Chapter4IAS16PropertyPlantEquipment.docx

Chapter4IAS16PropertyPlantEquipment.docx

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Chapter4IAS16PropertyPlantEquipment

Chapter4

IAS16–Property,PlantandEquipment

ContentsPage

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A.Objective33

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B.Definition33

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C.Recognition33

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D.InitialMeasurement33

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E.SubsequentExpenditure35

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F.MeasurementafterRecognition36

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G.Derecognition39

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H.Depreciation39

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I.Disclosure40

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A.OBJECTIVE

TheobjectiveofIAS16istoprescribetheaccountingtreatmentforproperty,plantandequipment,sothatusersofthefinancialstatementscanunderstandthenatureoftheentitiesinvestmentinsuchassetsandanychangesthathaveoccurredinthatinvestment.

Thestandardindicatesthatthemainissuestobedealtwithare:

（a）Therecognitionofassets

（b）Thedeterminationoftheircarryingamount

（c）Depreciationandimpairmentlosses

（d）Disclosurerequirements

Thestandarddoesnotapplyto:

（a）Property,plantandequipmentclassifiedasheldforsaleunderIFRS5

（b）Mineralrightsandreserves

（c）Biologicalassets

B.DEFINITION

Property,plantandequipmentaretangibleitemsthat:

（a）Areheldforuseintheproductionorsupplyofgoodsorservices,forrentaltoothersorforadministrationpurposes;and

（b）Areexpectedtobeusedduringmorethanoneperiod.

Thecarryingamountreferstotheamountatwhichanassetisrecognisedafterdeductingaccumulateddepreciationandaccumulatedimpairmentlosses,i.e.itsnetbookvalue.

C.RECOGNITION

Anitemofproperty,plantandequipmentshouldberecognisedasanassetintheStatementofFinancialPositionif,andonlyif:

（a）Itisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheentity;and

（b）Thecostoftheitemcanbemeasuredreliably.

TheFrameworkforthePreparationandPresentationofFinancialStatementsalsostatesthathavingcontroloveranassetisanimportantfeatureintherecognitionofthatassetintheaccounts（forexample,legalownershipofanassetisnotessentialinestablishingtheexistenceoftheasset,aslongastheentitycanshowthatitcontrolsthebenefitswhichareexpectedtoflowfromthatasset,e.g.FinanceLease）.

Anentitycontrolsanassetifithasthepowertoobtainthefutureeconomicbenefitsflowingfromthatassetandalsorestricttheaccessofotherstothosebenefits.

D.INITIALMEASUREMENT

Ifanassetqualifiesforrecognition,thenitshouldinitiallybemeasuredatitscost.

Costistheamountofcashorcashequivalentspaidorthefairvalueofotherconsiderationgiventoacquireanassetatthetimeofacquisitionorconstruction.

Thecostofanassetcomprises:

ThePurchasePricelesstradediscountsandrebates

+Importdutiesandnon-refundablepurchasetaxes

+Anycoststhataredirectlyattributabletobringingtheassettothelocationandconditionnecessaryfortheassettobeusedasintended,forexample:

∙Sitepreparationcosts

∙Initialdeliveryandhandlingcosts

∙Installationandassemblycosts

∙Professionalfees

∙Costsoftestingwhethertheassetisfunctioningproperly（afterdeductingthesalesproceedsofanysamplesproducedduringtesting）

+Theinitialcostsofdismantlingandremovingtheitemandrestoringthesite,ifsuchanobligationisplacedontheentity（legallyorconstructively）

Administrationandothergeneraloverheadsarenotincludedinthecostoftheasset.

Likewise,thefollowingarealsoexcluded:

trainingcosts,advertisingandpromotionalcosts,andcostsincurredwhileanasset,capableofbeingusedasintended,isyettobebroughtintouse,isleftidleorisoperatingbelowfullcapacity.

[Notethatinthecaseofself-constructedassets,thefollowingareexcludedfromthecostoftheasset:

（a）Internalprofits

（b）Abnormalamountsofwastedmaterial,labourorotherresources]

Incertaincircumstances,IAS23allowspartoftheborrowingcosttobecapitalised.

Ifanassetisacquiredinexchangeforanotherasset,theacquiredassetismeasuredatitsfairvalueunlesstheexchangelackscommercialsubstanceorthefairvaluecannotbemeasuredreliably.Ifthisisthecase,theacquiredassetshouldbemeasuredatthecarryingvalueoftheassetgivenup（carryingamountbeingequaltocostlessaccumulateddepreciationandimpairmentlosses）.

Question:

TrottersLimitedhasrecentlyacquiredanitemofplant.Thedetailsofthisacquisitionare:

€

€

Listpriceofplant

240,000

TradediscountapplicabletoTrotters

12.5%

Ancillarycosts:

Shippingandhandlingcosts

2,750

Pre-productiontesting

12,500

Maintenancecontractforthreeyears

24,000

Sitepreparationcosts:

Electricalcableinstallation

14,000

Concretereinforcement

4,500

Ownlabourcosts

7,500

26,000

Trotterspaidfortheplant（excludingtheancillarycosts）withinfourweeksandthusreceiveda3%earlysettlementdiscount.

Anerrorwasmadeininstallingtheelectricalcable.Thiserrorcost€6,000andisincludedinthe€14,000figure.

Theplantisexpectedtolastfor10years.Attheendofthisperiod,therewillbecompulsorycostsof€18,000todismantletheplantandrestorethesite.（Ignorediscounting）.

WhatistheinitialcostoftheplantthatshouldberecognisedintheStatementofFinancialPosition?

Solution:

€

€

Listpriceofplant

240,000

Lesstradediscount（12.5%）

（30,000）

210,000

Shippingandhandlingcosts

2,750

Pre-productiontesting

12,500

Sitepreparationcosts:

Electricalcable（14,000–6,000）

8,000

Concretereinforcement

4,500

Ownlabourcosts

7,500

20,000

Dismantlingandrestoration

18,000

Initialcostofplant

263,250

Note:

∙Earlysettlementdiscountisarevenueitem

∙Maintenancecostisalsoarevenueitem

∙Theelectricalerrormustbechargedtotheincomestatement

E.SUBSEQUENTEXPENDITURE

Thecostofday-to-dayservicingofanassetisnotincludedinthecarryingamountofanasset.Thisexpenditureisreferredtoas“repairsandmaintenance”andshouldbechargedtotheincomestatementintheperioditisincurred.

However,ifpartofanassetisreplaced,e.g.newengineinaplaneornewlininginafurnace,thenthecostofthisreplacementcanbecapitalisediftherecognitioncriteriamentionedearlieraremet.

Thepartoftheassetthatisreplacedmustthenbederecognised（withanyresultingprofitorlossondisposalbeingcalculatedandrecognised）.

Someassetsrequireongoingandsubstantialexpenditureforoverhaulingandrestoringcomponentsofanasset,forexample:

∙OverhaulofAirplane,tokeepitairworthy

∙Drydockingofaship

∙Replacingtheliningofafurnace

Aprovisionforthisexpenditurecannotbemade.Rather,thecostiscapitalisedanddepreciatedseparatelyoveritsindividualusefuleconomiclife.Itisimportanttonotethatthisvarietyofsubsequentexpenditurecanonlybetreatedinthiswayiftheassetistreatedasseparatecomponentsfordepreciationpurposes.

Iftheassetisnotaccountedforasseveraldifferentcomponents,thiskindofsubsequentexpendituremustbetreatedasnormalrepairsandrenewalsandchargedtotheincomestatementasitisincurred.

Example

ShinkwinLimitedpurchasesaplanethathasanexpectedusefullifeof20years,andhasnoresidualvalue.Theplanerequiresasubstantialoverhaulevery5years（i.e.attheendofyears5,10,and15）.Theplanecost€45millionand€5millionofthisfigureisestimatedtobeattributabletotheeconomicbenefitsthatarerestoredbytheoverhauls.

Theannualdepreciationchargewouldbecalculatedasfollows:

Theplaneistreatedastwoseparatecomponentsfordepreciationpurposes:

∙The€5millionisdepreciatedover5years（i.e.€1millionperannum）

∙Thebalanceof€40millionisdepreciatedover20years（i.e.€2millionperannum）.

∙Thetotalannualdepreciationchargeis€3million.

Whenthefirstoverhauliscarriedoutattheendofyear5atacostof,say,€10million,thiscostiscapitalisedanddepreciatedtothedateofthenextoverhaul.

Thismeansthattotaldepreciationforyears6to10willbe€4million（€10m/5years+€40m/20years）.

F.MEASUREMENTAFTERRECOGNITION

IAS16providestwooptionswhenaccountingforproperty,plantandequipmentaftertheirinitialrecognition.

（a）CostModel

Afterrecognition,theassetshouldbecarriedintheStatementofFinancialPositionat:

Cost

LessAccumulatedDepreciation

LessAccumulatedImpairmentLosses

（b）RevaluationModel

Afterrecognition,anasset,whosefairvaluecanbemeasuredreliably,shouldbecarriedatarevaluedamount.

Therevaluedamountisthefairvalueoftheassetatthedateofrevaluationlesssubsequentaccumulateddepreciationandimpairmentlosses.

Thefairvalueofpropertyisbasedonitsmarketvalue,asassessedbyaprofessionallyqualifiedvaluer.

Thefairvalueofplantandequipmentisusuallytheirmarketvalue,determinedbya