PPE (PAS 16)

Learning objectives:

1. State the recognition criteria, initial measurement, and subsequent measurement of PPE
2. Apply the principles of PAS 16 in basic computations of a PPE’s cost, depreciation, carrying
amount, and revaluation surplus as well as the gain or loss on its disposal.

Introduction

PAS 16 prescribes the accounting treatment for PPE. It addressess the principal issues of recognition as
assets, measurement of carrying amount and recognition of depreciation charges.

PAS 16 applies to all items of PPE except to the following for which other standards apply:

a. Assets classified as held for sale (PFRS 5 Non-current assets held for sale and discontinued
operations)
b. Biological assets other than bearer plants (PAS 41 agriculture)
PAS 16 applies to bearer plants but it does not apply to the produce on bearer plants
c. The recognition and measurement of exploration and evaluation assets (PFRS 6 exploration for
and evaluation of mineral resources)
d. Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.

Note: PAS 16 applies to PPE used to develop or maintain the assets described in (b) to (d) (PAS 16.3)

Property, Plant and Equipment

1. Tangible assets
2. Used in business
3. Long-term in nature

Recognition – an item of PPE is recognized if:

1. Probable that future econimic benefits associated with the item will flow to the entity and;
2. The cost of the item can be measured reliably

A. Initial Measurement – An item of PPE is initially measured at cost. Cost comprises of the
following:
1. Purchase price, including import duties, non-refundable purchase taxes, less trade discounts and
rebates
2. Direct cost of bringing the asset to the location and condition necessary for it to be used in the
manner intended by management.
3. Initial estimate of dismantlement, removal and site restoration costs for which the entity incurs
an obligation by acquiring or using the asset other than to produce inventories.
Measurement of cost

Cost is measured at the cash price equivalent at the acquisition date.

If the payment is deferred beyond normal credit terms, the difference between the cash price
equivalent and the total payment is recognized as interest over the credit period.

The cost of a PPE acquired through an exchange of non-monetary assets is measured using the following
order of priority:

1. Fair value of the asset given up

2. Fair value of the asset received
3. Carrying amount of the asset given up

Note: if the exchange lacks commercial substance, the PPE acquired is measured at the carrying amount
of the asset given up.

Subsequent expenditures on recognized PPE

Rule: Expense outright (not capitalizable)

Exception:

1. Replacement costs – cost of replacing a part of an item of PPE is capitalizable, if the recognition
criteria are met.
2. Major Inspections – cost of a major inspection is capitalizable

B. Subsequent Measurement
An entity may choose either:
1. Cost model – a PPE is carried at its cost less any accumulated depreciation and any
accumulated impairment losses.

2. Revaluation model – a PPE is carried at its fair value at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.