IAS 16 | Property, Plant and Equipment

1

Objective

The objective is to prescribe the accounting treatment for property, plant, and equipment so users can discern information about an entity's investment in its assets and changes in that investment. Key issues include recognition, determination of carrying amounts, depreciation, and impairment.

2

Scope

The standard applies to accounting for property, plant, and equipment unless another standard requires or permits a different treatment.

3

Exclusions

The standard does not apply to: (a) assets classified as held for sale (IFRS 5); (b) biological assets related to agricultural activity, except for bearer plants which are included; (c) exploration and evaluation assets (IFRS 6); and (d) mineral rights and reserves. However, it applies to PPE used to develop or maintain these excluded assets.

5

Investment Property

An entity using the cost model for investment property under IAS 40 must use the cost model in this standard for owned investment property.

6

Definitions

Key terms are defined. Property, plant, and equipment are tangible items held for use in production, supply of goods/services, rental, or administration, and expected to be used for more than one period. A bearer plant is a living plant used to produce agricultural produce over more than one period with a remote likelihood of being sold as produce. Cost is the cash or equivalent paid or fair value given to acquire an asset. Recoverable amount is the higher of fair value less costs of disposal and value in use.

7

Recognition Principle

The cost of an item of PPE shall be recognised as an asset if, and only if, it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.

8

Spare Parts

Spare parts, stand-by equipment, and servicing equipment are recognised as PPE if they meet the definition; otherwise, they are classified as inventory.

9

Unit of Measure

The standard does not prescribe what constitutes a single item of PPE. Judgement is required. It may be appropriate to aggregate individually insignificant items (like moulds or tools) and apply criteria to the aggregate value.

10

Timing of Costs

The recognition principle applies to all PPE costs when incurred. This includes initial costs to acquire or construct the item and subsequent costs to add to, replace part of, or service it.

11

Safety/Environment Assets

Assets acquired for safety or environmental reasons qualify for recognition because they enable the entity to derive future economic benefits from related assets, even if they do not directly increase benefits of a specific existing asset.

12

Day-to-Day Servicing

Costs of day-to-day servicing (repairs and maintenance) are not recognised in the carrying amount of an asset. They are recognised in profit or loss as incurred.

13

Replacements

Parts of some assets require replacement at regular intervals (e.g., furnace relining, aircraft interiors). The cost of replacing such parts is recognised in the carrying amount of the asset if recognition criteria are met. The carrying amount of the replaced part is derecognised.

14

Major Inspections

When a major inspection is performed (e.g., for an aircraft), its cost is recognised in the carrying amount of the asset as a replacement if criteria are met. Any remaining carrying amount of the previous inspection is derecognised.

15

Measurement at Recognition

An item of PPE qualifying for recognition is measured at its cost.

16

Elements of Cost

Cost comprises: (a) purchase price including duties and non-refundable taxes, less discounts; (b) directly attributable costs to bring the asset to the location/condition for intended use; and (c) the initial estimate of dismantling and restoration costs.

17

Directly Attributable Costs

Examples include employee benefits arising from construction/acquisition, site preparation, initial delivery and handling, installation and assembly, testing costs, and professional fees.

18

Dismantling Obligations

Obligations for dismantling and restoration incurred during a period as a consequence of using the item to produce inventories are accounted for under IAS 2 Inventories.

19

Excluded Costs

Costs that are not part of PPE cost include: costs of opening a new facility, introducing a new product (advertising), conducting business in a new location (staff training), and administration/general overheads.

20

Cessation of Capitalisation

Recognition of costs in the carrying amount ceases when the item is in the location and condition necessary for intended use. Costs incurred subsequently (e.g., while the asset is idle or operating below capacity) are not capitalised.

20A

Proceeds before Intended Use

Items may be produced while bringing an asset to its intended location/condition (e.g., samples during testing). Proceeds from selling such items and their costs are recognised in profit or loss, not deducted from the cost of the PPE.

21

Incidental Operations

Income and expenses from incidental operations (e.g., using a building site as a car park before construction) are recognised in profit or loss and not included in the asset's cost.

22

Self-Constructed Assets

The cost is determined using the same principles as for an acquired asset. Internal profits are eliminated. Abnormal waste of material, labour, or resources is not included in the cost.

22A

Bearer Plants Construction

Bearer plants are accounted for as self-constructed assets. 'Construction' includes activities necessary to cultivate the plants before they are in the location/condition necessary for intended use.

23

Measurement Date

Cost is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference is recognised as interest over the credit period unless capitalised under IAS 23.

24

Exchange of Assets

Assets acquired in exchange for non-monetary assets are measured at fair value unless the transaction lacks commercial substance or fair value is not reliably measurable. If not measured at fair value, cost is the carrying amount of the asset given up.

25

Commercial Substance

A transaction has commercial substance if the configuration of cash flows of the asset received differs from the asset transferred, or if the entity-specific value of operations changes, and the difference is significant.

26

Reliable Measurement

Fair value is reliably measurable if the variability in the range of measurements is not significant or probabilities can be reasonably assessed. The fair value of the asset given up is used unless the fair value of the asset received is more clearly evident.

28

Government Grants

The carrying amount of PPE may be reduced by government grants in accordance with IAS 20.

29

Measurement Models

An entity must choose either the cost model or the revaluation model as its accounting policy and apply it to an entire class of PPE.

29A

Owner-Occupied Election

Entities operating investment funds or issuing insurance contracts may elect to measure owner-occupied properties included in such funds at fair value through profit or loss under IAS 40.

30

Cost Model

After recognition, an asset is carried at cost less accumulated depreciation and accumulated impairment losses.

31

Revaluation Model

After recognition, an asset whose fair value can be measured reliably is carried at a revalued amount (fair value at revaluation date) less subsequent accumulated depreciation and impairment losses. Revaluations must be made with sufficient regularity.

34

Revaluation Frequency

Frequency depends on fair value volatility. Assets with significant and volatile changes may require annual revaluation; others may only need revaluation every three or five years.

35

Accumulated Depreciation on Revaluation

At revaluation, accumulated depreciation is either: (a) restated proportionately with the change in the gross carrying amount; or (b) eliminated against the gross carrying amount, with the net amount restated to the revalued amount.

36

Class Revaluation

If an item is revalued, the entire class of PPE to which it belongs must be revalued.

37

Class Definition

A class is a grouping of assets of a similar nature and use (e.g., land, buildings, machinery, ships, aircraft, motor vehicles, furniture, bearer plants).

38

Simultaneous Revaluation

Items within a class are revalued simultaneously to avoid selective revaluation, though rolling revaluations are permitted if completed within a short period and kept up to date.

39

Revaluation Increase

An increase in carrying amount due to revaluation is recognised in other comprehensive income and accumulated in equity (revaluation surplus). However, it is recognised in profit or loss to the extent it reverses a previous revaluation decrease for the same asset recognised in profit or loss.

40

Revaluation Decrease

A decrease in carrying amount due to revaluation is recognised in profit or loss. However, it is recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus for that asset.

41

Transfer of Surplus

The revaluation surplus may be transferred directly to retained earnings when the asset is derecognised. Some surplus may be transferred as the asset is used (difference between depreciation on revalued amount and original cost). Transfers are not made through profit or loss.

43

Depreciation Components

Each part of an item of PPE with a cost that is significant in relation to the total cost must be depreciated separately.

44

Allocation to Parts

An entity allocates the initial cost to significant parts and depreciates them separately (e.g., airframe and engines of an aircraft).

45

Grouping Parts

Significant parts with the same useful life and depreciation method may be grouped for depreciation charges.

46

Remainder Depreciation

The remainder of the item (parts not individually significant) is also depreciated separately. Approximation techniques may be used.

48

Depreciation Charge

The depreciation charge for each period is recognised in profit or loss unless it is included in the carrying amount of another asset.

49

Capitalised Depreciation

Depreciation charges may be included in the cost of other assets, such as inventories (IAS 2) or intangible assets (IAS 38), if the benefits are absorbed in producing them.

50

Allocation Basis

The depreciable amount is allocated on a systematic basis over the useful life.

51

Review of Estimates

Residual value and useful life must be reviewed at least at each financial year-end. Changes are accounted for as changes in accounting estimates under IAS 8.

52

Depreciation Recognition

Depreciation is recognised even if fair value exceeds carrying amount, provided residual value does not exceed carrying amount. Repair and maintenance do not negate the need for depreciation.

53

Depreciable Amount

Depreciable amount is determined after deducting residual value. In practice, residual value is often insignificant.

55

Start and Cease Dates

Depreciation begins when the asset is available for use (location/condition ready). It ceases at the earlier of classification as held for sale (IFRS 5) or derecognition. It does not cease when the asset becomes idle unless fully depreciated or using a usage-based method.

56

Useful Life Factors

Useful life is determined by expected usage, physical wear and tear, technical/commercial obsolescence, and legal limits. It is defined in terms of utility to the entity, so it may be shorter than economic life.

58

Land and Buildings

Land and buildings are separable assets. Land generally has an unlimited useful life and is not depreciated (exceptions apply like quarries). Buildings have limited lives and are depreciated.

60

Depreciation Method

The method used shall reflect the pattern in which future economic benefits are expected to be consumed by the entity.

61

Method Review

The depreciation method must be reviewed at least at each financial year-end. If the pattern of consumption changes, the method is changed and accounted for as a change in accounting estimate under IAS 8.

62

Method Types

Methods include straight-line (constant charge), diminishing balance (decreasing charge), and units of production (charge based on output).

62A

Revenue-Based Methods

A depreciation method based on revenue generated by an activity involving the asset is not appropriate, as revenue reflects factors other than the consumption of the economic benefits of the asset.

63

Impairment

To determine if an item is impaired, an entity applies IAS 36. This explains reviewing carrying amounts, determining recoverable amounts, and recognising/reversing impairment losses.

65

Compensation

Compensation from third parties for items impaired, lost, or given up is included in profit or loss when it becomes receivable.

66

Separate Events

Impairments/losses, related claims for compensation, and purchase of replacements are separate economic events accounted for separately.

67

Derecognition Triggers

An item of PPE is derecognised on disposal or when no future economic benefits are expected from use or disposal.

68

Derecognition Gain/Loss

The gain or loss on derecognition is included in profit or loss. Gains are not classified as revenue.

68A

Assets Held for Rental

Entities routinely selling items held for rental transfer them to inventories at carrying amount when they become held for sale. Proceeds are recognised as revenue under IFRS 15.

71

Date of Disposal

The date of disposal is the date the recipient obtains control of the item in accordance with IFRS 15.

72

Gain/Loss Calculation

Gain or loss is the difference between the net disposal proceeds and the carrying amount. Consideration is determined under IFRS 15 transaction price requirements.

73

General Disclosures

For each class, disclose: measurement bases, depreciation methods, useful lives/rates, gross carrying amount, accumulated depreciation/impairment, and a reconciliation of carrying amounts at the beginning and end of the period (additions, disposals, revaluations, depreciation, etc.).

74

Additional Disclosures

Disclose restrictions on title, pledged assets, expenditures in the course of construction, and contractual commitments for acquisition.

74A

Proceeds Disclosure

If not presented separately, disclose compensation from third parties for impaired/lost items and proceeds/costs of items produced while bringing an asset to intended use (and the line item where included).

75

Judgement Disclosure

Disclosure of depreciation methods and useful lives provides users with information to review management policies and make comparisons.

76

Estimate Changes

Disclose nature and effect of changes in estimates for residual values, dismantling costs, useful lives, and depreciation methods under IAS 8.

77

Revaluation Disclosures

If revalued, disclose: effective date, independent valuer involvement, carrying amount under cost model for each class, and revaluation surplus (change for period and restrictions).

79

Encouraged Disclosures

Entities are encouraged to disclose carrying amounts of idle property, fully depreciated assets still in use, and assets retired from active use not classified as held for sale.

80

Transitional Provisions

Specific requirements for initial application of amendments regarding exchange of assets, revaluations, bearer plants, and proceeds before intended use.

81

Effective Date

The standard applies for annual periods beginning on or after 1 January 2005. Various amendments have specific later effective dates.