Chapter 9

Property, Plant &

Equipment
Prepared by
Mark Vallely

Learning objectives
1. Discuss the nature of property, plant and equipment (p. 396)
2. Explain the recognition criteria for initial recognition of property, plant and
equipment (p. 398)
3. Describe how to measure property, plant and equipment on initial recognition
(p. 400)
4. Explain the alternative ways in which property, plant and equipment can be
measured subsequent to initial recognition (p. 405)
5. Explain the cost model of measurement and understand the nature and
calculation of depreciation (p. 406)
6. Explain the revaluation model of measurement (p. 414)
7. Confirm the factors to consider when choosing which measurement model to
apply (p. 427)
8. Account for derecognition (p. 428)
9. Apply the disclosure requirements of AASB 116 (p. 430).

The nature of PP&E

AASB 116 defines property, plant & equipment

(PP&E) as:
Tangible
Tangiblevs.
vs.intangible
intangibledistinction
distinction
discussed
in
Chapter
11
discussed in Chapter 11
tangible items
- - Production or supply of goods
Production or supply of goods
- - Rental to others
Rental to others
- - Administrative purposes
Administrative purposes

with a specific use within the entity

that are expected to be used during more than

one period (i.e. they are non-current in nature)

AASB 116 specifically excludes assets held for resale

PP&E is normally divided into classes (Refer Figure
9.1 Boral Ltd)

Initial recognition of PP&E

Cost of an item is recognised as an asset if:
it is probable that future economic benefits
associated with the item will flow to the entity,
and
the cost can be measured reliably

Asset or Expense?
Where future economic benefits are not expected
to flow to the entity, costs incurred should be
expensed
Is there a market for the item?
Is there a market for output produced by the item?

Initial recognition of PP&E

Component parts

Is there one asset or several

different assets?
Requires judgement the
standard does not prescribe
the unit of measurement
Are components separable?
Different useful life?

Generation of benefits

Each individual asset does

not need to generate
benefits
Is the asset necessary for the
entity to generate benefits?

Initial measurement of
PP&E
AASB 116 (para. 15)
An item of property, plant and equipment that
qualifies for recognition as an asset shall be
measured at its cost
AASB 116 (para. 6) Cost is defined as:
the amount of cash or cash equivalents paid or
the fair value of other consideration given to
acquire an asset at the time of its acquisition or
construction
AASB 116 (para. 6) Fair value is defined as:
the price that wold be received to sell an asset
or
paid
toMeasurement
transfer aisisliability
in
aninorderly
AASB
covered
Chapter
AASB13
13Fair
FairValue
ValueMeasurement
coveredin
indetail
detailin
Chapter55
transaction between market participants at the
measurement date

Initial measurement of
PP&E
AASB 116 (para. 16) specifies three

components of cost:

Purchase
price
duties
Purchase
price
Purchase
priceincludes
includes
dutiesand
andtaxes
taxesbut
butexcludes
excludestrade
tradediscounts
discountsand
and
rebates
rebatesand
andrefundable
refundabletaxes
taxes(e.g.
(e.g.GST)
GST)

Directly attributable costs required to bring the

asset
to the
and
condition
necessary
Includes:
site
preparation,
delivery,
installation
and
Includes:
sitelocation
preparation,
delivery,
installation
andtesting
testingfor it
Excludes:
to operate
Excludes:Costs
Costsof
ofopening/marketing
opening/marketingaanew
newfacility,
facility,admin
admin
Refer
Refersection
section9.3.2
9.3.2for
fordetailed
detaileditem
itemlists
lists

E.g.
E.g.an
anoffshore
offshoreoil
oilplatform
platform

Initial estimate of costs of dismantling, removing

the item or restoring the site

Initial measurement of
PP&E
Acquisition date
AASB 116 time of its (the assets) acquisition
AASB 3 Business Combinations the date on which the acquirer
obtains control of the acquiree
Important for FV measurements use the date the acquirer obtains
control of the asset

Acquisition of multiple assets

Assets are sometimes acquired as bundles of assets (e.g. a fleet of
cars) or jointly (e.g. land and buildings)
Cost is determined under AASB 116 as described already
AASB 116 does not prescribe how to cost each individual asset
AASB 3 (2b) requires allocation on the basis of relative fair values

Measurement subsequent to
initial recognition

AASB 116 allows a choice of two possible

measurement models:
Cost model
Revaluation model

Each
Eachmodel
modelwill
willbe
bediscussed
discussedinindetail
detail
ininthe
following
slides
the following slides

Accounting policy choice of this decision based

primarily on relevance of information.
The policy that is chosen must be applied to a whole
class of assets
Policy choice can be changed, but only if results in
more relevant/ reliable information

The cost model

AASB 116 requires that PPE assets are carried at

cost less any accumulated
Impairment
depreciation
Impairmentisisdiscussed
discussedin
indetail
detailin
inChapter
Chapter13
13
impairment losses

Repair and maintenance costs are expensed as

incurred, not capitalised

E.g. replacement of car tyres

Capitalisation requires (at time of expenditure)

increased probable future economic benefit

E.g. replacement of car engine

Depreciation
AASB 116 includes the following definitions:

Depreciation: the systematic allocation of the

depreciable amount of an asset over its useful life
Depreciable amount: the cost of an asset, or
other amount substituted for cost (fair value), less
its residual value
Residual value: the estimated amount that an
entity would currently obtain from disposal (net of
disposal costs) if the asset were already of the
age/condition expected at the end of its useful life
Useful life: the period over which an asset is
expected to be used by an entity/ the number of
production (or similar) units expected to be obtained
by the entity

Depreciation
Depreciation is a systematic allocation process
designed to reflect the pattern in which the assets
future economic benefits are expected to be
consumed by the entity
AASB 116 does not specify how this allocation
process should be undertaken.
Various depreciation methods are used in practice.
Common methods
are
discussed
onisthe following
In
all
cases,
depreciation
expense
In all cases, depreciation expense is
slide.
recognised
recognisedwith
withthe
thefollowing
followingjournal:
journal:
DR
DR Depreciation
Depreciationexpense
expense
CR
CR Accumulated
Accumulateddepreciation
depreciation

Depreciation
Commonly used depreciation
methods include:

Straight-line method benefits are

received evenly throughout its life
Diminishing balance method more
benefits received in earlier years of the life
of asset
Units of production method based on
expected use or output of asset
The method chosen should be the method
which most closely reflects the expected
pattern of consumption of the future
economic benefits embodied in the asset.

ED231 Clarification of
Acceptable Methods of
Depreciation and
Amortisation
- Revenue based method
should not be applied
- Focus on consumption
of economic benefits
- Further guidance
diminishing balance
method RE technical /
commercial
obsolescence

Depreciation
Useful life

Management should consider the following

factors when estimating the useful life of an
asset:

Periodic review

expected use
physical wear and tear
technical or commercial obsolescence
legal or similar limits
Depreciation method,
residual value and useful
life must be reviewed at
least at each year end

Land is a special type of

asset

Is not subject to
depreciation as it does not
have a limited useful life

The revaluation model

As an alternative to the cost model AASB 116 allows

the revaluation model to be used for classes of

assets
Measurement basis is fair value (FV)
AASB 13 Fair Value Measurement is covered in detail in Chapter 5

AASB 13 Fair Value Measurement is covered in detail in Chapter 5

Frequency of revaluations is not specified,

But it must be performed with sufficient regularity such that
the carrying amount of assets is not materially different
from their FV
Revaluation performed on a class basis
Accounting performed on an asset-by-asset basis

The revaluation model:

Revaluation increases Land
Revaluation increases and their related tax effects
are initially recorded in other comprehensive income
and then transferred to equity
Record the revaluation increase in OCI:
Dr Land
10,000
Cr Gain on revaluation OCI
10,000
Revaluation of land to fair value
Record the tax effect:
Dr Income tax expense - OCI
Cr Deferred tax liability
Tax effect of revaluation gain

3,000
3,000

The revaluation model:

Revaluation increases Land
Transfer the gain to equity:
Dr Gain on revaluation OCI
10,000
Cr Income tax expense - OCI
3,000
Cr Asset revaluation surplus
7,000
Accumulation of net revaluation gain in equity
The gain on revaluation and the related income tax
are reported in the Statement of Profit or Loss and
Other Comprehensive Income
As an item of other comprehensive income that will not be
reclassified to profit or loss
Refer
Referto
toFigure
Figure9.2
9.2

The revaluation model

Accounting on an asset-by-asset basis

ABC Ltd has decided to change from the cost

model to the revaluation model to account for
plant.
At 30Cost
June 2016
owned
following
Accum ABC
depn Ltd
Carrying
valuethe
Fair
value
Increases/
(Decreases)
plants:

Plant A

200,000

120,000

80,000

150,000

70,000

Plant B

140,000

40,000

100,000

80,000

(20,000)

TOTAL

340,000

140,000

200,000

230,000

50,000

A revaluation increase will be recorded for Plant

A and a revaluation decrease will be recorded
for Plant B.

The revaluation model:

Revaluation increases Plant
Depreciable assets and revaluation increases
Step 1: Write of the accumulated depreciation
Dr Accum. depreciation
120,000
Cr Plant
120,000
Removal of existing accumulated depreciation prior to
revaluation

Step 2: Record the revaluation increase in OCI:

Dr Plant
70,000
Cr Gain on revaluation OCI
70,000
Revaluation of plant to fair value
These
Theseentries
entriescan
canbe
becombined
combinedinto
intoaasingle
singleentry
entry

The revaluation model:

Revaluation increases Plant
Step 3: Record the tax effect of the revaluation
Dr Income tax expense - OCI
21,000
Cr Deferred tax liability
21,000
Tax effect of revaluation gain
Transfer the gain to equity is as follows:
Dr Revaluation gain OCI
70,000
Cr Income tax expense - OCI
21,000
Cr Asset revaluation surplus
49,000
Accumulation of net revaluation gain in equity

The revaluation model:

Revaluation decreases

The accounting treatment of a revaluation decrease

is as follows:
Immediate recognition of an expense
No extra tax-effect entries beyond the tax-effect
worksheet

The revaluation of Plant B would be recorded as

follows:
Dr Accum. depreciation
40,000*
Dr Loss on devaluation - P&L 20,000**
***Cost***Cost-FV
FV
Cr
Plant
60,000***
*Removal
of
existing
*Removal of existing
**Amount of decrease

**Amount of decrease
accumulated
Devaluation
accumulatedof plant to fair value
depreciation
depreciation

(140,000
(140,00080,000)
80,000)==60,000
60,000

The revaluation model:

Reversing previous increases
A decrease reversing a previous increase eliminates
any surplus before recognising an expense.
In relation to Plant B, assume that a gross
revaluation increase of $15,000 had been made in
2014.
The journal entries required are as follows:
Dr Accum. depreciation
40,000
Cr Plant
40,000

Removal of existing accumulated depreciation prior to

revaluation

Dr Loss on devaluation OCI 15,000

Dr Loss on devaluation P&L 5,000
Cr Plant
20,000
Devaluation of plant to fair value

The revaluation model:

Reversing previous increases

Record the tax effect of the OCI component of the

revaluation:
Dr Deferred tax liability
*
4,500
Cr Income tax expense - OCI
4,500
Tax effect of devaluation loss

**Reverse
Reversethe
theDTL
DTLrecognised
recognisedat
atthe
the
time
timeof
ofthe
theoriginal
originalincrease
increase

Transfer the previous gain from equity is as follows:

Dr Asset revaluation surplus
10,500
Dr Income tax expense - OCI
4,500
Cr Loss on devaluation - OCI
15,000
Removal of net revaluation gain from equity

The revaluation model:

Reversing previous
decreases

An increase reversing a previous decrease is

recognised as a gain.
In relation to Plant A, assume that a gross
revaluation decrease of $80,000 had been made in
2014.
The journal entries required are as follows:
Dr Accum. depreciation
120,000
Cr Plant
120,000
Removal of existing accumulated depreciation prior to
revaluation

The
Dr Plant
70,000
Thetax
taxeffect
effectis
iscaptured
capturedin
in
the
tax
effect
worksheet
the
tax
effect
IfIfthe
was
the
Cr Revaluation
70,000worksheet
theincrease
increase
was>>$80,000,
$80,000,gain
the P&L
amount
above
is
amount
above$80,000
$80,000
isrecorded
recorded
in
Revaluation
of plant
to fair in
value
OCI
OCI++Tax
Taxeffect
effect++Transfer
Transferto
toequity
equity

The revaluation model

Effects of accounting on an asset-byasset basis

Consider the facts of ABC Ltd again (assume this

Accum depn
Carrying value Fair value
Increases/
is the Cost
first revaluation)
(Decreases)

Plant A

200,000

120,000

80,000

150,000

70,000

Plant B

140,000

40,000

100,000

80,000

(20,000)

TOTAL

340,000

140,000

200,000

230,000

50,000

If we accounted on class of asset basis a net

revaluation increase will be recorded for Plant,
rather than:
Is asset-by-asset excessively conservative?

An increase for Plant A Is asset-by-asset excessively conservative?

A decrease for Plant B

The revaluation model:

Transfers from ARS
Transfers may be made from the Asset
Revaluation Surplus (ARS) in the following
circumstances:

When a revalued asset is derecognised (i.e.

scrapped or sold)DR
> ARS
the balance in the ARS may be
DR ARS
CR
earnings
CRRetained
Retained
earnings
transferred to retained
earnings.

When a revalued asset is being depreciated

>a
DR
ARS
DR ARS
CR
proportion of the ARS (in relation to depreciation)
CR Share
Sharecapital
capital
Allocating
the
from
on
Allocating
thedecrease
decrease
fromaabonus
bonusissue
issue
onan
anasset-by-asset
asset-by-asset
may
be
progressively
transferred
to retained
basis
is
arbitrary
basis is arbitrary
earnings over the useful life of the asset.

The revaluation model:

Depreciation of revalued
assets

When an asset is revalued, the depreciation charge

to be recorded over the remaining useful life of the
asset is recalculated by reference to the fair value of
the asset.
Assume that plant A was acquired on 1 July 2015.
At that time it was assessed to have a useful life of
ten years and a residual value of zero.
Prior to revaluation the annual depreciation charge
was:
$200,000/10 years = $20,000 per year
After revaluation on 1 July 2020
to
$150,000
the
FV/
FV/Remaining
Remaininguseful
usefullife
life
annual depreciation charge will be:
$150,000/5 years = $30,000

Choosing between the

models
Revaluation model provides
more relevant information
However, there is a cost
disincentive of adopting the
revaluation model
Cost model harmonises with
US GAAP
Differing impacts on profit &
loss

Higher depreciation charges?

Impact on key ratios

RoA and leverage (debt

covenants)

Derecognition

AASB 5 deals with assets held-for-sale

AASB 116 deals with disposals of PPE assets not
previously classified as held-for-sale

A Ltd acquired a machine on 1 July 2014 for $50,000

Useful life = 4 years; Residual value = $10,000
On 1 July 2016 the machine was sold for $45,000

The journal entries to account for the sale are:

Dr Cash
45,000
Dr Accum. depreciation
20,000
Cr Machine
50,000
Cr Gain on sale
15,000

PPE
PPEassets
assetsshould
shouldalso
alsobe
bederecognised
derecognisedwhen
whenno
nofuture
futureeconomic
economic
benefits
benefitsare
areexpected;
expected;e.g.
e.g.end
endof
oftheir
theiruseful
usefullife
life

Disclosure
Paras 73-79 of AASB 116 contain required
disclosures
Refer to Figure 9.8
Illustrative example of disclosures required by
AASB 116