received in response to the ED. The feedback summary noted that many respondents
either disagreed with, or expressed concerns over, the proposed amendments. The
main areas for further consideration by the IASB were:
• the recognition of the proceeds and related costs in profit or loss;
• cost allocation;
• the determination of when an asset is available for use;
• the exclusion of depreciation from the cost of items produced before an item of
PP&E is available for use;
• the assessment of what constitutes an entities ‘ordinary’ activities; and
• potential inconsistencies with other standards.
The feedback summary included three approaches to proceeding with the project:
• proceed with the ED as published;
• proceed with the ED with some modifications; or
• proceed with additional disclosure requirements and consider alternative
standard-setting approaches.
No decisions were taken by the Committee and the matter will be discussed by the IASB
at a future meeting.
For more details of the development of the interpretation and considerations for
extractive industries, see Chapter 39 at 12.1.2 and 12.1.2.A.
4.2.2
Income received during the construction of property
One issue that commonly arises is whether rental and similar income generated by
existing tenants in a property development may be capitalised and offset against the cost
of developing that property.
The relevant question is whether the leasing arrangements with the existing tenants are
a necessary activity to bring the development property to the location and condition
necessary for it to be capable of operating in the manner intended by management.
Whilst the existence of the tenant may be a fact, it is not a necessary condition for the
1318 Chapter 18
building to be developed to the condition intended by management; the building could
have been developed in the absence of any existing tenants.
Therefore, rental and similar income from existing tenants are incidental to the
development and should not be capitalised. Rather rental and similar income should be
recognised in profit or loss in accordance with the requirements of IFRS 16 together
with related expenses.
4.2.3
Liquidated damages during construction
Income may arise in other ways, for example, liquidated damages received as a result of
delays by a contractor constructing an asset. Normally such damages received should
be set off against the asset cost – the purchase price of the asset is reduced to
compensate for delays in delivery.
4.3
Accounting for changes in decommissioning and restoration
costs
IAS 16 requires the initial estimate of the costs of dismantling and removing an item of
PP&E and restoring the site on which it is located to be included as part of the item’s
cost. This applies whether the obligation is incurred 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. [IAS 16.16]. See 4.1 above. However,
IAS 16 does not address the extent to which an item’s carrying amount should be
affected by changes in the estimated amount of dismantling and site restoration costs
that occur after the estimate made upon initial measurement. This issue is the subject
of IFRIC 1, which applies to any decommissioning, restoration or similar liability that
has been both included as part of the cost of an asset measured in accordance with
IAS 16 and recognised as a liability in accordance with IAS 37. [IFRIC 1.2]. It deals with the
impact of events that change the measurement of an existing decommissioning,
restoration or similar liability. Events include a change in the estimated cash flows, a
change in the discount rate and the unwinding of the discount. [IFRIC 1.3]. This is
discussed in detail in Chapter 27 at 6.3.
4.4
Exchanges of assets
An entity might swap an asset it does not require in a particular area, for one it does in
another – the opposite being the case for the counterparty. Such exchanges are not
uncommon in the telecommunications, media and leisure businesses, particularly after
an acquisition. Governmental competition rules sometimes require such exchanges.
The question arises whether such transactions give rise to a gain in circumstances where
the carrying value of the outgoing facility is less than the fair value of the incoming one.
This can occur when carrying values are less than market values, although it is possible
that a transaction with no real commercial substance could be arranged solely to boost
apparent profits.
IAS 16 requires all acquisitions of PP&E in exchange for non-monetary assets, or a
combination of monetary and non-monetary assets, to be measured at fair value, subject
to conditions:
Property, plant and equipment 1319
‘The cost of such an item of property, plant and equipment is measured at 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. The acquired
item is measured in this way even if an entity cannot immediately derecognise the asset
given up.’ [IAS 16.24].
The IASB concluded that the recognition of income from an exchange of assets does
not depend on whether the assets exchanged are dissimilar. [IAS 16.BC19].
If at least one of the two fair values can be measured reliably, that value is used for
measuring the exchange transaction; if not, then the exchange is measured at the carrying
value of the asset the entity no longer owns. [IAS 16.24]. For example, if the new asset’s fair
value is higher than the carrying amount of the old asset, a gain may be recognised.
This requirement is qualified by a ‘commercial substance’ test. If it is not possible to
demonstrate that the transaction has commercial substance as defined by the standard
(see 4.4.1 below), assets received in exchange transactions will be recorded at the
carrying value of the asset given up. [IAS 16.24].
If the transaction passes the ‘commercial substance’ test then IAS 16 requires the
exchanged asset to be recorded at its fair value. As discussed in 7 below, the standard
requires gains or losses on items that have been derecognised to be included in profit
or loss in the period of derecognition but does not allow gains on derecognition to be
classified as revenue, except for certain assets previously held for rental. [IAS 16.68, 68A].
It gives no further indication regarding their classification in profit or loss. Such
exchanges of goods and services are also excluded from the scope of IFRS 15 if the non-
monetary exchange is between entities in the same line of business to facilitate sales to
customers or potential customers (see Chapter 28 at 3). [IFRS 15.5(d)].
4.4.1 Commercial
substance
The commercial substance test was put in place as an anti-abuse provision to prevent
gains from being recognised in income when the transaction had no discernible effect
on the entity’s economics. [IAS 16.BC21]. The commercial
substance of an exchange is to
be determined by forecasting and comparing the future cash flows budgeted to be
generated by the incoming and outgoing assets. For there to be commercial substance,
there must be a significant difference between the two forecasts. The standard sets out
this requirement as follows:
‘An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result
of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.’ [IAS 16.25].
As set out in the definitions of the standard, entity-specific value in item (b) above is the
net present value of the future predicted cash flows from continuing use and disposal of
1320 Chapter 18
the asset (see 2.2 above). Post-tax cash flows should be used for this calculation. The
standard contains no guidance on the discount rate to be used for this exercise, nor on
any of the other parameters involved, but it does suggest that the result of these analyses
might be clear without having to perform detailed calculations. [IAS 16.25]. Care will have
to be taken to ensure that the transaction has commercial substance as defined in the
standard if an entity receives a similar item of PP&E in exchange for a similar asset of its
own. Commercial substance may be difficult to demonstrate if the entity is exchanging an
asset for a similar one in a similar location. However, in the latter case, the risk, timing and
amount of cash flows could differ if one asset were available for sale and the entity
intended to sell it whereas the previous asset could not be realised by sale or only sold
over a much longer timescale. It is feasible that such a transaction could meet conditions
(a) and (c) above. Similarly, it would be unusual if the entity-specific values of similar assets
differed enough in any arm’s length exchange transaction to meet condition (c).
Other types of exchange are more likely to pass the ‘commercial substance’ test, for
example exchanging an interest in an investment property for one that the entity uses
for its own purposes. The entity has exchanged a rental stream and instead has an asset
that contributes to the cash flows of the cash-generating unit of which it is a part. In this
case it is probable that the risk, timing and amount of the cash flows of the asset received
would differ from the configuration of the cash flows of the asset transferred.
4.4.2 Reliably
measurable
In the context of asset exchanges, the standard contains guidance on the reliable
determination of fair values in the circumstances where market values do not exist. The
‘reliable measurement’ test for using fair value was included to measure these exchanges
to minimise the risk that entities could ‘manufacture’ gains by attributing inflated values
to the assets exchanged. [IAS 16.BC23]. Note that fair value is defined by reference to
IFRS 13 and that the requirements below are specific to asset exchanges in IAS 16.
‘The fair value of an asset is reliably measurable if (a) the variability in the range of
reasonable fair value measurements is not significant for that asset or (b) the
probabilities of the various estimates within the range can be reasonably assessed and
used when measuring fair value. If an entity is able to measure reliably the fair value of
either the asset received or the asset given up, then 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.’ [IAS 16.26]. If the fair value of neither the asset given up
nor the asset received can be measured reliably (i.e. neither (a) nor (b) above are met),
the cost of the asset is measured at the carrying amount of the asset given up; this means
there is no gain on the transaction. [IAS 16.24].
No further guidance is given in IAS 16 on how to assemble a ‘range of reasonable fair
value measurements’ and the guidance in IFRS 13 should be followed (see Chapter 14).
4.5
Assets held under leases
IFRS 16 requires lessees to initially measure the right-of-use asset at the amount of lease
liability, adjusted for lease prepayments, lease incentives received, initial direct costs
and an estimate of restoration, removal and dismantling costs. IFRS 16 is discussed in
detail in Chapter 24.
Property, plant and equipment 1321
4.6
Assets acquired with the assistance of government grants
The carrying amount of an item of PP&E may be reduced by government grants in
accordance with IAS 20 – Accounting for Government Grants and Disclosure of
Government Assistance. [IAS 16.28]. This is one of the accounting treatments available
which are discussed further in Chapter 25.
5
MEASUREMENT AFTER RECOGNITION: COST MODEL
IAS 16 allows one of two alternatives to be chosen as the accounting policy for
measurement of PP&E after initial recognition. The choice made must be applied to an
entire class of PP&E, which means that not all classes are required to have the same
policy. [IAS 16.29].
The first alternative is the cost model whereby the item, after recognition as an asset, is
carried at cost less any accumulated depreciation and less any accumulated impairment
losses. [IAS 16.30]. The alternative, the revaluation model, is discussed at 6 below.
Some entities operate, either internally or externally, an investment fund that
provides investors with benefits determined by units in the fund. Similarly, some
entities issue groups of insurance contracts with direct participation features and
hold the underlying items. Some such funds or underlying items include owner-
occupied property. For many contracts that specify a link to returns on underlying
items, those underlying items include a mix of assets that are almost all measured at
fair value through profit or loss. Accordingly, the IASB decided that measurement
of owner-occupied property at fair value through profit or loss would be consistent
with the measurement of the majority of the underlying assets and would prevent
accounting mismatches. [IFRS 17.BC65(c)].
Consequently, when IFRS 17 is adopted (see 1 above), the subsequent measurement
requirements in IAS 16 will be amended by adding paragraphs 29A and 29B to permit
entities to elect to measure owner-occupied properties in such specified circumstances
as if they were investment properties measured at fair value through profit or loss in
accordance with IAS 40, despite paragraph 29 (as described above). For the purposes of
this election, insurance contracts include investment contracts with discretionary
participation features. An entity shall treat owner-occupied property measured using
the investment property fair value model as a separate class of PP&E.
[IAS 16.29A-29B].
5.1
Significant parts of assets
IAS 16 links its recognition concept of a ‘part’ of an asset, discussed at 3.2 above, with
the analysis of assets for the purpose of depreciation. Each part of an asset with a cost
that is significant in relation to the total cost of the item must be depreciated separately,
which means that the initial cost must be allocated between the significant parts by the
entity. [IAS 16.43, 44]. The standard once again refers to the airframe and engines of an
aircraft but also sets out that if an entity acquires PP&E subject to an operating lease in
which it is the lessor, it may be appropriate to depreciate separately amounts reflected
in the cost of that item that are attributable to favourable or unfavourable lease terms
relative to market terms. [IAS 16.44].
1322 Chapter 18
A determination of the significant parts of office buildings can be seen in Extract 18.7
below from Skanska. This policy may have been based on the construction methods
used for the particular buildings as it is unusual to see a separation between foundation
and frame for office buildings. In addition, Extract 19.1 in Chapter 19 shows an example
of the allocation for investment property, although favourable or unfavourable lease
terms are not identified as a separate part.
Extract 18.7: 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 that consist of parts with different periods of service are treated as separate
components of property, plant and equipment. Depreciation occurs on a straight-line basis during the estimated
useful life, or based on degree of use, taking into account any residual value at the end of the period. Office
buildings are divided into foundation and frame, with a depreciation period of 50 years, installations
of 35 years, and non-weight-bearing parts of 15 years. In general, industrial buildings are depreciated over
a 20-year period without allocation into different parts. Stone crushing and asphalt plants as well as concrete
mixing plants are depreciated over 10 to 25 years depending on their condition when acquired and without
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 260
