1. IAS 16 Property, Plant and Equipment
OPENING COMMENTS
The following are applicable only if presented as a stand-alone module:
Welcome participants
Introduce yourself with special emphasis on practical experience
If necessary - use introduction as an ice-breaker
Introduce content map and objectives (details on next 2 slides)
Set learning environment guidelines (questions any time)
Emphasise peer learning opportunities (working in pairs, sharing problems)
Introduce Module Learning Objectives
Understanding the rationale and conceptual logic of the revised Standard.
The principal issues in accounting for property, plant and equipment are the timing of recognition of the assets, the determination of their carrying amounts and the depreciation charges to be recognised in relation to them.
Module opening comments
This is a revised Standard, effective for annual financial statements beginning on or after 1 July Earlier application is encouraged. If the Standard is adopted for a financial period beginning prior to this date, the enterprise should disclose that fact and adopt IAS 22 (revised 1998), Business Combinations, IAS 36 Impairment of Assets, and IAS 37 Provisions, Contingent Assets and Contingent Liabilities at the same time.
There are no transitional provisions in the revised Standard, as the basic accounting treatments do not differ from those prescribed by the 1993 Standard.
The main purpose of the latest revision was to make the Standard consistent with IAS 22 (revised 1998), Business Combinations, IAS 36, Impairment of Assets, and IAS 37, Provisions, Contingent Liabilities and Contingent Assets. There are no significant changes to the basic principles of the Standard as revised in 1993.
Date of review of module and approval by technical specialist:
Date: 07/99
prepared By
Bahaa Al ghussin Faeq Al alamy
Ahmed Al souerky
Supervision
Yousef al medalal
Level 1+2

2. CONTENTS OBJECTIVE SCOPE DEFINITIONS RECOGNITION
MEASUREMENT AT RECOGNITION
Measurement of cost
Depreciation
Impairment
Disclosure

3. Objective To prescribe the accounting treatment for PP&E
Principal issues
timing of recognition of assets
determination of carrying amount
depreciation charges to be recognised
Slide level: 1 and 2
The principal issues listed on the slide will be addressed in the sections of this module dealing with the recognition and measurement of property, plant and equipment.
Timing of recognition addresses the question of when an item of property, plant and equipment should be recognised in the balance sheet, and when should it be de-recognised, ie eliminated from the balance sheet.
Determination of carrying amount addresses the question of the amount at which the asset is reflected in the balance sheet:
when it is initially acquired;
when subsequent expenditure is made after the acquisition (e.g. improvements); and
how its value is adjusted for external factors (such as changes in market price, obsolescence as a result of new technology, etc.) during the course of its useful life.
Depreciation addresses the issue of how to allocate the carrying amount of the asset to the income statement over its useful life, in order to achieve matching between the cost of the asset and the economic benefit derived therefrom (e.g. the income derived from the sale of the goods manufactured with a piece of machinery).

4. Scope…
The Standard applies to all PP&E, except where another IAS requires or permits a different treatment
Does not apply to biological assets related to agricultural activity or mineral rights and reserves. Does apply to PP&E used to develop and maintain these assets
Slide level: 1 and 2
IAS 16 does not apply to:
forests and similar regenerative natural resources
mineral rights
the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.
It does, however, apply to all property, plant and equipment used in such activities. (IAS 16.2)
Q: Can you think of any examples of other IAS standards which require or permit a different accounting treatment for property, plant and equipment?
A: There are examples:
IAS 25, Accounting for Investments, allows an entity to treat investment properties either as property in terms of IAS 16 or as long-term investments under IAS 25. However, IAS 25 is being revised (see E64, Investments Properties - Final IAS expected before the end of 1999). E64 proposes that investments should all be carried at fair value, with changes in fair value recognised in the income statement. However, if, at the date of acquisition, an enterprise is not able to determine the fair value of a property on a continuing basis, this property should be treated under IAS 16. E64 proposes that fair value cannot be determined reliably when, and only when, comparable market transactions are infrequent and alternative estimates of fair value (for example, based on discounted cash flow projections) are not available
IAS 15, Information Reflecting the Effect of Changing Prices, and IAS 29, Financial Reporting in Hyperinflationary Economies, on reflecting the effects of changing prices and on financial reporting in hyperinflationary economies, provide alternative bases for valuing property, plant and equipment subsequent to initial recognition.

5. Definition
Property, plant and equipment (PP&E) 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
are expected to be used during more than one period
Slide level: 1 and 2
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
(IAS 16.6)
Q: Should software be treated as an item of property, plant and equipment?
A: It depends. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 or as an intangible asset under IAS 38, Intangible Assets, judgement is required to assess which element is more significant. For example computer software for a computer controlled machine tool that cannot be operate without that specific software is an integral part of the related hardware and it is treated as PP&E. The same applies to the operating system of a computer. Where the software is not an integral part of the related hardware, computer software is treated as an intangible asset. (IAS 38.3)

6. Recognition An item of PP&E should be recognised as an asset when
it is probable that future economic benefits associated with asset will flow to the enterprise; and
cost of asset to the enterprise can be measured reliably
Slide level: 1 and 2
The recognition criteria for property, plant and equipment are derived from the Framework and thus are the same as those for other assets.
In practice, it can be difficult to establish when it is probable that future economic benefits will flow to the enterprise. IAS 16 suggests that this probability is generally established when the risks and rewards of ownership are passed to the enterprise. Before this occurs, the transaction to acquire the asset can usually be cancelled without significant penalty, and, therefore, the asset is not recognised.
It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies and to apply the criteria to the aggregate value.
Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare parts and stand-by equipment qualify as PP&E when the enterprise expects to use them during more than one period. Similarly, if spare parts and servicing equipment can be used only in connection with an item of PP&E and their use is expected to be irregular, they are accounted for as PP&E and are depreciated over a time period not exceeding the useful life of the related asset.
It may also be appropriate to allocate the expenditure on an asset into its component parts and to account for each component separately, for example, when the component parts have different useful lives. An example would be a commercial aircraft where the airframe, the engines and the cabin fittings may be accounted for as 3 separate assets.
PP&E may be acquired for safety or environmental reasons. The acquisition of such PP&E, while not directly increasing the future economic benefits of any particular existing item of PP&E may be necessary in order for the enterprise to obtain the future economic benefits form its other assets. When this is the case, such acquisitions of PP&E qualify for recognition as assets.

7. Initial measurement PP&E initially measured at cost Cost components
purchase price
import duties and purchase taxes
directly attributable costs of bringing asset to working condition / use
less: trade discounts & rebates
Slide level: 1 and 2
Cost - the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction
Q: What would be examples of directly attributable costs?
A: Cost of site preparation; initial delivery and handling costs; installation costs; professional fees (e.g. architects, engineers); decommissioning costs under IAS 37 (see case study 03) - Source: IAS Refer to case study 01 for further discussion of this issue.
Q: What costs would not be included in the cost of an item of PP&E?
A: Refundable purchase taxes (e.g. claimable VAT); administration and general overhead costs, start-up costs (unless they can be directly attributed to the acquisition of the asset or bringing the asset to its working condition); initial operating losses incurred prior to an asset achieving planned performance.
When payment is deferred beyond normal credit terms, its costs is the cash price equivalent; the difference between this amount and the total payments is recognised as an interest expense over the period of credit unless it is capitalised under IAS 23, Borrowing Costs.
Borrowing costs may also be capitalised as part of the cost of the asset if it is a qualifying asset in terms of IAS 23, Borrowing Costs, and the entity has elected to capitalise borrowing costs.
Where an asset is self-constructed, the cost is determined using the same principles as for an acquired asset (elimination of internal profits, costs of abnormal amounts of wasted material, labour and other resources are not included in the cost of the asset).
An item of PP&E may be acquired in exchange for a dissimilar item of PP&E. The cost of such an item is measured at the fair value of the asset received, which will be equivalent to the fair value of the asset given up (adjusted for any cash components in the exchange). There may therefore be a profit or loss on the disposal of the asset given up (since its carrying amount will not always be its fair value).
Where an item of PP&E is exchanged for a similar asset with a similar use and similar fair value, no gain or loss is recognised. The cost of the new asset is the carrying amount of the asset given up (and not its fair value).

8. Examples of directly attributable costs are:
(a) costs of employee benefits
(b) costs of site preparation;
(c) installation and assembly costs;
(d) costs of testing

9. Subsequent expenditure
When should subsequent expenditure be capitalised?
future economic benefits are probable
The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment
For example : aircraft , seats
Slide level: 1 and 2
The requirements for the recognition of subsequent expenditure as part of the cost of an asset follow the requirements for the recognition of an asset, ie when it is probable that as a result of the expenditure future economic benefits will flow to the enterprise.
This requirement relates to subsequent expenditure on an asset which has already been recognised by the enterprise in a prior period. The Standard lays down guidelines for when such expenditure can be added to the existing carrying amount of the asset. Any expenditure which does not meet the criteria should be recognised as an expense as incurred.
The key element is that the subsequent expenditure must “improve the condition of the asset beyond its originally assessed standard of performance” (IAS 16.24). Examples would be:
modification to plant to extend its useful life or increase its capacity
upgrading plant to improve the quality of output
adopting a new production process which reduces operating costs.
Repairs and scheduled maintenance are performed to restore or maintain the originally assessed standard of performance of the asset and is therefore expensed as incurred, as it does not improve the quality of the asset beyond its originally assessed standard of performance.
There is a relationship between how the cost of an item of PP&E has been divided into components and the useful life of each component.
Refer to case study 2 (for Level 2 only) for a further analysis of the type of subsequent expenditure which may be capitalised.

10. Subsequent measurement
Cost model
cost less accumulated depreciation and impairment losses
Revaluation model
Fair value at date of revaluation less subsequent depreciation, provided fair value can be measured reliably.
Slide level: 1 and 2
Depreciation and impairment losses apply to both the benchmark treatment and to the allowed alternative. Since the concept of “cost” has already been dealt with, this module discusses “revaluations” first and then examines the requirements for depreciation and impairment losses.

11. Subsequent measurement
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 surplus.
If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss.
Slide level: 1 and 2
A revaluation increase should be credited directly to an equity account called “revaluation surplus” (through the statement of changes in equity) and should not go through the income statement.
Where, however, there has previously been a revaluation decrease for the asset concerned, which has been recognised as an expense in the income statement, the current revaluation increase should be recognised as income in the income statement up to the amount of the previously recognised expense.
A revaluation decrease should be recognised as an expense in the income statement.
Where, however, there has previously been a revaluation increase for the asset concerned, which has been taken directly to equity, the current revaluation decrease should be recognised directly against the “revaluation surplus” in equity, up to the amount of the previously recognised increase.
The revaluation surplus can be realised fully on the retirement or disposal of the asset concerned, or over the remaining life of the asset. The transfer from the revaluation surplus to retained earnings does not go through the income statement, but is made as a direct transfer between the two equity accounts.
Note that the depreciation charge (compulsory) is calculated based on the revalued amount and recognised for its full amount in the income statement.

12. Depreciation Depreciation charge  expense
unless included in another asset
The depreciable amount should be allocated on a systematic basis over the asset’s useful life
The residual value and useful life should be reviewed at least annually and adjusted if necessary
Slide level: 1 and 2
Depreciation - the systematic allocation of the depreciable amount of an asset over its useful life. (IAS 16.6)
Depreciable amount - cost of an asset, or amount substituted for cost in the financial statements, less its residual value. (IAS 16.6)
Cost - the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. (IAS 16.6)
Useful life - is either:
the period of time over which an asset is expected to be used by the enterprise
or the number of production or similar units expected to be obtained from the asset.
(IAS 16.6)
The depreciation charge is recognised an an expense, unless it is included in the carrying amount of another asset (eg inventory, internally generated intangible asset).
Depreciation reflects the fact that the economic benefits embodied in an asset are consumed by the enterprise, through the use of the asset. However, other factors such as technical obsolescence and wear and tear while an asset remains idle often result in the diminution of the economic benefits that might have been expected to be available from the asset. The following factors are considered in determining the useful life of an asset :
expected usage, based on physical output (ie the number of units it will produce)
expected physical wear and tear
technical obsolescence
limited time frame for usage, eg the lease period on a leased asset (IAS 16.43)
The useful life of an asset should be periodically reviewed, as it may change as a result of new technological developments which shorten its useful life, or as a result of expenditure which improves the asset by lengthening its useful life. In such a case, the depreciation rate for the current and future periods is adjusted accordingly (not retrospective adjustment) (IAS16.50).

13. Depreciation Depreciation methods Change in depreciation method
straight-line method
diminishing balance method
sum-of-the-units
Change in depreciation method
change in accounting estimate
Slide level: 1 and 2
The selection of a depreciation method is a matter of judgement and “should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise” (IAS 16.41). This is an application of the “matching concept” which provides that the cost of an item should be allocated to the period in which the income resulting from that item is earned.
For example, where a machine is used to manufacture widgets, and will do so for ten years, the cost of the asset should be allocated over the ten years, so that the cost of the asset can be matched with the sales revenue from the sale of the widgets during the ten year period.
Different depreciation methods are available to allocate the depreciable amount over its useful life:
Straight line method: This method gives a constant charge over the useful life of the asset (eg 20% of cost per annum).
Diminishing balance method: This method results in a higher charge in the early part of the asset’s useful life and a decreasing charge each period thereafter (with the argument that it’s productivity diminishes over time). (eg 20% of net carrying value per annum)
Sum of the units method (unit of production): This method allocates the depreciable amount based on the number of units (eg widgets) which the asset is expected to produce in total over its useful life, and within each period of that useful life.
The selection of a method is based on judgement to best reflect the use of the economic benefits of the asset, and should be applied consistently from period to period, unless the pattern of benefits changes significantly. If such a change occurs, the depreciation method should be changed accordingly. Such a change is accounted for as a change in accounting estimate (and not as a change in accounting policy), and the depreciation charge for the current and future periods (but not prior periods) will be adjusted accordingly.

14. Impairment losses
IAS 16 no longer includes the requirements for impairment
Impairment of an item of PP&E should be dealt with under IAS 36, Impairment of Assets
Slide level: 1 and 2
Impairment loss - the amount by which the carrying amount of an asset exceeds its recoverable amount. (IAS 16.6)
Prior to the introduction of IAS 36, Impairment of Assets, IAS 16 contained requirements detailing how impairments of PP&E should be assessed and accounted for.
Impairments are now dealt with under IAS 36, which is the subject of a separate module. Basically, an impairment test is required when indicators of impairment - which should be reviewed annually - are triggered. Where an impairment loss has occurred, the carrying amount of an item of PP&E is reduced to its recoverable amount.

15. Disclosure
The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used
(b) the depreciation methods
(c) the useful lives or the depreciation rates
(d) the gross carrying amount and impairment
(e) a reconciliation of the carrying amount at the beginning and end of the period
Slide level: 1 and 2
An item of PP&E should be eliminated from the balance sheet on disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal. (IAS 16.55)
Gains or losses arising from the retirement or disposal of an item of PP&E should be determined as the difference between the estimated net proceeds, and the carrying amount of the asset and should be recognised as income or expense in the income statement. (IAS 16.56)
Entries on disposal:
Dr Cash (proceeds on sale) 500
Dr Accumulated depreciation 400
Cr PP&E (at cost / valuation) 800
Cr Profit on disposal 100
When an item of PP&E is permanently withdrawn from use, but will not be sold, it no longer meets the definition of an asset, since no future economic benefit is expected to be derived therefrom, and de-recognition must therefore take place. Any loss on retirement (ie the writeoff of the remaining carrying amount at the retirement date) will be reflected in the income statement.
Where an asset is retired from use and held awaiting sale, it is not eliminated from the balance sheet, but is carried at the carrying amount at the date at which it was retired from active use. As it is expected that the asset will be sold, it still meets the definition of an asset, since future economic benefits will be derived therefrom. An impairment test under IAS 36 is then carried out at least annually and any impairment loss recognised accordingly.
Source: IAS

16. THE END
Thank You
Level 1+2