Accounting for Property, Plant and Equipment - IAS 16/ LKAS 16

Objective
The objective of this standard is to prescribe the accounting treatment for PPE so that the users of
the financial statements can discern information about entity's investment in its PPE and changes
in such investment.

Key definitions
 Property, plant and equipment
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Cost
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Depreciable amount
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Depreciation
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Useful life
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Recoverable amount
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Residual value
………………………………………………………………………………………………………
……………………………………………………………………………………………………....
 Carrying amount

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 1
………………………………………………………………………………………………………
……………………………………………………………………………………………………....

 Fair value

………………………………………………………………………………………………………
……………………………………………………………………………………………………....

There are essentially four key areas when accounting for property, plant and equipment that you
must ensure that you are familiar with:
 Initial recognition
 Depreciation
 Revaluation
 Derecognition (disposals)

Initial recognition
The basic principle of IAS 16 is that items of property, plant and equipment that qualify for
recognition should initially be measured at cost. One of the easiest ways to remember this is that
you should capitalize all costs to bring an asset to its present location and condition for its intended
use.
Commonly used examples of cost include:
 Purchase price of an asset (less any trade discount)
 Directly attributable costs such as:
– cost of site preparation
– initial delivery and handling costs
– installation and testing costs
– professional fees
 The initial estimate of dismantling and removing the asset and restoring the site on which
it is located, to its original condition
 Borrowing costs in accordance with IAS 23, Borrowing Costs.

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 2
Question 1

On 1 March 2015 Yucca acquired a machine from Plant under the

following terms:
Rs.
List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a five-year maintenance contract with Plant 7,000
In addition to the above information Yucca was granted a trade discount of 10% on the initial list
price of the asset and a settlement discount of 5% if payment for the machine was received within
one month of purchase. Yucca paid for the plant on 25 March 2015.
How should the above information be accounted for in the financial statements?

Question 2
Construction of Deb and Ham’s new store began on 1 April 2009.
The following costs were incurred on the construction: Rs. 000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940
The store was completed on 1 January 2010 and brought into use following its grand opening on
the 1 April 2010. Deb and Ham issued a $25m unsecured loan on 1 April 2009 to aid construction
of the new store. The loan carried an interest rate of 8% per annum and is repayable on 1 April
2012.

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 3
Required
Calculate the amount to be included as property, plant and equipment in respect of the new store
and state what impact the above information would have on the income statement (if any) for
the year ended 31 March 2010.

Subsequent costs
Once an item of PPE has been recognized and capitalized in the financial statements, a company
may incur further costs on that asset in the future. IAS 16 requires that subsequent costs should be
capitalized if:
 It is probable that future economic benefits associated with the extra costs will flow to the
entity
 The cost of the item can be reliably measured.
All other subsequent costs should be recognized as an expense in the income statement in the
period that they are incurred.

Question 3
On 1 March 2010 Yucca purchased an upgrade package from Plant at a cost of $18,000 for the
machine it originally purchased in 2015 (Question 1). The upgrade took a total of two days where
new components were added to the machine. Yucca agreed to purchase the package as the new
components would lead to a reduction in production time per unit of 15%. This will enable Yucca
to increase production without the need to purchase a new machine.
Should the additional expenditure be capitalized or expensed?

Depreciation
Depreciation is defined in IAS 16 as being the systematic allocation of the depreciable amount of
an asset over its useful economic life. In other words, depreciation applies the accruals concept to
the capitalized cost of a non-current asset and matches this cost to the period that it relates to.

Depreciation methods
There are many methods of depreciating a non-current asset with the most common being:

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 4
  Straight line
% on cost OR Cost – residual value
Useful economic life
 Reducing balance
% on carrying value

Question 4
An item of plant was purchased on 1 April 2010 for Rs.200,000 and is being depreciated at 25%
on a reducing balance basis.
Prepare the extracts of the financial statements for the year ended 31 March 2013.

Useful economic lives and residual values

IAS 16 requires that these estimates be reviewed at the end of each reporting period. If either
changes significantly, the change should be accounted for over the useful economic life remaining.

Question 5
A machine was purchased on 1 April 2007 for Rs.120,000. It was estimated that the asset had a
residual value of Rs.20,000 and a useful economic life of 10 years at this date. On 1 April 2009
(two years later) the residual value was reassessed as being only Rs.15,000 and the useful
economic life remaining was considered to be only five years.
How should the asset be accounted for in the years ending 31 March 2008/2009/2010?

Question 6
A ltd acquired a machine for Rs. 1,500,000 and depreciate the same at 10% p.a on diminishing
balance basis which had a useful life of 10 years. After 2 years, A ltd decided to change the method
to straight line method. Calculate the depreciation after the decision.
Component depreciation
If an asset comprises two or more major components with different economic lives, then each
component should be accounted for separately for depreciation purposes and depreciated over its
own useful economic life.
Question 7

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 5
A company purchased a property with an overall cost of Rs.100m on
1 April 2009. The property elements are made up as follows:
Rs.000 Estimated life
Land and buildings
(Land element Rs. 20,000) 65,000 50 years
Fixtures and fittings 24,000 10 years
Lifts 11,000 20 years
100,000
Calculate the annual depreciation charge for the property for the year ended 31 March 2010.

Source: http://www.accaglobal.com
Practice Question
The following were extracted from A Ltd's book. A ltd imported a plant and machinery and
incurred the following costs.
CIF (Cost, Insurance and Freight) price of the plant - Rs. 1,500,000
Import duties and other non refundable taxes - Rs. 600,000
VAT (15% of which in non refundable taxes) - Rs. 180,000
Clearing expenses - Rs. 40,000
Trade discount - 5% on CIF price
Payment made to electrical technicians - Rs. 60,000
Other expenses on electricity connection - Rs. 45,000
Loading and unloading and transportation expenses - Rs. 35,000
Cost incurred for inspection by professional engineer - Rs. 120,000
Cost of test run - 1000 units at Rs.100 per unit
Selling price of units produced ( Test run) - Rs. 80 per unit
Estimated life of the plant is five years. Dismantling and removing cost after useful life is
Rs.100,000 (discount rate - 10%)
The plant was imported by A Ltd's purchasing division. The divisions monthly payroll expense -
Rs. 220,000.
Calculate the cost of plant.

Ms. K. Kalaipriya, MBA (PIM, USJ), BBA (Col.), ACMA (UK), CGMA, ACMA (SL). Page 6