IAS 16: PROPERTY

PLANT AND EQUIPMENT

(PPE)

Wednesday, November 30, 2022 1

 DEFINITION OF PPE
Property, plant and equipment are
tangible items that:
1. are held for USE in the production or
supply of goods or services, for
rental to others, or for administrative
purposes; and
2. are expected to be used during
MORE THAN ONE PERIOD.
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 OBJECTIVE OF IAS 16
▪The objective of IAS 16 is to prescribe the
accounting treatment for PPE
▪The principal issues are the recognition of
assets, the determination of their carrying
amounts, and the depreciation charges and
impairment losses to be recognized in
relation to them.

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SCOPE OF IAS 16
IAS 16 applies to the accounting for PPE,
EXCEPT where another standard requires or
permits differing accounting treatments, for
example:
▪Assets classified as held for sale in
accordance with IFRS 5
▪Biological assets related to agricultural
activity accounted for under IAS 41
▪Exploration and evaluation assets
recognized in accordance with IFRS 6

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SCOPE OF IAS 16
HOWEVER;
▪The standard does apply to PPE used to develop
or maintain the last three categories of assets.
▪The cost model in IAS 16 also applies to
investment property accounted for using the cost
model under IAS 40
▪The standard does apply to bearer plants (fruit
trees, grape vines) but it does not apply to the
produce of the bearer plants.
▪Note: Bearer plants were brought into the scope of IAS 16 by
the amendments to IAS 16 and IAS 41issued 2014, 30 June,
which applies to annual periods beginning on or after 1
January 2016.
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RECOGNITION OF AN ITEM OF
PPE AS ASSET

▪An item of property, plant and

equipment shall be recognized as an
asset if, and only if:
▪(a) it is probable that future economic
benefits associated with the item will flow
to the entity; and
▪(b) the cost of the item can be measured
reliably.

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RECOGNITION OF AN ITEM OF PPE
AS ASSET
This recognition principle shall be
applied to all costs at the time they are
incurred, both incurred initially to
acquire or construct an item of
property, plant and equipment and
incurred subsequently after recognition
to add to, replace part of or service it.

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MEASUREMENT OF AN ITEM OF PPE

1. Measurement at recognition
[Initial measurement]
2. Measurement after recognition
[Subsequent measurement]

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 INITIAL MEASUREMENT
▪An item of PPE which qualifies for
recognition as an asset should initially be
measured and recognized at its COST.

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 INITIAL MEASUREMENT
▪The cost of an item of property, plant and equipment comprises:
▪(a) its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade discounts
and rebates.
▪(b) any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by management. [site
preparation, delivery and handling, installation,
professional fees for architects and engineers, costs of
testing whether the asset is functioning properly]
▪(c) the initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located [IAS 37].
▪ In the case of a self-constructed asset, the cost of the acquired
materials, labour and other costs must be recognized.
Wednesday, November 30, 2022 10
INITIAL MEASUREMENT
Costs that would be excluded include:
▪Abnormal amounts of wasted material, labor and other
resources
▪Start up costs- Opening a new facility, introducing a new
product or service (including costs of advertising and
promotional activities)
▪Conducting business in a new location or with a new class of
customer (including costs of staff training)
▪ Administration & other general overhead costs
▪ Certain incidental operations
▪ Period when construction is interrupted, unless certain criteria
are met.

Wednesday, November 30, 2022 11

ILLUSTRATION #1: INITIAL MEASUREMENT
GBP Plc. incurs the following costs in relation to the
construction of a new factory and the introduction of its
products to the local market.
Tshs.
-Site preparation costs 240,000
-Materials used 1,500,000
Labour costs, including Tshs.90,000 incurred during an industrial dispute.
No construction occurred during the period of the dispute. 3,100,000
-Testing of various processes in factory 150,000
-Consultancy fees re-installation of equipment 220,000
-Relocation of staff to new factory 110,000
-General overheads 500,000
-Costs to dismantle the factory at end of its useful life in 10 years time 100,000
Required: How much of the costs should be capitalized?

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INITIAL MEASUREMENT:
INCOME EARNED DURING THE PRE-
PRODUCTION PHASE
▪Items may be produced while bringing an item of
PPE to the location and condition necessary for its
intended use (samples).
▪The proceeds from selling any such items, and the
cost of those items, are recognized in profit or loss in
accordance with applicable Standards.
▪These proceeds are no longer deducted from the
cost of the item of PPE
▪MAY 2020 amendments; Effective for annual periods beginning on
or after 1 January 2022

Wednesday, November 30, 2022 13

 ILLUSTRATION #2 : INCOME EARNED
DURING THE PRE-PRODUCTION PHASE
ABC acquired a machine for the production of product XY.
The acquisition cost including installation and other directly
attributable expenses is Tshs.10m. Before the machine can
be placed into normal operation, the testing is required in
order to satisfy the safety conditions.
ABC runs testing of the machine and in the testing
operations, the machine produces 1,000 pieces of XY
product that are sold for Tshs. 100/piece.
Required:
a) How do you recognize the revenue from the sale of
1000 produced items?
b) What is the acquisition cost of a machine?
Wednesday, November 30, 2022 14
 INITIAL MEASUREMENT:
SELF-CONSTRUCTED ASSET
▪The cost of a self-constructed asset is
determined using the same principles as
for an acquired asset.
▪If the asset is made available for sale by
the entity in the normal course of business
then the cost of the asset would be
determined under the principles set out in
IAS 2 Inventories.

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 INITIAL MEASUREMENT:
ASSET ACQUIRED IN EXCHANGE
▪If an asset is acquired in exchange for another
asset (whether similar or dissimilar in nature), the
cost will be measured at the FAIR VALUE,
unless;
▪(a) the exchange transaction lacks commercial substance or
▪(b) the fair value of neither the asset received nor the asset
given up is reliably measurable.

▪If the acquired item is not measured at fair

value, its cost is measured at the CARRYING
AMOUNT OF THE ASSET GIVEN UP.

Wednesday, November 30, 2022 16

INITIAL MEASUREMENT:
SUBSEQUENT EXPENDITURE
▪The inclusion of costs in the carrying amount of an item PPE
should cease once substantially all activities necessary to get the
asset ready for use are completed, even if the asset has not
yet been brought into use.
▪Costs which arise subsequent to acquisition which may be
capitalized only if the recognition criteria are met:
▪It is probable that future economic benefits in excess of the
originally assessed standard of performance of the existing asset
will, as a result of the expenditure, flow to the entity.
▪Contrary, expenditure that restores, rather than increases, the
originally assessed standard of performance of an asset is written
off as AN EXPENSE in the period incurred.

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 INITIAL MEASUREMENT:
SUBSEQUENT EXPENDITURE
▪IAS 16 recognizes that parts of
some items of PPE may require
replacement at regular intervals.
eg. Engines, aircraft interiors.
▪IAS 16 states that, provided such components have
readily ascertainable costs, they should be
accounted for as separate assets because they
have useful lives different from the items of PPE to
which they relate.
▪This means that when such components are
replaced they are accounted for as an asset
disposal and acquisition of a new asset.
Wednesday, November 30, 2022 18
SUBSEQUENT
EXPENDITURE…

▪A continued operation of an item of PPE (eg. an

aircraft) may require regular major inspections for
faults regardless of whether parts of the item are
replaced.
▪When each major inspection is performed, ITS COST
is recognized in the CA of the item of PPE, if the
recognition criteria are satisfied.

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MEASUREMENT OF PPE AFTER
INITIAL RECOGNITION
[SUBSEQUENT MEASUREMENT]

Wednesday, November 30, 2022 20

 SUBSEQUENT MEASUREMENT

▪IAS 16 permits two accounting models:

1. Cost model.
2. Revaluation model.
▪An entity shall use either the cost model or the
revaluation model as its accounting policy and shall
apply that policy to an entire class of PPE.
▪A Class of PPE - is a group of assets of a similar
nature or function in an entity’s operations.

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 SUBSEQUENT MEASUREMENT

1. Cost model.
The asset is carried at cost less
accumulated depreciation and
accumulated impairment loss
(IAS 36 deals with impairment in more
detail)

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 SUBSEQUENT MEASUREMENT

2. Revaluation model.
The asset is carried at a revalued
amount, being its FAIR VALUE at
the date of revaluation less
subsequent depreciation and
impairment loss, provided that fair
value can be measured reliably.

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 SUBSEQUENT MEASUREMENT
2. Revaluation model.
▪If an item is revalued, the ENTIRE CLASS
of assets to which that asset belongs
should be revalued.
▪Revalued assets are DEPRECIATED IN
THE SAME WAY as under the cost model

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DEPRECIATION
(COST/REVALUATION)
▪For all depreciable assets:
▪The depreciable amount (cost less
residual value) should be allocated on a
systematic basis over the asset's useful life.
▪Depreciation should be charged to
PROFIT OR LOSS
DR. P/L [Depreciation expense]
CR. Accumulated depreciation account
Wednesday, November 30, 2022 25
DEPRECIATION (COST/REVALUATION)

▪Depreciation period BEGINS when PP&E is in

place and ready to use, continues even if not
used or is retired from active use.
▪Depreciation period ENDS when PP&E is
derecognized or classified as held for sale
(IFRS 5).
▪If the asset has been owned for only part of
a year, only that proportion of the annual
depreciation should be accounted for.
ACTUAL TIME BASIS.
Wednesday, November 30, 2022 26
DEPRECIATION [COST/REVALUATION]
DEPRECIATION METHOD
▪The standard does not prescribe any DEPRECIATION
METHOD. An entity may choose any method as per
the nature of business.
▪Method adopted should reflect the pattern in which
the assets future economic benefits are expected to
be consumed by the entity. (SL or DB)
The depreciation method applied will be reviewed
at each financial year end.
Any change from the previous year will be treated
as change in accounting estimates IAS 8.

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DEPRECIATION AFTER
REVALUATION
The depreciation in periods after
revaluation is based on the revalued
amount.
= Revalued amount (FV)- residual value
Remaining useful life
Same as in cost model depreciation for
the period is charged in PROFIT OR LOSS.

Wednesday, November 30, 2022 28

ILLUSTRATION 2 : DEPRECIATION
AFTER REVALUATION
ABC Ltd. purchased a building worth Tshs. 200,000 on
January 1, 2008. The building has a useful life of 20
years and the company uses straight line method. On
December 31, 2010 the company intends to switch to
revaluation model and carries out a revaluation exercise
which estimates the FAIR VALUE of the building to be
Tshs.190,000 as at December 31, 2010.
On December 31, 2012 ABC Ltd. revalues the building
again to find out that the FAIR VALUE should be
Tshs.140,000. The expected useful life has remained
unchanged.
Required: Calculate the depreciation charge for each
period [ to Dec 2010&2012]
RECOGNIZING REVALUATION
GAIN/SURPLUS OR LOSS

Wednesday, November 30, 2022 30

 REVALUATION GAIN/SURPLUS
REVALUATION INCREASE
▪If an asset’s carrying amount is increased as a result of a
revaluation, the increase shall be recognized in other
comprehensive income [OCI] and accumulated in equity under the
heading of revaluation surplus.
DR. ASSETS
CR. REVALUATION SURPLUS (OCI)
▪However, the increase shall be recognized in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously recognized in
profit or loss.
DR. ASSET
CR. P/L (REVALUATION GAIN) [to the extent it reverses previous decrease ]
CR. REVALUATION SURPLUS
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REVALUATION LOSS
REVALUATION DECREASE
If an asset’s carrying amount is decreased as a result of a
revaluation, the decrease shall be recognized in profit or loss.
DR. P/L (Impairment loss)
CR. ASSETS
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.
DR. REVALUATION SURPLUS (to the extent it reverses previous increase)
DR. P/L (Impairment loss)
CR. ASSET

Wednesday, November 30, 2022 32

 REVALUATION SURPLUS/LOSS

GAIN Depends on Carrying amount

LOSS
FV>CA FV<CA

1st time subsequent 1st time subsequent

Dr. Rev surplus

Dr. Asset a/c Dr. P/L
Dr. Asset a/c Dr. P/L
Cr. P/L CR. Asset a/c
CR. Rev surplus CR. Asset a/c
Cr. Rev surplus

Wednesday, November 30, 2022 33

 RECOGNIZING REVALUATION
GAIN/SURPLUS OR LOSS
Axe Ltd. purchased a building worth Tshs. 200,000 on January
1, 2008. The building has a useful life of 20 years and the
company uses straight line method. On December 31, 2010 the
company intends to switch to revaluation model and carries out
a revaluation exercise which estimates the FAIR VALUE of the
building to be Tshs.190,000 as at December 31, 2010. On
December 31, 2012 Axe Ltd. revalues the building again to find
out that the FAIR VALUE should be Tshs.140,000. The expected
useful life has remained unchanged.
Required: Calculate
a) Depreciation charge for each period [ to Dec 2010&2012]
b) Revaluation surplus/Loss amounts and show the Journal
to record the revaluations
Wednesday, November 30, 2022 34
PRESENTATION_ REVALUATION
GAIN/SURPLUS OR LOSS
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
Profit for the Year xxx
Impairment loss /Revaluation gain xxx
Profit for the Year xxx
Other Comprehensive Income
Revaluation gain/loss [reversal] xxx
Total Comprehensive Income for the Year xxx

Wednesday, November 30, 2022 35

PRESENTATION_ REVALUATION
GAIN/SURPLUS OR LOSS
EXTRACT FROM SOFP
Non-Current Assets
PPE [Asset](at revalued amount) xxx
Total Non-Current Assets PPE xxx
Equity and Liabilities
Retained Earnings xxx
Revaluation Surplus xxx
Total Equity xxxx

Wednesday, November 30, 2022 36

ILLUSTRATION #3 : PRESENTATION_
REVALUATION GAINS
A company revalued their land from Tshs.200,000 to
Tshs.300,000. Previously, the same land had been
revalued downwards from Tshs.260,000 to
Tshs.200,000 creating a revaluation loss of
Tshs.60,000 which was taken to profit or loss as there
was no revaluation surplus as this was the first time the
asset had been revalued. The profit for this year from
normal day to day activities of the company before
revaluation is Tshs.300,000 and at the start of the
year the retained earnings amounted to Tshs.150,000.
Show the ledger entry and the extracts from the SOCI
and SOFP for this transaction:
Wednesday, November 30, 2022 37
ILLUSTRATION 4 : PRESENTATION
_ REVALUATION LOSSES
A company revalued their land from Tshs.500,000
to Tshs. 400,000. The profit for the year from
normal day to day activities of the company is
Tshs.300,000 and at the start of the year there
was a revaluation surplus of Tshs.75,000. The
retained earnings at the start of the year
amounted to Tshs.180,000.
Show the ledger entry and the extracts from the
SOCI and SOFP for this transaction

Wednesday, November 30, 2022 38

DISCLOSURE

Wednesday, November 30, 2022 39

 DISCLOSURE
FOR EACH CLASS PPE, DISCLOSE
▪basis for measuring carrying amount
▪ depreciation method(s) used
▪ useful lives or depreciation rates
▪ gross carrying amount and accumulated depreciation and impairment losses
▪ reconciliation of the carrying amount at the beginning and the end of the period,
showing:
▪ additions
▪ disposals
▪ acquisitions through business combinations
▪ revaluation increases or decreases
▪ impairment losses
▪ reversals of impairment losses
▪ depreciation
▪ net foreign exchange differences on translation
▪ other movements
Wednesday, November 30, 2022 40
 DISCLOSURE
ADDITIONAL DISCLOSURES
▪IAS 16 also encourages, but does not require, a
number of additional disclosures.
▪restrictions on title and items pledged as
security for liabilities
▪expenditures to construct PPE during the
period
▪contractual commitments to acquire PPE
▪compensation from third parties for items of
PPE that were impaired, lost or given up that is
included in profit or loss.
Wednesday, November 30, 2022 41
 DISCLOSURE REQUIREMENTS FOR
REVALUED ASSETS:
▪If PPE is stated at revalued amounts, certain additional
disclosures are required:
▪the effective date of the revaluation
▪whether an independent valuer was involved
▪for each revalued class of PPE, the carrying amount that
would have been recognized had the assets been
carried under the cost model.
▪the revaluation surplus, including changes during the
period and any restrictions on the distribution of the
balance to shareholders.

Wednesday, November 30, 2022 42

 DERECOGNITION.
The carrying amount of an item of PPE shall be derecognized
on disposal or when no future economic benefits or service
potential is expected from its use or disposal.
▪The cost of the PPE together with the related accumulated
depreciation and accumulated impairment loss shall be
removed from the accounts.
▪The gain or loss arising from derecognition of an item of PPE
shall be included in profit or loss when the item is
derecognized.
▪The gain or loss arising from the disposal of an item of PPE
shall be determined as the difference between the net
disposal proceeds, if any, and the carrying amount.
Wednesday, November 30, 2022 43
REVIEW QUESTION 1.
A building was purchased on the 1st January 2006 at a cost of
Tshs.100 million. It is being depreciated over 50 years. The company
decided to use the revaluation model for valuing buildings in 2011
and at the 31st December 2011, the building was valued at Tshs.80
million by a professional valuer.
Required:
a) Calculate the amount of Revaluation surplus/loss
b) Show the Journal entry to record the revaluation
C) State any four disclosure requirements for revalued assets as
per IAS 16 “Property, Plant and Equipment”

Wednesday, November 30, 2022 44

An entity started construction on a building on 1 April, 2017 and acquired the
following cost;
Tshs.' 000'
Purchase price of land 250,000
Stamp duty 5,000
Legal fees 10,000
Site preparation and clearance 18,000
Materials 100,000
Labor (period April 1, 2017 to July 1,
2018) 150,000
Architect’s fees 20,000
Additional Information;
Material costs were greater than anticipated. On investigation, it was found
that materials costing Tshs. 10m had been spilled and therefore wasted and
further Tshs. 1m was incurred as result of fault design work.
As a result of those problems, work on the building ceased for fortnight during
October 2017 and it is estimated that approximately Tshs. 9 million of labor
costs related to this period. The building was completed on July 1, 2018.
Required: Calculate the cost of the building that will be included in tangible
non-current assets additions
Wednesday, November 30, 2022 45
 WHAT NEXT !
IMPAIRMENT OF ASSETS
IAS 36

Wednesday, November 30, 2022 46