IAS 16: Property, Plant and Equipment

Last updated: January 2014

SCOPE
Apply to: Property, plant and equipment (PPE) = tangible items held for use in production/supply
of goods/services, rental to others, or administrative purposes AND expected use > 1 period.
Examples: land, buildings, machinery, vehicles, etc. ALSO investment property @ cost (see IAS 40).

RECOGNITION AND INITIAL MEASUREMENT

Does NOT apply when another Standard requires/permits different treatment: PPE classified as held for
sale (IFRS 5); biological assets related to agriculture (IAS 41); recognition and measurement of exploration
and evaluation assets (IFRS 6); and mineral rights/reserves. Recognition of leased PPE is based on IAS 17.

SUBSEQUENT MEASUREMENT

Recognize and measure cost of item as an asset if: probable that future economic
benefits associated with item will flow to entity AND cost can be measured reliably.

REVALUATION MODEL:
Apply
If FV reliably measurable carry at revalued amount LESS subsequent accumulated depreciation &
either
accumulated impairment.
PPE that enables entity to derive future economic benefits from related assets
(to entire
Revalued amount = FV at date of revaluation.
qualifies for recognition.
class of
Revalue regularly so that carrying amount not materially different from FV at period end.
Parts replaced at regular intervals recognize new part if recognition criteria met
PPE):
Revalue entire class simultaneously or on rolling basis within short period of time.
AND derecognize the parts replaced.
Accumulated depreciation is either: restated proportionately (usually when replacement costs
Spare parts, stand-by equipment, servicing equipment recognize as PPE if meet
determined) OR eliminated against gross carrying amount & net amount then restated.
definition of PPE, otherwise classify as inventory.
in carrying amount = recognize in other comprehensive income (under Revaluation Surplus
COST
MODEL:
Major inspections recognize cost in carrying amount as replacement regardless if
heading) EXCEPT to extent reverses previous /impairment recognized in P/L for same asset then
Carry at cost
previous inspection was identified in initial transaction.
first recognized in P/L.
LESS
Day-to-day servicing/maintenance/repairs (e.g., labour, consumables, small parts)
in carrying amount = recognize in P/L EXCEPT to extent that credit balance exists in revaluation
accumulated
no additional economic benefits recognized in P/L.
surplus related to same asset then rst reduced to zero.
depreciation &
Cost comprises: purchase price, including import duties and non-refundable purchase impairment
Revaluation surplus included in equity may be transferred directly to retained earnings when asset is
taxes, after deducting trade discounts and rebates.
derecognized or some of the surplus may be transferred as the asset is used.
Directly attributable costs to bring asset to location/condition for intended
operation.
DEPRECIATION
Initial estimate of cost to dismantle/remove item and restore site:
- Obligation incurred either when item is acquired (IAS 16) OR as consequence of Depreciation = Systematic allocation of depreciable amount over useful life.
having used it during a particular period (if to produce inventories IAS 2 applies, Recognize in P/L [unless included in carrying amount of another asset (e.g., depreciation of manufacturing
equipment included in cost of inventory)].
otherwise IAS 16). Apply IAS 37 to the obligation.
Reflect pattern of usage/consumption (e.g., straight-line, diminishing balance, units of production).
Measure cost at: cash price equivalent (at recognition date) if payment deferred
Componentization = part of PPE significant in relation to total cost depreciate component part separately.
beyond normal credit terms interest recognized over credit period.
Depreciable amount = cost (or amount substituted for cost) less residual value.
Non monetary exchanges measure at FV UNLESS transaction has no commercial
Residual value = estimated amount currently obtainable (less disposal costs) if PPE were already of age and in
substance/FV not reliable (see IAS 16 for more guidance).
condition expected at end of useful life in practice often insignificant.
PPE held by lessee under finance lease (see IAS 17).
Useful life = expected period over which asset is available for use OR expected units of production.
Carrying amount may be reduced by government grant (see IAS 20).
Consider expected capacity and physical output; expected wear and tear; technical/commercial obsolescence; or
May include borrowing costs (see IAS 23).
legal or similar limits.
Directly Attributable Costs
Costs NOT Included in PPE
Use judgment based on entitys experience with similar assets.
Review residual value, useful life and depreciation method at least every year-end  /^
Employee benefits arising
Cost of opening new facility, introducing new
8.
directly from
product or service (advertising/promotion).
construction/acquisition.
Staff training, admin and OH.
DERECOGNITION
Site prep, delivery, installation, Costs incurred while item capable of operation
Derecognize carrying amount on disposal/when no future economic benefits expected from use/disposal
assembly.
not yet brought into use.
Apply IAS 18 to determine disposal date on sale (or IAS 17 if finance lease).
Testing if functioning properly
Initial operating losses while demand builds.
Gain/loss = net proceeds MINUS carrying amount.
(less net proceeds on sale of
Incidental costs/income (e.g., rent out of site).
Recognize in P/L when asset derecognized (unless sale & leaseback see IAS 17).
samples produced).
DO NOT classify as revenue, unless routinely sell items held for rental to others transfer carrying amount to
Professional fees.
inventory and recognize revenue.
Apply IAS 36 to determine impairment and
Compensation from third parties for PPE that was impaired/lost/given up recognized in P/L when receivable.
OTHER POINTS
related accounting.
This communication contains a general overview of IAS 16: Property, Plant & Equipment. This summary is not comprehensive and should be considered only in conjunction with review and consideration of the requirements of the relevant International Financial
Reporting Standards. This information is current as at January 2014 and should not be regarded as a substitute for professional advice. MNP LLP accepts no responsibility or liability for any loss or damage caused by your reliance on information contained in this
publication. Please contact your MNP representative for additional advice/guidance on a specific situation. MNP LLP 2014. All Rights Reserved.