IAS 16

PROPERTY, PLANT & EQUIPMENT

 objectives
• To recognize assets
• To determine the cost of assets
• To depreciate PPE
• To account for revaluation of assets
• Subsequently measure assets
• Provide the journals and disclosure of PPE in
the financial statements.
 PPE Definition
Tangible assets that:
o Are held for use in the production or supply of goods
or services, for rental to others or for administrative
purposes, and
o Are expected to be used during more than one period

• IAS 16 deals with:

o Recognition, and
o Initial & subsequent measurement of such assets.

• Definition & recognition of assets criteria in

conceptual framework must be satisfied before
recognizing PPE.
 PPE Recognition
• PPE recognized as an asset when:
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.
• Can apply recognition criteria to individual
item or groups of similar items
 Initial Measurement
PPE is initially measured at cost which comprises of:
• Purchase price including import duties & non-refundable purchase
taxes after deducting trade discounts
• Any costs attributable to bringing the asset to location & condition
necessary for it to operate e.g
o Costs of employee benefits arising directly from acquisition or
construction of asset
o Costs of site preparation
o Initial delivery & handling costs
o Installation & assembly costs
o Costs of testing whether asset is functioning properly- deduct net
proceeds from selling any items produced while bringing asset to
location & condition
o Professional fees e.g. architects & engineers
• Initial estimate of costs of dismantling & removing the item &
restoring the site on which it is located. Only included if a provision
may be raised for the expenses.
 Excluded Costs
• Capitalization ceases when asset is in location
& condition necessary for it to operate.
Therefore, exclude these costs:
o Costs incurred while the asset capable of
operating and is not yet in use or operating at less
than full capacity
o Initial operating losses e.g. when demand is still
low
o Costs of relocating or reorganizing part or all of an
entity’s operations
 Example: 1
ABC Ltd bought a machine at a cost of $575 000 (VAT inclusive)(this
before taking into account a trade discount of 5%). The machine was
transported to ABC Ltd’s premises at a cost of $5 000, after which it
was installed by independent engineer, who charged $500 per hour-
installation took 4 hours to complete. After installation, the machine
was tested at a cost of $10 000. Fortunately, the samples
manufactured during testing could be sold for $6 000. Once
management was satisfied that the machine was functioning properly,
they spent $50 000 on advertising the product to be manufactured by
the machine and then commenced with manufacturing activities.
Initially the demand for the product was very low, resulting in
operating losses of $30 000 during the first three months. Thereafter
the machine was operating at a profitable level.

Required: Calculate the cost of the machine

 Solution
The cost of the machine is calculated as follows:

• Purchase price (575,000 x 100/115 x 0.95) 475,000

• Transport cost 5,000
• Installation cost (500 x 4) 2,000
• Testing cost (10,000 – 6,000) 4,000
• Advertising cost -
• Operating losses -

Total Cost 486,000

 Incidental operations and
Abnormal credit terms
• Incidental operations
Are not necessary to bring an item to the required location &
condition for it to operate and so recognize in profit or loss
(e.g., building site rented out as parking before
commencement of construction)

• Abnormal credit terms

When abnormal credit terms are granted, cost of the machine
is the present value of the amount payable unless if it’s a
qualifying asset where borrowing costs are capitalized.
o Expense the interest over the credit period.
 Example: 2
ABC Ltd leases a manufacturing building. In terms of the lease
agreement any machinery installed in the building must be
dismantled at the end of the lease term, which is at the end of
year 10. At the beginning of year 2, a machine was acquired
at a price of $800 000 and installed. It is normal practice that
settlement of the purchase price should occur immediately,
but the supplier agreed to postpone settlement till the end of
year 3. It is estimated that it will cost $100 000 to dismantle
the machine at the end of year 10. A fair discount factor is 8%
per annum (before tax, compounded annually).

Required: Calculate the cost of the machine.

 Solution
Purchase cost (Discounted)
n=2 i=8 FV=800,000 comp PV = 685,871
Dismantling cost (Discounted)
n=9 i=8 FV=100,000 comp PV = 50,025

Total cost of machine = 685,871 + 50,025

= 735,896
 Construction of PPE

• Include all directly attributable costs

• Exclude abnormal wastage & internal profits
• Directly attributable borrowing costs are
included to a qualifying asset
 Exchange of assets
• PPE acquired through exchange should be measured at
fair value(FV) of the asset given up except:
o When the FV of asset given up is not available – (use FV of
assets acquired)
o When FV of asset acquired if more clearly evident– (use FV
of assets acquired)
o When FV of either of assets cannot be reliably measured –
(use carrying amount of asset given up)
o When transaction has no commercial substance - (use
carrying amount of asset given up)
• FV is defined as 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.
 Exchange of assets…
• Commercial substance is considered by looking at
whether after tax cash flows are expected to
change as a result of the transaction.
• An exchange transaction has commercial
substance if;
o The risk, timing & amount of the cashflows of the
asset received differs from those of the asset
transferred
o Entity-specific value of the portion of operations
affected by the transaction changes
o The difference in the above is significant relative to
the FV of the assets exchanged.
 Example: 3
If A Ltd exchanges machine A(with a carrying
amount of $10 000 and FV of $15 000) for
machine B(with a fair value of $16 000)

Required: At what cost should machine B be

recognized if:
A. FV of B is more evident
B. The transaction lacks commercial substance
Spare parts & servicing equipment
• Normally spare parts & servicing equipment are carried
as consumables(inventory)
• Major spare parts e.g. airplane engine and stand-by
equipment (e.g. a generator) qualify as PPE if they are
expected to be used for more than one year.
• Spare parts & servicing equipment are also treated as
PPE if they are used only in connection with specific
recognized item of PPE & the useful life of spare part
should not exceed the useful life of the related PPE.
• If these spare parts & servicing equipment should be
installed first then start depreciating after installation,
otherwise depreciation must start on acquisition.
 Separate components
• PPE can be split into components on acquisition &
depreciated separately e.g allocate cost to frame & engines
on aircraft
• A component is recognized when it has a significant cost
and different depreciation (rate and method) from other
parts of the related asset.

• Replacements of components
o Recognition criteria will determine whether the amount should
be capitalized or expensed
o If capitalized, the carrying amount of the part being replaced is
derecognized
o If not practical to determine the carrying amount of the part,
the cost of the replaced part may be used to estimate CA.
 Example: 4
Alpha Ltd acquires an aircraft at a cost of
N$2,000,000. It is estimated that 45% of the cost is
attributable to the frame of the aircraft, which has
an expected useful life of 20 years. The remainder
of the cost is attributable to the engines, which
need to be replaced every 5 years.
Required:
A. Calculate the annual depreciation.
B. Assume that the engines are replaced at the end of
year 4 at a cost of N$1,300,000(earlier than expected
due to an accident on the runway). How should this
be accounted for?
 Major inspection
• When an asset requires regular major inspection as a
condition to its continued use, then the cost thereof
must be capitalized.
• On acquiring assets that has already undergone a
major inspection, a portion of the cost must be
allocated to the inspection component by reducing on
pro-rata basis the costs of the other components.
• The inspection component is depreciated over the
period until the date of the next inspection.
• On next inspection, the remaining carrying amount of
previous inspection should be derecognized, and the
cost of the new inspection capitalized.
 Example: 5
A machine is acquired at a cost of N$500,000. This machine
consists of two components, namely component A , with a
cost of N$300,000 and useful life of 15 years and component
B with a cost of N$200,000 and useful life of 12 years. A major
inspection, covering both components, needs to be
performed every three years. On acquisition of the machine,
an inspection similar to the one that will be performed after
three years, costs N$20,000 (present value).

Required:
A. Calculate the annual depreciation.
B. Provide the journal entries for year 3 if at the beginning of the
3rd year, the inspection is performed at a cost of N$24,000.
A)
Solution
Inspection component (20,000/3) 6,667
Component A [300,000 –(20,000x300,000/500,000]/15 19,200
Component B [200,000 –(20,000x200,000/500,000]/12 16,000
Total Depreciation 41,867

B)
(dr) Accumulated depreciation: Machine: Inspection cost 13,334
(dr) Loss on derecognition 6,667
(cr) Machine: Inspection (Cost) 20,000
Derecognition of previous inspection

(dr) Machine: Inspection (Cost) 24,000

(cr) Bank 24,000
Recognition of new inspection cost

(dr) Depreciation (P/L) 43,200

(cr) Accumulated depreciation: Machine: Inspection cost (24,000/3) 8,000
(cr) Accumulated depreciation: Machine: Component A 19,200
(cr) Accumulated depreciation: Machine: Component B 16,000
Depreciation of machinery
Safety and environmental equipment
• Safety & environmental equipment enable entity
to obtain greater economic benefits & so they
qualify to be recognized as an asset.
• Review for impairment after recognition on
combined carrying amount of safety equipment
& related asset.
• Example: Installation of a new water filtering
system in a factory to avoid spillage of chemicals
in the nearby river to reduce the clean-up cost
(legal obligation).
 Depreciation
• PPE should be reduced over time to reflect the
consumption of benefits through depreciation.
• Depreciable amount is cost less asset’s residual value
• Depreciation must match consumption
• If residual value exceeds carrying amount do not depreciate
• Useful life is either:
– Period over which that asset will be available for use
– Number of production or similar units expected to be obtained
from that asset.
• Consider the following when assessing useful life:
– Expected usage of asset
– Expected physical wear & tear
– Technical obsolescence
– Legal or other limits on the use of the asset
 Depreciation
• Useful life is shorter than economic life
• Useful lives should be reviewed at least at the end of
each year, and any change is accounted for as a change
in accounting estimate

• Land & buildings should be accounted for separately

• Buildings should be depreciated, and land has an
indefinite economic life
• If the cost of land includes the costs of site dismantling,
removal & restoration, the restoration portion is
depreciated.
 Depreciation
• Residual value
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 on the age & condition expected at the end of
its useful life
o Review the residual value of an asset at least each financial year-end
and any change is accounted for as a change in accounting estimate.
o No depreciation is calculated if the residual value is greater than the
carrying amount.

• Components
o On initial recognition, significant parts can be depreciated separately
o Entity may choose to depreciate insignificant parts separately
o The remainder after allocating significant parts should be depreciated
separately or if consumption patterns are different, use approximation
techniques to calculate depreciation.
 Depreciation
• Depreciation begins when it is available for
use
• Depreciation ceases:
o At date asset is classified as held for sale in terms
of IFRS 5, and
o The date the asset is derecognized
• Depreciation continues even when an asset is
idle/retired unless depreciation is based on
the number of units manufactured.
 Depreciation
• Depreciation methods
o Straight-line(equal parts)
o The diminishing balance method
o Unit of production
 Revaluations
• Subsequently PPE can be measured at cost(cost less accum
depreciation & accumulated impairment losses) or
revaluation(FV at date of revaluation less subsequent
accumulated depreciation & subsequent accumulated
impairment losses)
• To use revaluation model, FV of the assets should be
reliably measurable
• To use this model you must also revalue the entire class
simultaneously. Revaluations should be made with
sufficient regularity.
• Class of assets is a grouping of assets of a similar nature &
use e.g. Land, Machinery, Furniture & Fittings
• Revaluation is accounted for using either net replacement
or gross replacement method
 Revaluation surplus

• The increase in value is recognized as other

comprehensive income and shown in equity
as revaluation reserve which is non-
distributable
• Accumulated depreciation at date of
revaluation may either be restated to reflect
change in gross carrying amount or may be
eliminated against the gross carrying amount.
 Example 6
• An asset, with a useful life of 10 years, was
acquired at the beginning of year 1 at a cost of
$60 000. The asset is revalued at the beginning of
year 4 in terms of the entity’s revaluation policy
to gross replacement cost of $80 000 at this date.
Assume that depreciation calculated for
accounting purposes on the straight-line method
accurately reflects economic obsolescence.

• What is the revaluation amount?

 Example 7
• A company purchased PPE four years ago for
$100 000. PPE was depreciated on the
straight-line basis over ten years. The
company decided to revalue PPE at the end of
the fourth year. The net replacement cost at
that date was $75 000.
• Show the journal entries
 Subsequent revaluations or
devaluations
• Subsequent devaluation-decrease should be
recognized in other comprehensive income to the
extent that there is a credit in the revaluation
reserve relating to that asset & if in excess the
difference is charged to profit & loss
• Subsequent revaluations are recognized in other
comprehensive income except to the extent that
it reverses a previous revaluation deficit
recognized in profit or loss.
 Example 8
A machine with a cost of $200 000 & useful life of 8 years
was acquired at the beginning of year 1. The machine is
revalued every 2 years and the revaluation reserve will be
regarded as realized only when the machine is sold. The
net replacement cost of the machine was as follows;
– Beginning of year 3 $160 000
– Beginning of year 5 $95 000
– Beginning of year 7 $50 000

How will the revaluation increases/decreases be

accounted for?
 Example 8
Net CA Gain/(loss) on Revaluation Revaluation
replacement revaluation expense (P/L) income (p/l)
cost (OCI)
160,000 150,000 10,000
95,000 106,667 (10,000) (1,667)
50,000 47,500 833 1,667
 Realization of revaluation reserve
• Revaluation reserve is subsequently transferred to retained
earnings through statement of changes in equity on sale of
asset or while asset is being used.
• Revaluation reserve can also be left intact as a capital
maintenance reserve or transferred to asset replacement
reserve
• Revaluation treatment/realization should be disclosed in
accounting policy/.
• The amount transferred from realization reserve should be
net of tax
• The amount transferred should be the difference between
depreciation based on the revalued carrying amount of the
asset and depreciation based on the asset’s original cost.
 Impairment
• PPE must be assessed for impairment
• Impairment loss is the amount with which carrying
amount exceeds recoverable amount.
• Impairments of items of PPE should be recognized
under the standard on impairment (IAS 36)
• Compensation from 3rd parties for items of PPE that
were impaired, lost or given up should be included in
profit or loss when it becomes receivable
• Compensation received for impairment or loss of items
of PPE should be disclosed separately either on the
face of the statement of profit or loss and other
comprehensive income or in the notes
 Example 9
On 30 June 2020 plant & machinery of X Ltd with a
carrying amount of N$163,875 were destroyed in a hail
storm. An amount of N$155,000 was claimed
immediately from the insurance company. Although X Ltd
was informed on 31 July 2020 that the claim was
successful, the amount was received on 30 September
2020 only. Replacement assets were bought on credit on
15 August 2020 at a total cost of N$200,000.

How will the above information be disclosed in the

financial statements?
 Derecognition
• PPE should be derecognized on disposal or when no
future benefits are expected from either its use or
disposal.
• Gains or losses on disposal are calculated as the
difference between the net disposal proceeds and the
carrying amount of the asset and should be recognized
in profit or loss.
• Gain arising from derecognition may not be classified
as revenue except where an entity routinely sells items
of PPE that it has held for rental to others, these items
of PPE should be transferred to inventory at their
carrying amount and recognized as revenue on sale.
The carrying amount of such assets is included in cost
of sales
Changes in existing decommissioning,
restoration & similar liabilities
• When an item of PPE is to be dismantled at
the end of its useful life or if the site is to be
restored, these costs are capitalized.
• If the amount of the expected
decommissioning and restoration costs (or the
discount rate applied) changes, the treatment
depends on whether the cost model or
revaluation model applies to the related asset.
 Change in provision: Cost model
• If there is an increase in the provision due to an increase in the
expected costs or a decrease in the discount factor, the increase
should be accounted for by debiting the asset and crediting the
provision.
• The adjusted carrying amount of the asset should be written off
over its remaining useful life and the effect of the change should be
disclosed.
• This change is accounted for prospectively from the date the
estimate is revised & from the beginning of the current year.
• An increase in the provision could be an indication of impairment
• If there is a decrease in the provision the decrease is accounted for
by crediting the asset & debiting the provision.
• If the decrease exceeds the carrying amount of the asset, the
excess should be taken to profit & loss.
 Change in provision: Revaluation
model
• Adjustments to an asset revalued will affect
revaluation reserve to the extent that there is a
balance on the revaluation reserve relating to
that asset.
• A decrease in the provision should be treated as a
revaluation surplus in other comprehensive
income.
• If the decrease exceeds what the carrying amount
of the asset would have been if the asset was
accounted for under the cost model, then the
excess above should be recognized immediately
in profit or loss.
 Disclosure
• In respect of each class of PPE disclose:
• Measurement basis
• Depreciation method
• Useful lives or depreciation rates
• Depreciation if statement of comprehensive income is shown by
nature
• Gross carrying amount & accumulated depreciation at the
beginning and end of period
• Reconciliation of the carrying amount at the beginning & end of the
period showing:
– Additions
– Assets transferred
– Revaluation movements
– Impairment losses recognized or reversed through P/L
– Depreciation
 Disclosure cont..
– Exchange differences arising on translation
– Other movements
– Details of any restrictions on title or pledges of PPE
– The amount of compensation from 3rd parties for assets
impaired/lost/given up
– Expenditure on PPE under construction
– Contractual commitments for the acquisition of PPE
– Disclosures in respect of revalued PPE as follows:
• The valuation technique
• Effective date of valuation
• Whether the valuer was independent
• The carrying amount of each class of revalued PPE had that class
been carried under the cost model
• The balance on the revaluation reserve, the movement therein for
the period as well any restrictions on the distribution thereof.