10/28/2021

Chapter 3 • IAS 16 Property, Plant and

Equipment
• Depreciation accounting
Tangible non-current
• IAS 40 Investment Property
assets
• IAS 23 Borrowing Costs

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Learning objectives 1

• Define and compute the initial measurement of a non-

current asset (including borrowing costs and an asset that
has been self-constructed)
• Identify subsequent expenditure that may be capitalised,
distinguishing between capital and revenue items
• Discuss the requirements of relevant IFRS standards in
relation to the revaluation of non-current assets
• Account for revaluation and disposal gains and losses for
non-current assets

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Learning objectives 2

• Compute depreciation based on the cost and revaluation

models and on assets that have two or more significant
parts (complex assets)
• Discuss why the treatment of investment properties should
differ from other properties
• Apply the requirements of relevant IFRS standards to an
investment property

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Chapter overview

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IAS 16 Property, Plant and Equipment 1

Definition
Property, plant and equipment are tangible items that:
• Are held by an entity for use in the production or supply
of goods or services, for rental to others, or for
administrative purposes
• Are expected to be used during more than one period

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IAS 16 Property, Plant and Equipment 2

Recognition
Property, plant and equipment should be recognised once
the recognition criteria from the Conceptual Framework
have been met:
• It is probable that future economic benefits that are
attributable to the asset will flow to the entity
• The cost of the asset can be reliably measured

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IAS 16 Property, Plant and Equipment 3

Initial measurement at recognition

Initially recognise at cost.
Cost includes:
• Purchase price – including import duties and non-
refundable purchase taxes less trade discounts and
rebates
• Directly attributable costs:
– Cost of site preparation
– Initial delivery and handling costs
– Installations and assembly costs
– Costs of testing
– Professional fees
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IAS 16 Property, Plant and Equipment 4

Initial measurement at recognition (continued)

Cost includes (continued):
• Estimated cost of dismantling/removing the item
(IAS 37)
• Finance costs (IAS 23)

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IAS 16 Property, Plant and Equipment 5

Subsequent expenditure
• Capitalise as a non-current asset if the asset
recognition criteria are met
• Consider:
– Complex assets – assets which are made up of
separate components
– Assets requiring overhauls

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IAS 16 Property, Plant and Equipment 6

Subsequent expenditure (continued)

• Examples:
– Furnace
– Aircraft
• Treat each component separately for depreciation
purposes and capitalise the costs when they are
replaced/overhauled

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IAS 16 Property, plant and equipment 7

• Eg airframe, depreciate over 20 years

• Eg seating, depreciate over 8 years
• Eg engines, depreciate over 6 years

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IAS 16 Property, plant and equipment 8

Subsequent expenditure (continued)

• Where subsequent expenditure does not meet the
asset recognition criteria the expenditure should be
included as part of the profit or loss for the period.
• Recognise as an expense.

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IAS 16 Property, Plant and Equipment 9

Measurement after recognition

• Choice of accounting treatment, the entity can either
maintain the asset at cost or revalue it to fair value.
• Cost model:
– Property, plant and equipment is carried in the
financial statements at cost less accumulated
depreciation and impairment losses.

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IAS 16 Property, Plant and Equipment 10

Measurement after recognition (continued)

• Revaluation model:
– Property, plant and equipment is carried in the
financial statements at fair value less accumulated
depreciation and impairment losses.
– Fair value is '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 market
date'.

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IAS 16 Property, Plant and Equipment 11

What is the fair value of an asset?

• Land and buildings  market value where the valuation
is usually carried out by a professionally qualified valuer
• Plant and equipment  market value
• Specialised assets  depreciated replacement cost if
the market value is not available

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IAS 16 Property, Plant and Equipment 12

Revaluations
• Where an item of property, plant and equipment is
revalued the whole class of assets to which it belongs
should be revalued.
• Revaluations should be performed sufficiently often so
that the carrying amount of the asset is not materially
different from the fair value of the asset.
• Where an asset has increased in value, the revaluation
gain is reported in other comprehensive income and in
the revaluation surplus in the statement of financial
position unless the gain reverses a previous revaluation
loss which was charged to profit or loss.

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IAS 16 Property, Plant and Equipment 13

Revaluations (continued)
• A revaluation loss is charged first to other
comprehensive income (and the revaluation surplus)
with any excess reported in profit or loss.
• Where an asset is revalued depreciation is charged on
the revalued amount.
• If the asset has been revalued upwards the depreciation
charge will be higher than before the revaluation.
• The excess depreciation can be transferred to retained
earnings from the revaluation surplus.
• This adjustment will be shown in the statement of
changes in equity.
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Question: Xavier

Xavier has a year end of 30 September and purchased a piece of

production equipment on 1 July 20X5 incurring the following costs.
$
List price of machine 8,550
Trade discount (855)
Delivery costs 105
Set-up costs incurred internally 356
8,156

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Question: Xavier (continued)

Notes
1 The machine was expected to have a useful life of 12 years and a
residual value of $2,000.
2 Xavier's accounting policy is to charge a full year's depreciation in the
year of purchase and no depreciation in the year of retirement or sale.
3 Xavier has a policy of keeping all equipment at revalued amounts. No
revaluations had been necessary until 30 September 20X8 when one
of the major suppliers of such machines went bankrupt causing a rise
in prices. A specific market value for Xavier's machine was not
available, but an equivalent machine would now cost $15,200
(including relevant disbursements). Xavier treats revaluation
surpluses as being realised through use of the asset and transfers
them to retained earnings over the life of the asset. The remaining
useful life and residual value of the machine remained the same.

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Question: Xavier (continued)

Required
Show the accounting effect of the above transaction at 30 September
20X5, 20X8 and 20X9.

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Depreciation accounting 1

Definition
• The systematic allocation of the depreciable amount of
an asset over its estimated useful life
• Where the depreciable amount of an asset is its
historical cost (or other amount) less the estimated
residual value
• Where the useful life is the period over which a
depreciable asset is expected to be used by the entity or
the number of production or similar units expected to be
obtained from the asset by the entity

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Depreciation accounting 2

Definition (continued)
• The useful life, residual value and depreciation method
must be reviewed at least each financial year end and
adjusted where necessary.
• The need for depreciation of non-current assets arises
from the accruals assumption. If money is expended in
purchasing an asset then the amount expended must at
some time be charged against profits. If the asset is
one which contributes to an entity's revenue over a
number of accounting periods, it would be inappropriate
to charge any single period with the whole of the
expenditure.

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IAS 40 Investment Property 1

Definition
• Property (land or buildings – or part of a building – or
both) held (by the owner or by the lessee as a right-of-
use asset) to earn rentals or for capital appreciation or
both, rather than for:
– Use in the production or supply of goods or services
or for administrative purposes; or
– Sale in the ordinary course of business.

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IAS 40 Investment Property 2

Recognition
• An investment property is recognised when and only
when:
– It is probable that the future economic benefits
associated with the investment property will flow to
the entity
– The cost of the investment property can be measured
reliably

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IAS 40 Investment Property 3

Measurement at recognition
• The investment property is initially recognised at cost.
• Cost comprises:
– Purchase price plus
– Any directly attributable expenditure (for example
professional fees)
• For self-constructed investment properties, cost is the
cost at the date when the construction/development is
complete.
• An investment property held by a lessee as a right-of-
use asset must be measured initially in accordance with
IFRS 16 Leases.

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IAS 40 Investment Property 4

Measurement after recognition

There is a choice of accounting policy which must be
applied to all investment properties held by the entity.
• Cost model:
– The investment property is carried in the financial
statements at cost less accumulated depreciation and
impairment losses, ie it is treated as a non-current
asset under IAS 16.

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IAS 40 Investment Property 5

Measurement after recognition (continued)

• Fair value model:
– The investment property is measured at fair value at
the end of each reporting period.
– Any gain or loss on remeasurement is included in
profit or loss for the period.
– The investment property is not depreciated.

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Question: Propex Co
Propex Co has the following properties but is unsure how to account
for them:
(1) Tennant House cost $150,000 five years ago. The property is
freehold and is let out to private individuals for six monthly
periods. The current market value of the property is $175,000.
(2) Stowe Place cost $75,000. This is used by Propex Co as its
headquarters. The building was acquired ten years ago.
(3) Crocket Square is a recently started development which is two
thirds complete. Propex Co intends to let this out to a company
called Speedex Co in which it has a controlling interest.
Propex Co depreciates its buildings at 2% per annum on cost.
Required
Describe the most appropriate accounting treatment for each of these
properties.

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IAS 23 Borrowing Costs 1

Definition
• Borrowing costs:
– Interest and other costs incurred by an entity in
connection with the borrowing of funds
• Qualifying asset:
– An asset that necessarily takes a substantial period of
time to get ready for its intended use or sale
Accounting treatment
• Borrowing costs that directly relate to the acquisition,
construction or production of a qualifying asset must be
capitalised as part of the cost of that asset.

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IAS 23 Borrowing Costs 2

Types of borrowing costs

• Funds borrowed specifically:
– Capitalise actual borrowing costs incurred less
investment income on temporary investment of funds
• Funds borrowed generally:
– Capitalise borrowing costs calculated as the weighted
average cost of borrowings for the period multiplied
by the expenditure on the qualifying asset
– Note that the amount capitalised should not exceed
total borrowing costs incurred in the period

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IAS 23 Borrowing Costs 3

Commencement of capitalisation
• Capitalisation of borrowing costs should begin when:
– Expenditures for the asset are being incurred
– Borrowing costs are being incurred
– Activities that are necessary to prepare the asset for
its intended use or sale are in progress

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IAS 23 Borrowing Costs 4

Suspension and cessation of capitalisation

• Capitalisation of borrowing costs should be suspended
during extended periods when development is
interrupted, for example due to workforce strikes or
inclement weather.
• Capitalisation of borrowing costs should cease when
substantially all of the activities necessary to prepare the
qualifying asset for its intended use or sale are
complete.
• This is likely to be when the asset is ready for use (even
if it is not being used).

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Exam questions

Nature of question Exam details

Adjustments relating to property, plant and equipment Dec 2013 – revaluation
are frequently examined in the financial statement of NCA (as part of
preparation question. These may involve: SOFP presentation)
• Adjustments for depreciation Jun 2012 – revaluation
• Revaluations (as part of SOFP
• Acquisitions and disposals presentation)

Identification of borrowing costs and other costs which March/June 2019 as

should be capitalised. part of OT case study
Revaluation model. question.
There could also be OTQs on PPE – both on
knowledge and application.

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Past exam question (March 2017)

An entity has decided to adopt the revaluation model for the first time
from 31 December 20X6. At that date, details relating to two
properties were as follows:
Asset as at 31.12.X6 Carrying amount Fair value
($’000) ($’000)
Head office 10,200 10,800
Factory 7,875 7,500
What is the total gain to be recorded in the revaluation surplus as at 31
December 20X6?
A $0
B $225,000
C $375,000
D $600,000

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Chapter Summary 1

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Chapter Summary 2

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Chapter Summary 3

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