IAS 16 Property, Plant and Equipment
How do we recognise them on initial recognition? At cost!
So, what is cost? Cost includes: purchase price import duties and non-refundable purchase taxes LESS: trade discounts and rebates. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
Examples of Costs include: Employee benefits arising directly from the construction or acquisition of the item of Property, Plant & Equipment Initial delivery and handling costs Installation and assembly costs Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition Training? (Never!!)
Subsequent measurement: Revaluation Method At the date of the revaluation, the asset is treated in one of the following ways: 1. the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. or 2. the accumulated depreciation is eliminated against the gross carrying amount of the asset.
Revaluation: Gross adjustment method The gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses.
Issue 1: Capitalise Final Costs Measurement at recognition Dismantlement, removal and restoration costs Initial estimate of the costs of dismantling and removing item and restoring the site Should be included in the cost of the asset Changes in the estimate of the obligation may be due to: Estimate change Unwinding (P&L)
Breaking assets up! IFRS requires you to determine the depreciation charge for each significant part of an item of Property, Plant & Equipment WHAT IS SIGNIFICANT??
Issue 2: Components PROBLEM: No definition of significant Use your judgement, be consistent and document Consider both individual and aggregate significance
Issue 3: Residual Value When you depreciate, you don t depreciate to zero Required to depreciate an asset to its RESIDUAL VALUE (unless immaterial) Residual value is defined as: Estimated amount that an entity would currently obtain from disposal of the asset After deducting estimated costs of disposal If it were at the age and condition expected at the end of its useful life
Issue 4: Useful life Assets are depreciated over their expected economic useful lives This is judgemental so it could differ from entity to entity Will need to justify and document your decisions though
Remember. IAS 16 requires the residual value and useful life of an asset to be reviewed at least at each financial year-end Change amount on a PROSPECTIVE basis meaning Don t change last years numbers
So can you have a ZERO book value asset that is still in use????
Major Spare Parts (previously) Spare parts and servicing equipment Usually carried as inventory and recognised in P&L as they are consumed Major spare parts treated as PPE if expected to be used for more than one period. Spare parts / servicing equipment can only be used in connection with an item of PPE - account for as PPE Depreciation starts when the asset is available for use Major spare parts meeting PPE definition may therefore need to be depreciated.
Major Spare Parts (amended) Spare parts and servicing equipment Recognise as PP&E if it meets the definition Otherwise, classify as inventory.