5. IAS 16 PPE.pptx

Objective
This Standard deals with the accounting
treatment of Property, Plant &
Equipment including the guidance for the
main issues related to the recognition &
measurement, determination of carrying
value, depreciation charges, any impairment
loss and de-recognition aspects for the
property, plant & equipment in the financial
statements of an entity.

Scope
- The requirements of this standard are applicable for
the accounting treatment of property, plant and
equipment.
- This Standard is not applicable:
(a) To the property, plant and equipment which are
classified as held for sale and are covered under
IFRS 5
(b) For the accounting treatment of biological
assets related to agricultural activity which are
covered under IAS 41

Scope
(c) For the accounting treatment of exploration and
evaluation assets and mineral rights and reserves
such as oil and gas and other non-regenerative
resources which are covered under IFRS 6.
However, IAS 16 is applicable to the property, plant &
equipments, which are used to maintain or develop
the biological assets under IAS 4 and mineral rights
and reserves such as oil and gas and other non-
regenerative resources which are covered under
IFRS 6.

Definition
1. Property, Plant & Equipment
• The item which meets the following criteria will be
treated as property plant and equipment as the
standard prescribes:
(a)These are tangible items;
(a) That are held for use in the production, supply
of goods or services, rental to others, or use in
administration and
(b) Their economic benefits are for more than one
accounting period.

Cost
It is the amount of cash or cash equivalents paid
or the fair value of the consideration
transferred to acquire, purchase or construct
an asset.

Carrying Value
It is the value at which asset will be presented in
the Statement of Financial Position and it is
determined as Cost less Accumulated
Depreciation and Accumulated Impairment
Loss.

Depreciable Amount
It is the amount of asset which will be
depreciated over its useful life and is
determined as the cost of an asset less its
residual value.

Residual Value
• It is the estimated net disposal proceeds that
an entity would currently obtain from disposal
of the asset, if the asset were already in the
condition and situation which is expected to
be at the end of its useful life.

Useful Life
It is the period of time or number of production
units for which asset will be used by the
management.

Depreciation
It is the systematic allocation of the depreciable
amount of an asset over its related useful life.

Fair value
It is amount that is expected to be received to
sell an asset or required to be paid to transfer
a liability, in an orderly transaction between
market participants at the date of
measurement (IFRS 13).

Impairment Loss
• If the carrying value of asset exceeds its
recoverable value, the excess is known as
impairment loss.

Initial Recognition
An asset will be recognized as property, plant and
equipment if it meets:
(a) The definition of property, plant & equipment
and
(b) The recognition criteria given in IASB’s frame
work i.e.
-The future economic benefits related to the asset
are probable, to flow to the entity and
- The cost of the asset is reliably measurable.

Application of Initial Recognition
The entity will apply the initial recognition rule to the
following items as follows:
(i) Spare Parts & Servicing Equipment:
- Normally these are treated as inventory and their
cost will be charged to the statement of profit or
loss as expense when these are consumed by the
entity.
- However, the cost of major spare parts will be
capitalized as property, plant & equipment if these:

(i) Spare Parts & Servicing Equipment: Contn…
Are specialized in nature and can only be used
with the specific asset;
• Have material cost and
• Their economic benefits are expected to be
for more than one accounting period.

(ii) Safety Equipments:
• These do not enhance the economic benefits of
related asset, therefore, their cost will be charged
to statement of profit or loss as expense such as
fire alarms, sound proof equipments and smoke
filters.
However, if an entity indentifies that it will
enhance the economic benefits of related asset
then its cost will be capitalized as part of property,
plant & equipment.

(iii) Aggregation & Segmenting:
- This Standard does not prescribe that what
items constitute property, plant & equipment.
Therefore, if the cost of individually
insignificant items such as tools, jigs, dies, and
structures becomes material after aggregation
then these may be recognized as property,
plant and equipment. (Aggregation)

(iii) Aggregation & Segmenting:
- If an asset contains different components and
these components are different in nature
with each component having different useful
life, then each component will be recognized
as property, plant and equipment separately.
(Segmenting)

• It may be appropriate to allocate total
expenditure on an asset to its component
parts and account for each component
separately e.g. an aircraft and its engines.

Initial Measurement
The assets which are recognized as property, plant and
equipment are initially measured at Cost which is
determined as:
• Manufacturer’s or distributor’s list price
• Less any Trade Discount or Rebate,
• Plus any directly related cost which includes:
Transportation cost, Sales tax and Import duties (if non-
refundable), any Legal charges, Handling cost, Site
preparation cost, Installation cost, Professional
charges, Pre-production testing cost (Net expense), any
Modification cost (owner specified), any Dismantling
and Restoration cost.

Initial Measurement
• Any other cost which is necessary to bring the
asset into its operating use or intended use by
the management.
• The capitalization of cost will cease when the
asset becomes available for operating use or
intended use by the management

Notes:
i. Following elements of cost will not become the part of
the cost of asset and will be charged to statement of
profit or loss as expense:
• Insurance cost
• Labor training cost
• Rectification cost of an error
• Cost of initial operating losses
• Start up cost
• Relocation cost
• Cost related to opening of new facility
• Any general and administrative overheads

Notes:
ii. Any cash discount taken for the prompt payment of cash
related to asset will not affect the cost of the asset, and it
will be recorded as income separately in the statement of
profit or loss.
iii. If an asset is purchased on extended credit period or on
deferred installment basis, then the cost of such asset
will be its Cash Price Equivalent any excess paid over the
cash price will be treated as Interest expense which will
be recognized over the period of credit.
iv. The cost of the asset held by the lessee under finance
lease will be determined in accordance with IFRS 16.

Self Constructed Asset:
• If an entity chooses to construct an item of property,
plant & equipment using its own resources, then the
cost of such self constructed asset will be
determined as the cost of the asset which is
constructed by the entity for sale in the normal
course of the business under IAS 2, i.e. it will be the
sum of Material, Labor and Overhead cost of such
asset.
• However, any cost of abnormal wasted material,
labor or other resources will be charged to statement
of profit or loss as expense.

Exchange of asset:
• If an entity acquires an item of property, plant
and equipment in exchange for a non-
monetary asset, then the cost of the asset
acquired in exchange will be determined as
follows:

If Transaction of Exchange has
Commercial Substance:
The transaction of exchange will deem to have
commercial substance if:
• The risk, timing and amount of cash flows
related to the asset acquired are different
from the asset transferred;
• The exchange has resulted in the change in
the entity specific value of that operational
portion of the entity

If Transaction of Exchange has
Commercial Substance:
• The change in (a) and (b) above is material.
• In such circumstances the entity will determine
the cost of the asset acquired in exchange as:
• (a) The fair value of asset transferred ± cash,
• (b) If the fair value of asset transferred is not
determinable , then it will be recognized at the fair
value of asset acquired,
• Any gain or loss on the exchange transaction will be
charged to the statement of profit or loss.

2. If Transaction of Exchange does not
have Commercial Substance:
• If the transaction of exchange does not have
commercial substance or the fair value of
asset transferred and the asset acquired both
are not determinable, then the new asset will
be recognize at the carrying value of asset
transferred, which will result in no gain or loss
on exchange.

Subsequent Recognition
• Property, plant and equipment may be requiring
the replacement of some component parts
during the useful life (such as the spare parts of
a plant or walls of a building).
• In such circumstances, the entity will recognize
the cost of replacement in the carrying value of
relevant asset if it satisfies the recognition
criteria given in this Standard.

Subsequent Recognition
• The cost of day to day or ongoing repair and
maintenance will be charged to the statement
of profit or loss as expense.
• If the asset requires an inspection after a
specified interval as per industry laws (such as
airline industry) then the entity will recognize
the cost of such inspection in the carrying value
of related asset, if its economic benefits are for
more than one accounting period.

Subsequent Measurement
The entity has two options to account for the
property, plant and equipment at reporting
date as a choice of accounting policy;
• Cost Model
• Revaluation Model

Cost Model
• If an entity chooses to measure the property,
plant and equipment under Cost model at
reporting date, then such assets will be
measured at Cost less accumulated
depreciation less accumulated impairment
loss.

Depreciation:
(a) It is the systematic allocation of the
depreciable amount of an asset over its
related useful life.
(b) Each component of property, plant and
equipment having substantial cost will be
depreciated separately.

Depreciation:
(c) The depreciation charge for the accounting
period will be charged to the statement of profit
or loss as an expense. However, if the asset is
being used in the construction of another asset,
then the depreciation charge will be added to
the cost of such asset under construction or
being produced, such as the depreciation of the
manufacturing plant is added in the cost of
inventory.

Depreciation:
(d)The entity should review the useful life and
residual value of the asset at each reporting
date, if it has changed as of the original
estimate the entity should also revise the useful
life and residual value following the change.
It will be accounted for as change in accounting
estimate and it will have Prospective
Application in accordance with IAS 8.

Depreciation:
(e) The entity will continue to depreciate the
asset even if fair value of asset is higher than
its carrying value.
However, entity will not charge any depreciation
if the residual value of the asset exceeds its
carrying value.

Depreciation:
(f) The depreciation charge will commence, when
the asset is available for operating use or
intended use by the management.
(g) The entity will cease depreciation charge when
either the asset is classified as held for sale
under IFRS5 or the asset is de-recognized from
statement of financial position.
(h)The entity will depreciate the asset even if the
asset is idle, until the asset is fully depreciated.

Depreciation Method:
(a) The depreciation method opted by the entity
should be in accordance with the pattern of
economic benefits which are to be consumed
by the entity over its useful life.

Depreciation Method:
(b) The entity should review the depreciation
method opted at each reporting date and if there
is any change in the pattern of consumption of
economic benefits related to the asset, then the
entity should change the depreciation method in
accordance with the new pattern of consumption
of economic benefits and such change will be
accounted for as change in accounting estimate,
which will be applied prospectively from that
date.

Useful Life
i. The entity should consider the following
aspects in determination of the useful life of
the asset:
– The expected use of the asset including its
production capacity or output.
– Any expected physical wear and tear due to its
operational use including its expected repair and
maintenance plan.

Useful Life
– Any expected change in the demand of the
product related to the asset due to commercial or
technical changes in the market.
– Any legal restriction on the asset in terms of its
use.

Useful Life
ii. The useful life of the asset is a matter of
judgment according to the expected use of
the asset by management.

Impairment:
Any impairment will be determined as per the
requirements of IAS 36.

Revaluation Model
If an entity chooses to measure the property,
plant and equipment under Revaluation
model at reporting date, then such assets will
be measured at Revalued Amount less
subsequent accumulated depreciation less
subsequent accumulated impairment loss.

Revaluation Model
The entity should consider the following points
in revaluation:
(a) Normally the revalued amount is taken
as fair value of asset which is determined in
accordance with IFRS 13.
(b) The frequency of revaluation depends upon
the volatility of the market related to the
asset.

Revaluation Model
(c) Revaluation should be performed regularly
enough, so that the carrying value of asset
should not be materially different from its
revalued amount.
(d) When the asset is revalued, its depreciation
charge to the date of revaluation will be reset
to zero, as it will be reflected in the revalued
amount.

Revaluation Model
(e) Once an asset is revalued, the whole class of
assets to which that asset belongs has to be
revalued to avoid the presentation of assets in
the same category at different cost and values
with different valuation dates.

Revaluation Model
(f) Any increase in the carrying value of the asset
resulting from revaluation will be recognized
in other comprehensive income and will be
accumulated in a separate column of the
statement of changes in equity.
However first, it will reverse any loss related to
the asset up to the extent it is recognized in
the previous years.

Revaluation Model
(g) Any decrease in the carrying value of the
asset resulting from the revaluation will be
recognized in the statement of profit or loss as
expense.
However first, it will offset any revaluation
surplus related to the asset up to the extent it
is recognized in the previous years.

Revaluation Model
(h) If depreciation charge on the basis of revalued
amount exceeds the original depreciation
charge, then the excess will be transferred out
of the revaluation surplus to the retained
earnings as realization of the revaluation
surplus.
However, this transfer is optional and if opted by
the entity then it will be applicable annually till
the disposal of related asset.

Revaluation Model
(i) Any remaining revaluation surplus in the
statement of changes in equity will be
transferred as whole to the retained earnings
when the asset is de-recognized from the
statement of financial position.

Disposal
An entity will de-recognize the asset from
statement of financial position when:
(a) The asset is disposed off:
(b) No economic benefits are expected either
from use or from sale of asset

Disposal
• Any gain or loss on the disposal of asset will
be charged to the statement of profit or loss
which will be the difference between carrying
value and disposal proceeds.

Disposal
• If the asset is sold on extended credit period
or on deferred installment basis, then the
disposal proceeds will be taken as cash price
equivalent and any excess over the cash price
will be treated as Interest Income which will
be recognized over the period of credit.

Disclosures
For each class of property, plant and equipment,
the entity is required to disclose the following:
(a) The measurement model
(b) Method of depreciation
(c) Depreciation rate or useful life

Disclosures
(d) A statement reconciling the carrying value at
the start of the period to the carrying value at
reporting date which includes:
• Any additions and disposals during the year
• Any assets acquired as part of a business
combination
• Any impairment loss recognized in the current
year

Disclosures
Depreciation charge for the year
Assets classified as held for sale under IFRS 5
Any exchange differences arising on translation
of foreign currency assets.

Disclosures
(e) Any expense on the asset during the year
which was capitalized as part of the carrying
amount of the asset.
(f) Any compensation received from the third
parties in respect of any impairment related to
the asset.

Disclosures
(h) Any depreciation charges which are recognized as
part of cost of other assets.
(i) Any change in useful life, residual value or
depreciation method related to the property, plant
and equipment.
(j) The entity should disclose the date of revaluation,
involvement of the expert and the revaluation
surplus in respect of the assets which are revalued
in the current period.
(k) Carrying values of the assets which are idle.

Worked Examples
Example 1:
• AB Ltd. acquired a plant at a cost of Tshs 15
million. The plant has two parts namely Part A
with a cost of Tshs 9 million and useful life of
100,000 hours, while other Part B costing Tshs 6
million has a useful life of 5 years.
• Required:
How the plant will be recognized in the financial
statements of the AB Ltd.?

Solution:
As both parts of the plant have different useful
lives therefore, each part will be recognized as
a separate non-current asset and will be
depreciated over the respective useful lives.

Example 2:
AB Ltd. exchanged a land with a carrying value
of Tshs 15 million and fair value of Tshs 20
million, for an imported plant. Additionally AB
Ltd. has also paid Tshs 5 million along with the
land.
Required:
What will be the cost of the acquired plant in
the financial statements of the AB Ltd.?

Solution:
• As per IAS 16, the cost of the asset acquired in
exchange will be primarily the fair value of
asset transferred± Cash,
therefore the cost of the acquired plant will be:
• Tshs 20 million + Tshs 5 million = Tshs 25
million.

Example 3
A company revalued their land from Tshs 200,000
to Tshs 300,000.
The profit for the year from normal day to day
activities of the company is Tshs 350,000 and at
the start of the year there was a revaluation
surplus of Tshs 75,000.
The retained earnings at the start of the year
amounted to Tshs 120,000.
The ledger entry and the extracts from the SOCI and
SOFP for this revaluation are shown below:

Solution The ledger entry is as follows:
Tshs Tshs
Dr. PPE (SOFP) 100,000
Cr. OCI (SOCI) 100,000

Extract from SOCI
Profit for the Year 350,000
Other Comprehensive
Income Revaluation Gain from Land 100,000
Total Comprehensive Income for the Year 450,000

Extract from SOFP
Non-Current Assets PPE 300,000
Total Non-Current Assets 300,000
Equity
Retained Earnings (120,000 + 350,000) 470,000
Revaluation Surplus (75,000 + 100,000)175,000
Total Equity 645,000

Note that the Total Comprehensive Income amount
of Tshs 450,000 is taken to the Equity section of
the SOFP but Tshs 350,000 of it goes to retained
earnings and the Tshs 100,000 revaluation gain is
added to the revaluation surplus.
In relation to revaluation gains on PPE, an increase
or gain shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of
the same asset previously recognized in profit or
loss.

Example 4
A company revalued their land from Tshs
200,000 to Tshs 300,000.
Previously, the same land had been revalued
downwards from Tshs 260,000 to Tshs 200,000
creating a revaluation loss of Tshs 60,000
which was taken to profit or loss as there was
no revaluation surplus as this was the first
time the asset had been revalued.

• The profit for this year from normal day to day
activities of the company before revaluation is
Tshs 300,000 and at the start of the year the
retained earnings amounted to Tshs 150,000.
The ledger entry and the extracts from the
SOCI and SOFP for this transaction are shown
below:

Solution The ledger entry is as follows:
Tshs Tshs
Dr. PPE (SOFP) 100,000
Cr. Profit or Loss (SOCI) 60,000
Cr. OCI (SOCI) 40,000

Extract from SOCI
Revaluation Gain 60,000
Other Comprehensive Income Revaluation
Gain from Land 40,000

Extract from SOFP
Equity Retained Earnings (150,000 + 360,000)
510,000
Revaluation Surplus 40,000

Revaluation Losses
If an asset’s carrying amount is decreased as a
result of a revaluation, the decrease shall be
recognized in profit or loss.
However, the decrease shall be recognized in OCI
to the extent of any credit balance existing in the
revaluation surplus in respect of that asset.
The decrease recognized in OCI reduces the
amount accumulated in equity under the heading
of revaluation surplus.

The double entry for this is as follows:
Dr. OCI (SOCI) (If Revaluation Surplus already in Accounts) X
Cr. PPE – Non-Current Asset (SOFP) X
Up to the maximum of a revaluation surplus and the
balance being accounted as follows:
Dr. Profit or Loss (SOCI) X
Cr. PPE – Non-Current Assets (SOFP) X

Example
A company revalued their land from Tshs 500,000
to Tshs 400,000.
The profit for the year from normal day to day
activities of the company is Tshs 300,000 and at
the start of the year there was a revaluation
surplus of Tshs 75,000.
The retained earnings at the start of the year
amounted to Tshs 180,000.
The ledger entry and the extracts from the SOCI and
SOFP for this transaction follow:

Solution
The ledger entry is as follows:
Tshs Tshs
Dr. OCI (SOCI) 75,000
Dr. Profit of Loss (SOCI) 25,000
Cr. PPE (SOFP) 100,000

Extract from SOCI
Revaluation Loss (25,000)
Other Comprehensive
Income Revaluation Loss (75,000)

Extract from SOFP
Tshs Tshs
Equity Retained Earnings (180,000 + 275,000)
455,000
Revaluation Surplus (75,000 - 75,000) 0

• Note that the Total Comprehensive Income
amount of Tshs 200,000 is taken to the Equity
section of the SOFP but Tshs 275,000 of it goes
to retained earnings and the Tshs 75,000
revaluation loss is taken from the revaluation
surplus brought forward.
.

• The revaluation surplus included in equity in
respect of PPE may be transferred directly to
retained earnings when the asset is
derecognized
• This may involve transferring the whole of the
surplus when the asset is retired or disposed
of. Alternatively, some of the surplus may be
transferred as the asset is used by an entity.

• In such a case, the amount of the surplus
transferred would be the difference between
depreciation based on the revalued carrying
amount of the asset and depreciation based
on the asset’s original cost. Transfers from
revaluation surplus to retained earnings are
not made through profit or loss but instead
through the statement of changes in equity

5. IAS 16 PPE.pptx

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