EPHRAIM:

IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Property, Plant and Equipment (PPE) refers to all tangible assets controlled by an
entity which are held for use in production or supply of goods and services and other
administrative purposes for more than one period.
RECOGNITION
This is the process of capturing for inclusion in the financial statement an item that
meet the recognition criteria. An item of Property, Plant and Equipment (PPE) is
recognized as a non-current asset in the statement of financial position.

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Recognition Criteria for PPE

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An item of PPE is recognized as a non-current asset in the statement of financial
position when:

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• it is probable that the asset's future economic benefits will flow to the entity

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• the cost of the asset can be measured reliably
• it is held for production/supply/administrative purposes for more than one

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period.
MEASUREMENT U
The following measurements shall be considered, initial measurement and subsequent
measurement.
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Initial Measurement
At initial recognition, an item of PPE should be measured at cost and carried forward
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in compliance with the historical cost concept. This cost is the cash or cash equivalent
paid in exchange for the assets. The cost can be determined as follows.
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Purchased or Constructed Assets: The cost of the asset shall consist of the purchase
rice or cost of construction plus any cost that is directly necessary to bring the asset to
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a useable condition. This cost shall consist of; import duties, purchase taxes, cost of
installation and assembly, delivery cost of the asset, testing cost, professional fees of
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purchase and agreements, present value of dismantling cost (if there’s a pre-purchase
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agreement for the asset to be dismantled and removed after its useful life). The cost of
the asset must not include abnormal loss from the assets, cost of design flaws, and
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provision for internal profit.

Assets Purchased on Credit: The cost of the asset shall be the total price to be paid
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discounted to its present value. The interest shall be recognised as an expense for the
period.
Asset Acquired Through Exchange: The cost of such an asset shall be determined as
the fair value of the asset given up to acquire the new asset plus any cash
consideration paid.
Costs of PPE
The following are the costs of PPE:
i. purchase price less trade discount
ii. import duties and non refundable purchase taxes
iii. directly attributable costs such as:
 Installation and assembly cost
 Initial delivery cost
 Site clearance cost
 Testing cost
 Professional fees associated with purchase of PPE and agreements

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 Dismantling cost

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Costs excluded from PPE
i. Cost of opening a new facility

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ii. Cost of introducing a new product

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iii. Cost of moving business to a new location
iv. Administration and other general overhead cost

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Illustration 1
An entity started construction on a building for its own use on 1 April 2017 and incurred
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the following costs:
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 Material costs were greater than anticipated. On investigation, it was found that
materials costing $10 million had been spoiled and therefore wasted and a further
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$15 million was incurred on materials as a result of faulty design work.

 As a result of these problems, work on the building ceased for a fortnight during
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October 20X7 and it is estimated that approximately $9 million of the labour costs
relate to this period.
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 The building was completed on 1 July 20X8 and occupied on 1 September 20X8.
The following information is also relevant:
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Purchase price of land 250,000

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Stamp duty 5,000

Legal fees 10,000
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Site preparation and clearance 18,000

Materials 100,000
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Labour (period 1 April 20X7 to 1 July 20X8) 150,000

Architect's fees 20,000
General overheads 30,000
583,000

You are required to calculate the cost of the building that will be included in tangible
non-current asset additions,
Illustration 2
An oil rig was built in the sea, the cost to be capitalized is likely to include the cost of
constructing the asset and the present value of the cost of dismantling it. If the asset
cost $10 million to construct and would cost $4 million to remove in 20 years with an
interest rate of 5%. Show how this transaction will be recorded in the books in the first
year.

Illustration 3

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A company buys a machine on 1 January 2014. The terms of the purchase are that the
company will pay N5 million for the machine on 31 December 2014 (1 year later). An

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appropriate discount rate is 6%. Required: compute the cost of the asset to be

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recognised in the books
Subsequent Measurement
After an asset is recognised in the first instance of use, the business is permitted by the

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standard to re-measure the asset using the cost model or revaluation model.
Cost Model
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This model shows assets in the books at Carrying Amounts (Cost Less Accumulated
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Depreciation). IAS 16 defines Depreciation as the systematic allocation of the

depreciable amount of an asset over its useful life.
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Computation of depreciation is affected by the following issues.

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Subsequent Expenditures - Where money is spent on an asset that has already been
recognised in the books, the expense incurred be added to the carrying amount of the
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asset if it is a replacement part of the asset or if it improves the asset (increases life,
performance, quality or reduces operational cost).
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Review of Remaining Useful life - IAS 16 requires that the useful lives and residual
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values of assets be reviewed every year. Where there is a change from the earlier
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estimated amount, the carrying amount of the asset shall be written off over the
remaining useful life.
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Components of the asset - Where an asset has distinct components that makes up it
system, they may be depreciated separately if the cost and estimated lives of the
components can be ascertained. Where an asset is expected to incur period inspection
cost that is necessary for the continued operation, such period cost will be capitalized
and depreciated over the period covered by such cost.
Illustration 4
A machine was purchased 3 years ago at the cost of N150,000 and its expected useful
life is 10 years with an expected residual value of N30,000. Due to technological
changes, the expected useful life of the asset was reviewed and the machine is
considered to have no residual value. The financial year end of the entity is 31st Dec.
Required:
What is the depreciation charge for the year ended?
Illustration 5
Given the following data:
Cost = N50,000

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Life = 5 years

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Rate = 20%
Total output = 20,000 units

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Output yr 1 = 4,000 units

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Output yr 2 = 3,000 units
Output yr 3 = 4,500 units

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Output yr 4 = 4,500 units U
Output yr 5 = 4,000 units
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Required:
Calculate the depreciation charge using:
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(a) Straight line method

(b) Output/hour method
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(c) Reducing balance method

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Illustration 6
On 1 October 2005 Dearing acquired a machine under the following terms: Hours $
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Manufacturer's base price- 1,050,000

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Trade discount (applying to base price only) 20%

Early settlement discount taken (on-the payable amount of the base cost only) 5%
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Freight charges 30,000

Electrical installation cost 28,000
Staff training in use of machine 40,000
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Pre-production testing 22,000

Purchase of a three-year maintenance contract 60,000
Estimated residual value 20,000
Estimated life in machine hours 6,000
Hours used – year ended 30 September 2006 1,200
– year ended 30 September 2007 1,800
– year ended 30 September 2008 850
On 1 October 2007 Dearing decided to upgrade the machine by adding new components
at a cost of $200,000. This upgrade led to a reduction in the production time per unit of
the goods being manufactured using the machine. The upgrade also increased the
estimated remaining life of the machine on 1 October 2007 to 4,500 machine hours and
its estimated residual value was revised to $40,000.
Required Prepare extracts from the income statement and statement of financial
position for the above machine for each of the three years to 30 September 2008.
Revaluation Model

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The revalued amount of assets is the fair value of an asset as at a particular date

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taking into consideration all significant influential variables. When assets are revalued,
the carrying amount (Cost Net of Accumulated Depreciation) of the asset is changed to

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the fair value which is usually the current market price of the asset. When revaluation

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is done, it will result to either an increase or decrease in the carrying amount of the
asset.

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If the revaluation alternative is adopted, two conditions must be complied with:
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 Revaluations must subsequently be made with sufficient regularity to ensure that the
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carrying amount does not differ materially from the fair value at each reporting
date.
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 When an item of property, plant and equipment is revalued, the entire class of assets
to which the item belongs must be revalued.
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Steps for revaluation of PPE

1. Restate asset's cost to the new valuation.
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2. Eliminate any existing accumulated depreciation for the asset.

3. Show the total increase in Other Comprehensive Income, at the foot of the
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statement of profit or loss. This would then be taken to the revaluation surplus
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(much like the profit for the year gets taken to retained earnings).
Upon revaluation, a gain or deficit shall be obtained, this is treated as follows.
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Revaluation Gains - Gains on revaluation are recognised in OCI and Equity as

revaluation surplus account (SOFP). However, in a case where a previous deficit was
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recorded in the SOPl, the gains must be used to offset the previous deficit (recorded in
the SOPl) and any excess is then taken to the OCI/Equity.
Revaluation Deficits - Deficits on revaluation are recorded as admin expenses in the
SOPl, however, if there is an existing revaluation surplus rom the same asset, the new
deficit can be set off against this gain (recognised as a deduction in OCl) and here there
is an excess, it is then recognised as admin expenses in the SOPL.
Illustration 7
On 1 April 20X8 the fair value of Xu's property was $100,000 with a remaining life of
20 years. Xu's policy is to revalue its property at each year end. At 31 March 20X9 the
property was valued at $86,000. The balance on the revaluation surplus at 1 April
20X8 was $20,000 which relates entirely to the property.
Xu does not make a transfer to realized profit in respect of excess depreciation.
Required:
1. Prepare extracts of Xu's financial statements for the year ended 31 March 20X9

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reflecting the above information.

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2. State how the accounting would be different if the opening revaluation surplus
did not exist.

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Realization of the Revaluation Surplus

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The revaluation surplus recorded in equity for an asset can be realized (transferred) to
retained earning such that when the asset is derecognized through full depreciation or

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disposal, the related revaluation surplus shall also be derecognized. The transfer of
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surplus can be done by computing the excess depreciation due to revaluation gains or a
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simple proration over the remaining life of the asset.
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Derecognition of Property, Plant and Equipment
Derecognition of an asset refers to the situation where an asset is removed partially or
fully from the financial statement. In this case, the asset is no longer under the control
of the entity, or it does not generate any economic benefit for the business. Derecognition
will occur when assets are disposed or written off.
Gain or Loss on Disposal
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Sales proceeds on disposal xx

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Less cost of disposal (xx)
Net disposal value xx

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Cost of asset xx
Less Accumulated (xx)
Depreciation

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Carrying amount (xx)

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Gain or loss on disposal xx/(xx)

Illustration 8

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A non-current asset originally cost N75,000, accumulated depreciation is N51,000. The
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asset is now sold for N18,000 and the disposal cost is N500.
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Required: What is the gain or loss on disposal?

Illustration 9
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A non-current cost N96,000 and was purchased on 1st June 2001. Its expected useful
life was 5 years. Its expected residual value was N16,000 and straight line method of
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depreciation was used. The asset was sold on 1st September, 2003 for N68,000 and
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there was no cost of disposal. It is the company policy to charge depreciation on

monthly basis.
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Required: What is the gain or loss on disposal of the asset?

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Illustration 10
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Sugar Sugar (SS) Plc bought a motor van and building for N600,000 and N800,000
respectively on 1st Jan. 2016. The two assets were depreciated at 10% straight line and
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15% reducing balance respectively. On 30th June, the company sold the two assets to
realise N1,000,000.
Required:
What is the gain or loss on disposal?

Illustration 11
Derek purchased a property costing $750,000 on 1 January 20X4 with a useful
economic life of 10 years. It has no residual value. At 31 December 20X4 the property
was valued at $810,000 resulting in a gain on revaluation being recorded in other
comprehensive income of $135,000. There was no change to its useful life. Derek does
not make a transfer to realized profits in respect of excess depreciation on revalued
assets.
On 31 December 20X6 the property was sold for $900,000.
Required:
How should the disposal on the previously revalued asset be treated in the financial

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statements for the year ended 31 December 20X6?

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Disclosure Requirements
IAS 16 requires the following disclosures in the notes to the financial statements, for

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each major class of property, plant and equipment.

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 The measurement bases used (cost or revaluation model).

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 The depreciation methods used.
 The useful lives or depreciation rates used.
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 Gross carrying amounts and the accumulated depreciation at the beginning and at
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the end of the period.
 A reconciliation between the opening and closing values for gross carrying
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amounts and accumulated depreciation, showing:

 Additions during the year.
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 Disposals during the year.

 Depreciation charge for the year.
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 Assets classified as held for sale in accordance with IFRS 5.

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 Acquisitions of assets through business combinations.

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 Impairment losses.
November 2020 Q6
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Noodles Nigeria Limited (NNL) manufactures various type of noodles in Oluyole for s-
ale across the states in Nigeria.
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Recently, to continue to sustain leadership of the company in the Nigerian market, on

September 1, 2015; a brand-new machine was bought from a supplier under the
following conditions:
N’000
Supplier’s invoice price 500,000
Trade discount applicable to invoice price 25%
Discount applicable on invoice price for early settlements 5%
Freight and shipment cost 100,000
Stevedore expenses 20,000
Initial operating losses 10,000
Handling cost 15,000
Electrical and installation cost 25,000
Interest on loan to the point of usage 12,000
Interest on loan after the usage 18,000
Pre-operation expenses 5,000

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Staff training in use of the machine 4,000

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Professional and consultancy fee on advice to buy the machine 30,000
Purchase of a four year maintenance contract 120,000

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Pre-production testing cost 13,000

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Estimated residual value 90,000
Estimated useful life in machine output/units 5,000,000
Actual Y/E Y/E Y/E Y/E

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31/8/2016 31/8/2017 31/8/2018 31/8/2019
000 000 000 000
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Outputs/Units 1,000 1,200 1400 800
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On September 1, 2016, NNL limited decided to upgrade the machine by adding new
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major components at a cost of N300,000,000. As a result of the new upgrade, there was
an increase in the remaining useful life of the output to 8,000,000 units on September 1,
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2016, and the residual value of the machine was revised to N1l4,000,000.
You are required to:
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a. Describe what is meant by depreciable amount within the context of IAS 16 (1

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Mark)
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b. Highlight THREE characteristics of depreciable assets under IAS 16. (3 Marks)

c. Describe the TWO models of accounting for cost of property, plant and
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equipment (PPE) under IAS 16. (3 Marks)

Calculate the following:
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i. Machine cost. (3 Marks)

ii. Revenue expenditure over the years in the statement of profit or loss. (5 Marks)
iii. Carrying amounts of the machine over the years. (5 Marks)
(Total 20 Marks)