Scope of IAS 16<\/strong><\/p>\n

IAS 16 should be followed when accounting for property, plant and equipment unless another international accounting standard requires a different treatment. Property, plant and equipment are tangible assets that 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.<\/p>\n

IAS 16 does not apply to: –<\/strong><\/p>\n

(a) Biological assets related to agricultural activity<\/p>\n

(b) Mineral rights and mineral reserves, such as oil, gas and other non-regenerative resources. However, the standard applies to property, plant and equipment used to develop these assets<\/p>\n

Reorganization Criteria<\/strong><\/p>\n

The recognition of property, plant and equipment depends on two criteria.<\/p>\n

(a) It is probable that future economic benefits associated with the asset will flow to the entity; and<\/p>\n

(b) The cost of the asset to the entity can be measured reliably.<\/p>\n

These recognition criteria apply to subsequent expenditure as well as costs incurred initially. There are no separate
\ncriteria for recognizing subsequent expenditure. Property, plant and equipment can amount to substantial amounts in financial statements, affecting the presentation of the company’s financial position and the profitability of the entity, through depreciation and also if an asset is wrongly classified as an expense and taken to profit or loss.<\/p>\n

Initial measurement<\/strong><\/p>\n

Once an item of property, plant and equipment qualifies for recognition as an asset, it will initially be measured at cost.<\/p>\n

Components of cost<\/strong><\/p>\n

The standard lists the components of the cost of an item of property, plant and equipment.<\/p>\n

\n
• \u00a0 \u00a0 \u00a0 \u00a0\u00a0Purchase price, less any trade discount or rebate<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0\u00a0Import duties and non-refundable purchase taxes<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0\u00a0Directly attributable costs of bringing the asset to working condition for its intended use, e.g.:<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0The cost of site preparation<\/li>\n
• \u00a0 \u00a0 \u00a0\u00a0 Initial delivery and handling costs<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0Installation costs<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0Testing<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0Professional fees (architects, engineers)<\/li>\n
• \u00a0 \u00a0 \u00a0 \u00a0Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring the site on which it is located<\/li>\n<\/ul>\n

  Measurement subsequent to initial recognition<\/strong><\/p>\n

  The standard offers two possible treatments here, essentially a choice between keeping an asset recorded at cost or revaluing it to fair value.<\/p>\n

  (a) Cost model: – Carry the asset at its cost less depreciation and any accumulated impairment loss.<\/p>\n

  (b) Revaluation model: – Carry the asset at a revalued amount, being its fair value at the date of the revaluation less
  \nany subsequent accumulated depreciation and subsequent accumulated impairment losses. The revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably.<\/p>\n

  Revaluation<\/strong><\/p>\n

  The market value of land and buildings usually represents fair value, assuming existing use and line of business. Such
  \nvaluations are usually carried out by professionally qualified valuers.<\/p>\n

  In the case of plant and equipment, fair value can also be taken as market value. When a market value is not available, however, depreciated replacement cost should be used. There may be no market value where types of
  \nplant and equipment are sold only rarely or because of their specialized nature (i.e. they would normally only be sold as part of an ongoing business).<\/p>\n

  The frequency of valuation depends on the volatility of the fair values of individual items of property, plant and equipment. The more volatile the fair value, the more frequently revaluations should be carried out. Where the current fair value is very different from the carrying value then a revaluation should be carried out.<\/p>\n

  Most importantly, when an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.<\/p>\n

  All the items within a class should be revalued at the same time, to prevent selective revaluation of certain assets and
  \nto avoid disclosing a mixture of costs and values from different dates in the financial statements.<\/p>\n

  IAS 16 requires the increase in value to be credited to a revaluation surplus (i.e. part of owners’ equity), unless the increase is reversing a previous decrease which was recognized as an expense. To the extent that this offset is made, the increase is recognized as income; any excess is then taken to the revaluation surplus.<\/p>\n

  Depreciation<\/strong><\/p>\n

  The standard states:<\/p>\n

  \n
  • \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The depreciable amount of an item of property, plant and equipment should be allocated on a systematic basis over its useful life.<\/li>\n
  • \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity.<\/li>\n
  • \u00a0 \u00a0 \u00a0 \u00a0 \u00a0The depreciation charge for each period should be recognized as an expense unless it is included in the carrying amount of another asset.<\/li>\n<\/ul>\n

    Land and buildings are dealt with separately even when they are acquired together because land normally has an unlimited life and is therefore not depreciated. In contrast buildings do have a limited life and must be depreciated. Any increase in the value of land on which a building is standing will have no impact on the determination of the building’s useful life.<\/p>\n

    Review of useful life<\/strong><\/p>\n

    A review of the useful life of property, plant and equipment should be carried out at least at each financial year end and the depreciation charge for the current and future periods should be adjusted if expectations have changed significantly from previous estimates. Changes are changes in accounting estimates and are accounted for prospectively as adjustments to future depreciation.<\/p>\n

    Review of depreciation method<\/strong><\/p>\n

    The depreciation method should also be reviewed at least at each financial year end and, if there has been a significant change in the expected pattern of economic benefits from those assets, the method should be changed to
    \nsuit this changed pattern. When such a change in depreciation method takes place the change should be accounted for as a change in accounting estimate and the depreciation charge for the current and future periods should be adjusted.<\/p>\n

    Impairment of asset values<\/strong><\/p>\n

    An impairment loss should be treated in the same way as a revaluation decrease i.e. the decrease should be recognized as an expense. However, a revaluation decrease (or impairment loss) should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset.<\/p>\n

    A reversal of an impairment loss should be treated in the same way as a revaluation increase, i.e. a revaluation increase should be recognized as income to the extent that it reverses a revaluation decrease or an impairment loss of the same asset previously recognized as an expense.<\/p>\n

    Where an asset requires regular overhauls in order to continue to operate, the cost of the overhaul is treated as an additional component and depreciated over the period to the next overhaul.<\/p>\n

    Disclosure<\/strong><\/p>\n

    The standard has a long list of disclosure requirements, for each class of property, plant and equipment.<\/p>\n

    a)\u00a0 Measurement bases for determining the gross carrying amount (if more than one, the gross carrying amount for that basis in each category)<\/p>\n

    b)\u00a0\u00a0 Depreciation methods used<\/p>\n

    c)\u00a0\u00a0\u00a0 Useful lives or depreciation rates used<\/p>\n

    d)\u00a0\u00a0 Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period<\/p>\n

    e)\u00a0\u00a0\u00a0 Reconciliation of the carrying amount at the beginning and end of the period showing:<\/p>\n

    1.\u00a0\u00a0\u00a0 Additions<\/p>\n

    2.\u00a0\u00a0\u00a0 Disposals<\/p>\n

    3.\u00a0\u00a0\u00a0 Acquisitions through business combinations<\/p>\n

    4.\u00a0\u00a0\u00a0\u00a0 Increases\/decreases during the period from revaluations and from impairment losses<\/p>\n

    5.\u00a0\u00a0\u00a0 Impairment losses recognized in profit or loss<\/p>\n

    6.\u00a0\u00a0\u00a0 Impairment losses reversed in profit or loss<\/p>\n

    7.\u00a0\u00a0\u00a0 Depreciation<\/p>\n

    8.\u00a0\u00a0\u00a0 Net exchange differences (from translation of statements of a foreign entity)<\/p>\n

    9.\u00a0\u00a0\u00a0 Any other movements.<\/p>\n

    The financial statements should also disclose the following.<\/p>\n

    1.\u00a0\u00a0\u00a0\u00a0 Any recoverable amounts of property, plant and equipment<\/p>\n

    2.\u00a0\u00a0\u00a0 Existence and amounts of restrictions on title, and items pledged as security for liabilities<\/p>\n

    3.\u00a0\u00a0\u00a0\u00a0 Accounting policy for the estimated costs of restoring the site<\/p>\n

    4.\u00a0\u00a0\u00a0\u00a0 Amount of expenditures on account of items in the course of construction<\/p>\n

    5.\u00a0\u00a0\u00a0\u00a0 Amount of commitments to acquisitions<\/p>\n

    Revalued assets require further disclosures.<\/p>\n

    1.\u00a0\u00a0\u00a0 Basis used to revalue the assets<\/p>\n

    2.\u00a0\u00a0\u00a0 Effective date of the revaluation<\/p>\n

    3.\u00a0\u00a0\u00a0 Whether an independent valuer was involved<\/p>\n

    4.\u00a0\u00a0\u00a0 Nature of any indices used to determine replacement cost<\/p>\n

    5.\u00a0\u00a0\u00a0\u00a0 Carrying amount of each class of property, plant and equipment that would have been included in<\/p>\n

    6.\u00a0\u00a0\u00a0 The financial statements had the assets been carried at cost less accumulated depreciation and accumulated impairment losses.<\/p>\n

    7.\u00a0\u00a0\u00a0 Revaluation surplus, indicating the movement for the period and any restrictions on the distribution of the balance to shareholders.<\/p>\n","protected":false},"excerpt":{"rendered":"

    Scope of IAS 16 IAS 16 should be followed when accounting for property, plant and equipment unless another international accounting standard requires a different treatment. Property, plant and equipment are tangible assets that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and … Read more<\/a><\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[8],"tags":[180,179],"class_list":["post-1553","post","type-post","status-publish","format-standard","hentry","category-ifrs","tag-ias","tag-ifrs"],"yoast_head":"\n