1. International Accounting Standard 16 Property, Plant and Equipment
Francesco Gualano, 27/03/2012

2. Objective
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them.

3. Scope
This standard applies to all property, plant and equipment except when another standard requires or permits a different accounting treatment.
This standard does not apply to:
Assets held for sale (IFRS 5)
Biological assets related to agricultural activity (IAS 41)
recognition of exploration and evaluation assets (IFRS 6)
Mineral rights, mineral reserves (oil, gas, etc.) and similar non-regenerative resources

4. Definitions Property, plants and equipment Carrying amount Cost
tangible items
held for use in the production or supply of goods or services, for rental or administrative purposes
expected to be used during more than one period
Carrying amount
amount at which an asset is recognized – depreciation – impairment loss
Cost
cash or cash equivalent or fair value at which the asset is initially build, bought or recognized
Depreciation
systematic allocation of the depreciable amount of an asset over its useful life
Impairment loss
amount by which the carrying amount of an asset exceeds its recoverable amount

5. Measurement at recognition
Recorded at cost
Included costs
Purchase price + (Import duties + Non refundable taxes) - (Trade Discounts + Rebates)
Relevant borrowing costs (IAS 23)
Costs directly related to getting the asset ready for use
site preparation
installation
testing the asset
professional fees (legal costs, surveyors, architects, etc.)
Dismantling and restoration costs
Excluded costs
Maintenance contract costs
costs of opening a new facility, introducing a new product or service (costs of advertising and promotional activities), relocating a business or activity
administration and other general overhead costs

6. Recognition at cost – Example
ABC s.r.o. is installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (supplier’s invoice plus taxes) CZK 2,500,000 Initial delivery and handling costs CZK 200,000 Cost of site preparation CZK 600,000 Consultants used for advice on plant acquisition CZK 700,000 Interest charges paid to supplier for credit CZK 200,000 * Estimated dismantling costs to be after 7y CZK 300,000 Operating losses before commercial production CZK 400,000
According to IAS 16, these costs can be capitalized:
Cost of the plant                      CZK 2,500,000 Initial delivery and handling costs        CZK 200,000 Cost of site preparation                      CZK 600,000 Consultant’s fees        CZK 700,000 Estimated dismantling costs after 7y CZK 300, Total Cost Capitalized                         CZK 4,300,000
* Interest charges can be capitalized as per allowed alternative treatment of IAS-23 Borrowing Cost

7. Measurement after recognition
An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.
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 impairment losses.
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. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period
If a revaluation results in an increase in value, it should be credited to equity 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. [IAS 16.39]  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. [IAS 16.40]  When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement (that is, no "recycling" through profit or loss). [IAS 16.41] 

8. Measurement after recognition - Example
ABC s.r.o. has a plant with an initial cost of CZK 100,000. At the date of revaluation accumulated depreciation amounted to CZK 55,000. The fair value of asset, by reference to transactions in similar assets, is assessed to be CZK 65,000
Method – I:
Accumulated depreciation Dr 55,000
Asset Cost Cr 55,000
Asset Cost Dr 20,000
Revaluation reserve Cr 20,000
The net result is that the asset has a carrying amount of CZK 65,000
(100,000 – 55, ,000)
Method – II:
Carrying amount (100,000 – 55,000) = 45,000
Fair value (revaluated amount) 65,000
Surplus 20,000
% of surplus (20,000/45,000) %
Entries to be Made:
Asset (100,000 x 44.44%) Dr 44,440
Accumulated Depreciation (55,000 x 44.44%) Cr 24,442
Surplus on Revaluation Cr 20,000
■ An increase in value is credited to other comprehensive income under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in this case the increase in value is recognized in profit or loss (as income).
■ A decrease in value 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 recognised in other comprehensive income reduces the amount accumulated in equity under the heading revaluation surplus.

9. Depreciation and impairment losses
The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
The depreciable amount takes account of the expected residual value of the assets (Depreciable amount = Cost – Residual value)
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
To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets.

10. Derecognition
The carrying amount of an item of property, plant and equipment shall be derecognized:
on disposal; or
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 when the item is derecognized (unless IAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.

11. Thank you for your attention!