IAS 16 Property, Plant and Equipment
Background
IAS 16 Property, Plant and Equipment establishes guidance
for recognising property, plant and equipment as assets, measuring their
carrying amounts, and measuring the depreciation charges and impairment losses
to be considered in relation to them.
This was reissued in December 2003 and applicable to the
period start on or after 1 January 2005.
Objective
The objective of IAS 16 is to establishes the accounting
treatment for property, plant and equipment to make it more useful for users to
discern information about an entity’s investment in its property, plant and
equipment and the any related changes. The principal outlines in accounting for
property, plant and equipment are:
· asset
recognition,
· determination
of carrying amounts,
· depreciation
and
· any impairment
losses to be measured.
Scope
This Standard shall be applied in accounting for property,
plant and equipment except when another Standard requires or permits a
different accounting treatment.
This Standard does not apply to:
(a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non‑current Assets Held for Sale and Discontinued Operations.
(b) biological assets related to agricultural activity
other than bearer plants (see IAS 41 Agriculture). This Standard applies to
bearer plants but it does not apply to the produce on bearer plants.
(c) the recognition and measurement of exploration and
evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral
Resources).
(d) mineral rights and mineral reserves such as oil,
natural gas and similar non‑regenerative
resources.
However, this Standard applies to property, plant and
equipment used to develop or maintain the assets described in (b)–(d).
An entity using the cost model for investment property in
accordance with IAS 40 Investment Property shall use the cost model in this
Standard for owned investment property.
Key definitions
Bearer plant
It’s a living plant that has following characteristics:
(a) agricultural product production or supply;
(b) expected to produce for more than one period; and
(c) remote likelihood of being sold as agricultural produce
except for incidental scrap sales.
Carrying amount
The amount on which an asset is measured after reducing any
accumulated depreciation and any accumulated impairment losses.
Cost
The amount paid in cash or cash equivalents or fair value
of the other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount attributed to that
asset when initially recognised in accordance with the specific requirements of
other IFRSs, like IFRS 2 Share‑based
Payment.
Depreciation
The systematic allocation of the depreciable amount of an
asset over its useful life.
Entity‑specific
value
The present value of the cash flows an entity expects to
arise from the continuing use of an asset and from its disposal at the end of
its useful life or expects to incur when settling a liability.
Property, plant and equipment 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.
Residual value
The residual value of an asset is the estimated amount that
an entity would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
Useful life
(a) the period over which an asset is expected to be
available for use by an entity; or
(b) the number of production or similar units expected to
be obtained from the asset by an entity.
Recognition of Asset
The cost of any item of property, plant and equipment shall
be measured as an asset if it is:
(a) Probable that future economic benefits associated with
that item will flow to the entity; and
(b) the cost of the item can be measured reliably.
Spare parts: Items
like spare parts, any stand-by equipment and servicing equipment are recognised
in accordance with this IFRS when they meet the definition of property, plant
and equipment. Otherwise, such items are classified as inventory.
Unit of measure: This
Standard does not prescribe the unit of measure for recognition; thus,
judgement is required in applying the recognition criteria to an entity’s
specific circumstances. It may be appropriate to aggregate individually
insignificant items, such as moulds, tools and dies, and to apply the criteria
to the aggregate value.
Initial costs
An entity evaluates under this recognition principle
all its property, plant and equipment costs at the time they are incurred.
These costs include;
· Costs
incurred initially to acquire or
· construct
an item of property, plant and equipment and
· costs
incurred subsequently to add to, replace part of, or service it.
· may
include costs incurred relating to leases of assets that are used to construct,
add to, replace part of or service an item of property, plant and equipment,
such as depreciation of right‑of‑use assets.
If an item may not directly increasing the future economic
benefits of any specific existing item of property, plant and equipment but may
be essential for the entity to obtain the future economic benefits from its
other assets will qualify the recognition principal to consider as assets
because they empower an entity to derive additional future economic benefits
from related assets compared to the case when those items have not been
acquired.
Subsequent costs
An entity does not recognize the cost of the day‑to‑day
servicing ( ‘repairs and maintenance’ ) in the carrying amount of an item of
property, plant and equipment. Rather, these costs shall be considered in
profit or loss as incurred.
The asset may require replacement of parts or a major
inspection at regular intervals. an entity shall recognises that cost in the
carrying amount of an item of property, plant and equipment when that cost is
incurred if the recognition criteria are met. The carrying amount of those
parts that are replaced is derecognised in accordance with the derecognition
provisions of this Standard.
Measurement at recognition
An item of property, plant and equipment that qualifies for
recognition as an asset shall be measured at its cost.
Components of Cost:- The
cost comprises following:-
(a) purchase price, import duties and non‑refundable purchase taxes, after deducting trade discounts
and rebates.
(b) any costs incurred to bring the asset to the location
and make it capable of operating in accordance with management expectations.
(c) Estimate of the dismantling costs and removing the item
and restoring the site, the obligation for which an entity incurs either when
the item is acquired or as a consequence of having used the item during a
particular period for purposes other than to produce inventories during that
period.
Measurement of cost - The
cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date. If payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is
recognised as interest over the period of credit unless such interest is
capitalised in accordance with IAS 23.
Measurement after recognition - An
entity shall choose either of following models as its accounting policy and
shall apply that policy to an entire class of property, plant and equipment:
1. 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.
2. 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.
a. The
frequency of revaluations depends upon the changes in fair values of the items
of property, plant and equipment being revalued. When the fair value of a
revalued asset differs materially from its carrying amount, a further
revaluation is required. Some items of property, plant and equipment experience
significant and volatile changes in fair value, thus necessitating annual
revaluation.
b. When
an item of property, plant and equipment is revalued, the carrying amount of
that asset is adjusted to the revalued amount. At the date of the revaluation,
the asset is treated in one of the following ways;
i. the
gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. For example, the gross
carrying amount may be restated by reference to observable market data or it
may be restated proportionately to the change in the carrying amount. The
accumulated depreciation at the date of the revaluation is adjusted to equal
the difference between the gross carrying amount and the carrying amount of the
asset after considering accumulated impairment losses; or
ii. the
accumulated depreciation is eliminated against the gross carrying amount of the
asset. The
amount of the adjustment of accumulated depreciation forms part of the increase
or decrease in carrying amount.
iii. 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.
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. The depreciation charge for each period shall be
recognised in profit or loss unless it is included in the carrying amount of
another asset.
Depreciable amount and depreciation period
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.
Depreciation method
The depreciation method used shall reflect the pattern in
which the asset’s future economic benefits are expected to be consumed by the
entity.
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 in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be
accounted for as a change in an accounting estimate in accordance with IAS 8.
A variety of depreciation methods can be used to allocate
the depreciable amount of an asset on a systematic basis over its useful life.
These methods include the straight‑line
method, the diminishing balance method and the units of production method.
Impairment
To determine whether an item of property, plant and
equipment is impaired, an entity applies IAS 36 Impairment of Assets. That
Standard explains how an entity reviews the carrying amount of its assets, how
it determines the recoverable amount of an asset, and when it recognises, or
reverses the recognition of, an impairment loss.
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 derecognised:
(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 when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
The gain or loss arising from the
derecognition of an item of property, plant and equipment shall be determined
as the difference between the net disposal proceeds, if any, and the carrying
amount of the item.
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; and
(e) a reconciliation of the carrying amount at the
beginning and end of the period showing:
(i) additions;
(ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals;
(iii) acquisitions through
business combinations;
(iv) increases or decreases
resulting from revaluations under paragraphs 31, 39 and 40 and from impairment
losses recognised or reversed in other comprehensive income in accordance with
IAS 36;
(v) impairment losses
recognised in profit or loss in accordance with IAS 36;
(vi) impairment losses
reversed in profit or loss in accordance with IAS 36;
(vii) depreciation;
(viii) the net exchange
differences arising on the translation of the financial statements from the
functional currency into a different presentation currency, including the
translation of a foreign operation into the presentation currency of the reporting
entity; and
(ix) other changes.
The financial statements shall also disclose:
(a) the existence and amounts of restrictions on title, and
property, plant and equipment pledged as security for liabilities;
(b) the amount of expenditures recognised in the carrying
amount of an item of property, plant and equipment in the course of its
construction;
(c) the amount of contractual commitments for the
acquisition of property, plant and equipment; and
(d) if it is not disclosed separately in the statement of
comprehensive income, the amount of compensation from third parties for items
of property, plant and equipment that were impaired, lost or given up that is
included in profit or loss.
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