Financial Reporting

1. Property, Plant and
Equipment
IAS – 16

2. Tangible Non-Current Assets

3. Objective
 To prescribe the accounting treatment for
property, plant and equipment. The timing of
recognition of assets, carrying amount and
depreciation expense regarding them.

4. Scope
 The standard should be applied in accounting
for property, plant and equipment except when
another IAS requires or permits a different
accounting treatment.

5. Definitions
 Property, Plant and Equipment are tangible assets
that are held by an enterprise 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
for more than one year.
 Depreciation is the systematic allocation of the
depreciable amount of an asset over its useful life.
 Depreciable amount is the cost of an asset or any
other amount substituted for it that has to be
depreciated.

6. Definitions
 Useful life is either the time period over which the
asset is expected to be used or the number of units
which the asset is likely to produce.
 Cost is the amount of cash paid or fair value of other
consideration given to acquire an asset at the time of its
acquisition or construction.
 Residual Value is the amount which an asset is
expected to have at the end of its useful life
 Fair Value is the amount for which an asset could be
exchanged between knowledgeable, willing parties in an
arm's length transaction

7. Definitions
 Impairment Loss in the amount by which the carrying
amount of as asset exceeds its recoverable amount
 Carrying Amount is the amount at which an asset is
recognized in the balance sheet after deducting any
accumulated depreciation and accumulated impairment
losses thereon
 Recoverable amount: the higher of an asset's fair
value less costs of disposal* (sometimes called net
selling price) and its value in use.

8. Recognition of Property, Plant and
Equipment
 These should be recognized as an asset when:
 It is probable that future economic benefits
related to the asset will flow to the organization
 The cost of the asset to the enterprise can be
measured reliably

9. Initial Measurement of Property,
Plant and Equipment
 These should be initially measured at cost. The
cost has the following components:
 Purchase price
 Import duties
 Non-refundable purchase taxes, and
 Directly attributable costs of bringing the asset to
working condition for its intended use
 Trade discounts and rebates are deducted in arriving at the
purchase price

10. Example of components of cost
 The cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Professional fees such as for architects and engineers
 The estimated cost of dismantling and removing the
asset and restoring the site to the extent that its is
recognized as provision under IAS 37, Provision,
Contingent Liabilities and Contingent Assets

11. Exchanges of Assets
 If an asset is acquired in exchange for another
asset (whether similar or dissimilar in nature),
the cost will be measured at the fair value unless
(a) the exchange transaction lacks commercial
substance or
 (b) the fair value of neither the asset received
nor the asset given up is reliably measurable.
 If the acquired item is not measured at fair
value, its cost is measured at the carrying
amount of the asset given up.

12. Subsequent Expenditure
 This should be added in the carrying amount of the asset if it
is probable that the future economic benefits, in excess of the
originally assessed standard of performance of the existing
assets, will flow to the enterprise. For example:
 Modification of an item to extend its useful life,
including its capacity
 Upgrading machine parts to achieve a substantial
improvement in the quality of output
 Adoption of a new production process enabling a
substantial reduction in previously assessed operating
costs.

13. Measurement Subsequent to Initial
Recognition
 Benchmark Treatment is that an asset should
be valued at cost less accumulated depreciation
and any accumulated impairment losses.
 Alternate Treatment is that in which an asset is
carried at a revalued amount, being its fair
value at the date of the revaluation less any
subsequent accumulated and subsequent
accumulate impairment losses.

14. Revaluation
 The fair value is usually assets market value. This
is determined by appraisal done by qualified
valuers.
 When an item is revalued the entire class of
property, plant and equipment to which that
asset belongs should be revalued.

15. Revaluation
 Increase in the value of an asset should be directly
credited to equity in the head of revaluation surplus
unless it represents the reversal of a revaluation
decrease of the same asset previously recognised as an
expense, in which case it should be recognised in profit
or loss.
 If the value of an asset is decreased due to revaluation
then it should be shown as an expense.

16. Depreciation
 The depreciation charge of an asset should be
recognized as an expense.
 To determine the useful life of an asset the
following should be considered:
 Expected usage of the asset
 Expected physical wear and tear
 Technical obsolescence
 Legal or similar limits on the use of the asset, such as the
expiry dates of related leases

17. Review of useful life and
depreciation method
 The useful life should be reviewed periodically
and depreciation allowance should adjusted
accordingly.
 The depreciation method should be changed if
there is a change in the pattern of economic
benefits that are expected from the asset.

18. Recoverability of the Carrying
Amount – Impairment Losses
 IAS 36 deals with the impairment of an asset.
The standard explains how an enterprise reviews
the carrying amount of its assets, how it
determines the recoverable amount of an asset
and when it recognizes or reverses an
impairment loss.

19. Retirements and Disposals
 An item of property, plant and equipment
should be eliminated from the balance sheet on
disposal or when the assets is permanently
withdrawn from use and no future economic
benefits are expected from its disposal.
 The gains or losses from retirements or
disposals should be recognized in the profit and
loss account in the year of disposal.

20. Disclosure
 The measurement basis used for determining
the gross carrying amount
 The depreciation method used
 Useful lives or the depreciation rates
 Gross carrying amount and accumulated
depreciation at the start and end
 A reconciliation of the carrying amount at the
beginning and end of the period showing the
following:

21. Disclosure
 Additions
 Disposals
 Acquisitions through business combinations
 Increase or decrease through revaluation or impairment
 Depreciation
 The net exchange difference arising on the translation of the
financial statement of a foreign entity
 Other movements

22. Further Disclosure
 Details related to assets pledged.
 Accounting policy for restoring the costs of site
items.
 The amount of expenditure on account of
property, plant and equipment in the course of
construction.
 The amount of commitments for the acquisition
of property, plant and equipment.

23. Disclosure for revalued assets
 Basis used to revalue the assets
 Effective date of revaluation
 Whether an independent valuer was involved
 The nature of any indices used to determine
replacement cost
 The revaluation surplus