1. IAS 16: Property, Plant and
Equipment
Roshankumar Pimpalkar
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2. This standard prescribes the way property, plant and equipment (PP&E) is
accounted for.
IAS 16 requires that an item of property, plant and equipment be recognised as
an asset when it satisfies the definition and recognition criteria for an asset in
the framework for preparation and presentation of financial statement.
An item of property, plant and equipment should be recognised as an asset
when:
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 reliably measured.
This standard does not apply to
1. PP&E classified as held for sale in accordance with IFRS 5
2. Biological assets related to agricultural activity (IAS 41)
3. Mineral rights and reserves i.e. oil, natural gas
4. The recognition and measurement of exploration and evaluation
asset (IFRS 6)
5. Investment property (IAS 40)
This standard does apply to PP&E used to develop and maintain assets
described in 2 & 3. Infrastructure within the scope of IFRIC 12 is not recognised
as PP&E of the operator as contractual service agreement does not transfer
right to control the use of public service infrastructure, but only access to
operate the infrastructure.
IAS 16 prescribes the cost of an item of property, plant and equipment as:
Purchase price including, import duties and non-refundable purchase
taxes, after deducting any trade rebates or discounts
Any directly attributable costs to bring the asset to the location and
working condition necessary for it to be capable of operating as intended
by management
The initial estimate of cost of dismantling and removing the item and
dismantling the site on which it is located, the obligation for which an
entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than to
produce the inventory during that period.
Revenue items that may reduce the cost of item of Property, Plant and Equipment
Internal profits are eliminated from cost of self-constructed assets
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3. The carrying amount of property, plant and equipment may be reduced
by applicable government grants under the relevant standard.
Net proceeds from selling an item produced in bringing the asset to
that location (such as sale of samples produced when testing the equipment).
However, revenues and expenses incidental to construction or development,
but not necessary to bring the asset to its required location or condition, would
be separately recognised in the net profit or loss (e.g. the operation of car
park on a building site)
Methods of acquiring the Asset
1. Deferred Payment
When the payment for an item of property, plant and equipment is deferred
beyond normal credit terms, its cost is the cash price equivalent i.e. present
value of payments. The difference between this amount and the total
payments is recognised as interest payments over the period of credit, unless
the capitalised in accordance with IAS 23 Borrowing Cost.
2. Exchange of Assets
The cost of such item of PP&E is measured at fair value unless:
The exchange transaction lacks commercial substance, or
The fair value of neither the asset received nor the asset given
is reliably measured
Fair value is the amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.
An exchange transaction has commercial substance if:
The risk, timing and amount of cash flows of the asset received
differs from the risk, timings and amount of cash flows of asset
transferred; or
The entity specific value of the portion of the entity’s operations
affected by transaction changes as a result of the exchange
The difference in (1) or (2) is significant relative to the fair value
of asset exchanged.
Entity specific value is the present value of cash flows an entity expects to
arise from the continuing use of an asset and from its disposal at the end of its
useful life or expects to incur when settling the liability.
3. Equity Instrument
If an item of Property, Plant and Equipment is acquired in exchange equity
instrument of the entity, the cost of the item of the property, plant and
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4. equipment is its fair value. If that fair value cannot be reliably determined the
fair value of the equity instrument is used.
Useful Life
Useful life is either:
The period of time over which the asset is expected to be available for
use by the entity; or
The number of production or similar units expected to be obtained from
the asset by the entity.
Following factors should be considered in determining the useful life of an asset:
The expected usage of the asset by the entity. Usage is assessed by
reference to the assets expected capacity or physical output
The expected physical wear and tear
Technical or commercial obsolescence arising from changes or
improvements in production, or from change in market demand for the
product or service output of the asset
Legal or similar limits on the use of the asset, such as the expiry dates
of related leases.
Application of IFRIC 1
IFRIC 1 is applicable when:
Entities have the obligation to dismantle, remove and restore items of
property, plant and equipment and
Subsequent changes to cash flows, interest rates and time periods
have occurred affecting changes in liability.
Cost Model:
Increase in liability
Dr. Asset
Cr. Liability
Since the asset value is increased test the asset value for potential impairment.
Decrease in Liability
Dr. Liability
Cr. Asset
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5. The amount deducted from cost limited to carrying amount. Excesses are
immediately recognised in Profit or Loss.
Revaluation model:
Increase in Liability
Dr. Profit or Loss OR
Dr. Revaluation surplus (to the extent a credit balance exist in the revaluation
surplus in respect of that asset)
Cr. Liability
Decrease in Liability
Dr. Liability
Cr. Revaluation surplus OR
Cr. Profit or Loss (to the extent previous decrease in value of asset is recognised in
Profit or Loss)
If the decrease in the liability exceeds the carrying amount (as per cost model), the
excess is immediately recognised in Profit or Loss.
Depreciation is the recognition of the economic benefits of the assets consumed
during each period. The depreciation method should reflect the pattern in which the
assets future economic benefits are expected to be consumed by entity.
Depreciable amount of an asset is its cost less its residual value. The residual value
is determined at acquisition date and reviewed at the end of each reporting period.
Any significant change in the residual value will have impact on depreciable amount
and depreciation charge and is accounted for prospectively.
Residual value is the estimated amount that the entity would currently obtain from
disposal of asset after deducting the estimated cost of disposal, if the asset were
already at the age and in condition expected at the end of its useful life.
Depreciation of an ceases at the earlier of the date that
The asset is classified as held for sale in accordance with IFRS 5
The date that asset is derecognised.
Depreciation does not cease when the asset becomes idle or is retires from active
use unless the asset is fully depreciated.
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6. Measurement of items of Property, Plant and Equipment
IAS 16 prescribes two alternative methods of measuring items of Property, Plant
and Equipment subsequent to initial recognition.
1. Cost Model:
Subsequent to initial recognition as an asset, an item of Property, Plant and
Equipment should be carried at its cost less accumulated depreciation and
any accumulated impairment losses.
2. Revaluation Model:
After recognition as asset, an item of property, plant and equipment whose
fair value can be measured reliably shall be carried at revalued amount being
its fair value at the date of revaluation less any subsequent accumulated
depreciation and any accumulated impairment losses.
The fair value of land, building, plant and equipment is usually its market value.
However if there is no evidence of the market value because of the specialised
nature of the plant and equipment and because these assets are rarely sold, except
as a part of continuing business, they are valued at depreciated replacement cost.
When an asset’s carrying amount is increased as a result of a revaluation, the
increase should be recognised in other comprehensive income and accumulated in
equity under the heading revaluation surplus. However, it should be recognised as
income to the extent it reverses an impairment loss with respect to the same asset
that was previously recognised as an expense.
When the carrying amount of a previously revalued asset decreases, the decrease
should be recognised in other comprehensive income as a decrease in the
revaluation surplus. To the extent that the decrease exceeds revaluation surplus with
respect to the same asset, the excess (expense) should be recognised in profit or
loss.
The revaluation surplus included in equity may be transferred directly to retained
earnings when the asset is derecognised. Some of the revaluation surplus may be
transferred directly to retained earnings while the asset is used. Transfers from
revaluation surplus to retained earnings are not made through profit or loss.
When an entity chooses to revalue an item of property, plant and equipment it should
revalue all assets in its class.
Revaluation: the Accounting
Method 1
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7. Any accumulated depreciation at the date of revaluation is eliminated against the
gross carrying amount of the asset and the net amount is restated to the revalued
amount of asset. Result:
The asset is stated at revalued amount; and
Accumulated depreciation reset to zero.
This method is often used for buildings that are revalued to their market value.
Method 2
Any accumulated depreciation at the date of the revaluation is restated
proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. Result:
Ratio of gross carrying amount to the accumulated depreciation will
stay the same
Net carrying amount will equal revalued amount
Eg. gross CA = 100, acc. Dep = 20, net CA = 80. If we want to revalue
the net CA to 120 and keep the gross CA to acc. Dep ratio, which is 5, the
same then if revised acc. dep is x then revised gross CA will be 5x. That
means 5x – x = 120, solving the equation we get x = 30.
This method is often used when the asset is revalued by means of applying an index
to its depreciated replacement cost.
Subsequent Expenditure:
The cost of replacing a part of an item of property, plant and equipment when
incurred is recognised in the carrying amount of that item if the recognition criteria
are met, which are:
It is probable that future economic benefits associated with item will
flow to the entity; and
The cost of the item can be measured reliably
The carrying amount of those parts that are replaced is derecognised in accordance
with the derecognition provisions of IAS 16.
Disposal or retirement of an item of property, plant and equipment
An item of property, plant and equipment should be derecognised on:
Disposal; or
No future economic benefits are expected from its disposal or use
The gain or loss arising from the retirement or disposal of an item of property, plant
and equipment is the difference between net disposal proceeds and the carrying
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8. amount of asset. The gains or losses should be recognised in the profit or loss
unless IAS 17: leases requires otherwise.
If the payment to be received on disposal is deferred, the consideration received is
recognised initially at the cash equivalent (i.e. present value). The difference
between the nominal amount and cash price equivalent of the consideration received
is recognised as interest revenue under IAS 18: Revenue.
Compensation from third parties for item of property, plant and equipment that were
impaired, lost or given up is included in determining profit or loss for the period when
it becomes receivable. Such receipt of compensation is treated as a separate
economic event and accounted for separately.
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