Property, Plant & Equipment-IAS 16

CHAPTER 2

LECTURE BY: RAFAQAT HASNAT

PPE

 An item of PPE should be recognized as an asset when:

 Future economic benefits will flow to the entity
 It is possessed or controlled by the entity
 The cost of the asset can be measured reliably

 Property, plant and equipment are tangible assets held by an entity for more than
one accounting period for:

Use in Use in supply of Administrative

Rental to others
Production g/s purposes
PPE – Initial Measurement
 Initial measurement include:
 Direct cost of bringing asset into working condition e.g. Stamp duty, legal fees
 Capital costs like site preparation, delivery, installation & borrowing costs
 Dismantling costs (PV of the costs are capitalized)
 Revenue costs, administration/general overhead costs & abnormal costs (material spoiled
due to rain) are written off in income statement.
PPE – Subsequent Expenditure

 Subsequent expenditure should be capitalized (and depreciated) if:

 It contributes in enhancing economic benefits
 Extending asset’s life
 Expansion
 Increasing the productivity of the asset
 It relates to overhaul or required major inspection
 Replacement of a component of a complex asset
 If the original component has been written off

 All other subsequent expenditure should be recognised in SPL e.g.: cost of general
repairs
PPE - Subsequent Expenditure
2. Depreciation
Systematic allocation of the depreciable amount of an asset over its useful life
 Depreciable amount = Cost of an asset ─ residual value
 Depreciation must be charged from the date its is available for use (not brought into use),
and continued even if the asset is idle
 3 methods of depreciation:
1. Straight-line
2. Reducing balance/Written down value/Diminishing Balance
3. Machine hours
Depreciation (Cont’d)
 A change from one method to another is permissible:
 Fairer presentation of financial position
 Doesn’t constitute change in accounting policy
 If an asset is classed as a complex asset, it may be thought of as having separate
components within a single asset.
 Useful life and residual value should be reviewed at the end of each reporting period and
may be revised.
 Journal Entry:
Dr ($) Cr ($)
Dr- Depreciation Expense XX
Cr- Accumulated Depreciation XX
Example

A lorry bought for a business cost $17,000. It is expected to last for 3 years and then be sold for
scrap for $2,000. Usage over the 3 years is expected to be:
Year 1 200 days
Year 2 150 days
Year 3 150 days

Straight-line depreciation
yr 1 yr 2 yr 3
Carrying value at year start 17,000 12,000 7,000
Depreciation (5000) (5,000) (5,000)
CV @ year end 12,000 7,000 2,000
3. Revaluation of Non-current Assets

 IAS 16 allows a choice of accounting treatment for PPE:

1. The Cost Model
 PPE is valued at cost less accumulated depreciation

2. The Revaluation Model

 PPE is carried at a revalued amount less any subsequent accumulated depreciation

 Regularity of revaluations to avoid material difference between the carrying amount and fair
value at each reporting date.

 When an item is revalued, its entire class of assets must be revalued.

Revaluation gain

Refer to excel sheet for

solution & journal
entries
 Accounting for Revaluation
Journal $ $
Dr Cr
Restate Asset from cost to revalued amount
Dr Non-current assets (revalued amount – cost) X

Dr Accumulated depreciation X Remove existing accumulated depreciation

Cr Revaluation gain The gain goes to OCI (bottom of SPL). And taken to
X
(Other Comprehensive Income) revaluation surplus in Equity (SFP)

 Revaluation gains – a component of other comprehensive income

 Revaluation losses – deducted against previous revaluation gain in other comprehensive
income. Any surplus impairment will be recorded as impairment expense in P/L statement.
A loss in revaluation of an asset
Depreciation of Revalued Assets
Once an asset has been revalued:
 Depreciation must be charged, based on revalued amount less residual value.

 An annual reserves transfer MAY be made (from revaluation surplus to retained earnings) for
excess depreciation on the revalued amount compared to cost.
 Excess depreciation that has been charged in the profit and loss account which relates to the revalued
portion of the asset.
 Transfer is disclosed in SOCIE (doesn’t get taken to OCI).
Depreciation on Revalued Asset- Example
Annual Reserves Transfer- Example

Refer to excel
sheet for solution
FV @ year start

cost at t-10
useful life
depn/year

Statement of Profit/Loss and othe comprehensive income for the

year ending XX
Depreciation expense
OCI
Revaluation gain

Statement of Financial Position at year end

Non-current assets
PPE

Equity
Revaluation Reserve

Statement of Change in Equity for the year ending XX

Revaluation
reserve opening
Revaluation gain
less: annual ransfer
Disposal of Revalued non-current assets
Profit on Disposal = Net sale proceeds less carrying amount
1. Profit/loss is accounted for in the Statement of Profit & Loss.
Dr- Cash/Bank XX
Dr- Accumulated Depreciation XX
Cr- PPE (cost) XX
Cr- Profit on disposal XX
2. Revaluation surplus balance related to this asset is transferred to retained earnings.
Dr- Revaluation Surplus XX
Cr- Retained Earnings XX
 No effect on other comprehensive income (it is only altered when the asset is actually
revalued upwards or downwards)
Reducing balance method depreciation