IAS 16 - PPE

• PPE: Definition


  Tangible, held for use in the production of goods or delivery of services or for an administrative purpose, expected to use more than 12 months. Examples: land and buildings, plant and machinery, motor vehicles and office equipment. Classified as non-current assets in Statement of Financial Position (SFP).
• PPE: Definition (cont'd)


  • Production / Supply of good or services
  • Administrative purposes
  • Sale in ordinary course of business
  • To earn rentals – land and buildings
  • For capital appreciation or both
• Recognition and Measurement


  • The PPE is recognised based on the following conditions: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably
• Cost of a PPE

  Purchase price, including non-recoverable duties and taxes, less trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and the initial estimate of the costs of dismantling and removing the items and restoring the site on which it is located
• Directly attributable costs


  • Salary and wages (including benefits) arising from construction of the PPE
  • Professional fees (e.g. legal cost and architects' fees)
  • Site preparation cost and delivery cost
  • Assembly cost and testing cost (income generated during testing can be deducted as part of the initial PPE cost)
• Costs that do not qualify for capitalisation

  • Cost of new product
  • Advertising and marketing costs
  • General overhead
  • Staff training
• Repairs cost


  The costs of day-to-day servicing of an asset are not included in the carrying amount of the asset but expensed when incurred
• Replacement Parts


  Should be capitalised but the original part must derecognised at the time of replacement
• Separate Components


  If a PPE consist with number of components with different useful life, the components are depreciated separately based on individual useful life. The component approach is also applied where regular major inspections (e.g. aircraft) of an asset are a condition of continuing to use it. The cost of each inspection is treated as a separate item (replacement) of PPE.
• Subsequent Measurement


  • IAS 16 sets out two models for subsequent measurement: Cost model = Cost less Accumulated Depreciation less accumulated impairment loss (if any). Revaluation model = Fair Value less subsequent Accumulated Depreciation less subsequent impairment loss (if any). The above accounting policy choice must be applied across an entire class of PPE. Revaluation frequency – not specified but maximum interval is 5 years.
• Straight-line method


  Formula: (cost of asset – Residual value)/useful life. Calculation: ($25,000 - $500)/10 = $2,450
• Diminishing (or reducing) balance method

  Formula: Current Carrying Value x Depreciation Rate. Calculation: $25,000 x 30% = $7,500
• Units of production method

  Formula: (cost of asset – Residual value)/estimated units over asset's life x actual units made. Calculation: ($25,000 - 500)/50,000 units x 5,000 units = $2,450
• Important Pointers!!


  • Depreciation should commence when the asset is ready to use not when it is in use
  • Depreciation continues even if the asset lies idle
  • Depreciation only ceases when the asset is derecognized
  • Useful life and residual amount are reassessed every year. Change is applied prospectively
  • Can change depreciation method but only if there is a change in the pattern of consumption of economic benefits. Change is applied prospectively
• Accounting for Revaluation - Increase in value

  Restate asset's cost to the new valuation (latest fair value), eliminate any existing accumulated depreciation for the asset, show the total increase (FV minus CV) in Other Comprehensive Income. This would then be taken to the revaluation surplus.
• Accounting for Revaluation - Decrease in value

  Restate asset's cost to the new valuation (latest fair value), the decrease in value should reverse an earlier revaluation increase on the same asset (up to '0') and the remaining as an expense in profit or loss statement.
• Accounting for Revaluation - Depreciation

  Depreciation must be charged, based on latest valuation less residual value, over the remaining useful life of the asset. The depreciation charge must be recognized in profit or loss statement. An annual reserves transfer may be made, from revaluation surplus to retained earnings, for the additional depreciation charged on the revalued amount compared to cost - This permitted treatment under IAS 16 is to address the imbalance between a non-distributable gain held in revaluation surplus and the reduction in retained earnings due to the increased depreciation charge.
• Accounting for Revaluation - Summary

  • Increase in value: Restate asset's cost to the new valuation, eliminate any existing accumulated depreciation, show the total increase in Other Comprehensive Income
  • Decrease in value: Restate asset's cost to the new valuation, the decrease should reverse an earlier revaluation increase (up to '0') and the remaining as an expense in profit or loss
  • Depreciation: Charged based on latest valuation less residual value, over remaining useful life, recognized in profit or loss. Annual reserves transfer from revaluation surplus to retained earnings for additional depreciation charge
• Derecognition


  The carrying amount of an item of PPE shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal. Gain or loss on derecognition is calculated as disposal proceeds – carrying amount of PPE, and shall be included in profit or loss.
• Derecognition - Revaluation Model

  Gain or loss on disposal recognized in profit or loss statement. Balance on the revaluation surplus relating to this asset should now be transferred to retained earnings. Don't reclassified to profit or loss statement.