6.5 Assets
held
under leases .................................................................................... 1338
Property, plant and equipment 1295
7 DERECOGNITION AND DISPOSAL ............................................................... 1339
7.1
IFRS 5 – Non-current Assets Held for Sale and Discontinued
Operations ............................................................................................................ 1340
7.2
Sale of assets held for rental ............................................................................. 1340
7.3
Partial disposals and undivided interests ....................................................... 1341
8 IAS 16 DISCLOSURE REQUIREMENTS ......................................................... 1343
8.1
General disclosures ............................................................................................ 1343
8.2
Additional disclosures for revalued assets ..................................................... 1346
8.3 Other
disclosures
................................................................................................
1348
List of examples
Example 18.1:
Recognition and derecognition of parts ......................................... 1306
Example 18.2:
Diminishing balance depreciation ................................................... 1328
Example 18.3:
Sum of the digits depreciation ......................................................... 1329
Example 18.4:
Highest and best use .......................................................................... 1333
Example 18.5:
Effect of depreciation on the revaluation reserve ....................... 1335
Example 18.6:
Revaluation by eliminating accumulated depreciation ............... 1336
Example 18.7:
Reversal of a downward valuation .................................................. 1337
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1297
Chapter 18
Property, plant and
equipment
1 INTRODUCTION
One fundamental problem in financial reporting is how to account periodically for
performance when many of the expenditures an entity incurs in the current period also
contribute to future accounting periods. Expenditure on property, plant and equipment
(‘PP&E’) is the best example of this difficulty.
The accounting conventions permitted by the IASB are the subject of this chapter,
although the underlying broad principles involved are among the first that
accountants and business people learn in their professional life. The cost of an item
of PP&E is capitalised when acquired (i.e. recorded in the statement of financial
position as an asset); then subsequently a proportion of the cost is charged each year
to profit or loss (i.e. the cost is spread over the future accounting periods expected
to benefit from the item). Ideally, at the end of the item’s working life the cost
remaining on the statement of financial position should be equal to the disposal
proceeds of the item, or be zero if there are none.
The principal standard is IAS 16 – Property, Plant and Equipment. The objective of this
standard is to prescribe the accounting treatment for PP&E so that users of the financial
statements can discern information about an entity’s investment in its PP&E and the
changes in such investment. The principal issues in accounting for PP&E are the
recognition of the assets, the determination of their carrying amounts and the
depreciation charges and impairment losses to be recognised in relation to them.
[IAS 16.1]. Impairment is a major consideration in accounting for PP&E, as this procedure
is intended to ensure PP&E costs that are not fully recoverable are immediately written
down to a level that is fully recoverable. Impairment is covered by IAS 36 – Impairment
of Assets – and dealt with as a separate topic in Chapter 20. In addition, there is a
separate standard, IAS 40 – Investment Property – that deals with that particular
category of PP&E which is discussed in Chapter 19.
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – deals with the
accounting required when items of PP&E are held for sale and is discussed in Chapter 4.
1298 Chapter 18
This chapter discusses the most recent version of IAS 16, which was published in
March 2004 and became effective for periods beginning on or after 1 January 2005, as
subsequently updated by various narrow-scope amendments, including minor
consequential amendments arising from other standards.
In January 2016, the IASB issued a new leasing standard, IFRS 16 – Leases, which
supersedes the existing leases standard and interpretations in IFRS. Under IFRS 16, lessees
apply a single model for most leases recognising these leases (i.e. rental contracts) in their
statement of financial position as lease liabilities with corresponding right-of-use assets.
Therefore, lessees no longer need to classify leases as finance or operating leases.
Accordingly, lessee accounting for PP&E held under leases classified as finance leases
under IAS 17 – Leases –is affected by the new standard. IFRS 16 and its consequential
amendments to other standards are effective for annual periods beginning on or after
1 January 2019. Early application is permitted provided that IFRS 15 – Revenue from
Contracts with Customers – has been applied, or is applied, at the same date as IFRS 16.
In May 2017, the IASB issued IFRS 17 – Insurance Contracts, a comprehensive new
accounting standard for insurance contracts covering recognition and measurement,
presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 – Insurance
Contracts – that was issued in 2005. As part of the consequential amendments arising
from IFRS 17, the subsequent measurement requirements in IAS 16 will be amended
(see 5 below). IFRS 17 and its consequential amendments to other standards are
effective for annual periods beginning on or after 1 January 2021, with adjusted
comparative figures required. Early application is permitted provided that both IFRS 9
– Financial Instruments – and IFRS 15 have already been applied, or are applied for the
first time, at the date on which IFRS 17 is first applied.
For those entities early adopting IFRS 17, and for the detailed discussions and
requirements of IFRS 16 and IFRS 17, see, Chapter 24 and Chapter 52, respectively.
2
THE REQUIREMENTS OF IAS 16
2.1 Scope
All PP&E is within the scope of IAS 16 except as follows:
• when another standard requires or permits a different accounting treatment, for
example, IAS 40 for investment properties held at fair value (but investment
properties held using the cost model under IAS 40 should use the cost model in
IAS 16 which is discussed at 5 below);
• PP&E classified as held for sale in accordance with IFRS 5;
• biological assets related to agricultural activity (covered by IAS 41 – Agriculture)
other than bearer plants (see 3.1.7 below);
• the recognition and measurement of exploration and evaluation assets (c
overed by
IFRS 6 – Exploration for and Evaluation of Mineral Resources); and
• mineral rights and mineral reserves such as oil, gas, and similar ‘non-regenerative’
resources. [IAS 16.2-3, 5].
Property, plant and equipment 1299
Although the standard scopes out non bearer plant biological assets and mineral rights and
reserves, it includes any PP&E used in developing or maintaining such resources. [IAS 16.3].
Therefore, exploration PP&E is included in the scope of the standard (see Chapter 39), as
is agricultural PP&E (see Chapter 38).
Other standards may require an item of PP&E to be recognised on a basis different from
that required by IAS 16. For example, under IFRS 16, lessees will recognise most leases
in their statement of financial position as lease liabilities with corresponding right-of-
use assets. Consequently, accounting for right-of-use assets should be in accordance
with IFRS 16 (see Chapter 24).
IFRS 16 amended paragraph 5 of IAS 16 (described above) to clarify that an entity should
use the cost model in IAS 16 for its owned investment property if the entity chooses the
cost model to account for its investment property under IAS 40.
2.2
Definitions used in IAS 16
IAS 16 defines the main terms it uses throughout the standard as follows: [IAS 16.6]
Bearer plant is a living plant that:
• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales (see 3.1.7 below).
Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of 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, e.g. IFRS 2 – Share-
based Payment.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
Entity-specific value is 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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (See
IFRS 13 – Fair Value Measurement – discussed in Chapter 14).
An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
1300 Chapter 18
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.
Recoverable amount is the higher of an asset’s fair value less costs to sell and its value
in use.
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 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.
These definitions are discussed in the relevant sections below.
3 RECOGNITION
An item of PP&E should be recognised (i.e. its cost included as an asset in the statement
of financial position) only if it is probable that future economic benefits associated with
the item will flow to the entity and its cost can be measured reliably. [IAS 16.7].
Extract 18.1 below describes Skanska’s criteria for the recognition of PP&E.
Extract 18.1: Skanska AB (2017)
Notes including accounting and valuation principles [extract]
Note 1.
Consolidated accounting and valuation principles [extract]
IAS 16 Property, Plant and Equipment [extract]
Property, plant and equipment are recognized as assets if it is probable that the Group will derive future
economic benefits from them and the cost of the assets can be reliably calculated. Property, plant and
equipment are recognized at cost minus accumulated depreciation and any impairment losses. Cost includes
the purchase price plus expenses directly attributable to the asset in order to bring it to the location and
condition to be used in the intended manner. Examples of directly attributable expenses are delivery and
handling costs, installation, ownership documents, consultant fees and legal services. Borrowing costs are
included in the cost of property, plant and equipment produced by the Group. Impairment losses are applied
in compliance with IAS 36.
The cost of property, plant and equipment produced by the Group includes expenditures for materials and
remuneration to employees, plus other applicable manufacturing costs that are considered attributable to the asset.
Further expenditures are added to cost only if it is probable that the Group will derive future economic benefits
from the asset and the cost can be reliably calculated. All other further expenditures are recognized as expenses in
the period when they arise.
Property, plant and equipment 1301
The decisive factor in determining when a further expenditure is added to cost is whether the expenditure is related to
replacement of identified components, or parts thereof, at which time such expenditures are capitalized. In cases where a new component is created, this expenditure is also added to cost. Any undepreciated carrying amounts for replaced
components, or parts thereof, are disposed of and recognized as an expense at the time of replacement. If the cost of the removed component cannot be determined directly, its cost may be estimated as the cost of the new component adjusted
by a suitable price index to take into account inflation. Repairs are recognized as expenses on a continuous basis.
3.1
Aspects of recognition
3.1.1
Spare parts and minor items
Items such as spare parts, stand-by equipment and servicing equipment are inventory
unless they meet the definition of PP&E (see 2.2 above). [IAS 16.8]. This treatment is
illustrated in Extract 18.2 below.
Extract 18.2: Heineken Holding N.V. (2017)
Notes to the Consolidated Financial Statements [extract]
3. Significant
accounting
policies [extract]
(f)
Property, plant and equipment [extract]
(i) Owned
assets
[extract]
Spare parts that are acquired as part of an equipment purchase and only to be used in connection with this specific
equipment or purchased software that is integral to the functionality of the related equipment are capita
lised and
amortised as part of that equipment. In all other cases, spare parts are carried as inventory and recognised in the
income statement as consumed.
Materiality judgements are considered when deciding how an item of PP&E should be
accounted for. Major spare parts, for example, qualify as PP&E, while smaller spares
would be carried as inventory and as a practical matter many companies have a
minimum value for capitalising assets.
Some types of business may have a very large number of minor items of PP&E such as
spare parts, tools, pallets and returnable containers, which nevertheless are used in more
than one accounting period. There are practical problems in recording them on an asset-
by-asset basis in an asset register; they are difficult to control and frequently lost. The
main consequence is that it becomes very difficult to depreciate them. Generally, entities
write off such immaterial assets as expenses in the period of addition. Skanska in
Extract 18.7 below immediately depreciates such minor equipment, achieving the same
result. The standard notes that there are issues concerning what actually constitutes a
single item of PP&E. The ‘unit of measurement’ for recognition is not prescribed and
entities have to apply judgement in defining PP&E in their specific circumstances. The
standard suggests that it may be appropriate to aggregate individually insignificant items
(such as tools, moulds and dies) and to apply the standard to the aggregate amount
(presumably without having to identify the individual assets). [IAS 16.9].
3.1.2
Environmental and safety equipment
The standard acknowledges that there may be expenditures forced upon an entity by
legislation that requires it to buy ‘assets’ that do not meet the recognition criteria
because the expenditure does not directly increase the future economic benefits
1302 Chapter 18
expected to flow from the asset. Examples would be safety or environmental protection
equipment. IAS 16 explains that these expenditures qualify for recognition as they allow
an entity to derive future economic benefits from related assets in excess of those that
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 256
