IAS 16: Property, Plant and Equipment

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.

Initial recognition
The cost of an item of property, plant and equipment must be recognised as an asset if, and only if:
– it is probable that future economic benefits associated with the item will flow to the entity; and
– the cost of the item can be measured reliably.

Initial measurement
Property, plant and equipment are initially recorded in the accounts of a business at their cost.
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire
an asset at the time of its acquisition or construction.
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 it is capitalised in accordance with IAS
23: Borrowing costs.
Exchange transactions
An asset may be acquired in exchange for another asset. The cost of such asset is measured at its fair value
unless:
 the exchange transaction lacks commercial substance; or
 the fair value of neither the asset received nor the asset given up is reliably measurable.

If the new asset is measured at fair value, the fair value of the asset given up is used to measure the cost of the
asset received unless the fair value of the asset received is more clearly evident.

If the new asset is not measured at fair value, its cost is measured at the carrying amount of the asset given in
exchange for it. This would be the case when the exchange lacked commercial substance or when the fair value
of either asset cannot be measured.

A transaction is said to have commercial substance when it has a meaningful impact on the entity’s financial
position, performance, or risk profile.

Elements of cost
The cost of an item of property, plant and machinery consists of:
 its purchase price after any trade discount has been deducted, plus any import taxes or non-refundable
sales tax; plus
 the directly attributable costs of bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management. These directly attributable costs may
include:

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  employee costs arising directly from the installation or construction of the asset;
 the cost of site preparation;
 delivery costs (‘carriage inwards’);
 installation and assembly costs;
 testing costs to assess whether the asset is functioning properly (net of sale proceeds of
items produced during the testing phase).
 professional fees directly attributable to the purchase.
 Legal fees
 When the entity has an obligation to dismantle and remove the asset at the end of its life, its initial cost
should also include an estimate of the costs of dismantling and removing the asset and restoring the site
where it is located.
Subsequent expenditure
Expenditure relating to non-current assets, after their initial acquisition, should be capitalised if it meets the
criteria for recognising an asset. In practice, this means that expenditure is capitalised if it:
▪ improves the asset (for example, by enhancing its performance or extending its useful life); or

▪ is for a replacement part (provided that the part that it replaces is treated as an item that has been disposed
of).

Repairs and maintenance expenditure is revenue expenditure. It is recognised as an expense as it is incurred,

because no additional future economic benefits will arise from the expenditure.

A basic rule is that improvements are capitalised but repairs are expensed.

Subsequent measurement
IAS 16 allows a choice of accounting treatments after initial recognition.
All items of property, plant and equipment in a class can be accounted for using one of two models:
▪Cost model - Property, plant and equipment is carried at cost less any accumulated depreciation and any
accumulated impairment losses.

▪Revaluation model - Property, plant and equipment is carried at a revalued amount. This is the fair value at the
date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses.
The above choice must be applied consistently

Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its 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 costsof disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.

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Useful life is:
(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.

Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation
and accumulated impairment losses. (Net book value (NBV) is a term that is often used instead of carrying
amount).
Component assets
Each part of an asset that has a different useful life and cost that is significant in relation to the total cost of the
item must be depreciated separately. This means that the cost of an asset might be split into several different
component assets and each depreciated separately.

Commencement and cessation of depreciation

Depreciation of an asset begins when that asset is available for use. This means when the asset is in the location
and condition necessary for it to be capable of operating in the manner intended by management. This might
be before the asset is actually used.

Depreciation ends at the earlier of when an asset is classified as held for sale in accordance with IFRS 5: Non-
current assets held for sale and discontinued operations and when it is derecognised. Depreciation does not
cease when an asset becomes idle or is withdrawn or retired from active use.

Land and buildings

Land and buildings are separable assets and are dealt with separately for accounting purposes, even when they
are acquired together. Land normally has an unlimited life and is therefore not depreciated. However, there are
exceptions to this. If land has a physical attribute that is used over a period, then the land should be depreciated
over this period.

Buildings normally have a limited life and are therefore depreciable assets.

Review of useful life

IAS 16 requires useful lives and residual values to be reviewed at each year-end. Any change is a change in
accounting estimate.

A change in the asset’s residual value is accounted for prospectively as an adjustment to future depreciation.

Depreciation methods
The depreciation method used should reflect the way in which the economic benefits of the asset are consumed
by the business over time. The main choice is between the straight line method and the reducing balance
method (also known as the diminishing balance method).

Depreciation by number of units produced

Here, depreciation is calculated by expressing the useful life of an asset in terms of its expected total output and
allocating the annual charge to depreciation based on actual output

Where there is a change in the depreciation method used, this is a change in accounting estimate.

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Accounting for revaluation

Scenario Accounting treatment

Upward revaluation Recognize gain in other comprehensive income and in the “revaluation
surplus” equity account
Downward revaluation Recognize loss in profit or loss (Expense)
Upward revaluation after a Recognize gain in profit or loss to the extent of the previous loss, with the
prior downward revaluation remainder in other comprehensive income
Downward revaluation after a Recognize loss in other comprehensive income to the extent of the revaluation
prior upward revaluation surplus balance, with the remainder in profit or loss.
Changing the carrying amount of a revalued asset.
DR: Accumulated depreciation depreciation to date

DR: Non-current asset – cost β (balancing figure)

CR: Revaluation surplus revaluation gain

Depreciation of a revalued asset

After a non-current asset has been revalued, depreciation charges are based on the new valuation.

Realisation of the revaluation surplus

IAS 16 allows (but does not require) the transfer of a revaluation surplus to retained earnings when the asset to
which it relates is disposed (or realized).

Gain or loss on disposal of a non-current asset

Property, plant and equipment are eventually disposed of:
– by sale, or

– if they have no sale value, through disposal as scrap.

Disposal can occur at any time and need not be at the end of the asset’s expected useful life. There is a gain or
loss on disposal of the asset, as follows:

Sales proceed (less: disposal costs) – Carrying amount as at disposal date = Gain/(loss) as at disposal

Accounting for the disposal of property, plant and equipment

Disposal for cash consideration
1. Remove the original cost of the non-current asset from the ‘non-current asset’ account
Dr Disposal account
Cr Non-current asset cost account
2. Remove accumulated depreciation on the non-current asset from the ‘accumulated depreciation’
account.
Dr Accumulated depreciation account
Cr Disposals account

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 3. Record the proceeds.
Dr Cash account
Cr Disposals account

The balance on the disposals account is the profit or loss on disposal which is transferred to the statement
of profit or loss.

Disposal through a part-exchange agreement (PEA)

A part-exchange agreement arises where an old asset is provided in part payment for a new one, the balance on
the new asset being paid in cash.

The procedure to record the transaction is very similar to the three-step process seen for a cash disposal.

The first two steps are identical; however, steps 3 and 4 are as follows:

3) Record the part-exchange allowance (PEA) as proceeds.

Dr Non-current asset cost account (= part of cost of new asset)

Cr Disposals account (= sale proceeds of old asset)

4) Record the cash paid for the new asset.

Dr Non-current asset cost account
Cr Cash account

The balance on the disposals account is the profit or loss on disposal which is transferred to the statement
of profit or loss.

ICAN Past Questions

NOV 20 Q6
Noodles Nigeria Limited (NNL) manufactures various type of noodles in Oluyole for sale across the states in
Nigeria. Recently, to continue to sustain leadership of the company in the Nigerian market, on September 1 2015;
a brand new machine was bought from a supplier under the following conditions:

N’ 000
Supplier’s invoice price 500,000
Trade discount applicable to invoice price 25%
Discount applicable on invoice price for early settlements 5%
Freight and shipment cost 100,000
Stevedore expenses 20,000
Initial operating losses 10,000
Handling cost 15,000
Electrical and installation cost 25,000
Interest on loan to the point of usage 12,000
Interest on loan after the usage 18,000

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Pre-operation expenses 5,000
Staff training in use of the machine 4,000
Professional and consultancy fee on advice to buy the machine 30,000
Purchase of a four-year maintenance contract 120,000
Pre-production testing cost 13,000
Estimated residual value 90,000

Estimated useful life in machine output/units 5,000,000

Actual Y/E Y/E Y/E Y/E

Outputs: 31/8/2016 31/8/2017 31/8/2018 31/8/2019
N’000 N’000 N’000 N’000
Outputs/Units 1,000 1,200 1,400 800

On September 1, 2016, NNL Limited decided to upgrade the machine by adding new major components at a cost
of N300,000,000. As a result of the new upgrade, there was an increase in the remaining useful life of the output
to 8,000,000 units on September 1, 2016 and the residual value of the machine was revised to N114,000,000.

You are required to:

a. Describe what is meant by depreciable amount within the context of IAS 16 on property, plant and equipment
(PPE). (1 Mark)
b. Highlight THREE characteristics of depreciable assets under IAS 16. (3 Marks)
c. Describe the TWO models of accounting for cost of property, plant and equipment (PPE) under IAS 16.
(3 Marks)
Calculate the following:
i. Machine cost. (3 Marks)
ii. Revenue expenditure over the years in the statement of profit or loss (5 Marks)
iii. Carrying amounts of the machine over the years. (5 Marks)
(Total 20 Marks)
NOV 14 Q7
a. IAS 16 covers all aspects of accounting for Property, Plant and Equipment (PPE) including its measurement and
qualification for recognition as an asset. The standard also described the elements of cost, stating that some
costs are directly attributable costs of PPE while some other costs failed to qualify as costs of an item of PPE.

Required:
In the context of IAS 16, identify the elements of cost of an item of Property, Plant and Equipment, giving SIX
examples of directly attributable costs. (5 Marks)

b. The following details are extracted from the non-current assets register of Kwali Nigeria Plc at the year ended
30 September 2013:

N’000

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Freehold property at cost 586,700
Leasehold property at valuation 30 Sept. 2012 229,500
Construction in progress 355,800
Plant and equipment at cost 198,600
Plant and equipment (Leased) at cost 85,200
Accumulated depreciation 30 Sept. 2012:
Freehold property 264,015
Plant and equipment 86,888
Plant and equipment (Leased) 21,300

Additional information:

(i) During the year ended 30 September 2013, the company incurred the sum of N106,000,000 on the
construction work in progress and this resulted in the completion of a warehouse costing N325,000,000. The
warehouse was put to use on 1 June, 2013. The freehold property is depreciated at a flat rate of 15% per annum
on a straight-line basis.

(ii) The leasehold property was acquired on 1 October 2011 on 15 years lease at a cost of N300,000,000. The
company’s policy is to revalue the property at market value at each year end. At 30 September 2013, the
property was valued at N204,600,000.

(iii) Plant acquired is depreciated at 25% per annum using the reducing balance method while the leased plant
is also depreciated at 25% using the straight-line method.

(iv) One item of plant acquired for N48,000,000 on 1 October 2010 was disposed on 30 September, 2013 for
N36,000,000 while a new plant with a higher capacity was acquired as a replacement for N65,000,000 on the
same date.

(v) All the additional pieces of information above are yet to be adjusted for in the books of Kwali Nigeria Plc.

Required:
Prepare a statement of changes in Property, Plant and Equipment for inclusion in the Financial Statements for
the year ended 30 September 2013. (10 Marks)
(Total 15 Marks)
MAY 18 Q7
a. Explain the disclosure requirements in published financial statements with respect to property, plant and
equipment in accordance with IAS 16. (5 Marks)

b. As the accounting officer in charge of your company’s property plant & equipment (PPE), draft a memo to the
chief accountant explaining how impairment of PPE should be identified and accounted for by your company in
accordance with IAS 36. (7 Marks)

c. Odeda Limited operates its business with plant and equipment that qualified under IAS 16 as property, plant
and equipment. On January 1, 2016 the cost of the company’s plant was N4,000,000 and the accumulated

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depreciation was N1,600,000. On January 2, 2016 the company bought a new equipment at the cost of
N1,000,000 and the equipment supplier accepted an old equipment owned by Odeda Limited in part exchange
for a value of N80,000. The equipment originally cost N600,000 and its accumulated depreciation is N500,000.

You are required to calculate the gain or loss on the disposal of the old equipment. (3 Marks)
(Total 15 Marks)
MAY 19 Q4
a. The objectives of IAS 16 is to prescribe the accounting treatment of property, plant and equipment (PPE).

Required:
Explain how initial costs of property, plant and equipment (PPE) should be measured and state the circumstances
in which subsequent expenditure on non-current assets should be capitalised. (7 Marks)

b. You are a senior accounting officer in Chidinma Ventures Plc. The chief accountant of the company has
requested you to explain to some newly recruited trainee accountants, the requirements of IAS 16 as regards
the revaluation of non-current assets and accounting treatment of surpluses and deficits on revaluation as well
as gain and losses on disposal of assets.

Required:
Explain the transactions as required by the chief accountant. (5 Marks)

NOV 21 Q7B
IAS 16 prescribes the principles and models of the valuation in recognising items of property, plant and
equipment in the financial statements of an entity.

Required:
Briefly explain the TWO methods of valuation recognised in IAS 16 - property, plant and equipment. (5 Marks)
(Total 15 Marks)

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