This chapter covers the following:

1. IAS 16 Property, plant and equipment

2. Depreciation
3. Revaluation of non-current assets
4. IAS 20 Accounting for government grants and disclosure
of government assistance
5. IAS 23 Borrowing costs
6. IAS 40 Investment properties

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1. IAS 16 Property, plant and equipment
• Definition :
Property, plant and equipment are tangible assets held by an
entity 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.
• Recognition: PPE should be recognised as an asset when:
• it is probable that future economic benefits associated with the asset will flow
to the entity; and
• the cost of the asset can be measured reliably.
• Initial measurement
• PPE should initially be measured at its cost:
• include all costs to bring the asset into working condition
• include cost of site preparation, delivery costs, installation costs
• revenue costs should be written off as incurred.
• Dismantling costs: Present values of these costs to be added to the assset
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• Subsequent expenditure on PPE
• Should only be capitalised if it results in increase the total economic benefits
expected from the asset
• All other subsequent expenditure should be recognised in the income
statement, because it merely maintains the original economic benefits

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 2. Depreciation
• Definitions
• Depreciable amount is the cost of an asset, or other amount substituted
for cost in the financial statements, less its residual value.
• Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life.
• Depreciation must be charged from the date the asset is available for use,
i.e. it is capable of operating in the manner intended by management.
• This may be earlier than the date it is actually brought into use, for
example when staff need to be trained to use it.
• Depreciation is continued even if the asset is idle.

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• Methods of depreciation
• The method of depreciation should reflect as fairly as possible the pattern in
which the asset’s economic benefits are consumed
• Possible methods include:
• straight line
• reducing balance
• machine hours.
• Change of depreciation method :
• is permissible only when the new method will give a fairer presentation of the
results and financial position
• does not constitute a change of accounting policy
• is a change in accounting estimate.
• The carrying amount should be written off over the remaining useful life,
commencing with the period in which the change is made.

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• Review of useful lives & residual values:
• At the end of each reporting period review if expectations are
significantly different from previous estimates.
• The carrying amount of the asset at the date of revision less any residual
value should be depreciated over the revised remaining useful life

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• Major inspection or overhaul costs
• These are generally expensed as they are incurred.
• They are capitalised if they satisfy the IAS 16 rules for separate
components.
• Once capitalised then depreciate over their useful lives.

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Choice of Accounting treatment of non-current assets
IAS 16 allows a choice of accounting treatment for PPE:
• the cost model
• the revaluation model.
• The cost model
• PPE should be valued at cost less accumulated depreciation.
• The revaluation model
• PPE may be carried at a re-valued amount less any subsequent
accumulated depreciation.
• conditions for revaluation:
• Regular revaluations must be made with sufficient regularity to ensure
that the carrying amount does not differ materially from the fair value
at each reporting date.
• When an item of property, plant and equipment is re-valued, the entire
class of assets to which the item belongs must be re-valued

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3. Accounting for a revaluation
• Steps:
• (1) Restate asset from cost to valuation.
• (2) Remove any existing accumulated depreciation provision.
• (3) Show the increased value in revaluation reserve (part of other
components of equity in financial position).
• Journal Entry:
Dr Non-current assets cost/valuation X
(revalued amount – cost)
Dr Accumulated depreciation X
(eliminate all of existing provision)
Cr Revaluation reserve X
(valuation less previous CV)

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• Recognising revaluation gains and losses
• Revaluation gains reported in comprehensive income
• Revaluation losses as impairment recognised in the income statement.
• Depreciation of re-valued assets
• Depreciation = Re-valued value less residual value divided by over
remaining useful life.
• Show depreciation in income statement
• A portion of revaluation reserve need to be transferred to income statement
to adjust the excess depreciation charged based on re-valued value.
• Journals
Dr Income statement (depreciation charg) X
Cr Accumulated depreciation X
And:
Dr Revaluation reserve X
(depreciation on valuation – depreciation on original cost)
Cr Retained earnings X
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• Disposal of re-valued non-current assets
• The profit or loss on disposal of a re-valued non-current asset should be
calculated as the difference between the net sale proceeds and the carrying
amount.
• It should be accounted for in the income statement of the period in which the
disposal occurs.
• The remainder of the revaluation reserve relating to this asset should now be
transferred to retained earnings.

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4. IAS 20 Accounting for government grants and disclosure of
government assistance
Governments often provide money or incentives to companies to
export or promote local employment.
• Government grants could be:
• revenue grants, e.g. money towards wages
• capital grants, e.g. money towards purchase of non-current assets.
• General principles
• IAS 20 follows two general principles when determining the
treatment of grants:
• Prudence: grants should not be recognised until the conditions for receipt
have been complied with and there is reasonable assurance the grant will
be received.
• Accruals: grants should be matched with the expenditure towards which
they were intended to contribute.

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• Revenue grants
• The recognition of the grant will depend upon the circumstances.
• If the grant is paid when evidence is produced that certain expenditure has
been incurred, the grant should be matched with that expenditure.
• If the grant is paid on a different basis, e.g. achievement of a non-financial
objective, such as the creation of a specified number of new jobs, the grant
should be matched with the identifiable costs of achieving that objective.
• Presentation of revenue grants
• be presented as a credit in the income statement, or
• deducted from the related expense.
• Capital grants
• IAS 20 permits two treatments:
• Write off the grant against the cost of the non-current asset and depreciate
the reduced cost.
• Treat the grant as a deferred credit and transfer a portion to revenue each
year, so offsetting the higher depreciation charge on the original cost.
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• Method 1
• On initial recognition, deduct the grant from the cost of the non-current asset
and depreciate the reduced cost.
• Method 2
• Recognise the grant initially as deferred income and transfer a portion to
revenue each year, so offsetting the higher depreciation charge based on the
original cost.
• Method 1 is obviously far simpler to operate. Method 2, however, has the
advantage of ensuring that assets acquired at different times and in different
locations are recorded on a uniform basis, regardless of changes in
government policy.

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5. IAS 23 Borrowing costs
• IAS 23 Borrowing costs regulates the extent to which entities are allowed to
capitalise borrowing costs incurred on money borrowed to finance the
acquisition of certain assets.
• Borrowing costs must be capitalised as part of the cost of an asset, if that
asset is one which necessarily takes a substantial time to get ready for its
intended use or sale.
• The rate of interest to be taken
• Where borrowings are made specifically to acquire a qualifying asset:
• Borrowing costs which may be capitalised are those actually incurred, less
any investment income on the temporary investment of the borrowings.
• Where funds for the project are taken from general borrowings:
• The weighted average cost of general borrowings is taken. This excludes
borrowings with specific functions.

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• Commencement of capitalisation
• Capitalisation of borrowing costs should commence when all of the following
conditions are met:
• expenditure for the asset is being incurred.
• borrowing costs are being incurred.
• activities that are necessary to prepare the asset for its intended use or sale
are in progress.
• Cessation of capitalisation
• Capitalisation of borrowing costs should cease when either:
• substantially all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete, or
• construction is suspended, e.g. due to industrial disputes.

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6. IAS 40 Investment properties
• Investment property is land or a building held to earn rentals, or for capital
appreciation or both, rather than for use in the entity or for sale in the ordinary
course of business.
• Owner-occupied property is excluded from the definition of investment
property.
• Accounting treatment
• Investment properties should initially be measured at cost.
• IAS 40 then gives a choice between following:
• a cost model
• a fair value model. Once the model is chosen it should be used for all
investment properties
• Cost model
• Under the cost model the asset should be accounted for in line with the cost model
laid out in IAS 16.
• Fair value model: Under the fair value model:
• the asset is revalued to fair value at the end of each year
• the gain or loss is shown directly in the income statement
• no depreciation is charged on the asset.
• Fair value is normally established by reference to current prices on an active
market for properties in the same location and condition.
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