IAS 16 Property, plant and equipment PwC

Objectives and Scope Initial recognition Subsequent measurement Valuation Depreciation Derecognition IAS 16 (revised) sets out the requirements for the initial recognition; subsequent measurement; valuation; depreciation; and derecognition of tangible fixed assets. The standard does not apply to property, plant and equipment classified as held for sale in accordance with IFRS 5, Non Current Assets Held For Sale and Discontinued Activities. Also covered in this presentation is the key differences between IAS 16 and the equivalent UK standard, FRS 15.

Initial cost Initial cost comprises - purchase price - directly attributable costs - costs of dismantling where the entity has an obligation Self constructed assets Subsequent expenditure Finance costs Exchange of assets An item of property, plant and equipment shall be initially recognised at its cost 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. The cost of an item of property, plant and equipment comprises: Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates Any costs directly attributable to bringing the asset to the necessary location and condition for it to be capable of operating in the manner intended by management The initial estimates of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which the entity incurs either when the item is acquired of as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Examples of directly attributable costs include a) costs of employee benefit arising directly from the construction or acquisition of the item b) Costs of site preparation c) Initial delivery and handling costs d) Installation and assembly costs e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing that asset that location and condition (such as samples produced when testing equipment) f) Professional fees The cost of a self constructed asset is determined using the same principles as an acquired asset. The costs of any abnormal amounts of wasted material, labour etc is not included in the cost. Subsequent expenditure on an asset is capitalised if it meets the same recognition criteria as for initial expenditure. Capitialisation of finance costs is dealt with in IAS 23. Where adopted the policy must be applied consistently to all relevant assets. Exchanges of fixed assets for non-monetary assets should be accounted for at fair value, except where the exchange lacks commercial substance or where there is no reliably measurable fair value. The fair value should be that of the asset given up, unless the fair value of the asset received is more clearly evident, when that value should be used. If the acquired item is not measured at fair value, its cost is the carrying value of the asset given up.

Measurement subsequent to initial recognition Cost v revaluation Revaluation - frequency - classes of asset - treatment The carrying value of property, plant and equipment shall be determined using either the cost model or the revaluation model. Where the cost model is used the item shall be carried at its cost less any accumulated depreciation and less any accumulated impairment losses. For the revaluation model to be used, the fair value of the item must be able to be measured reliably. Fair value is usually market value. Where the revaluation model is adopted, revaluations must be made with sufficient frequency that the carrying value of the asset does not differ materially from its fair value. Some items of property, plant and equipment experience significant and volatile changes in fair value, so an annual revaluation may be necessary. Other items whose fair value does not change significantly year on year do not need such frequent revaluations. If the revaluation model is used for a particular item of property, plant and equipment, it must be used for all items of property, plant and equipment in the class of assets to which that particular item belongs. The use of the revaluation model to one class of assets does not mean it has to be used for all classes of assets. (A class is a group of assets with a similar nature and function in the business, for example land; machinery; ships; aircraft etc). Any gains on revaluation should be usually be credited to equity. The exception to this rule is if the gain relates to an asset where a revaluation decrease has been taken to the income statement, in which case the extent to which the surplus reverses the revaluation decrease shall be recognised in the profit and loss. Any decreases in value should be recognised in the income statement, unless there is a credit balance in the revaluation reserve relating to that asset in which case the credit balance shall be cleared out before any revaluation decrease is taken to the profit and loss. Note that the equivalent rules under UK GAAP make a distinction here between losses caused by consumption of economic benefit (to p&l) and those caused by general downturn in prices (to STRGL until reach depreciated cost – then to p&l). IAS 16 makes no such distinction.

Depreciation and impairment Component approach Systematic basis for depreciation - straight line - diminishing balance - units of production Review of - method - residual value Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The remainder of the item, i.e. the sum of the parts which do not have a cost significant to the total cost of the item, shall be depreciated in a manner which faithfully represents the consumption pattern and/or the useful life of the parts. The entity may choose to depreciate these parts separately. The depreciable amount of an asset (cost less residual value) should be allocated on a systematic basis over its useful life. The depreciation should be charged to profit and loss, unless it is included in the carrying amount of another asset. The residual value of an asset should be reviewed at least at each financial year end, and if it is considered to have changed from previous estimates, it should be treated as a change in accounting estimate in accordance with IAS 8. A variety of methods can be used to allocate the depreciable amount of an asset over its useful life on a systematic basis, including straight line, diminishing balance and units of production. The method should reflect the pattern of benefits the asset is expected to provide the entity. The depreciation method should be reviewed at least each financial year end, and if it is considered to have changed from previous estimates, it should be treated as a change in accounting estimate in accordance with IAS 8. Depreciation should begin when an asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation should cease when the asset is derecognised, or when it is classified as held for sale, whichever is earlier. Therefore, depreciation does not cease when the asset becomes idol or is retired from active use (unless fully depreciated).

Impairments, derecognition and disclosure Impairments- per IAS 36 Derecognition: earlier of - disposal - no future economic benefits expected Disclosure requirements To determine if an item of property plant and equipment is impaired, an entity applies IAS 36, Impairments of assets. The carrying amount of an item of property, plant and equipment shall be derecognised On disposal; or When no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognised. The gain or loss is calculated as the difference between the net disposal proceeds and the carrying amount. Gains shall not be recorded as revenue. The disclosure requirements of IAS 16 are extensive and similar to those of FRS 15.

UK GAAP differences Component depreciation Revaluation losses FRS 15 residual value based on prices at time of acquisition FRS 15 subsequent expenditure capitalised if enhances asset FRS 15 no guidance on exchange of assets for non-monetary assets We have already covered component depreciation and revaluation losses. IAS 16 requires the residual value of an asset to be determined based on current prices at the balance sheet date, whereas FRS 15 residual values are based on prices prevailing at the date of acquisition. This could make a significant difference to depreciation charges for assets where the cost model is used, though is likely to have little impact on charges for assets whose carrying value is determined using the revaluation model. IAS 16 capitalises subsequent expenditure on an asset using the same criteria as the initial recognition. FRS 15 requires capitalisation of subsequent expenditure only when the expenditure improves the previously the previously assessed standard of performance. FRS 15 has no equivalent rules for the exchange of fixed assets for non-monetary assets.