included in the cost of finished goods.

Regardless of where the debit goes;

o The credit always goes to accumulated depreciation for that specific
asset being used or class of assets being used.

43
Learning Objective 4 – Subsequent measurement
Depreciation
Depreciation journal entry

Expensed Debit Credit

Depreciation: asset name (P/L: E) XXX
Accumulated depreciation: asset name (SFP: -A) XXX
Depreciation of PPE is expensed to P/L

Capitalised Debit Credit

Constructed asset: cost (SFP: A) XXX
Depreciation: name of the asset that was used (P/L: E) XXX
Capitalisation of depreciation to the cost of the constructed asset -SFP

Gripping GAAP reference: Chapter 7 – Section 4.3.6 44

Learning Objective 4 – Subsequent measurement

Example 1: Depreciation expense using Straight-line method

Example 2: Depreciation expense using Diminishing balance method

Example 3: Depreciation expense using Units of production method

Example 4: Depreciation expense of a PPE Item with significant parts (MUST DO)

45
Learning Objective 4 – Subsequent measurement

Example 1: Depreciation expense using Straight-line method

46
Learning Objective 4 – Subsequent measurement

An asset is purchased at a cost of R110 000 on 1 January 2019.

• The asset has a total useful life of 10 years.
• The company expects to sell the asset after 5 years for an estimated R30 000 (present
value), before taking into consideration the present value of the expected costs of disposal of
R20 000.
• The straight-line method of depreciation is to be used for this asset.

Required:
1. Calculate the depreciable amount
2. Calculate the depreciation for the year ended 31 December 2019.

47
Learning Objective 4 – Subsequent measurement

Example 2: Depreciation expense using Diminishing balance method

48
Learning Objective 4 – Subsequent measurement

Koos Limited purchased an asset on 1 April 20x1 for R800 000.

• The rate of depreciation to be used is 20% and the residual value is R327 680.
• The depreciation method appropriate to the use of this asset is the diminishing balance.

Required:
1. In which year should the entity stop depreciating the asset?

2. Calculate the depreciation expense recognised in each affected year assuming that:
• the year end is 31 March.

Gripping GAAP reference: Chapter 7 – Section 4.2 49

Learning Objective 4 – Subsequent measurement

Example 3: Depreciation expense using Units of production method

50
Learning Objective 4 – Subsequent measurement

Koos Limited purchased an asset on 1 January 20x1 for R100 000.

• A company intends to depreciate its plant using the units of production method.
• The asset is expected to be able to produce 100 000 units in its lifetime.
• Production in the year ended 31 December 20X1 was 10 000 units (20X2 was 15 000 units).

Required:
1. Calculate depreciable amount

2. Calculate depreciation for the 20X1 and 20X2.

51
Learning Objective 4 – Subsequent measurement

Example 4: Depreciation expense of a PPE Item with significant parts

52
Learning Objective 4 – Subsequent measurement
An entity operates airline services. The entity’s only item of property, plant and equipment is an aircraft
that was acquired for R8 000 000 on 1 January 2020.

• The cost of the aircraft is attributed to its significant parts as follows: the jet engine (75%) and body
(25%).
• The jet engine is required to be replaced when it has flown 2,000,000 air miles.
• Management intends to fit a new engine to the aircraft when it requires replacement so that the
aircraft can be used for approximately 10 years, at which time it intends to scrap the aircraft.
• Management does not expect to replace the body of the aircraft.

Required:
Use the above scenario to answer the below questions

53
Learning Objective 4 – Subsequent measurement
1. What is the cost of each of the significant parts of the aircraft that the entity must
depreciate separately?
2. What depreciation methods are most appropriate for the entity to apply to compute
depreciation for the significant parts of the aircraft
a) straight-line method for all parts of the aircraft.
b) units of production method based on air miles flown, for the jet engines and the straight-
line method for all other parts of the aircraft.
c) units of production method based on air miles flown for all parts of the aircraft.
d) diminishing balance method for all parts of the aircraft.
3. Calculate the total depreciation expense assuming:
• The aircraft flew 230 000 air miles in the current period
• The entity’s year-end is 31 December 2020
4. Show how the depreciation expense should be journalised for the year ended 31 Dec 2020

54
Summary of Unit 2 -Week 1
What did we do this week?
Recognition of PPE
Definition must be met:
tangible items that are held for
use;
in the production or supply of
goods or services, for rental to
others,
or for administrative purposes;
and
are expected to be used during
more than one period
Recognition criteria must be
met:
probable that future economic
benefits will flow to the entity AND
cost must be reliably measured
Initial measurement
PPE is initially measured at
cost.
Its purchase price less trade
discounts/rebates, plus
Any costs directly attributable to
bringing the asset to the location
and condition necessary for it to
be capable of operating in the
manner intended by
management.
Cost and effect of acquisition
Asset acquired via asset
exchange
Asset acquired for cash and
payment is delayed
Subsequent measurement
involves:
Model: cost model and the
revaluation model (we only cover
the cost model)
Depreciation
Subsequent
Measurement:
Depreciation
The depreciable amount must
be depreciated on a systematic
basis over the estimated useful
life of the asset.
The depreciation method used
should reflect the pattern in which
economic benefits are expected
to be generated from the asset (it
should never be based on related
revenue generated by the asset).
The depreciation charge is
expensed unless it is capitalised
to another asset.
Depreciation methods:
Straight-line method:
Depreciable amount/useful life
Diminishing balance method
Carrying value * dep rate
Units of production method
Depreciable amount * (actual
units in the current year/ total
units over the life of the asset)
56
Definitions as per IAS 16 paragraph 6
Term Definition
Carrying amount Is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses (unit 3)

Cost Is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or
construction or, where applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements of other
IFRSs

Depreciation The systematic allocation of the depreciable amount of an asset over its
useful life.

Depreciable amount Is the cost of an asset, or other amount substituted for cost, less its residual
value.

Fair value 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

57
Definitions as per IAS 16 paragraph 16

Term
Property, plant and equipment
Definition
Tangible assets 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

Residual value The estimated amount that an entity would currently obtain from the
disposal of an asset after deducting the estimated costs of disposal, if
the asset were already of the age and in the condition expected at he
end of its useful life.

Useful life 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.

58
Recommended Question to do
Questions to do this week
Question Learning objectives

Week 1 Practical Question Learning objectives:

• Identify the costs that must be capitalised to the cost of an asset
• Calculate the cost of the asset at acquisition date
• Determine the date at which depreciaition of PPE starts
• Calculate depreciation expense and carrying amount
• Account for acquisition of an asset through asset exchange.
• Prepare journal entries and correcting journal entries

Week 1 Tutorial Question Learning objectives:

• Calculate and recognise the initial cost of an item of PPE
• Identify costs that are directly attributable to getting the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
• Split the cash equivalent and finance cost when the payment is deferred beyond normal terms.
• Identify the acquisition date and the date at which the company should start depreciating the asset.
• Calculate depreciation expense using different methods and for different significant parts
• Straight – line method
• Units of production method

60
Questions???

61