Ias 16

IAS 16
Property, Plant and Equipment
By:- Yohannes Negatu (ACCA,DipIFR)

Overview
 OBJECTIVE
 SCOPE
 DEFINITIONS
 RECOGNITION
 MEASUREMENT AT RECOGNITION
 Elements of cost
 MEASUREMENT AFTER RECOGNITION
 Cost model
 Revaluation model
 Depreciation
 Impairment
 Compensation for impairment
 DERECOGNITION
 DISCLOSURE

OBJECTIVE
 To prescribe the accounting
treatment for property, plant and
Equipment i.e Recognition,
Determination of carrying amount
and Depreciation charges and
impairment losses.

SCOPE
The Standard shall be applied in
accounting for property, plant and
equipment except:- IFRS 5, IFRS 6,
IAS 41

DEFINITIONS
PPE:- are tangible items that:
(a)are held for use in the production or
supply of goods or services, for rental to
others, or for administrative purposes;
and
(b) are expected to be used during more
than one period.

continued
Carrying amount :-is the amount at which
an asset is recognized after deducting
any accumulated depreciation and
accumulated impairment losses.
Depreciation;- is the systematic allocation
of the depreciable amount of an asset
over its useful life.

continued
Fair value:-is the price that would be
received to sell an asset or paid to
transfer a liability in an orderly
transaction between market
participants at the measurement
date.

continued
Recoverable amount:- is the higher of an
asset’s fair value less costs to sell and
its value in use.
Value in use :-is the present value of the
future cash flows expected to be
derived from an asset or cash
generating unit.

continued
A cash-generating unit:-is the smallest
Identifiable group of assets that
generates cash
Impairment:- is a fall in the value of an
asset i.e recoverable less than its
carrying amount.

RECOGNITION
The cost of an item of property, plant and
equipment shall be recognized as an asset if,
and only if:
(a)it is probable that future economic
Benefits associated with the item will flow
to the entity; and
(b) the cost of the item can be measured

MEASUREMENT
An item of property, plant and
equipment that qualifies for
recognition as an asset shall be
Measured at its cost.

Elements of cost
The cost of an item of property, plant
and equipment comprises:
(a)its purchase price, including import
duties and non refundable purchase
taxes, after deducting trade discounts
and rebates.

continued
(b) any costs directly attributable to bringing
the asset to the location and condition
Necessary for it to be capable of operating in
the manner intended by management.
(c) the initial estimate of the costs of
Dismantling And removing the item and
restoring the site on which it is located and any
obligation associated

continued
Examples of directly attributable costs
are:-
(a) costs of employee benefits (as
Defined in IAS 19 Employee Benefits)
Arising directly from the construction
Or acquisition of the item of property,
plant and equipment;

continued
(b) costs of site preparation;
(c) initial delivery and handling
costs;
(d) installation and assembly costs;
(e) costs of testing
(f) professional fees

continued
Examples of costs that are not costs of
an item of property, plant and
equipment are:
(a) costs of opening a new facility;
(b) costs of introducing a new product or
Service (including costs of advertising
and promotional activities);

continued
(c) costs of conducting business in a
new location or with a new class of
customer (including costs of staff
training); and
(d) administration and other
general overhead costs.

MEASUREMENT AFTER RECOGNITION
An entity shall choose either the cost
model or The revaluation model.
Cost model
After recognition as an asset, an item of
property, plant and equipment shall be
Carried at its cost less any accumulated
Depreciation and any accumulated

continued
Revaluation model
 After recognition as an asset, an item of
property, plant and equipment whose fair
value can be measured reliably shall be carried
at a revalued amount, being its fair value at
the date of the revaluation less any
subsequent accumulated depreciation and
subsequent accumulated impairment losses.

continued
 If an item of property, plant and
equipment is revalued, the entire
class of property, plant and
equipment to which that asset
belongs shall be revalued.

continued
examples of separate classes:
(a) land; (b) land and buildings;
(c) machinery;
(d) ships; (e) aircraft; (f) motor
vehicles; (g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.

continued
If an asset’s carrying amount is
increased as a result of a
revaluation, the increase shall be
recognized in other comprehensive
income and accumulated in equity
under the heading of revaluation

continued
However, the increase 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.

continued
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 other comprehensive income to
the extent of any credit balance existing in the
revaluation surplus in respect of that asset. The
decrease recognized in other comprehensive income
reduces the amount accumulated in equity under the
heading of revaluation surplus.

Depreciation
 Each part of an item of property,
plant and equipment with a cost
that is significant in relation to
the total cost of the item shall be
Depreciated separately.

continued
e.g. airframe and engines of an
Aircraft The depreciation charge for
each period shall be recognized in
profit or loss unless it is included in
The carrying amount of another
asset.

continued
The depreciable amount of an asset shall be
allocated on a systematic basis over its useful life.
The residual value and the useful life of an asset
shall be reviewed at least at each financial year-end
and, if expectations differ from previous
estimates, the change(s) shall be accounted for as
a change in an accounting estimate in accordance
with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors.

continued
Depreciation is recognized even if
the fair value of the asset exceeds
its carrying amount, as long as the
asset’s residual value does not
exceed its carrying amount.

continued
Depreciation of an asset begins
when it is available for use, ie when
it is in the location and condition
necessary for it to be capable of
operating in the manner intended
by management.

continued
Depreciation does not cease when
the asset becomes idle or is retired
from active use unless the asset is fully
depreciated. However, under usage
methods of depreciation the
depreciation charge can be zero while
there is no production.

continued
The depreciation method applied to
an asset Shall be reviewed at least at
each financial year end and, if there
has been a significant change, the
method shall be changed. Such a
Change shall be accounted for as a
change in an accounting estimate in
accordance with IAS 8.

Impairment
To determine whether an item of
property, plant and equipment is
impaired, an entity applies IAS 36
Impairment of Assets.

Compensation for impairment
Compensation from third parties
for items of property, plant and
equipment that were impaired,
lost or given up shall be included in
profit or loss when the
compensation becomes receivable.

Derecognition
The carrying amount of an item of property, plant
and equipment shall be derecognized:
(a) on disposal; or
(b) when no future economic benefits are expected
from its use or disposal.
The gain or loss arising from the derecognition of an
item of property, plant and equipment shall be
included in profit or loss.

Disclosure
The financial statements shall disclose, for each
class of property, plant and equipment:
(a) the measurement bases used for determining the
gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated
depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the
period;

Ias 16

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