IAS 16 Overview
The objective of IAS 16 property plant and equipment (PPE) is to prescribe the accounting treatment for property, plant and equipment. The principal issue is the timing of recognition of assets, the determination of their carrying amounts, and the depreciation charges to be recognized in relation to them. The following is the IAS 16 summary
IAS 16 Property, Plant and Equipment
IAS 16 Recognition criteria
Items of property, plant and equipment should be recognized as assets when:
- It is probable that the future economic benefits associated with the asset will flow to the enterprise.
- The cost of the asset can be measured reliably.
Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees and estimated cost of dismantling and removing the asset and restoring the site it the payment for an item of Property, Plant and Equipment is deferred, interest at a market rate must be recognized or imputed.
Elements of cost (IAS 16 directly attributable costs examples)
The cost of an item of property, plant and equipment consists of:
- Its purchase price less trade discount plus any import taxes; plus
- The directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These directly attributable costs must include:
- Employee costs arising directly from the installation or construction of the asset
- The cost of site preparation
- Delivery costs
- Installation and assembly costs
- Testing costs to assess whether the asset is function properly (net of any sales proceeds of items produced during the testing phase).
- Professional fees
- When the entity has an obligation to dismantle and remove the asset at end of its life, its initial cost should also include an estimate of the costs of dismantling and removing the asset and restoring the site where it is located.
Subsequent expenditure IAS 16 on Asset
Expenditure relating to non-current assets, after their initial acquisition, should be treated as expense unless it meets the criteria for recognizing an asset. In practice, this means that expenditure is capitalized if it improves the asset (for example, by enhancing its performance or extending its useful life).
Measurement Subsequent to Initial Recognition
IAS 16 Property, Plant and Equipment permits TWO accounting models:
- Cost Model – The asset is carried at cost less accumulated depreciation and impairment.
- Revaluation Model – The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be measured reliably.
The Revaluation Model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date.
If an item is revalued, the entire class of assets to which that asset belongs should be revalued.
Revalued assets are depreciated in the way as under the cost model.
- If a revaluation results in an increase in value, it should be credited to entity under the heading “Revaluation Surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in which case it should be recognized as income.
- A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.
- When a revalued asset is disposed-off, any revaluation surplus may be transferred directly to retained earnings.
Depreciation (Cost and Revaluation Models)
IFRS property plant and equipment
For all depreciable assets:
- The depreciable amount (cost less depreciation, impairment and residual value) should be allocated on a systematic basis over the asset’s useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8.
- The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8.
Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle.
Derecognition (Retirement and Disposal) of An Asset
An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognized in the income statement.
IAS 16 PDf
The International accounting standards 16 pdf is available to download. Moreover, click here to Download IAS 16 summary pdf