Topic 9: IAS 16

• Costs that are included in the cost of an item of property, plant and equipment


  • equipment
  • costs of site preparation
  • initial delivery and handling costs
  • installation and assembly costs
  • costs of testing whether the asset is functioning properly
  • professional fees
• An entity applies IAS 2 Inventories to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period
• The obligations for costs accounted for in accordance with IAS 2 or IAS 16 are recognised and measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
• Examples of costs that are not costs of an item of property, plant and equipment

  • 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)
  • administration and other general overhead costs
• Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management
• Examples of costs that are not included in the carrying amount of an item of property, plant and equipment

  • costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity
  • initial operating losses, such as those incurred while demand for the item's output builds up
  • costs of relocating or reorganising part or all of an entity's operations
• Items may be produced while bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management (such as samples produced when testing whether the asset is functioning properly)
• The entity measures the cost of those items applying the measurement requirements of IAS 2
• Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management
• The income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense
• The cost of a self-constructed asset is determined using the same principles as for an acquired asset
• If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale
• The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset
• Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management
• Measurement of cost


  The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date
• If payment is deferred beyond normal credit terms

  The difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23
• Measurement of cost when acquired in exchange for a non-monetary asset

  1. The cost is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable

  2. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up
• Commercial substance of an exchange transaction

  • The configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred
  • The entity-specific value of the portion of the entity's operations affected by the transaction changes as a result of the exchange
  • The difference in (a) or (b) is significant relative to the fair value of the assets exchanged
• Reliable measurement of fair value


  • The variability in the range of reasonable fair value measurements is not significant for that asset
  • The probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value
• The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
• Measurement after recognition


  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
• An entity may elect to measure owner-occupied properties that are included in an investment fund or are underlying items using the fair value model in accordance with IAS 40
• An entity shall treat owner-occupied property measured using the investment property fair value model as a separate class of property, plant and equipment
• Cost model


  After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses
• Revaluation model


  After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses
• Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period
• Frequency of revaluations

  • Depends upon the changes in fair values of the items of property, plant and equipment being revalued
  • When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required
  • Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation
  • For items with only insignificant changes in fair value, it may be necessary to revalue the item only every three or five years
• Revaluation of an item of property, plant and equipment

  1. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset

  2. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses

  3. The accumulated depreciation is eliminated against the gross carrying amount of the asset
• If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued
• Examples of separate classes of property, plant and equipment

  • land
  • land and buildings
  • machinery
  • ships
  • aircraft
  • motor vehicles
  • furniture and fixtures
  • office equipment
  • bearer plants
• The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates
• Accounting for revaluation increase

  1. The increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus

  2. The increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
• Accounting for revaluation decrease

  1. The decrease shall be recognised in profit or loss

  2. The decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset
• The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised
• The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes
• Depreciation


  Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately
• An entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part
• A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item
• To the extent that an entity depreciates separately some parts of an item of property, plant and equipment, it also depreciates separately the remainder of the item
• Depreciation of property, plant and equipment

  • It may be appropriate to depreciate separately the airframe and engines of an aircraft
  • If an entity acquires property, plant and equipment subject to an operating lease in which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms