IAS 16

PROPERTY,
PLANT AND
EQUIPMENT
Compiled by: Murtaza Quaid, ACA
IAS 16: PROPERTY, PLANT AND EQUIPMENT
In this Part:
► Objective

► Definition of PPE

► Recognition of PPE

► Initial Measurement of PPE

► Subsequent Costs

► Depreciation

► Subsequent Measurement of PPE

► Derecognition of PPE
IAS 16: PROPERTY, PLANT AND EQUIPMENT

Objective

⮚ How to account for the property, plant and equipment

What How

✔ Definitions ✔ Carrying Amount

✔ Recognition ✔ Depreciation
IAS 16: PROPERTY, PLANT AND EQUIPMENT

OUT OF SCOPE
IAS 16 does not apply to:
X PPE classified as held for sale in accordance
with IFRS 5: Non-current assets held for sale
and discontinued operations;
X Biological assets related to agricultural activity
(refer IAS 41: Agriculture);
X Recognition and measurement of exploration
and evaluation assets (refer IFRS 6:
Exploration for and evaluation of mineral
resources);
X Mineral rights and mineral reserves such as oil,
natural gas and similar non-regenerative
resources.
 PROPERTY, PLANT AND EQUIPMENT

Tangible items that:

⮚ are held for:

✔ Use in the production or supply of goods or services,

✔ Rental to others, or

✔ Administrative purposes; and

⮚ are expected to be used during more than one

period

☝ Land & Building for rental � IAS 40: Investment Property

 RECOGNITION OF PPE

It is probable that future economic

The cost of the asset can be reliably
benefits associated with the asset AND
measured
will flow to the entity

 Asset  Controlled by the Entity

 INITIAL MEASURMENT OF PPE

COST = Purchase Price + Directly Attributable Costs + Dismantling Costs

Purchase price Any costs directly attributable to Initial estimate of the

bringing the asset to the location costs of dismantling and
▪ plus import duties
and condition necessary for it to be removing the item and
and non-refundable
capable of operating in a manner restoring the site on which
taxes,
intended by management. For e.g: it is located.
▪ after deducting
▪ Employee costs arising directly
trade discounts and
from the installation or
rebates
construction of the asset;
▪ Cost of site preparation;
▪ Initial delivery and handling costs
▪ Installation and assembly costs;
Deferred Payment ▪ Testing costs to assess whether the
asset is functioning properly
⮚ The cost of an item of property, plant
and equipment is the cash price ▪ Professional fees directly
equivalentat the recognitiondate. attributable to the purchase.
⮚ If payment is deferred beyond normal
credit terms,the differencebetweenthe
cash price equivalent and the total
paymentis recognizedas interest over
the periodof credit
 INITIAL MEASURMENT OF PPE

XXX NOT PART OF COST

⮚ Costs of opening a new facility;

⮚ Costs of introducing a new product or service
(including costs of advertising and promotional
activities);
⮚ Costs of conducting business in a new location or
with a new class of customer (including costs of
staff training); and
⮚ Administration and other general overhead costs.
 DEPRECIATION
⮚ Depreciation is the systematic allocation of depreciable
amount of an asset over its useful life.
⮚ Depreciation method reflects the pattern in which future
economic benefits are expected to be consumed.
⮚ Significant parts/components are required to be depreciated
separately over their estimated useful life.
⮚ Depreciation is charged to profit or loss, unless it is included
in the carrying amount of another asset.
⮚ Depreciation commences when the asset is available for use.

⮚ The residual value, the useful life and the depreciation method of an asset are reviewed
annually at reporting date.
⮚ Changes in residual value, depreciation method and useful life are changes in estimates are
accounted for prospectively in accordance with IAS 8.
⮚ Depreciation ends at the earlier of when asset is classified as held for sale in accordance with
IFRS 5 and when it is derecognized.
⮚ Revenue based depreciation is prohibited.
 DEPRECIATION

Depreciation = Cost – Residual Value

Useful Life
(1) Straight Line Method Alternatively,
Depreciation = (Cost – Residual Value) x Depreciation %

(2) Reducing Balance Depreciation = Opening WDV x Depreciation %

Method

(3) Units of Production Depreciation = Cost – Residual Value x Unit produced

Method Useful Life (in Units)

Depreciation = (Cost – Residual Value) x Remaining years

(4) Sum of Year’s Digits Sum of year’s digit
Method Sum of year’s digit = Useful life (Useful life + 1)
2
 INITIAL MEASURMENT OF PPE

Exchange of Asset

An asset may be acquired in exchange for another asset.

The cost of acquired asset is measured at:
⮚ the fair value of the asset given up;
⮚ the fair value of the asset received, if it is more clearly
evident;
⮚ the carrying amount of the asset given, if
▪ the exchange transaction lacks commercial substance or
▪ fair value of neither the asset received nor the asset given up is reliably
measurable.
 SUBSEQUENT COSTS
⮚ Subsequent expenditure are recognized as an asset if it meets the
recognition criteria.

⮚ In practice, subsequent expenditure is capitalised if it:

▪ improves the asset (for example, by enhancing its performance or
extending its useful life); or
▪ is for a replacement part (provided that the part that it replaces is
treated as an item that has been disposed of).

⮚ Costs of replacing components/parts are required to be capitalized if the recognition criteria

are met.. The carrying amount of those parts that are replaced is derecognised

⮚ Continued operation of an item of property, plant and equipment (PPE) may require regular
major inspections for faults. The cost of such major inspection is recognized in the carrying
amount of the item of PPE as a replacement if the recognition criteria are satisfied.

⮚ Do not recognise capitalize the costs of the day-to-day servicing of the item. Rather, these costs
are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs
of labour and consumables, and may include the cost of small parts. The purpose of these
expenditures is often described as for the ‘repairs and maintenance’ of the item of property,
plant and equipment.
 SUBSEQUENT MEASUREMENT OF PPE

An entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant and
equipment.

Cost XXXX
Less. Accumulated Depreciation (XXX)
COST MODEL
Less. Accumulated Impairment (XXX)
Carrying Amount XXXX

Fair Value XXXX

REVALUATION Less. Accumulated Depreciation (XXX)

MODEL Less. Accumulated Impairment (XXX)
Carrying Amount XXXX
 SUBSEQUENT MEASUREMENT OF PPE

COST MODEL

Cost XXXX
Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX)
Carrying Amount XXXX

Lower of:
▪ Historical Cost; or
▪ Recoverable Amount

Historical Cost  Carrying Amount of an asset (After depreciation)

as if it had never been revalued / impaired.
Recoverable Amount  Higher of (i) Value in Use; or
(ii) Fair Value less Cost to sell
 SUBSEQUENT MEASUREMENT OF PPE

REVALUATION MODEL
⮚ If an asset is revalued, the entire class of assets to which that asset belongs is required to be revalued
⮚ An increase in value of PPE is credited to revaluation surplus. However, increase shall be credited in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously debited in profit or loss.
⮚ A decrease in value of PPE is debited to profit or loss. However, the decrease shall be debited to revaluation
surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
⮚ The net carrying amount of the asset is adjusted to the revalued amount by one of the following ways:
▪ Gross Replacement Method: Restate accumulated depreciation proportionately with the change in the
gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its
revalued amount; or
▪ Net Replacement Method: Eliminate accumulated depreciation against the gross carrying amount and
then change the carrying amount of the assets to the revalued amount.
Depreciation of revalued asset
⮚ Revalued assets are depreciated the same way as under the cost model. However, an amount equal to
incremental depreciation must be transferred from “Revaluation Surplus” to accumulated profit/retained
earning through statement of changes in equity.
Frequency of revaluation
⮚ Revaluations should be carried out regularly to ensure that carrying amount of an asset should not differ
materially from its fair value at the reporting date.
⮚ Revaluation frequency depends upon the changes in fair value of the items measured (annual revaluation for
volatile items or intervals between 3 - 5 years for items with less significant changes)
 SUBSEQUENT MEASUREMENT OF PPE

REVALUATION MODEL

FAIR VALUE

Revaluation Surplus – Other Comprehensive Income

Historical Cost
Revaluation Gain / (Loss) – Profit and Loss
 DERECOGNITION OF PPE
⮚ Carrying amount of an item of property, plant and equipment shall be
derecognized:
▪ on disposal; or
▪ when no future economic benefits are expected from its use or disposal.

⮚ Gain or loss on disposal is the difference between the proceeds and the carrying
amount and is recognized in profit or loss.

⮚ When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings. The transfer to retained earnings is not made through
profit or loss.
 PRESENATION AND DISCLOSURE
Plant & Motor
Building Total
Machinery Vehicle
COST
Opening Balance XXXX XXXX XXXX XXXX
Addition XXXX XXXX XXXX XXXX
Revaluation XXXX XXXX XXXX XXXX
Other Adjustment (XXX) (XXX) (XXX) (XXX)
Disposal (XXX) (XXX) (XXX) (XXX)
Closing Balance XXXX XXXX XXXX XXXX

ACCUMULATED DEPRECIATION / IMPAIRMENT

Opening Balance XXXX XXXX XXXX XXXX
Depreciation for the year XXXX XXXX XXXX XXXX
Other Adjustment (XXX) (XXX) (XXX) (XXX)
Disposal (XXX) (XXX) (XXX) (XXX)
Closing Balance XXXX XXXX XXXX XXXX

Carrying Amount XXXX XXXX XXXX XXXX

Measurement Model CM / RM CM / RM CM / RM CM / RM
Depreciation Method SLM / RBM SLM / RBM SLM / RBM SLM / RBM
Useful Life / Rate of Depreciation X% X% X% X%
 PRESENATION AND DISCLOSURE
If items of property, plant and equipment are stated
at revalued amounts, the following shall be disclosed
in addition to the disclosures required by IFRS 13:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) for each revalued class of property, plant and
equipment, the carrying amount that would
have been recognised had the assets been
carried under the cost model; and
(d) the revaluation surplus, indicating the change
for the period and any restrictions on the
distribution of the balance to shareholders.