International Financial Reporting

Standard
IAS16- Property, Plant and
Equipment (PPE)
Scope
The requirements of IAS 16 are applied to accounting for all
property, plant, and equipment unless another Standard
permits otherwise, except
• Property, plant, and equipment classified as held
for sale in accordance with IFRS 5
• Biological assets relating to agricultural activity
under IAS 41
• Mineral rights, mineral reserves, and similar no
regenerative resources

2
DEFINITIONS OF TERMS

• Accumulated depreciation
• Asset held for sale
• Carrying amount (book value)
• Fair value
• Cash-generating unit (CU)
• Costs of disposal
• Current asset. 3
• Decommissioning costs
DEFINITIONS OF TERMS

• Depreciable amount.
• Depreciation method
• Impairment loss
• Intangible assets/ tangible assets
• Noncurrent asset.
• Residual (salvage) value.
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• Useful life
What is property, plant and equipment?
(PPE)
Tangible items Held for use Long-term

a) For rental to
others
b) In the supply of Expected to be
They have a goods or used more than
physical presence services one accounting
c) For period
administrative
purpose
Example of PPE
• Land
• Buildings
• Plant
• Machinery
• Vehicles
• Computer equipment
• Furniture
• Ex 1: An entity owns a factory building in which it manufactures its
products.
• Ex 2: An entity owns a building occupied by its administrative staff.

• Ex 3: An entity owns a building that it rents out to independent

third party under operating lease in return for rental payments
• Ex 4: An entity owns a fleet of motor vehicles. The vehicles are used
by the sales staff in the performance of their duties.
• Ex 5: An entity owns a car that it rents out to independent third
party under operating lease in return for rental payments
• Ex 6: An entity (parent) holds a building to earn rentals under an
operating lease from its subsidiary. The subsidiary uses the building
as a retail outlet for its products.
• Ex 7: An entity owns a two-storey building. Floor 1 is rented out to
independent third parties under operating leases in return for rental
payments. Floor 2 is occupied by the entity’s administration and
maintenance staff.
• Ex 8: An entity provides security services and buys trained guard
dogs, which are used to support employees in guarding customers’
premises.
• Ex 9 : A private hospital has installed two identical back-up
generators. The first back-up generator provides electricity when
the supply from the national grid is interrupted. The second back-
up generator will be used in the unlikely event that the first back-
up generator fails when the supply from the national grid is
interrupted.
RECOGNITION AND MEASUREMENT

1. Initial measurement

2. Subsequent measurement
When do we recognize PPE in the
account?
The cost of PPE is recognized as an asset when:

1. The benefits associated with the PPE will

go to the company

2. The cost of the item can be measured

reliably
INITIAL MEASUREMENT
• How should the value of the PPE be measured
initial?
PPE should initially be recorded as it COST

• So how should we calculate the COST?

Include costs of bringing the asset into
working condition
 INITIAL MEASUREMENT
Include Exclude
Purchase price/ import Administrative and general
duties overheads costs
Site preparation/ delivery Cost of opening a new facility
costs
Installation and assembly Cost of introducing a new
costs product or service
Testing costs
Professional fees Cost of conducting business in a
new location or with a new class
of customers
Estimated dismantling/
removal costs
Land
The cost of land is not depreciated. It includes the
following costs paid by the purchaser:
● Purchase price
● Brokerage commission
● Survey and legal fees
● Property taxes in arrears
● Taxes assessed to transfer the ownership (title) on
the land
● Cost of clearing the land and removing unwanted 13
buildings
Buildings
The cost of a building depends on whether the
company is constructing the building itself or is
buying an existing one. These costs include the
following:
• Constructing a Building
• Architectural fees
• Building permits
• Contractor charges
• Payments for material, labor, and overhead
• Capitalized interest cost, if self-constructed 14
Machinery and Equipment
The cost of machinery and equipment includes its:
● purchase price (less any discounts),
● transportation charges,
● insurance while in transit,
● sales tax and other taxes,
● purchase commission,
● installation costs, and
● the cost of testing the asset before it is used.
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Furniture and Fixtures
Furniture and fixtures include desks, chairs, file
cabinets, display racks, shelving, and so forth. The
cost of furniture and fixtures includes the basic
cost of each asset (less any discounts), plus all
other costs to ready the asset for its intended use.

FAA. IAS 16 -PPE

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Initial Measurement
Situation-equipment:
• $100 cost, 7% sales tax
• $10 to transport to plant, $5 storage cost (plant
not ready)
• $3 labor, $2 materials to calibrate machine. $4
recovered from trial run production
• Used at 50% of capacity: costs = $50, sales = $55
• $11 to consultant for services related to choice of
machine and calibration
• $1 interest cost during one month storage

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Solution

Equipment cost:
Invoice and tax: 100 + 7 = $107
Transportation 10
Calibration: 3 + 2 – 4 = 1
Professional fees 11
$129

20
Example
Deasin company needs property and
purchases land for $50,000 with a note payable for
the same amount. Deasin also pays cash as follows:
$4,000 in property taxes in arrears, $2,000 in
transfer taxes, $5,000 to remove an old building,
and a $1,000 survey fee. What is the company’s
cost of this land?

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Example
Solution
On 1 January 20X1 an entity purchased an office block
(building) for CU1,000,000(1) . The purchase price was
funded by a loan of CU1,010,000 (including CU10,000 loan
raising fees). The loan is secured against the building. Non-
refundable property transfer taxes and direct legal costs of
respectively CU50,000 and CU10,000 were incurred in
acquiring the building. In 20X1 the entity redeveloped the
building into upmarket residential apartments for rent under
operating leases to independent third parties. Expenditures on
redevelopment were:
• CU100,000 planning permission
• CU1,500,000 construction costs (including 60,000 refundable
purchase taxes)
The redevelopment was completed and the apartments ready
for rental on 1 October 20X1. The local government charged
the entity property service taxes of CU1,000 per month on the
building. What is the cost of the building at initial recognition?
On 1 January 20X1 an entity purchased an item of equipment for CU600,000,
including CU50,000 refundable purchase taxes. The purchase price was funded by
raising a loan of CU605,000. In addition, the entity has to pay CU5,000 in loan raising
fees to the Bank. The loan is secured against the equipment.
In January 20X1 the entity incurred costs of CU20,000 in transporting the equipment to
the entity’s site and CU100,000 in installing the equipment at the site. At the end of the
equipment’s 10-year useful life the entity is required to dismantle the equipment and
restore the building housing the equipment. The present value of the cost of
dismantling the equipment and restoring the building is estimated to be CU100,000.
In January 20X1 the entity’s engineer incurred the following costs in modifying the
equipment so that it can produce the products manufactured by the entity:
• Materials – CU55,000
• Labour – CU65,000
• Depreciation of plant and equipment used to perform the modifications – CU15,000
In February 20X1 the entity’s production team tested the equipment and the
engineering team made further modifications necessary to get the equipment to
function as intended by management. The following costs were incurred in the testing
phase:
• Materials, net of CU3,000 recovered from the sale of the scrapped output – CU21,000
• Labour – CU16,000
The equipment was ready for use on 1 March 20X1. However, because of low initial
order levels the entity incurred a loss of CU23,000 on operating the equipment during
March. Thereafter the equipment operated profitably. What is the cost of the equipment
at initial recognition?
Subsequent Measurement is an AMOUNT in which
asset, liability or equity shall be recorded in the
financial statements AFTER ITS INITIAL
RECOGNITION—or in the 2nd, 3rd, 4th year of its
recognizing in the financial statements.
Subsequent Recognition

Costs that are incurred subsequent to the

purchase or construction of the long-
lived asset, such as those for repairs,
maintenance, or betterments, may
involve an adjustment to the carrying
amount, or may be expensed, depending
on the precise facts and circumstances.

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 Measurement after Recognition
IAS 16 allows two ways of accounting (a) to
recognize assets at cost or (b) revaluate them at
fair value.

Cost model Revaluation model

*Carrying value: is the value which an item of PPE is

report on Statement of Financial Position
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Measurement after Recognition
Cost Model (CM):
PP&E are carried after acquisition at cost, less
any accumulated depreciation and any accumulated
impairment losses
Revaluation Model(RM):
PP&E are carried after acquisition at fair value at
date of revaluation, less any depreciation and
impairment losses after revaluation

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IV. SUBSEQUENT MEASUREMENT
SUBSEQUENT MEASUREMENT

THE COST MODEL THE REVALUATION MODEL

Cost of asset = Cost of asset (at revalued amount) =
FV is
Cost Fair value (at the date of revaluation)
measured
– Acc. Depreciation – Depreciation
reliability
– Impairment loss – Impairment loss
Ex: At 31 December 20X1, an entity owns plant with an original
cost of CU500,000 and accumulated depreciation of CU80,000.
The entity determines that, due to damage to the plant, an
impairment of CU120,000 is necessary. The entity uses the cost
model for all its property, plant and equipment. What is the
carrying amount of the plant on 31 December 20X1?
Cost model
Depreciation:
• Each major component may have a
different depreciation policy
• Depreciable amount: carrying amount less
residual value
• Residual value defined:
- estimate of net amount entity would
receive now from asset’s disposal, if asset
was as old and in same condition as
expected at end of its useful life
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Depreciation (continued):
• Useful life – consider capacity, wear and tear,
technology changes, changes in product demand,
contractual or legal limits
• Choose method based on pattern that asset’s
economic benefits are expected to be received:
Straight Line, Double B, or activity-based
• If change in pattern, change method prospectively
(change in estimate)
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The depreciation method chosen in relation to an item
of property, plant and equipment should match the
usage pattern of that item.

Available depreciation methods include:

• the straight-line method;
• the diminishing balance method;
• the units of production method.
A. THE COST MEASUREMENT
1. Depreciation

a. Straight-line
Cost – Residual value (Salvage value)
Depreciation =
Useful life

Eg:

Solution:
Straight line method
Example:
• Cost of asset $100,000
• Estimated useful life 5 years
• Estimated residual value $10,000
• Productive life in hours 8,000

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Example
On April 1, 2011, Company A purchased an
equipment at the cost of $140,000. This
equipment is estimated to have 5 year useful life.
At the end of the 5th year, the salvage value
(residual value) will be $20,000. Company A
recognizes depreciation to the nearest whole
month.
Calculate the depreciation expenses for 2011,
2012 and 2013 using straight line depreciation
method.
 A. THE COST MEASUREMENT
1. Depreciation

b. Double-declining balance
Depreciation = 2 × Straight-line rate × Carrying amount at beginning of year

• The depreciation charge is higher (or accelerated) in the early years and reduces
during the life of the asset.
• Double-declining balance depreciation (if salvage value is to be recognized, stop
when carrying amount = estimated salvage value)

Eg:
Taj Mahal Milling Co., a calendar-year entity, acquired a machine on June 1, 2013, that cost €40,000 with an

estimated useful life of four years and a €2,500 salvage value .

 Double-declining balance method
The depreciation charge is higher (or
accelerated) in the early years and reduces
during the life of the asset.
• Double-declining balance depreciation (if
salvage value is to be recognized, stop when
carrying amount = estimated salvage value)
Depreciation = 2 × Straight-line rate × Carrying
amount at beginning of year

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 Measurement after Recognition
Depreciation method
Double-declining balance method
• Cost of asset $100,000
• Estimated useful life 5 years
• Estimated residual value $10,000
• Productive life in hours 8,000

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On April 1, 2011, Company A purchased an
equipment at the cost of $140,000. This
equipment is estimated to have 5 year useful life.
At the end of the 5th year, the salvage value
(residual value) will be $20,000. Company A
recognizes depreciation to the nearest whole
month.
Calculate the depreciation expenses for 2011,
2012 and 2013 using double declining balance
depreciation method.
 Measurement after Recognition
Depreciation method
• Sum-of-years digits method
The depreciation charge is based on a
decreasing fraction of the depreciable
amount.
Each fraction uses the sum of the years of
useful life as the denominator, and the
number of years of estimated useful life
remaining as the numerator.
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Company A purchased the following asset on
January 1, 2011.
What is the amount of depreciation expense for
the year ended December 31, 2011?
Acquisition cost of the asset is $100,000
Useful life of the asset = 5 years
Residual value (or salvage value) at the end of
useful life $10,000
Calculate depreciation method by sum-of-the-
years'-digits method
Example of depreciation

Calculate:
1. Straight line depreciation
2. Double declining balance depreciation
3. Sum-of-the-years'-digits depreciation
 A. THE COST MEASUREMENT
1. Depreciation

c. Sum of year digit

Fraction= Year of useful life remain / Sum of year of useful life

• The formula for calculating the fraction denominator is : n(n + 1)/2,

where n = the number of periods for which depreciation is to be charged.
• Eg., if the depreciable life is 5 years, the denominator is:
5(5 + 1)/2 = 15
Ex:
On January 1, the company ABC buys a machine that cost $52,000 in order to use for the
day-to-day operation. The machine is expected to have 4 years of useful life with a
salvage value of $2,000. Due to the nature of the machine, the company ABC decides to
use the sum of years’ digits depreciation method to allocate the cost of the machine over
its useful life.
Calculate the sum of years’ digits depreciation for each year of the fixed asset above.
1. Depreciation

Hours or unit: Depreciation based on hours

Cost – Residual value (Salvage value)
Depreciation =
Number of hours
Eg:

Solution:
1. Depreciation

Hours or unit: Depreciation based on units

Cost – Residual value (Salvage value)
Depreciation =
Number of units
Eg:

Solution:
Requirement: Calculate depreciation under alternative methods
 B. THE REVALUATION MODEL
• When???

- Revaluation should be carried out regularly (the

carrying amount of the asset should not differ
materially from its fair value at the reporting date –
either higher or lower) (para 31)
- IAS 16, therefore, does not require annual revaluation.
When items of PPE have only insignificant changes in
fair value, the Standard indicates that it may be
necessary to revaluate them every three or five years
THE REVALUATION METHOD
Which assets???

- If an item of PPE is revalued, all item of the same class also get revalued (para 37)

Land Land & Machinery Ships Aircraft Motor vehicle

building

Furniture and fixture Office equipment Bearer plants

• How???
- The asset is to be revalued to fair value
- An upward revaluation recognized in OCI
(para39), specifically as a Revaluation surplus
- An downward revaluation recognized in
P/L(para40)

Dr. Asset
Cr. OCI- Revaluation Surplus
• PPE cost

Dr. P/L- Revaluation Loss

Cr. Asset
• However, if you are reversing a previous
revaluation, you put:
- Put an upward revaluation through P/L (para 40)
- Put an downward revaluation through OCI (para
41)
• Land purchased at $100,000
• Year 1: revalued to $120,000
• Year 2: revalued to $90,000

• PPE cost Dr. PPE 20,000

Cr. OCI- Revaluation Surplus 20,000

Dr. OCI- Revaluation Surplus 20,000

Dr. P/L– Loss on revaluation 10,000
Cr. PPE 30,000
 • Land purchased at $100,000
• Year 1: revalued to $90,000
• Year 2: revalued to $120,000

• PPE cost Dr. PPE 30,000

Cr. P/L -Revaluation Loss 10,000
Cr. OCI- Revaluation surplus 20,000

Dr. P/L -Revaluation Loss 10,000

Cr. PPE 10,000
• On 1 January 20X1, an entity acquired a piece of land for CU500,000. At 31
December 20X1, the land was valued at CU600,000. The entity uses the
revaluation model for its land and buildings. How must the entity account for
the increase in the value of the land for the year ended 31 December 20X1?
• At 31 December 20X2, the land was valued at CU300,000. The land is not
impaired as its value in use is higher than its fair value. How must the entity
account for the revaluation of the land for the year ended 31 December 20X2?
• Note: Ignore deferred tax
• On 1 January 20X1, an entity acquired a piece of land for
CU600,000.
• At 31 December 20X1, the asset was valued at CU900,000.
• At 31 December 20X2, the land was valued at CU300,000.
• How must the entity account for the revaluation of the asset for
the year ended 31 December 20X1 and 31 December 20X2?
Revaluation with depreciation
Revaluation gains
• Where an asset’s carrying amount is increased as a result of a
revaluation (ie a revaluation gain), this gain is normally recognised in
other comprehensive income and accumulated in equity under the
heading of revaluation surplus. However, the gain should be
recognised in the statement of profit or loss to the extent that it
reverses a revaluation decrease (ie a revaluation loss) of the same asset
which had previously been recognised in profit or loss.
Journal entry:
• Dr Non-current asset cost [difference between valuation and original
cost/valuation]
Dr Accumulated depreciation [eliminate any accumulated depreciation]
Cr Revaluation surplus [gain on revaluation recognised in other
comprehensive income]
• A company purchased a building on 1 April
20X1 for $100,000. The asset had a useful life
at that date of 40 years. On 1 April 20X3 the
company revalued the building to its fair value
of $120,000.
• Required
Calculate the revaluation gain and prepare the
journal entry to account for the revaluation.
Revaluation losses
• A revaluation loss should be charged to profit or loss.
Journal entry:
• Dr Statement of profit or loss [any loss]
Dr Accumulated depreciation [eliminate any accumulated
depreciation]
Cr Non-current asset cost [difference between valuation and
original cost/valuation]
• The carrying amount of Zen Co’s property at the
end of the year amounted to $108,000 (cost/value
$125,000 and accumulated depreciation
$17,000). On this date the property was revalued
and was deemed to have a fair value of $95,000.
Required
• Calculate the revaluation loss and prepare the
journal entry to account for the revaluation.
• Building price: $1,200,000
• Useful life = 60 years
• Revaluation after 3 years with FV = $700,000
•Machine price: $1,000,000
•Useful life = 10 years
•Revaluation after 2 years with FV = $500,000
•2 years later, the asset is revalued again with FV=
$900,000
Require:
Write the journal entry
EMS purchase machinery for $500,000 on January
1st 20x4. Useful life is 80 years, no residual value.
The fair value of equipment is as follows:
December 31th, 20x5 is $400,000
June 30th, 20x7 is $600,000

Require: Write the journal entry

ABC purchase equipment for $300,000 on January
1st 2014. Useful life is 10 years, no residual value.
The fair value of equipment is as follows:
• December 31th, 2014 is $360,000
• June 30th, 2015 is $200,000
Require:
Write the journal entry
• On 1 January 20X1, an entity acquired an office
building for CU500,000 with a useful life of 20 years
and a nil residual value. At 31 December 20X5, the
building has a fair value of CU300,000. The entity uses
the revaluation model. At 31 December 20X6 through
to 31 December 20X9, the carrying amount was not
materially different from the fair value and therefore no
adjustments for revaluation were required.
• However, during the year 20X10 there has been a
significant increase in property prices. At 31 December
20X10, the building was valued at CU400,000.
• How must the entity account for the revaluation of the
asset for the year ended 31 December 20X5 and 31
December 20X10?
• An entity applies the revaluation model to
its buildings. At 31 December 20X5, the
entity’s office building has a historical cost
of CU500,000, useful life in 10 years. At
31/12/20X9 fair value of CU600,000
 3. How ???
Initial revaluation

INITIAL REVALUATION

“GROSS-UP” “NET” METHOD

METHOD
- Calculate Gross Fair value - Remove the old Accumulated
- Increase cost of asset to Gross Fair Value Depreciation + Decrease the asset
- Increase Depreciation to FV of - Increase/Decrease the carrying asset to
Depreciation Fair value and the other part is
- The difference: + Increase: Other
+ Increase: Other comprehensive income comprehensive income — gain on
— gain on revaluation revaluation
+ Decrease: P/L – Loss on revaluation + Decrease: P/L – Loss on
revaluation
- Calculate Depreciation based on FV
THE REVALUATION METHOD
• Konin Corporation owns buildings with a cost
of €200,000 and estimated useful life of five (5)
years. Accordingly, depreciation of €40,000 per
year is anticipated. After 2 years, Konin obtains
market information suggesting that a current
fair value of the buildings is €600,000 and
decided to write the buildings up to a fair value
of €600,000
• Asset bought at $42,000, useful life = 7
years. After 5 years, revaluation with FV =
$40,000
• Require:
Write the journal entry as gross up method
XYZ owns plant with a cost of $42,000 and
estimated useful life of seven years. After 2
years, XYZ obtains market information
suggesting that a current fair value of the
buildings is $40,000. Write the journal entry
based on:
• Gross up method
• Netting method
• Plant cost $10,000, useful life = 5 years.
After 2 years, revaluate with price of 3,000
Required: write the journal entry with gross
up method
ABC purchase equipment for $300,000
on January 1st 2014. Useful life is 10
years, no residual value. The fair value
of equipment is as follows:
• December 31th, 2015 is $200,000
Derecognition

• The carrying amount of an item of PP&E shall be

derecognized:
• on disposal; or
• when no future economic benefits are expected from its use
• Gains arising from derecognition shall not be
classified as revenue
• Gain or loss shall be determined as the difference
between the net disposal proceeds and the carrying
amount of the item
• Scenario 1: Disposal of fully depreciated asset
ABC International buys a machine for $50,000 and recognizes
$5,000 of depreciation per year over the following ten years.
At that time, the machine is fully depreciated, ABC gives it
away, and records the following entry.
• Scenario 2: Disposal by asset sale with a gain

ABC International sells a $100,000 machine for

$35,000 in cash, after having compiled $70,000 of
accumulated depreciation.
• Scenario 3: Disposal by asset sale with a loss

ABC International sells another machine that had

originally cost it $40,000 for $25,000 in cash.
The company had compiled $10,000 of
accumulated depreciation on the machine
Example for asset disposal
• Cost of machinery: $12,000
• Useful life = 6 years
• End of four years, sold for $5,000
• Cost of machinery: $12,000
• Useful life = 6 years
• After 4 years, owner sold the machinery for $3,000
Require: write the journal entry
Main disclosure requirements of IAS16
For each class of property, plant and equipment:
• the measurement bases used;
• the depreciation methods used;
• the gross carrying amount and accumulated
depreciation at the beginning and end of the
accounting period;
• a reconciliation of the carrying amount at the
beginning and end of the period, showing additions,
disposals, revaluation increases and decreases,
depreciation, impairment losses and any other
movements.