Chapter 04

Property, plant and equipment (IAS 16)

Learning Outcomes

At the end of this chapter, students will be able to:

▪ Define and compute the initial measurement of a non-current asset
▪ Identify subsequent expenditure that may be capitalized, distinguishing between capital and
revenue items.
▪ Compute depreciation based on cost for assets that have two or more significant parts (complex
assets).
▪ Account for the depreciation of property that has been revalued
▪ Account for revaluation and disposal gains and losses for non-current assets.

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Property, plant and equipment (IAS 16)

Property, plant and equipment are tangible assets held by an enterprise for more than one
accounting period for use in the production or supply of goods or services, for rental to others or for
administrative purposes

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Classes of PPE

Classes of property plant and equipment include:

▪ Land
▪ Buildings
▪ Machinery
▪ Ships
▪ Aircraft
▪ Motor Vehicles
▪ Furniture and fixtures
▪ Office equipment

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PPE Cost

1. Purchase price, less discounts

2. Costs to bring asset to location of use
3. Import duties
4. Cost to construct, install, test
5. Estimate of cost of compulsory removal or restoration
6. Borrowing costs for an asset that takes 12+ months to construct

NOT costs: Maintenance, general overheads

Note: Items gained in an exchange are recognized at fair value.

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Example 1

Foster has built a new factory incurring the following costs:

$'000
Land 1,200
Materials 2,400
Labour 3,000
Architect's fees 25
Surveyor's fees 15
Site overheads 300
Apportioned administrative overheads 150
Testing of fire alarms 10
Maintenance for first year 12
7,112

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Example 1 (Cont.)

What will be the total amount capitalized in respect of the factory?

A. $6,112,000
B. $6,950,000
C. $7,112,000
D. $7,100,000

7,112 – 150 – 12 = 6,950 (B)

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Measurement after Recognition

For each class, reporting entities have the choice of:

1. THE COST MODEL

PPE valued at cost less accumulated depreciation and impairment.

2. THE REVALUATION MODEL

PPE carried at a revalued amount being its fair value at the date of revaluation less subsequent
depreciation and impairment, provided that fair value can be measured reliably.

If the asset is carried under the revaluation model, the following must be applied:
▪ Review periodically and keep revaluations up to date
▪ Consistent policy for each class of asset (avoids cherry-picking of assets)
▪ Depreciate the revalued asset less residual value over its remaining useful life
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Depreciation

IAS 16 allows two methods of depreciation:

▪ Straight line
▪ Reducing balance

Additional factors to consider are as follows:

▪ Depreciation starts when the asset is ready for its intended use and not from when it starts to be
used.
▪ Any change in estimate is applied prospectively by applying the new estimates to the carrying
value of the PPE at the date of change.
▪ Separate the cost into its component parts and depreciate separately if a complex asset.

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Useful Life

Useful life is the number of years that the asset is expected to be used by the business.

Major parts may have separate useful lives.

Review useful life each year adjusted as a change in estimate.

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Residual Value

Residual value is the expected value at the end of the useful life of the asset.

Residual value is estimated at date of acquisition or revaluation but reviewed every year.

Deduct expected costs of disposal.

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 Straight-Line Depreciation

Depreciation Cost - (Residual Value – Disposal Costs)

Expense per Year Years of Useful Life

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Example 2 – Straight-Line Depreciation

Machine:
Cost: $50,000
Useful life: 7 years
Residual Value: $5,000

What is the straight-line depreciation for year 1 and year 2?

Year 1: (50,000 - 5,000) / 7 = 6,429

Year 2: (50,000 - 5,000) / 7 = 6,429

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Example 3 – Declining Balance

Machine:
Cost: $50,000
Expected decline in value: 20%

What is the declining balance depreciation?

Year 1: 50,000 Year 2: 50,000

x 20% (10,000) Year 1 depreciation
10,000 40,000
x 20%
8,000 Year 2 depreciation

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Example 4 – Land A: Revaluation Gain

Land
Market Value
Date ‘000
1 January 2020 $400
31 December 2020 $500

Gain: 500 – 400 = 100

Dr PPE 100
Cr OCI Revaluation Gain 100

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Example 5 – Land B: Revaluation Loss

Land
Market Value
Date ‘000
1 January 2020 $80
31 December 2020 $65

Loss 80 – 65 = 15

Dr Revaluation Loss Expense 15

Cr PPE 15

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Example 6 – Land A: Revaluation Gain, Then Loss

Land Market Value

Date ‘000 $500
1 January 2020 $400 $100
31 December 2020 $500
31 December 2021 $370 $400
$30
$370

Dr. OCI Revaluation Loss 100

Dr Revaluation Loss Expense 30
Cr PPE 130

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 Example 7 – Land B: Revaluation Loss, Then Gain

Land Market Value

Date ‘000
$65
1 January 2020 $80
$15
31 December 2020 $65 $80
31 December 2021 $97
$17
$97

Dr PPE 32
Cr Reversal of Revaluation Loss 15
Cr OCI Revaluation Gain 17
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Example 8 – Building Revaluation

Building
Market Value Useful
Date ‘000 Life
1 January 2020 $400 20
31 December 2020 $500 19

Carrying Amount Before Revaluation 400 - 400/20 = 380

Revaluation Gain Balancing figure: 500-380 = 120
Carrying Amount After Revaluation 500

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Journal entry

31 December 2020
To record depreciation
Dr Depreciation expense 400/20 20
Cr Accumulated depreciation 20

To record the revaluation:

Dr Accumulated depreciation 20
Dr PPE Cost Balancing Figure: 120 - 20 = 100
Cr Revaluation gain (OCI) 120

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Journal entry (Cont.)

31 December 2021
To record depreciation
Dr Depreciation expense 500/19 26.3
Cr Accumulated depreciation 26.3

For buildings, we have the choice to transfer the revaluation reserve to retained earnings over the
remaining useful life:

Dr Revaluation reserve 120/19 years 6.3

Cr Retained retained earnings 6.3

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IAS 16 Narrative Disclosures

▪ The choice of cost or revaluation (measurement base)

▪ Depreciation method, useful lives or depreciation rate
▪ Restrictions on use of assets (e.g. used as collateral)

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IAS 16 Quantitative Disclosures

▪ Beginning and ending cost (gross carrying amount)

▪ Depreciation for the year
▪ Impairment losses in profit or loss
▪ Beginning and ending accumulated depreciation (depreciation + impairment)
▪ New PPE ( additions)
▪ PPE held for sale

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IAS 16 Revaluation Disclosures

Narrative disclosures:
▪ Date of revaluation
▪ If an independent valuer was involved

Quantitative disclosures:
▪ Revaluation gains and losses
▪ Net carrying amount if the cost model had been used
▪ Beginning and ending revaluation surplus

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Practice 1

Land X
Market Value
Date ‘000
1 January 2020 $1,400
31 December 2020 $1,750
31 December 2021 $1,350

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Practice 2

Land Y
Market Value
Date ‘000
1 January 2020 $600
31 December 2020 $480
31 December 2021 $690

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Practice 3

Artem Co prepares financial statement to 30 June each year.

During the year to 30 June 20X5, the company spent $550,000 on new plant as follows:

$’000
Plant cost 525
Delivery to site 3
Building alterations to accommodate plant 12
Costs of initial testing of the new plant 2
Plant operator training cost 8

In accordance with IAS 16 Property, Plant and Equipment, what is the value of additions to plant for
Artem Co for the year ended 30 June 20X5?

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Practice 4

Artem Co’s fixtures and fittings were purchased on 1 July 20X2 at a cost of $50,000. The directors
have depreciated them on a straight-line basis over an estimated useful life of eight years
assuming a $5,000 residual value.

At 1 July 20X4, the directors realise that the remaining useful life of the fixtures is five years. There
is no change to the estimated residual value.

What is the depreciation charge for the fixtures and fittings for Artem Co for the year ended 30
June 20X5 in accordance with IAS 16?
A. $7,500
B. $9,000
C. $7,750
D. $6,750
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Practice 5

Wetherby Co purchased a machine on 1 July 20X7 for $500,000. It is being depreciated on a

straight-line basis over its expected life of ten years. Residual value is estimated at $20,000.

On 1 January 20X8, following a change in legislation, Wetherby Co fitted a safety guard to the
machine. The safety guard cost $25,000 and has a useful life of five years with no residual value.

What amount will be charged to profit or loss for the year ended 31 March 20X8 in respect of
depreciation on this machine?

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Practice 6

Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips
for mobile phones. It purchased a machine on 1 July 20X3 for $80,000 which has a useful life of
ten years and is depreciated on the straight-line basis, time apportioned in the years of acquisition
and disposal.

The machine was revalued to $81,000 on 1 July 20X4. There was no change to its useful life at
that date.

In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation charged to
Aphrodite Co.’s profit or loss in respect of the machine for the year ended 31 December 20X4?

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Practice 7

Auckland Co purchased a machine for $60,000 on 1 January 20X7 and assigned it a useful life of
15 years. On 31 March 20X9 it was revalued to $64,000 with no change in useful life.

What will be the depreciation charge in relation to this machine in the financial statements of
Auckland Co for the year ending 31 December 20X9?

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Practice 8

Auckland Co purchased a machine for $60,000 on 1 January 20X7 and assigned it a useful life of
15 years. On 31 March 20X9 it was revalued to $64,000 with no change in useful life.

What will be the revaluation reserve in relation to this machine in the financial statements of
Auckland Co for the year ending 31 December 20X9? The company does not make a transfer from
the reserve. There was no further revaluation needed at year end.

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Practice 9

Panama bought an item of property, plant and equipment for $80 million on 1 January 2012. The
asset had zero residual value and was to be depreciated over its estimated useful life of 20 years.

On 1 January 2015 the asset was revalued to its fair value of $95 million.

Calculate the amounts to shown in the financial statements of Panama for the year-ended 31
December 2015.

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Practice 10

On 1 January 2013, Panama purchased an item of property, plant and equipment for $12 million.
Panama uses the revaluation model to value its non-current assets. The asset has zero residual
value and is being depreciated over its estimated useful life of 10 years. At 31 December 2014, the
asset was revalued to $14 million but at 31 December 2015, the value of the asset had fallen to $8
million. Panama has not taken the effect of the revaluation at 31 December 2015 in its financial
statements.

Calculate the amounts to shown in the financial statements of Panama for the year-ended 31
December 2015.

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Practice 11

Ecuador bought an item of property, plant and equipment for $25 million on 1 January 2012 and
depreciated over its useful life of 10 years.
On 31 December 2014, the assets remaining life was estimated as 5 years.

Calculate the amounts to shown in the financial statements of Ecuador for the year-ended 31
December 2015.

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Practice 12

The extracts from the trial balance of Kandy as at 30 September 2014 are:
$’000 $’000
Land ($5 million) and buildings – at cost 55,000
Plant and equipment – at cost 58,500
Accumulated depreciation at 1 October 2013
: buildings 20,000
: plant and equipment 34,500

The following notes are relevant:

Non-current assets:
The price of property has increased significantly in recent years and on 1 October 2013, the directors decided to
revalue the land and buildings. The directors accepted the report of an independent surveyor who valued the land at $8
million and the buildings at $39 million on that date. The remaining life of the buildings at 1 October 2013 was 15 years.
Kandy does not make an annual transfer to retained profits to reflect the realisation of the revaluation gain.

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Practice 12 (Cont.)

Plant and equipment is depreciated at 12½% per annum using the reducing balance method.

No depreciation has yet been charged on any non-current asset for the year ended 30 September
2014. Depreciation is charged to cost of sales.

Prepare extracts from the statement of profit or loss and other comprehensive income for
Kandy for the year ended 30 September 2014 and from the statement of financial position as
at the same date with regards property, plant and equipment.

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END OF CHAPTER

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