IAS 16 Property, Plant and Equipment

Characteristics:
1. Tangible
2. Used in business
3. To be used more than one year
Does not apply to:
a. ppe classified as held for sale
b. biological assets related to AGRICULTURAL activity
c. exploration and evaluation assets (mineral resources)
d. mineral rights and reserves (oil, natural gas, non regenerative resources)
Entity Specific Value PV of all cash flows including cash flow from disposal
Property, Plant and Equipment
1. held for use in the
production/supply of goods/services
for rental to others
for administrative purposes
2. to be used for more than one period
Recoverable amount higher of FV less costs to sell and value in use
Recognition of PPE Criteria:
1. Probable future economic benefits
2. Costs can be measured reliably
Spare Parts and Servicing Equipment
carried as inventory
recognized in P/L when consumed
MAJOR Spare Parts and Stand-by Equipment
when used for more than one period PPE
when it can only be used ONLY in connection with PPE PPE
INITIAL COSTS
PPE acquired for safety/environmental reasons are recognized as PPE.
SUBSEQUENT COSTS
Day-to-day costs of servicing of the PPE (repairs and maintenance) NOT
capitalized, outright expense
Parts that are replaced capitalized; the replaced parts are derecognized
MAJOR inspection is performed capitalized as a replacement
INITIAL MEASUREMENT
- recognized at COST
ELEMENTS OF COST
Cost of PPE comprises:
a. purchase price, import duties, nonrefundable taxes, net of discounts and
rebates
b. cost to bring the asset at location AND condition for it to be capable of
operating
c. cost of dismantling/removing the item
d. restoration costs
e. obligations incurred for purposes OTHER than to produce inventories
Directly attributable costs:
a. employee benefits
b. cost of site preparation
c. initial delivery and handling costs
d. installation and assembly costs
e. cost of testing, net of proceeds from sale of prototype
f. professional fees
Obligations incurred for dismantling/removing/restoring as a consequence
of production of inventories apply IAS 2, inventories NOT IAS 16
NOT COSTS OF PPE:
a. cost of opening a new facility
b. cost of introducing new product/service (advertising/promotion)
c. conducting business in new location or to new customers
d. administration/overhead
When capitalization of cost to PPE CEASES?
- when the item is in the location and condition necessary for it to be capable
of operating
e.g.
a. costs incurred while item is capable of operation but NOT yet brought
into use OR operated in less than capacity
b. initial operating losses
c. cost of relocation/reorganizing OPERATIONS
Incidental Operations
- its nature being unnecessary to bringing the asset to condition and location
necessary for operation; hence, NOT CAPITALIZED, recorded separately as
regular income and expense
Self-Constructed Assets
- internal profits deducted to arrive at net cost
Abnormal Waste
- NOT capitalized
MEASUREMENT OF COST
Cash Basis: Cash price equivalent
Installment: At Cash price equivalent, difference between total payment and
cash price recognized as interest
Acquired Asset through exchange
- measured at FAIR VALUE
- unless
a. LACKS commercial substance
b. FV or asset received nor given up is RELIABLY measurable
- if not measured at FV, measured at CARRYING amount of asset GIVEN up,
NO GAIN OR LOSS IS RECOGNIZED WHEN THERE IS NO COMMERCIAL SUB
WHEN IS THERE COMMERCIAL SUBSTANCE?
a. configuration risk (risk, timing and amount) of cash flows of asset
received and given up differ
b. entity-specific-value affected by the transaction changes
c. difference in A and B is significant relative to FV of assets exchanged
- CASH FLOWS REFERRED TO ARE POST-TAX

WHEN FAIR VALUE MEASURABLE EVEN IF NO COMPARABLE MARKET
TRANSACTIONS EXISTS
a. INsignificant variability of reasonable FV estimates
b. Probability of various estimates are reasonably assured
FV of asset given up is PREFERRED over FV of asset of acquired
Except: when FV of acquired is MORE RELIABLE/CLEARLY EVIDENT
Cost of PPE under Finance Lease is determined with IAS 17
IAS 16 Property, Plant and Equipment

CARRYING AMOUNT of PPE may be REDUCED by government grants
SUBSEQUENT MEASUREMENT
Choose between:
a. Cost model
b. Revaluation Model
COST MODEL
- Cost less accumulated depreciation and accumulated impairment losses
REVALUATION MODEL
- revalued amount less SUBSEQUENT accumulated depreciation and
SUBSEQUENT impairment losses
Fair Market Value Determined by APPRAISAL
If no market-based evidence of FV due to specialized nature/rarely sold, an
entity may use:
a. income /depreciated replacement cost approach
Frequency of revaluation depends of frequency of changes in FV.
Significant changes ANNUAL
Insignificant every 3-5 years
TREATMENT OF ACCUMULATED DEPRECIATION when revaluing PPE
a. restated proportionately (used when determining depreciated
replacement cost) PROPORTIONAL APPROACH
b. eliminated against gross carrying amount, then gross amount revalued
(commonly used for buildings) ELIMINATION APPROACH
If an item of PPE is revalued, the entire class is revalued
Classes of PPE
a. Land
b. Land and building
c. Machinery
d. Ships
e. Aircraft
f. Motor vehicles
g. Furniture and fixtures
h. Office equipment
GR: Items must be revalued simultaneously
E: Rolling basis is allowed if it revaluation will be completed within a short
period
INCREASE as a result of revaluation
a. Apply to previously recognized revaluation loss
b. Apply to revaluation surplus
DECREASE as a result of revaluation
a. Apply to previously recognized revaluation surplus
b. Recognize as expense/loss
TREATMENT OF REVALUATION SURPLUS
a. May be transferred to RE upon DISPOSAL/RETIREMENT
b. May be transferred to RE through DEPRECIATION *Piecemeal
Realization
DEPRECIATION
- Each item of PPE is depreciated SEPARATELY
- Parts of the same useful life and depreciation method may be
depreciated in groups
- An entity may choose to depreciate separately items that have
INSIGNIFICANT costs
- GR: Depreciation recorded in P/L
E: when it forms part of another asset
WHEN RESIDUAL VALUE REVIEWED?
- annually
- changes in residual value accounted for as change in ESTIMATE
- Repair and maintenance does not negate the need to
depreciate PPE.
- In practice, residual value of an asset is OFTEN INSIGNIFICANT
- When RESIDUAL VALUE > CARRYING AMOUNT, deprecation is 0
WHEN DOES DEPRECIATION BEGIN?
- When asset is in the location and condition for it to be capable of
operating in the manner intended by management
WHEND DOES IT CEASE?
Earlier of:
a. date of classification as held for sale
b. date of derecognition
Depreciation DOES NOT cease when asset becomes idle or is
retired from active use UNLESS fully depreciated.
HOWEVER, depreciation may be 0 if there is no production under
the usage method of depreciation.
- the useful life of an asset may be shorter than its economic life
- land and building are accounted for SEPARATELY
- if cost of land includes cost of site dismantlement, removal and
restoration, that portion is depreciated
WHEN SHOULD DEPRECIATION BE REVIEWED?
- annually
COMPENSATION FOR IMPAIRMENT FROM THIRD PERSONS
- shall be recognized when RECEIVABLE @ FV in OCI, if not, P/L
DERECOGNITION
When:
a. disposal
b. when no future economic benefits are expected
Gains and Losses recorded in P/L.
GAINS SHALL NOT BE CLASSIFIED AS REVENUE.
Previously rented out assets reclassified to inventory, gains on sale shall be
classified as REVENUE.
Disposal may occur through
a. sale
b. disposal
c. lease out under finance lease
d. donation
When an item is replaced, the replaced item is derecognized at its carrying
amount. If the item was not previously recognized at a separate cost, the
replacing item may serve as the estimate of the probable cost of the replaced
item.
IAS 16 Property, Plant and Equipment

CHANGES in estimates may arise from changes in:
a. residual value
b. estimated costs of dismantling, removing, restoring
c. useful lives
d. depreciation methods
ENCOURAGED ISCLOUSRES
a. idle PPE
b. fully depreciated PPE
c. retired from active use
d. FV of PPE when cost model is used