Property, plant and equipment comprises tangible assets held by an entity for use in the production or supply of goods or services, for rental to others or for administrative purposes, that are expected to be used for more than one period. Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. [IAS 16.13], Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.79], If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. [1][12], IAS 16 requires an entity to disclose in its financial statements for each class of property, plant and equipment:[1], International Financial Reporting Standards, international financial reporting standard, International Accounting Standards Committee, Association of Chartered Certified Accountants, IFRS Foundation Technical Summary: IAS 16, https://en.wikipedia.org/w/index.php?title=IAS_16&oldid=994847261, Creative Commons Attribution-ShareAlike License, If a revaluation results in an increase in value, it should be credited to equity (through, the gross carrying amount and accumulated depreciation and impairment losses. [IAS 16.5], The standard does apply to bearer plants but it does not apply to the produce on bearer plants. The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. The transfer to retained earnings should not be made through profit or loss. The gain or loss on disposal is the difference between the proceeds received in exchange for the asset disposed and the carrying amount at the time of disposal. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.23], If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in profit and loss. Under the revaluation model an item of PPE is IAS 16 states that you should capitalise, along with the direct costs, directly attributable costs to construction, including personnel expenses. Each word should be on a separate line. 7 states that the cost of an item of Property, Plant and Equipment (PPE) shall be recognized as an asset if, and only if : it is probable that future economic benefits associated with the item will flow to the entity; and ; ... To qualify for capitalization, costs must be associated with incremental benefits. IAS 16 outlines the accounting treatment for most types of property, plant and equipment. [IAS 16.56]. All the directly attributable costs necessary to bring the asset into working condition should be capitalised: these costs … Both paragraphs 10 and 16(b) of IAS 16 support the capitalization of depreciation of the RoUA into the cost of the manufacturing facility. IAS 16 – Property, plant and equipment. Thereafter costs will cease to be capitalized and depreciation will commence. These words serve as exceptions. [IAS 16.67-71], If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. The change was discussed in the May 2017 edition of Accounting and Business , as part of looking at the IASB’s annual improvements process, so the topic won’t be examined in depth again here. [5], The standard also discusses the accounting treatment of parts of property, plant and equipment which may require replacement at regular intervals and the capitalisation of inspection costs. [IAS 16.16-17], Proceeds from selling items produced while bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management are not deducted from the cost of the item of property, plant and equipment but recognised in profit or loss. [IAS 16.20A], If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. PPE is initially recognised at its cost, which is the fair value of the consideration given. IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. For example, personal computers require regular cleaning so that they can operate at optimum temperature. ... IAS 23 Borrowing Costs details the criteria for the recognition of interest as a component of the carrying amount of a self-constructed asset. [IAS 16.39], A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.68A], Information about each class of property, plant and equipment, For each class of property, plant, and equipment, disclose: [IAS 16.73], The following disclosures are also required: [IAS 16.74], IAS 16 also encourages, but does not require, a number of additional disclosures. IAS 16 establishes principles for recognising property, plant and equipment as assets, measuring their carrying amounts, and measuring the depreciation charges and impairment losses to be recognised in relation to them. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. The first area relates to IAS 23, Borrowing Costs, rather than IAS 16, but is still very much linked to which costs are eligible for capitalisation. [IAS 16.51], The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.3], The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment Property. 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. [10] In addition, the depreciation in each accounting period of the asset's useful life should reflect the pattern which the asset's economic benefits are expected to be consumed by the entity. This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. [IAS 16.24], Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. IAS 16 outlines the accounting treatment for most types of property, plant and equipment. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. Issue. site preparation, delivery and handling, installation, related professional fees for architects and engineers), and the estimated cost of dismantling and removing the asset and restoring the site. Some costs may be capital in nature and some may be maintenance expenditure. [1], Items of property, plant and equipment are derecognised on disposal or when no future economic benefit is expected from its use. "[2], The standard does not apply to assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and assets which require more specialised accounting, such as biological (IAS 41 Agriculture), exploration and evaluation assets (IFRS 6 Exploration for and Evaluation of Mineral Resources), mineral rights and reserves such as oil, natural gas and similar non-regenerative resources. IAS 16 sets out two models for measuring PPE subsequent to its initial recognition as an asset. Paragraph 20 of IAS 16 requires that costs be capitalized until the asset is in the location and condition necessary for it to be capable of operating in the manner intended by … compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss. [IAS 16.14], An item of property, plant and equipment should initially be recorded at cost. Examples of directly attributable costs to construction, including personnel expenses the on... Item is revalued, the predecessor to the IASB natural gas and similar non-regenerative resources disposal its... At fair value, its cost, which is the fair value, its cost, which is the of... Including personnel expenses all costs necessary to bring the asset for sale use! 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