TUTORIAL

MFRS 116: PROPERTY PLANT AND EQUIPMENT

IDENTIFICATION, CLASSIFICATION AND RECOGNITION OF ELEMENT

1. Anas Bhd is a leading garment manufaturer. Due to rapid expansion of its operations, the company
acquired additional machinery on 1 March 2011 for RM10,000,000. The machinery was to be tested
before it could be used. Following successful testing, an operating certificate was issued on 1 April
2011. The testing of the machinery and certification costs were RM300,000. All payments were
made immediately by cheque.

a. Does Anas Bhd have an asset? Briefly state reasons for your answer.

b. Is the asset an item of PPE? Why?

c. Under MFRS116 Property, Plant and Equipment, explain when the machinery can be
recognised and included in the financial statements.

2. On 1 January 2013, Anaqi Bhd purchased several new sets of leather furniture to replace old
furniture which was meant to be used in the head office for an estimated 10 years. The fair value of
the new furniture was RM130,000. The trade in allowance and accumulated depreciation of the old
furniture was RM30,000 and RM40,000 respectively. Anaqi made cash payment for the new
furniture of RM100,000.

a. Does Anaqi Bhd have an asset? Briefly state reasons for your answer.

b. Is the asset an item of PPE? Why?

c. Under MFRS116 Property, Plant and Equipment, explain when the furniture can be
recognised and included in the financial statements.

3. Amar Bhd acquired a building (fair value of RM10,000,000) from Island & Peninsular on 1 January
2013 to administer the company’s business. The building would house the accounting, human
resources and other administrative staff. Amar made immediate payment by cheque and expects to
use the building for about 50 years.

a. Does Amar Bhd have an asset? Briefly state reasons for your answer.

b. Is the asset an item of PPE? Why?

c. Under MFRS116 Property, Plant and Equipment, explain when the building can be
recognised and included in the financial statements.

4. Aniq Bhd is involved in the rental and retailing of motor vehicles. On 1 January 2013, the company
acquired 20 units of motor vehicles. 5 units were meant to be rented out to customers, while the
remaining units were meant for sale. The vehicles to be rented out were estimated to generate
income for a period of 10 years. The total purchase price of RM1,000,000 was paid in 3 installments.

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 The first 50% was paid immediately upon delivery. The remaining 50% was paid at the end of the
year, the present value being RM450,000.

a. Are the motor vehicles to be rented out to customers assets? Briefly state reasons for your
answer.

b. Are the motor vehicles to be rented out to customers items of PPE? Why?

c. Are the motor vehicles to be sold assets? Briefly state reasons for your answer.

d. Are the motor vehicles to be sold items of PPE? Why?

e. Under MFRS116 Property, Plant and Equipment, explain when the motor vehicle can be
recognised and included in the financial statements.

IDENTIFICATION AND CLASSIFICATION OF AN ELEMENT

5. DNN is a biscuits manufacturing company which produces 100kg of biscuits per month. The factory
has 5 ovens worth RM21,000 each, 3 industrial mixers costing RM3,500 each and 10 shelves of
RM1,800 each. The ovens and industrial mixers are expected to be used for 8 years and 10 years
respectively.

a. Does the company have an asset(s)?

b. Is the asset(s) identified in (a) an item of PPE?

.
6. Nana Bhd owns 80 deer and 60 goats that form the breeding stock of its agricultural activities. The
livestock are placed at different fenced areas. The entity owns 4 trailers, 1 pick-up and 2 tractors.
These vehicles are used to transport feed to the livestock.

a. Does the company have an asset(s)?

b. Is the asset(s) identified in (a) an item of PPE?

7. CK Land Bhd located in Perlis owns two tracts of land, land A and land B. Land A is a harumanis
orchard and land B is indeterminable future use.

a. Does the company have an asset(s)?

b. Is the asset(s) identified in (a) an item of PPE?

8. AMN Bhd constructed 50 units of shops and 20 units of terrace houses for sale. The company also
constructed 2 units of temporary houses for the use of the construction workers during the
construction period of 2 years.

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 a. Does the company have an asset(s)?

b. Is the asset(s) identified in (a) an item of PPE?

RECOGNITION OF AN ELEMENT

9. DNN is a biscuits manufacturing company which produces 100kg of biscuits per month. The factory
has 5 ovens worth RM21,000 each, 3 industrial mixers costing RM3,500 each and 10 shelves of
RM1,800 each. The ovens and industrial mixers are expected to be of use for 8 years while the
shelves for 10 years.

During festive season, the demand for biscuits increases. The company decided to install two
generators as backup in case there is electricity failure. One generator provides electricity when the
normal supply of electricity is interrupted. The second backup generator will be used in the unlikely
event that the first backup generator also fails.

Under MFRS116 Property, Plant and Equipment, explain when the generators can be recognised and
included in the financial statements.

MEASUREMENT

10. On 1 January 2011, AB Noodles Manufacturing Bhd. purchased a machine for making noodles for
RM50,000 paying a cheque for the purchase. On 2nd January 2011 another noodle making machine
was purchased for RM40,000, to cater for the increase in the business. The total transportation cost
to bring the machine from the supplier to the factory was RM7,000 and the installation cost
incurred was RM5,000.

Explain which of the costs incurred may be part of the cost of the noodle machine at the initial
recognition.

11. On 1 January 2009, Kay acquired a plant and machinery where the supplier iniatially quoted total
payments of RM500,000. Due to close family relationship , Kay was given a rebate of RM 50,000.
The payment was to be made in three equal installments . The first installment was made upon
delivery, while the second and third installments were payable every half yearly on 30 June 2009
and 31 December 2009. The present value of the respective deferred payments were RM 120,000
and RM110,000. Delivery and handling costs of RM18,000 were paid immediately.

Explain which of the costs incurred may be part of the cost of the plant and machinery at the initial
recognition.

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12. A building was constructed using the company’s own resources- direct materials (RM4,000,000),
direct labour ((RM900,000), direct overheads(RM500,000) and general administrative overheads
(RM300,000). Payment for engineer and architect fees were RM100,000 and RM150,000
respectively. Materials wastage was RM80,000.

Explain which of the costs incurred may be part of the cost of a building at the initial recognition.

13. On 1 January 2012, AQ decided to trade in an old vehicle which was purchased on 1 january 2010
costing RM100,000 for a new vehicle . The trade in allowance and accumulated depreciation on the
old vehicle was RM50,000 and RM20,000 respectively. Cash payment for the new vehicle was
RM170,000.

Explain which of the costs incurred may be part of the cost of the vehicle at the initial recognition.

14. On 1 January 2007, Jay Bee Bhd bought an excavator machine for its mining operation on an
instalment basis. The cost of the machine was RM700,000. The first instalment of RM500,000 was
paid on 1 January 2007 and the second instalment amounting to RM200,000 will be paid on 31
December 2008. Jay Bee also paid incidental cost i.e to install the machine amounting to RM20,000
in relation to the acquistion of the machine.

The environmental department requires that the machine be dismantled after its life span. The cost
of dismantling the machine is estimated at RM10,000 and the estimated life span of the machine is
5 years. The weighted average cost of capital of Jay Bee is 10% per annum. Jay Bee closes its
accounts on 31 December each year. The discount factor of the present value of RM1 is as follows:

Period Discount factor at 10%

1 0.90909
2 0.82645
3 0.75131
4 0.68301
5 0.62092

Required:
i. Calculate the initial measurement of the excavator machine as at 1 January 2007
ii. Prepare the journal entries to record the above transactions as at 1 January 2007
(5 marks)

15. To maintain competitive within automotive industry, Trans Auto Bhd on 1 January 2009 had
acquired an equipment with latest technology for RM1,500,000. Term of payment was the company
need to pay 30% upon delivery of the equipment and the balance need to be settled within 2 equal
installments on 1 January 2010 and 1 January 2011.

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It is estimated that the useful life of the equipment is 5 years. The company also have to incurred
installation and commissioning fee of RM150,000 upon delivery of the equipment. At the end of the
useful life of the assets, the company is required to dismantle the equipment and the cost for
dismantling is estimated to RM100,000. The cost of capital of Trans Auto Bhd was 10% per annum.

Required:
a. Determine the initial cost of the equipment.
(4 marks)

b. Show journal entries to record the relevant transactions for the year ended 31 December 2009.
(3 marks)

c. Prepare income statement and balance sheet (extracted) for the accounting year ended 31
December 2010 and 2011.
(8 marks)
NOTES;
1. Show your workings clearly (where possible)
2. Round-off your figure to the nearest RM.
3. The discount factor of the present value of RM1 is as follows:

Period Discount factor

at 10%
1 0.90909
2 0.82645
3 0.75131
4 0.68301
5 0.62092
6 0.65403
7 0.51321
8 0.46752
9 0.42433
10 0.38645

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SUMMARY OF IAS 16
IAS 16 — Property, Plant and Equipment

Overview
IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property,
plant and equipment. Property, plant and equipment is initially measured at its cost, subsequently
measured either using a cost or revaluation model, and depreciated so that its depreciable amount is
allocated on a systematic basis over its useful life.

IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January
2005.

History of IAS 16

Date Development Comments

August 1980 Exposure Draft E18 Accounting for Property,

Plant and Equipment in the Context of the
Historical Cost Systempublished

March 1982 IAS 16 Accounting for Property, Plant and Operative for financial
Equipment issued statements covering
periods beginning on or
after 1 January 1983

1 January 1992 Exposure Draft E43 Property, Plant and

Equipment published

December 1993 IAS 16 Property, Plant and Equipmentissued Operative for financial
(revised as part of the 'Comparability of statements covering
Financial Statements' project) periods beginning on or
after 1 January 1995

April and July 1998 Amended to be consistent with IAS 22, IAS Operative for annual
36 and IAS 37 financial statements
covering periods beginning
on or after 1 July 1999

18 December 2003 IAS 16 Property, Plant and Equipmentissued Effective for annual periods
beginning on or after 1
January 2005

22 May 2008 Amended by Improvements to IFRSs(routine Effective for annual periods

sales of assets held for rental) beginning on or after 1
January 2009

17 May 2012 Amended by Annual Improvements 2009-2011 Effective for annual periods

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 Cycle (classification of servicing equipment) beginning on or after 1
January 2013

12 December 2013 Amended by Annual Improvements to IFRSs Effective for annual periods
2010–2012 Cycle (proportionate restatement beginning on or after 1 July
of accumulated depreciation under the 2014
revaluation method)

Related Interpretations
o IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
o SIC-6 Costs of Modifying Existing Software. SIC-6 was superseded by and incorporated into IAS 16
(2003).
o SIC-14 Property, Plant and Equipment – Compensation for the Impairment or Loss of Items.SIC-14
was superseded by and incorporated into IAS 16 (2003).
o SIC-23 Property, Plant and Equipment - Major Inspection or Overhaul Costs. SIC-23 was superseded
by and incorporated into IAS 16 (2003).

Amendments under consideration by the IASB

o IAS 16/IAS 38 - Revenue based depreciation and amortisation

Summary of IAS 16

Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The
principal issues are the recognition of assets, the determination of their carrying amounts, and the
depreciation charges and impairment losses to be recognised in relation to them.

Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another standards
requires or permits differing accounting treatments, for example:
 assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
 biological assets related to agricultural activity accounting for under IAS 41 Agriculture
 exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and
Evaluation of Mineral Resources
 mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three
categories of assets. [IAS 16.3]
The cost model in IAS 16 also applies to investment property accounted for using the cost model
under IAS 40 Investment Property. [IAS 16.5]

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Recognition
Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS
16.7]
 it is probable that the future economic benefits associated with the asset will flow to the entity,
and
 the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property,
plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) 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 must be depreciated separately. [IAS 16.43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement
at regular intervals. The carrying amount of an item of property, plant, and equipment will include the
cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future
benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is
derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognised in the carrying amount of the item of
property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary,
the estimated cost of a future similar inspection may be used as an indication of what the cost of the
existing inspection component was when the item was acquired or constructed. [IAS 16.14]

Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes
all costs necessary to bring the asset to working condition for its intended use. This would include not
only its original purchase price but also costs of site preparation, delivery and handling, installation,
related professional fees for architects and engineers, and the estimated cost of dismantling and
removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent
Assets). [IAS 16.16-17]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost
will be measured at the 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. If the acquired
item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS
16.24]

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Measurement subsequent to initial recognition
IAS 16 permits two accounting models:
 Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS
16.30]
 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be
measured reliably. [IAS 16.31]

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount
of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]
If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS
16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a
revaluation decrease of the same asset previously recognised as an expense, in which case it should be
recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS
16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss. [IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over the
asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a
change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the entity [IAS 16.60];
The depreciation method should be reviewed at least annually and, if the pattern of consumption of
benefits has changed, the depreciation method should be changed prospectively as a change in estimate
under IAS 8. [IAS 16.61]
Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another
asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is derecognised,
even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for
property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more

9
than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and
its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the
claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on
disposal is the difference between the proceeds and the carrying amount and should be recognised in
profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of business.
[IAS 16.68A]

Disclosure

Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]
 basis for measuring carrying amount
 depreciation method(s) used
 useful lives or depreciation rates
 gross carrying amount and accumulated depreciation and impairment losses
 reconciliation of the carrying amount at the beginning and the end of the period, showing:
o additions
o disposals
o acquisitions through business combinations
o revaluation increases or decreases
o impairment losses
o reversals of impairment losses
o depreciation
o net foreign exchange differences on translation
o other movements

Additional disclosures
The following disclosures are also required: [IAS 16.74]
 restrictions on title and items pledged as security for liabilities
 expenditures to construct property, plant, and equipment during the period
 contractual commitments to acquire property, plant, and equipment
 compensation from third parties for items of property, plant, and equipment that were impaired,
lost or given up that is included in profit or loss.

IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]

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Revalued property, plant and equipment
If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are
required: [IAS 16.77]
 the effective date of the revaluation
 whether an independent valuer was involved
 for each revalued class of property, the carrying amount that would have been recognised had
the assets been carried under the cost model
 the revaluation surplus, including changes during the period and any restrictions on the
distribution of the balance to shareholders.
Entities with property, plant and equipment stated at revalued amounts are also required to make
disclosures under IFRS 13 Fair Value Measurement.

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