MONASH

BUSINESS

Topic 5

Property, Plant and Equipment- Revaluation

Chapter 9 of 10th ed
AASB 116 Property, Plant and Equipment
 Learning objectives

• Discuss the nature of Property, Plant & Equipment (PPE)

• Explain initial recognition, and derecognition of PPE
• Understand the nature and calculation of depreciation
• Explain subsequent recognition of PPE: Revaluation model

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 Property, Plant, and Equipment

• AASB 116/ IAS 16 Property, Plant and Equipment

• AASB 116/ IAS 16 (para. 6) defines property plant and

equipment as “... tangible assets that are (a) held for
use in the production or supply of goods and services, for
rental to others, or for administrative purposes; and (b)
are expected to be used during more than one period.”

• Typically property, plant and equipment assets have long

lives and are acquired at significant cost to the business
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 Property, Plant, and Equipment

• Property, plant and equipment assets are

further classified by nature or use, such
as…
– Land
– Land and buildings
– Motor vehicles
– Machinery
– Furniture and fittings

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Property, Plant, and Equipment

ACW2491/Property, Plant and Equipment

 Initial Recognition

• AASB 116/ IAS 16 specifies the principles for recognition of PPE:

– probability that benefits received will flow to the entity and
– that the cost of the item can be measured reliably

• Note it is the cost of the item not the value of benefits that must
be reliably measured
– Differs from AASB Framework that specifies the cost or value of
the benefit must be capable of reliable measurement

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 Initial Recognition

• Consideration must be given to…

– whether the outlay should be expensed or capitalised
– whether the asset’s component parts should be recognised as individual
assets or whether they should be grouped together and considered as a
single asset

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 Components of Initial Measurement

• Purchase Price
– includes import duties and non-refundable purchase taxes and is
calculated after deducting trade discounts and rebates (Para 16a)
• Directly attributable costs
– Costs incurred that are necessary to bring the asset to a useable state
– Eg costs of employee benefits arising directly from construction or
acquisition of the item, costs of site preparation, initial delivery and
handling costs, installation and assembly costs, costs of testing,
professional fees (note: costs not to be included Para 19 and 20)
• Costs of dismantling, removal or restoration
– an entity is required to estimate and recognise any costs necessary to
eventually dismantle and remove an asset and restore its site

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 Derecognition of PPE Section 9.8 of text 10th ed.

Para 67 of AASB 116/ IAS 16 states two occasions for

derecognition of PPE:
• On disposal or sale of asset
• When no future use expected either from continuous
use or disposal

ACW2491/Property, Plant and Equipment

 Derecognition of PPE

Dr Cash
Cr Proceeds from sale of PPE
(cash received from sale)

Dr Carrying amount of PPE

Dr Acc depreciation
Cr Plant
(close acc depreciation and derecognize PPE)

ACW2491/Property, Plant and Equipment

 Nature of Depreciation

• Depreciation – the systematic allocation of the depreciable

amount of an asset over its useful life
• Depreciable amount – the cost of an asset or other amount
substituted for cost less its residual amount
• Useful life – the period over which an asset is expected to be
available for use or the number of production or similar units
expected to be obtained from the asset by the entity
• Residual value – the estimated amount that would be obtained
from disposal of the asset after deducting estimated costs of
disposal

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 Calculation of Depreciation

• Depreciation is a systematic process of allocation and must reflect the

pattern in which the future economic benefits are expected to be
consumed by the entity
– Ignores any change in the asset’s fair value
• Methods of depreciation
– Straight-line method
– Diminishing (reducing) balance method
– Units of production method
(note: choice based on estimates of length of period over which benefits to
be received and pattern of benefits)

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 Measurement Subsequent to Recognition

• Subsequent to initial recognition, the entity must choose the

measurement basis:
– Cost model – requires an asset to be carried at its cost less
accumulated depreciation and impairment losses (AASB 136/
IAS 36)
– Revaluation model – where an asset’s fair value can be
measured reliably, an entity can elect to carry an item of PPE
at its revalued amount (FV) less any subsequent accumulated
depreciation and impairment losses (AASB 116/ IAS 16)

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 Revaluation Model

• After initial recognition, items of PPE whose fair value can be

measured reliably shall be carried at a revalued amount being fair
value at the date of revaluation less any subsequent accumulated
depreciation and accumulated impairment losses (Para 31)
• The measurement basis is fair value
• Revaluations must be of sufficient regularity to ensure that the
carrying amounts of the assets do not materially differ from their fair
value

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 Revaluation Model

• It is not applied to individual assets but to classes of assets

– Limits the ability of management to selectively choose
assets for revaluation
– Ensures consistent measurement for the same type of
assets in the entity
• Choice of model is a policy decision and must be applied to
each class of assets (AASB 108)
 Revaluations are done on a class-by-class basis BUT the
accounting is done on an asset-by-asset basis

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 Revaluation Model

1. Revaluation 2. Revaluation decrement

increment

3. Revaluation increment 4. Revaluation decrement

reversing previous reversing previous
decrement increment

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 1. Revaluation Increment
• Carrying amount is less than fair value (CA < FV)
• Increase recognized as gain (OCI)
• Steps in accounting for a revaluation increment…
1. Recognize depreciation for the period
2. Write off any accumulated depreciation
3. Recognise the gain in ‘other comprehensive
income’ (OCI)
4. Account for the tax effect of revaluation
5. Transfer the gain, net of tax, to the ‘asset
revaluation surplus’

Refer Example 1

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 2. Revaluation Decrement

• Carrying amount is greater than fair value (CA > FV)

• The decrease shall be recognised as a loss (PL)
• The tax effect is dealt with in the normal workings of tax-effect
accounting i.e. no extra tax effect entries (outside those generated by
the worksheet) are required
• Steps in accounting for revaluation decrement
1. Recognize depreciation charge for the period
2. Write off any accumulated depreciation
3. Recognise loss (PL)

Refer Example 2

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3. Revaluation Increment Reversing Previous Decrement

• A revaluation increment is recognised in other comprehensive

income and accumulated in the revaluation surplus,
however…
• The increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrement of the same asset
previously recognised in profit or loss

Refer Example 3

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4. Revaluation Decrement Reversing Previous Increment

• A revaluation decrement is recognised as a loss, however…

• Where a revaluation surplus has been raised via a previous
revaluation increment, the surplus must be eliminated before
any loss can be recognised
– i.e. the asset revaluation surplus and the deferred tax
liability must be eliminated first
– Need to take into account any changes to the asset
revaluation surplus balance

Refer Example 3

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 See Illustrative Example

• Payback Ltd

ACW2491/Property, Plant and Equipment

 Tutorial questions

Chapter 9 (PPE and revaluation model):

• RQ1, 2, 10, 12,1 3
• PQ2, 6, 11*

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