1. PROPERTY, PLANT AND EQUIPMENT
CHAPTER 6
PROPERTY, PLANT AND EQUIPMENT

2. 6.1 INTRODUCTION
Property, plant and equipment are tangible items that are:
held for use in the production or supply of goods or services, for rental to others or for administrative purposes
expected to be used during more than one accounting or financial period
Amount held can vary widely depending upon the industry and size of the entity
Key accounting standards include:
IAS 16 Property, Plant and Equipment (See Chapter 6)
IAS 17 Leases (See Chapter 8)
IAS 40 Investment Property (See Chapter 5)
IAS 36 Impairment of Assets (See Chapter 10)
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (See Chapter 20)

3. 6.2 IAS 16 PROPERTY, PLANT AND EQUIPMENT
Objective
To prescribe the accounting treatment for property, plant and equipment
Scope
Applies unless another standard requires or permits a different treatment (e.g. IFRS 5, IAS 17, IAS 40)
Principal issues
Recognition of assets
Determination of their carrying amounts
Depreciation charges to be recognised
Impairment losses to be recognised (if any)

4. Initial recognition
Property, plant and equipment should only be recognised as an asset if, and only if:
probable that future economic benefits associated with the item will flow to the entity; and
cost of the item can be measured reliably

5. Measurement at initial recognition
An item of property, plant and equipment which qualifies for recognition as asset should initially be measured at its cost
Cost comprises:
Purchase price, including import duties and non-refundable purchase taxes
Less trade discounts and rebates
Costs directly attributable to bringing the asset to the location and condition
Costs directly and necessarily incurred for item to operate in the intended manner
Anticipated costs of dismantling/removing the asset, together with any site restoration costs
Cost of financing (IAS 23 Borrowing Costs – See Chapter 7)

6. Example 6.1: Measurement at initial recognition
A manufacturing company commissioned the building of a new factory. The costs associated are as follows:
Site selection €30,000 Site purchase €1,000,000
Architect’s fees €50,000 Eng. fees €150,000
Legal fees €50,000 Constr. costs €1,500,000
Testing and checking (Note 1) €250,000 Admin. costs €500,000
The plant was available for use on 31 March 2012 and reached normal production levels by 31 October 2012.
Note 1: This includes €50,000 in connection with a six-monthly diagnostic check of machinery.
Requirement
Calculate the cost to be recorded as an asset in the statement of financial position.

7. Example 6.1: Measurement at initial recognition
Suggested Solution: €
Site cost 1,000,000
Construction cost 1,500,000
Architects fees ,000
Legal fees ,000
Engineers fees ,000
Testing costs ,000
Total cost 2,950,000
Note 1: €50,000 re. diagnostic check not included as it is not a direct cost, nor was it a cost relating to the start-up period.
Note 2: Site selection and admin. overheads are not direct costs and are therefore excluded.

8. Subsequent expenditure
Replacements and overhauls should be capitalised if they lead to an enhancement in performance
All other subsequent expenditure should be recognised as an expense in the period in which it is incurred
Day-to-day servicing costs are revenue expenditure

9. Example 6.2: Day-to-day running costs
If an aircraft is repainted, how should this expenditure be treated?
Solution:
The repainting costs should be written off to the statement of profit or loss and other comprehensive income – profit and loss in the period that the expense was incurred.
The costs are deemed to be part of the day to day running or servicing costs, which do not lead to an increase or an enhancement in the performance of the aircraft.

10. Example 6.3: Enhancement in performance
Manders Limited installs a new production process in its factory at a cost of €50,000. This enables a reduction in operating costs (as assessed when the original plant was installed) of €10,000 per year for at least for the next 15 years.
Requirement
How should the expenditure be treated?
Solution:
It should be capitalised and added to the original cost of the plant as it results in an enhancement of the economic benefits.

11. Measurement after initial recognition
Cost Model (See next)
Revaluation Model (See later)

12. 1. The cost model
Carry at cost less accumulated depreciation and any impairment losses
Example 6.4
A company records its property, plant and equipment at cost less accumulated depreciation. On 1 January 2012, the company purchased property at a cost of €500,000 for cash.
Requirement
How should this be recorded in the company’s financial statements on 1 January 2012?
Solution:
DR Property €500,000
CR Cash €500,000

13. Depreciation
This is the measure of the wearing out, consumption or other reduction in the EUEL of a non-current asset
The depreciable amount (net of residual value) of an asset should be allocated on a systematic basis over its EUEL so as to charge a fair proportion if cost or valuation to each accounting period expected to benefit from its use
The depreciation method used should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity
The depreciation charge for each period should be recognised in profit or loss unless it is included in the carrying amount of another asset

14. Residual value
The residual value is the estimated amount that an entity would currently obtain from the disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life
The residual value of an asset shall be reviewed at least at each financial year end
In order to determine if PPE is impaired, the procedures in IAS 36 Impairment of Assets should be followed (See Chapter 10)

15. Causes of depreciation
Physical – wear and tear and erosion
Economic factors – obsolescence and inadequacy
Time
Depletion

16. Choice of depreciation method
The two most common methods are:
Straight-line
Reducing balance
Change of method = change in accounting estimate (not policy) (See IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – See Chapter 21)
If method changed, adjust current and future periods’ depreciation

17. = (Cost less estimated residual value) x Depreciation rate, or
Depreciation method
Straight line
= (Cost less estimated residual value) x Depreciation rate, or
= (Cost less estimated residual value) / EUEL of the asset
See Chapter 6, Examples 6.5 and 6.6
Reducing Balance
= Carrying value x Depreciation rate
See Chapter 6, Examples 6.7 and 6.8

18. Land and Buildings
Land and buildings should be dealt with separately for accounting purposes
Land normally has an infinite life and should not be depreciated
Buildings have a finite life and should be depreciated
An increase in the value of the land on which the building stands does not affect the determination of the EUEL of the building

19. Example 6.9: Change in pattern of consumption
An item of plant cost €600,000 in March 2010 and was depreciated at 12.5% reducing balance. During the year ended 31 December 2012, the directors changed the method to 20% straight line in order to give a fairer presentation of the consumption of benefits (i.e. an estimated useful life of five years). It is company policy to charge a full years depreciation in the year of acquisition and none in the year of disposal.
Requirement
Explain how this should be reflected in the financial statements.

20. Example 6.9: Change in pattern of consumption
Solution:
Calculate the NBV at the start of the year of change €
Cost ,000
Depreciation year ended ( 75,000)
Carrying amount as at ,000
Depreciation year ended ( 65,625)
Carrying amount as at ,375
Write off the NBV over the revised UEL
Revised remaining UEL years
Depreciation charge year ended €153, (€459,375 / 3 years)
See Chapter 6, Example 6.10

21. 2. The revaluation model
Carry at fair value at date of revaluation less subsequent accumulated depreciation and impairment losses
Fair value is usually market value as determined by professionally qualified valuers
Revaluations shall be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date
Must revalue ALL assets within class
Revalued assets must continue to be depreciated
See Chapter 6, Example 6.11

22. Accounting treatment of revaluations
If the first time an asset is revalued is upwards, the revaluation surplus goes directly to equity under the heading of revaluation reserve (through OCI)
Subsequent drops in value are recognised in profit or loss except in so far as covered by previous revaluation surpluses on the same asset
If the first time an asset is revalued is downwards, the decrease should be recorded as an expense
Subsequent reversals of losses are recognised in profit or loss

23. Revaluations - summary
First Revaluation
Subsequent Revaluation
Deficit
Charge to SPLOCI in arriving at profit/loss
Debit to SPLOCI in arriving at profit/loss unless reverses a previous surplus, then charge to equity
Surplus
Credit to equity
(Include in ‘Other Comprehensive Income’)
Credit to equity (‘OCI’) unless reverses a previous deficit, then credit to SPLOCI in arriving at profit/loss

24. Example
The following details are available in relation to a non- specialised property:
Carrying value €960,000
Depreciated historic cost €800,000
Open market value €760,000
Existing use value €700,000
Requirement
What revaluation loss would be recorded and how should this loss be accounted for?

25. Example: Suggested solution
Revaln Res.
€160,000
Deprec.
historic
cost
€800k
Book
value
€960k
SPLOCI – P/L
€40,000
Market
value
€760k
DR Equity – RR €160,000
DR SPLOCI – P/L €40,000
CR Non-current assets €200,000

26. Examples 6.12 and 13: First time downwards revaluation and subsequent upwards revaluation
Ben Limited, a company that prepares its financial statements to 31 March each year, purchased a tangible non-current asset for €200,000 on 1 April Depreciation is charged at 10% SL. The carrying value at 31 March 2011 is therefore €160,000, before taking account of a revaluation on this date, which showed a valuation of €130,000.
Requirement
How should this be reflected in the financial statements of Ben Limited for the years ended 31 March 2011 to 2013.
Solution
Dr SPLOCI – P/L €30,000
Cr Non-current asset €30,000
Depreciation per annum for the year ending 31 March 2012 and 2013:
= €130,000 / 8 = €16,250
If the asset was revalued to €120,000 on 31 March 2013:
Net Book Value 31 March 2013 (before valuation on this date):
= €130,000 - (2 x €16,250) = €97,500
Dr Non-current asset €22,500
Cr SPLOCI – P/L €22,500
The revaluation increase can be recognised in arriving at profit/loss to the extent of previous revaluation deficits in respect of the same asset (a further €7,500 of upwards revaluations may still be credited to SPLOCI – P/L).

27. Depreciation/accumulated depreciation of revalued assets
Calculated on the carrying amount of the asset (See Chapter 6, Example 6.14)
When PPE is revalued, any accumulated depreciation at the date of revaluation is treated in one of the following ways:
The accumulated depreciation is restated proportionately with the gross carrying amount, so that the carrying amount after the revaluation equals the revalued amount; or
The accumulated depreciation is eliminated against the gross carrying amount and the net amount restated to the revalued amount.
See Chapter 6, Example 6.15

28. Depreciation and the revaluation reserve
IAS 16 gives companies the option of transferring some of the revaluation gain/surplus from the revaluation reserve to retained earned earnings (through OCI) to offset the higher/additional depreciation
The amount transferred is the difference between depreciation based on the revalued carrying amount and depreciated calculated based on the asset’s original cost
See Chapter 6, Example 6.17

29. Derecognition
The carrying amount of an item of PPE should be derecognised when it is disposed of/traded-in or when no future economic benefits are expected from its use
The proceeds from the sale of the asset (or trade-in allowance) is compared with the carrying amount of the asset and a profit or loss recognised
Gains or losses arising from the derecognition of an item of property, plant and equipment are:
the difference between the net disposal proceeds, and
the carrying amount of the asset, and
recognised in arriving at profit or loss, but gains shall not be classed as revenue
If:
Carrying Amount > Proceeds = Loss on disposal
Carrying Amount < Proceeds = Profit on Disposal

30. Example 6.16: Disposal of an asset
FIXIT Limited is preparing its financial statements for the year ended 31 December A van, which had cost €5,000 and had a carrying amount of €2,813 at 1 January 2012, was traded in on 1 March 2012 as part exchange for the purchase of a new van, which cost €7,800.
A cheque for €5,800 was paid by the company to complete the purchase. Depreciation is charged on vans at 25% per annum on a straight line basis. A full year’s depreciation is to be charged in the year of purchase and none in the year of sale.
Requirement
Prepare the journal entries necessary to record the above in the company’s financial statements for the year ended 31 December 2012.

31. Example 6.16: Disposal of an asset – solutionDR CR
Vans – Cost
Bank
5,800
Van – Cost of additions
Disposal Account
2,000
Accumulated Depreciation – Van
Van Cost
2,187
2,813
5,000
SPLOCI – P/L (Loss on Disposal)
813
Depreciation Charge – Vans
Accumulated Depreciation – Vans
1,950

32. Example 6.17: Purchase, depreciation, revaluation and disposal
JD Limited, a company that prepares its financial statements to 31 December each year, revalues its property every two years. It is company policy to charge a full year’s depreciation in the year of acquisition and none in the year of disposal. Before the change on 31 December 2009 (see below), the property was depreciated at 20% p.a. using the reducing balance method.
1 January 2008: property purchased at a cost of €390,000
31 December 2009: property revalued to €275,000, with a remaining useful life revised to 4 years from 1 January 2010 and depreciation method has been changed to straight line
31 December 2011: property revalued to €112,500, with the decline believed to be permanent
30 September 2012: property sold for €125,000
Requirement
How would the property be reflected in the company’s financial statements in each of the years ending 31 December 2008 to 2012, assuming that JD Ltd opts to transfer a portion of any revaluation surplus to offset the additional depreciation?

33. Example 6.17: Solution 2008: € Cost 390,000 Depreciation @ 20% (RB)
(SPLOCI – P/L)
(78,000)
NBV at 31/12/08
312,000
2009:
(62,400)
249,600
Revalued at 31/12/09
(RR & OCI)
25,400
NBV at 31/12/09
[DR Acc. Depn €140,000 CR Prop. €115,000 CR RR/OCI €25,400]
275,000
2010:
25% (SL)
(68,750)
NBV at 31/12/10
(W1) (€6,350 transfer in 2010, therefore RR balance = €19,050)
206,250
2011:
NBV at 31/12/11
(€6,350 transfer in 2011, therefore RR balance = €12,700)
137,500
Revaluation loss
(€25,000 loss split €12,700 against RR/OCI & €12,300 charged in arriving at profit or loss) (See Note)
(25,000)
112,500
2012:
30/9/12 proceeds
(125,000)
Profit on disposal
12,500 W1
Depreciation based on HC
(€249,600 / 4)
62,400
Depreciation based on valuation
Transfer from revaluation reserve
6,350
Note: Original gain reported in OCI in 2009, therefore loss must ‘follow’ the gain.

34. And finally
Change from Cost Model to Revaluation Model (or from Revaluation Model to Cost Model) is treated as a change in accounting policy (See IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – See Chapter 21)
A change from the Cost Model to the Revaluation Model is the only exception to the “apply retrospectively” rule for changes in accounting for changes in accounting policy