Assets IAS 16 PPE

Assets
Ibrahim A Ganiyu
(PPE)IAS 16: Property, Plant & Equipment

2Ibrahim Ganiyu/Asset/IAS 16
Students should be able to:
 Define assets and distinguish between:
 Current and non-current assets
 Tangible and intangible assets
 Calculate the initial cost of a non-current asset
Learning Outcomes

Reporting standards used:
 IASB Conceptual Framework for Financial Reporting
 IAS 16 Property, Plant and Equipment
 IAS 1 Presentation of Financial Statements
 IAS 23 Borrowing Cost
 IAS 37 Provisions, Contingent Liability and Contingent Assets
 IFRS 13 Fair value measurement
Reporting standards

Definition of Assets
IASB Conceptual Framework for Financial Reporting defines an asset as:
“a resource controlled by an entity as a result of past events
and from which future economic benefits are expected to flow to
the entity.”
Essential elements of definition of an asset:
 Control is essential and not necessarily ownership.
 Past events: purchase or produce or an agreement to control the
economic benefits of an asset not owned by the entity
 The future economic benefits: the use of an asset to produce goods or
services, use of asset as security to secure another asset, or to settle
liability etc.

Categories of Assets
Non-current Assets
Resources controlled by an entity
as a result of past events, in order
to gain future economic benefit for
more than one period to the end
of the current reporting period
Current Assets:
these are resources controlled to gain
future economic benefits within the
next 12 months to the end of the
reporting period and are generally
assets held for resale or consumption in
the normal operating circle.
It includes the followings:
 Inventory (IAS 2)
 Trade and other receivables
 Bank and Cash in Hand
Assets are categorised into two as follows (IAS 1):

Types of Assets
Two forms of assets are generally used to gain future economic benefits
 Assets with physical form such as machinery, property and equipment
 Assets without any physical form e.g. brand names, copyrights etc.
Hence there are generally 2 types of assets as follows:
Types of Assets
Intangible AssetsTangible Assets
IAS 16
 IAS 16 set out the reporting principles for tangible non-current assets
 Traditionally, the tangible non-current assets of an entity include land, building,
machinery, office equipment, fixture and fittings and vehicles etc.
 all these assets are collectively referred to as property, plant, and equipment
(PPE) by IAS 16
See discussion on IAS 38 later
Reporting
standards

Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for tangible non-
current assets, collectively referred to as property, plant, and equipment (PPE).
The principal issues addressed by IAS 16 are;
 Definition and recognition criteria of assets,
 Derivation of initial cost,
 explanation of depreciation and determination of carrying amounts of assets,
 treatment of subsequent expenditure
 De-recognition of asset i.e. treatment of disposal of assets
 revaluation of tangible non-current assets
 Disclosure requirement in the note to the financial statements

Definition and recognition criteria
IAS 16 guide: definition
Property, plant and equipment are tangible items controlled by an entity
and are held for use in the production or supply of goods or services, for
rental to others or for administrative purposes and are expected to be
used during more than one period
Recognition criteria of an asset
An item of property, plant and equipment should be recognised as an
asset when:
 it is probable that future economic benefits associated with the asset
will flow to the entity; and
 the cost of the asset can be measured reliably

Initial cost or value of property, plant, and equipment (PPE)
The cost of an asset is the cash or cash equivalent paid to acquire the control of an
item of property, plant, and equipment (PPE)
IAS 16 guides
The initial cost of an item of property, plant, and equipment (PPE) comprises of
 Purchase/list price excluding trade discounts and rebates plus
irrecoverable taxes
 plus any direct costs’ attributable to bringing the asset into working
condition for its intended use
 plus other costs as specified by other reporting standards
Hence, the initial cost of an item of property, plant, and equipment (PPE) includes
the following three elements

Elements of initial cost of an Asset
1. Historical cost
 The historical cost is the purchase/list price excluding trade discount
and rebates, including transportation, handling, packaging, delivery
costs and any other non-refundable costs and taxes such as stamp
duty, import duty etc.

2. Directly attributable costs
Direct cost includes the followings:
 Site preparation and clearance costs
 Installation, assembling and testing costs
 Professional fees, e.g. legal, architect fees
 Direct labour cost of self-produced assets, but exclude any
abnormal costs such as wastage, mistakes and errors.

3. Other costs as specified by other reporting standards
In addition to the costs, the following costs are also allowed to be included in the
initial cost of an asset based on other reporting standards:
 Borrowing cost: finance cost incurred on loans borrowed to acquire or
construct an asset, the finance cost incurred up until when the asset is ready for
its intended use, is allowed to be capitalised. (IAS 23 Borrowing cost)
 Decommissioning cost: this is the present value of the estimated costs of
dismantling, removing and restoring the site to its original condition, at the
end of the useful life of the asset. (measurement in accordance with IAS 37
Provisions, Contingent Liability and Contingent Assets)

Question 1.1 (ACCA Q Adjusted Q)
List price of the plant £240,000
Trade discount applicable to Broadoak 12·5% on list price
Shipping and handling costs £2,750
Estimated pre-production testing £12,500
Maintenance contract for three years £24,000
Site preparation costs:
Electrical cable installation £14,000
Concrete reinforcement £4,500
Own labour costs £7,500 £26,000
Broadoak has recently purchased an item of plant from Plantco, the details of this are:
Broadoak paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an early
settlement discount of 3%.
Broadoak had incorrectly specified the power loading of the original electrical cable to be installed by the
contractor. The cost of correcting this error of £6,000 is included in the above figure of £14,000
The plant is expected to last for ten years. At the end of this period, there will be compulsory costs of £15,000 to
dismantle the plant and £3,000 to restore the site to its original use condition. (amount in PV terms)
Required: Calculate the amount at which the initial cost of the plant should be measured.

Solution
Calculation of the initial cost of the plant to be capitalised
£
List price 240,000
less trade discount of 12·5% on list price (30,000)
Shipping handling and installation costs 2,750
Estimated pre-production testing 12,500
Electrical cable installation (14,000 - 6,000) 8,000
Concrete reinforcement 4,500
Own labour costs 7,500
Dismantling and restoration costs (15,000 + 3,000) 18,000
Initial cost of plant 263,250
Note: the maintenance contract cost and cost of rectifying error doesn’t form part of the cost an
asset, both costs and the 3% settlement discount will be recognised as expenses and other
income respectively in the statement of profit or loss.

Source
This presentation is an extract from my textbook with the below reference:
Ibrahim, G. (2014). Asset, Complex Asset & Non-current held for sale. US
Charleston, SC: CreateSpace Independent Publishing (ISBN-13: 978-1495343742)
Book available at www.amazon.co.uk

Assets IAS 16 PPE

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