the increase should be credited directly to OCI and accumulated in equity under the
heading of revaluation surplus. However, the increase should be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously
recognised in profit or loss (see 6.2 above). [IAS 16.39].
The same rules apply to a reversal of an impairment loss – see discussion in Chapter 20
at 11.4.2.
If the revalued asset is being depreciated, we consider that the full amount of any
reversal should not be taken to profit or loss. Rather, the reversal should take account
of the depreciation that would have been charged on the previously higher book value.
The text of IAS 16 does not specify this treatment but other interpretations would be
inconsistent with IAS 36, which states:
‘The increased carrying amount of an asset other than goodwill attributable to a
reversal of an impairment loss shall not exceed the carrying amount that would
have been determined (net of amortisation or depreciation) had no impairment loss
been recognised for the asset in prior years.’ [IAS 36.117].
The following example demonstrates a way in which this could be applied.
Example 18.7: Reversal of a downward valuation
An asset has a cost of £1,000,000, a life of 10 years and a residual value of £nil. At the end of year 3, when
the asset’s NBV is £700,000, it is revalued to £350,000. This write down below cost of £350,000 is taken
through profit or loss.
The entity then depreciated its asset by £50,000 per annum, so as to write off the carrying value of £350,000
over the remaining 7 years.
1338 Chapter 18
At the end of year 6, the asset’s depreciated cost is £200,000 but it is now revalued to £500,000. The effect
on the entity’s asset is as follows:
£000
Valuation
At the beginning of year 6
350
Surplus on revaluation
150
At the end of the year 500
Accumulated depreciation
At beginning of year 6 *
100
Charge for the year 50
Accumulated depreciation written back on revaluation
(150)
At the end of the year
–
Net book value at the end of year 6
500
Net book value at the beginning of year 6
250
* Two years’ depreciation (years 4 and 5) at £50,000 per annum.
The total credit for the uplift in value is £300,000 on the revaluation in year 6 (i.e. £500,000 less £200,000).
However, only £200,000 is taken through profit or loss. £100,000 represents depreciation that would
otherwise have been charged to profit or loss in years 4 and 5. This will be taken directly to the revaluation
surplus in OCI.
From the beginning of year 7, the asset at revalued amount of £500,000 will be written off over the remaining
four years at £125,000 per annum.
In the example the amount of the revaluation that is credited to the revaluation surplus
in OCI represents the difference between the net book value that would have resulted
had the asset been held on a cost basis (£400,000) and the net book value on a revalued
basis (£500,000).
Of course this is an extreme example. Most assets that are subject to a policy of
revaluation would not show such marked changes in value and it would be expected
that there would be valuation movements in the intervening years rather than dramatic
losses and gains in years 3 and 6. However, we consider that in principle this is the way
in which downward valuations should be recognised.
There may be major practical difficulties for any entity that finds itself in the position of
reversing revaluation deficits on depreciating assets, although whether in practice this
eventuality often occurs is open to doubt. If there is any chance that it is likely to occur,
the business would need to continue to maintain asset registers on the original, pre-
write down basis.
6.4
Adopting a policy of revaluation
Although the initial adoption of a policy of revaluation by an entity that has previously
used the cost model is a change in accounting policy, it is not dealt with as a prior period
adjustment in accordance with IAS 8. Instead, the change is treated as a revaluation
during the current period as set out in 6.2 above. [IAS 8.17]. This means that the entity is
not required to obtain valuation information about comparative periods.
6.5
Assets held under leases
When IFRS 16 is adopted, lessees no longer classify leases as finance leases or as
operating leases (as was required under IAS 17), instead lessees are required to recognise
Property, plant and equipment 1339
most leases in their statement of financial position as lease liabilities with corresponding
right-of-use assets. A lessee subsequently measures the right-of-use asset using a cost
model under IFRS 16, unless it applies one of the following measurement models
allowed by IFRS 16 (see Chapter 24):
• the fair value model in IAS 40, but only if the lessee applies this to its investment
property and the right-of-use asset meets the definition of investment property in
IAS 40; or
• if the lessee applies the revaluation model in IAS 16 to a class of PP&E, the lessee
would also have the option to revalue all of the right-of-use assets that relate to
that class of PP&E.
7 DERECOGNITION
AND
DISPOSAL
Derecognition, i.e. removal of the carrying amount of an item of PP&E from the financial
statements of the entity, occurs when an item of PP&E is either disposed of, or when
no further economic benefits are expected to flow from its use or disposal. [IAS 16.67].
The disposal of an item of PP&E may occur in a variety of ways (e.g. by sale, by entering
into a finance lease or by donation). IFRS 15 requires that revenue (and a gain or loss on
disposal of a non-current asset not in the ordinary course of business) be recognised
upon satisfaction of performance obligation by transferring control. Accordingly, the
actual date of disposal of an item of PP&E is the date the recipient obtains control of
that item in accordance with the requirements for determining when a performance
obligation is satisfied in IFRS 15 (see Chapter 28 at 8). IFRS 16 applies to a disposal by
way of a sale and leaseback. [IAS 16.69].
All gains and losses on derecognition must be included in profit and loss for the period
when the item is derecognised, unless another standard applies; e.g. under IFRS 16 a sale
and leaseback transaction might not give rise to a gain (see Chapter 24 at 8). [IAS 16.68].
Gains are not to be classified as revenue, although in some limited circumstances
presenting gross revenue on the sale of certain assets may be appropriate (see 7.2
below). [IAS 16.68]. Gains and losses are to be calculated as the difference between any
net disposal proceeds and the carrying value of the item of PP&E. [IAS 16.71]. This means
that any revaluation surplus in equity relating to the asset disposed of is transferred
directly to retained earnings when the asset is derecognised and not reflected in profit
or loss (see 6.2 abo
ve). [IAS 16.41].
Replacement of ‘parts’ of an asset requires derecognition of the carrying value of the
replaced part, even if that part had not been depreciated separately. In these
circumstances, the standard allows the cost of the replacement part to be a guide in
estimating the original cost of the replaced part at the time it was acquired or
constructed, if that cannot be determined. [IAS 16.70].
The amount of consideration to be included in the gain or loss arising from the
derecognition of an item of PP&E is determined in accordance with the requirements
for determining the transaction price in paragraphs 47–72 of IFRS 15 (see Chapter 28
at 6). Any subsequent changes to the estimated amount of the consideration included in
1340 Chapter 18
the gain or loss should be accounted for in accordance with the requirements for
changes in the transaction price in IFRS 15 (see Chapter 28 at 7.5). [IAS 16.72].
7.1 IFRS
5 – Non-current Assets Held for Sale and Discontinued
Operations
IFRS 5 introduced a category of asset, ‘held for sale’, and PP&E within this category is
outside the scope of IAS 16, although IAS 16 requires certain disclosures about assets
held for sale to be made, as set out at 8.1 below.
IFRS 5 requires that an item of PP&E should be classified as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than continuing use,
though continuing use is not in itself precluded for assets classified as held for sale. [IFRS 5.6].
An asset can also be part of a ‘disposal group’ (that is a group of assets that are to be disposed
of together), in which case such group can be treated as a whole. Once this classification
has been made, depreciation ceases, even if the asset is still being used, but the assets must
be carried at the lower of their previous carrying amount and fair value less costs to sell.
For assets (or disposal group) to be classified as held for sale, they must be available for
immediate sale in their present condition, and the sale must be highly probable. [IFRS 5.7].
Additionally, the sale should be completed within one year from the date of
classification as held for sale, management at an ‘appropriate level’ must be committed
to the plan, and an active programme of marketing the assets at current fair value must
have been started. [IFRS 5.8].
The requirements of IFRS 5 are dealt with in Chapter 4. IFRS 5 does not apply when
assets that are held for sale in the ordinary course of business are transferred to
inventories (see 7.2 below). [IAS 16.68A].
7.2
Sale of assets held for rental
If an entity, in the course of its ordinary activities, routinely sells PP&E that it has held
for rental to others, it should transfer such assets to inventories at their carrying amount
when they cease to be rented and are then held for sale. The proceeds from the sale of
such assets should be recognised as revenue in accordance with IFRS 15. [IAS 16.68A]. In
contrast, the sale of investment property is generally not recognised as revenue. The
rationale and possible treatment of investment property in such cases is discussed in
detail in Chapter 19 at 9 and 10.
A number of entities sell assets that have previously been held for rental, for example, car
rental companies that may acquire vehicles with the intention of holding them as rental
cars for a limited period and then selling them. An issue was whether the sale of such
assets, which arguably have a dual purpose of being rented out and then sold, should be
presented gross (revenue and cost of sales) or net (gain or loss) in profit or loss.
The IASB concluded that the presentation of gross revenue, rather than a net gain or
loss, would better reflect the ordinary activities of some such entities and amended
IAS 16 accordingly.
The IASB also made a consequential adjustment to IAS 7 – Statement of Cash Flows –
to require that both (i) the cash payments to manufacture or acquire assets held for
rental and subsequently held for sale; and (ii) the cash receipts from rentals and sales of
Property, plant and equipment 1341
such assets are presented as from operating activities. [IAS 7.14]. This amendment to IAS 7
is intended to avoid initial expenditure on purchases of assets being classified as
investing activities while inflows from sales are recorded within operating activities.
7.3
Partial disposals and undivided interests
IAS 16 requires an entity to derecognise ‘an item’ of PP&E on disposal or when it expects
no future economic benefits from its use or disposal. [IAS 16.67].
Items of PP&E are recognised when their costs can be measured reliably and it is
probable that future benefits associated with the asset will flow to the entity. [IAS 16.7].
The standard ‘does not prescribe the unit of measure for recognition, i.e. what
constitutes an item of property, plant and equipment’. [IAS 16.9].
However, items that are derecognised were not necessarily items on initial recognition. The
item that is being disposed of may be part of a larger ‘item’ bought in a single transaction that
can be subdivided into parts (i.e. separate items) for separate disposal; an obvious example
is land or many types of property. The principle is the same as for the replacement of parts,
which may only be identified and derecognised so that the cost of the replacement part may
be recognised (see 3.2 above). The entity needs to identify the cost of the part disposed of
by allocating the carrying value on a systematic and appropriate basis.
In these cases, the part disposed of is a physical part of the original asset. The
standard assumes that disposal will be of a physical part (except in the specific case
of major inspections and overhauls – see 3.3.2 above). However, some entities enter
into arrangements in which they dispose of part of the benefits that will be derived
from the assets.
Although IAS 16 defines an asset by reference to the future economic benefits that will be
controlled by the entity as a result of the acquisition, it does not address disposals of a
proportion of these benefits. An entity may dispose of an undivided interest in the whole
asset (sometimes called an ownership ‘in common’ of the asset). This means that all
owners have a proportionate share of the entire asset (e.g. the purchaser of a 25%
undivided interest in 100 acres of land owns 25% of the whole 100 acres). These
arrangements are common in, but are not restricted to, the extractive and property
sectors. Vendors have to determine how to account for the consideration they have
received from the purchaser. This will depend on the details of the arrangement and, in
particular, whether the entity continues to control the asset or there is joint control.
(a) Joint
control
In some cases there may be joint control over the asset, in which case the arrangement will
be within scope of IFRS 11 – Joint Arrangements – which will determine how to account for
the disposal and the subsequent accounting. Joint control is discussed in detail in Chapter 12.
The accounting treatment may depend on whether the disposing entity holds an asset
directly or holds it within a single-as
set subsidiary. If the entity is disposing of an interest
in an asset that is not held within a single-asset subsidiary and if the retained interest
represents an investment in an entity a gain or loss is recognised as if 100% of asset had
been sold because control has been lost. If the transaction is with other parties to a joint
operation, the vendor will only recognise gains and losses to the extent of the other
1342 Chapter 18
parties’ interests. [IFRS 11.B34]. In other words, it will recognise a part disposal. The
retained interest will be analysed as a joint operation or a joint venture.
In the former case, the entity will account for its own assets, liabilities, revenue etc.
while in the latter case it will apply the equity method to account for its interests in the
joint venture (see Chapter 12 at 6 and 7, respectively). Undivided interests cannot be
accounted for as joint arrangements in the absence of joint control.
In many jurisdictions it is common for certain assets, particularly properties, to be bought
and sold by transferring ownership of a separate legal entity formed to hold the asset (a
‘single-asset’ entity) rather than the asset itself. If the asset is held in a single-asset subsidiary
entity that becomes a joint venture, there is a conflict between the requirements of IFRS 10
– Consolidated Financial Statements – and IAS 28 – Investments in Associates and Joint
Ventures. In September 2014, the IASB issued amendments to IFRS 10 and IAS 28, in
dealing with the sale or contribution of assets between an investor and its associate or joint
venture. The main consequence of the amendments is that a full gain or loss is recognised
when a transaction involves a business (whether it is housed in a subsidiary or not). A partial
gain or loss is recognised when a transaction involves assets that do not constitute a
business, even if these assets are housed in a subsidiary. The amendments were to be
applied prospectively for transactions occurring in annual periods commencing on or after
1 January 2016, with earlier application permitted.6 However, in December 2015, the IASB
issued a further amendment Effective Date of Amendments to IFRS 10 and IAS 28. This
amendment defers the effective date of the September 2014 amendment until the IASB has
finalised any revisions that result from the IASB’s research project on the equity method
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 264
