1. NZ IAS 16 Property, Plant and Equipment (PP&E)

2. The nature of PP&E
NZ IAS 16 defines property, plant & equipment (PP&E) as:
Tangible items
With a specific use within the entity
That are expected to be used during more than one period (i.e. they are non-current in nature) (para 6)
NZ IAS 16 specifically excludes:
Assets held for sale (as per NZ IFRS 5)
Biological assets (as per NZ IAS 41)
Mineral rights/reserves (as per NZ IFRS 6) (para 3)

3. Initial recognition of PP&E
Cost is recognised 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 (para 7)
Major spare parts and servicing equipment are PP&E, except if small when they can be expensed through inventory (para 8)
Small items can be aggregated (para 9)
Where future economic benefits are not expected to flow to the entity, costs incurred should be expensed.
Component parts (with different useful lives) are required to be separately accounted for. e.g. an aircraft – the engine, frame and fittings are likely to have different useful lives.

4. Initial measurement Initial measurement is at cost (para 15)
Note that if an asset is acquired at no cost or nominal cost, the cost is its fair value as at the date of acquisition (para NZ15.1)
‘At cost’ covers (para 16):
Purchase price, including…(see (a))
Directly attributable costs, necessary to bring the asset to the location and condition for operation (examples para 17)
Estimate to dismantle/remove/restore (e.g. oil platform)
See para 19 for examples of costs that are not capitalised

5. Measurement after recognition
After initial recognition (at cost) the entity can choose to use one of two measurement models:
Cost (para 30)
Revaluation (para 31)
This is an accounting policy decision and must apply to an entire class of PP&E (para 29)
Examples of classes are in para 37
May change policy, but only for more relevant/reliable information

6. 1 - Cost Model
Asset is carried at cost less any accumulated depreciation and any accumulated impairment losses (para 30)
Repairs and maintenance costs are expensed as incurred, not capitalised (para 12)
Capitalisation requires (at time of expenditure) increased probable future economic benefit (para 7)
e.g. replacement of car tyres
e.g. replacement of a car engine

7. Depreciation NZ IAS 16 includes the following definitions:
Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life
Depreciable amount: the cost of an asset less its residual value (or other appropriate amounts substituted for cost – eg. fair value)
Residual value: the estimated value of the asset at the end of its useful life to the entity
Useful life: the period over which an asset is expected to be used by an entity/the number of production (or similar) units expected to be obtained by the entity

8. Note…
Depreciation is specifically described as an allocation process – not as a change in the value of an asset
‘Useful life’ is affected by expected usage, physical wear and tear, technical or commercial obsolescence, legal or similar limits on use
Residual value estimates what the entity would currently (at the time of the estimate) obtain from disposal (sale less costs of sale) if already of the age and condition expected at the end of its useful life (para 6)
Why deduct residual value from cost?
Precision: to reflect the item’s net cost
Economics: to stop depreciation if asset is expected to increase more than diminish.

9. Depreciation choice
IAS 16 does not specify any depreciation method (but some are mentioned in para 62)
The depreciation method chosen should be the one that most closely reflects the pattern in which the asset’s future economic benefits are expected to be consumed (para 60)
A depreciation method applied to an asset should be reviewed annually. If there is a significant change in the pattern of consumption, the method should be changed – accounted for as a change in accounting estimate under NZ IAS 8 (para 61)

10. Methods Commonly used depreciation methods include:
Straight-line method – asset used evenly throughout its life
Diminishing balance method – more benefits received in earlier years of the life of asset
Units of production method – based on expected use or output of asset

11. 2 - Revaluation Model In this alternative to the cost model:
Measurement basis is fair value at date of valuation less any subsequent accumulated depreciation or impairment losses (para 31)
Fair value – the amount an asset would be sold for in an orderly transaction between market participants at the measurement date (para 6)
Revaluation frequency varies dependent on material changes in value – could be annual or as infrequent as 3 – 5 years (para 34)
Revaluation must be by class to avoid selective revaluation (para 36)
Hence all assets within a class must be able to be measured at fair value for a revaluation model to be adopted for that class

12. At 30 June 2012 A Ltd owned the following:
Although the whole class must be revalued, accounting is on an asset-by-asset basis
Example
A Ltd has decided to change from the cost model to the revaluation model to account for plant.
At 30 June 2012 A Ltd owned the following:
Cost
Accum dep’n
Carrying value
Fair value
Increment/
(decrement)
Plant A
200,000
100,000
150,000
50,000
Plant B
140,000
40,000
80,000
(20,000)
TOTAL
340,000
230,000
30,000
A revaluation increment will be recorded for Plant A and a revaluation decrement will be recorded for Plant B.

13. Revaluation increments
Increases (increments) are recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus (para 39)
The revaluation of Plant A would be recorded as follows:
Dr Accum. depreciation ,000 *
Cr Plant ,000 **
Cr Asset revaluation surplus 50,000 ***
Revaluation of Plant A
On derecognition of the asset (e.g. disposal) this amount is transferred to retained earnings. Transfers are not through the Income statement (profit/loss) (para 41)
* Removal of existing accumulated depreciation
** Cost- Fair value
(200,000 – 150,000) = 50,000
*** Amount of increment

14. Revaluation decrements
Decrements are recognised in the Income Statement as a loss (para 40).
The revaluation of Plant B would be recorded as follows:
Dr Accum. depreciation ,000*
Dr Loss on revaluation of plant 20,000**
Cr Plant ,000***
Revaluation of Plant B
***Cost- Fair value
(140,000 – 80,000) = 60,000
*Removal of existing accumulated depreciation
**Amount of decrement

15. Reversing prior increments…
A decrement reversing a previous increment will be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus, so reducing the accumulation in the surplus (para 40)
In relation to Plant B, assume that a gross revaluation increment of $10,000 had been made in an earlier year.
The revaluation of Plant B would be recorded as follows:
Dr Accum. depreciation ,000
Dr Asset revaluation surplus ,000
Dr Loss on revaluation of plant 10,000
Cr Plant ,000
Revaluation of Plant B

16. Reversing prior decrements…
An increment reversing a prior decrement is recognised in the profit or loss to the extent of the previous decrement increment (para 39)
In relation to Plant A, assume that a gross revaluation decrement of $15,000 had been made in an earlier year.
The revaluation of Plant A would be recorded as follows:
Dr Accum depreciation 100,000
Cr Plant ,000
Cr Gain on revaluation of plant 15,000
Cr Asset revaluation surplus 35,000
Revaluation of Plant A

17. Which model to choose…
There is a cost disincentive to adopt the revaluation model because there is more involved
However, the revaluation model provides increased relevance & reliability
Currently the cost model harmonises with existing US GAAP but in the IASB/FASB current projects this will change

18. Derecognition Derecognition occurs:
On disposal (sale)
When no future economic benefits expected (from use or sale) (para 67)
Gain or loss arising from derecognition is recorded in profit or loss (para 68)
Gains shall not be classified as revenue unless sale was part of ordinary business activities (paras 68 & 68A)
Reflected through cash flow from investing activities

19. Example A Ltd acquired a machine on 1 July 2010 for $50,000
Useful life = 4 years; Residual value = $10,000
Annual depreciation is $10,000 p.a.
On 1 July 2012 the machine was sold for $45,000
The journal entry to account for the sale are:
Dr Cash 45,000
Dr Accum. depreciation 20,000
Cr Machine 50,000
Cr Gain on sale 15,000
Sale of machine
The gain on sale is $15,000 ($45,000- $30,000)

20. Disclosure
Required disclosures are described in NZ IAS 16 paras 73–79:
For each class the following are stated:
measurement bases,
depreciation methods,
useful lives or depreciation rates used,
Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at beginning and end of period, and
A reconciliation of the carrying amount at the beginning and end of the period (para 73)

21. Disclosure if revalued…
If revalued, the following needs disclosure:
date of revaluation,
whether an independent valuer was used
Carrying amount under the cost model for each revalued class of property, plant and equipment
Revaluation surplus indicating any change (para 77)

22. Additional disclosures…
The existence and amounts of restrictions on title and PP&E pledged as security for liabilities
Expenditures recognised in the carrying amount of item of PP&E in the course of its construction
Contractual commitments for the acquisition of PP&E
Compensation from third parties for items of PP&E impaired, lost or given up (if not already disclosed in the Income Statement) (para 74)

23. Investment property
Accounting for investment property is covered in a separate standard – NZ IAS 40
This is property held (owned or under a finance lease) for the purpose of earning rentals or for capital appreciation or both (para 5)
After initial recognition at cost, investment property is measured at fair value (para 33) (unless fair value is not reliably determinable on a continuing basis - para 53)
Any gain or loss on change in fair value is recognised in profit or loss for the period in which is arises (para 35)
Where investment property is at cost, the cost model under NZ IAS 16 is applied (NZ IAS 16 para 5)