IAS 16 Property, Plant and Equipment – summary
Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and therefore it is one of the most important and commonly applied standards.
The main issues dealt in IAS 16 are recognition of property, plant and equipment, measurement at and after recognition, impairment of property, plant and equipment (although IAS 36 deals with impairment in more detail) and derecognition.
Recognition of Property, Plant and Equipment
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; and are expected to be used during more than one period.
IAS 16 states that the cost of an item of property, plant and equipment 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
- the cost of the item can be measured reliably.
This recognition principle shall be applied to all costs at the time they are incurred, both incurred initially to acquire or construct an item of property, plant and equipment and incurred subsequently after recognition to add to, replace part of or service it.
Initial costs
Some items of property, plant and equipment might be necessary to acquire for safety or environmental reasons.
Although they do not directly increase the future economic benefits, they might be inevitable to obtain future economic benefits from other assets and therefore, should be recognized as an asset.
For example, water cleaning station might be necessary in order to proceed with some chemical processes within chemical manufacturer.
Subsequent costs
Day-to-day servicing of the item shall be recognized in profit or loss as incurred, because they just maintain (not enhance) item’s capacity to bring future economic benefits.
However, some parts of the item of property, plant and equipment may require replacement at regular intervals, for example, aircraft interiors.
In such a case, an entity derecognizes carrying amount of older part and recognizes the cost of new part into the carrying amount of the item. The same applies to major inspections for faults, overhauling and similar items.
Measurement
Initial Measurement
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
The cost of an item of property, plant and equipment comprises:
- its purchase price including import duties, non-refundable purchase taxes, after deducting 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. Examples of these costs are: costs of site preparation, professional fees, initial delivery and handling, installation and assembly, etc.,
- the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.
The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.
If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit (unless such interest is capitalized in accordance with IAS 23).
If an asset is acquired in exchange for another non-monetary asset, the cost will be measured at the fair value unless:
- the exchange transaction lacks commercial substance or
- the fair value of neither the asset received nor the asset given up is reliably measurable.
If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
Subsequent Measurement
An entity may choose 2 accounting models for its property plant and equipment:
- Cost model: An entity shall carry an asset at its cost less any accumulated depreciation and any accumulated impairment losses.
- Revaluation model:An entity shall carry an asset at a revalued amount. Revalued amount is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
An entity shall revalue its assets with sufficient regularity so that the carrying amount does not differ materially from its fair value at the end of the reporting period. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.
The change of asset’s carrying amount as a result of revaluation shall be treated in the following way:
| Change in Carying Amount | Where | |
|---|---|---|
| Increase | Other comprehensive income (heading “Revaluation surplus”) | Profit or loss if reverses previous revaluation decrease of the same value |
| Decrease | Profit or loss | Other comprehensive income if reduces previously recognized revaluation surplus (heading “Revaluation surplus”) |
You can learn more about the revaluation model in this video:
Depreciation (both models)
Depreciation is defined as the systematic allocation of the depreciable amount of an asset over its useful life.
The items of property, plant and equipment are usually depreciated in order to maintain matching principle – as they are in operation for more than 1 year, they assist in producing the revenues in more than 1 year and therefore, their cost shall be spread among those years in order to match the revenue they help to produce.
When dealing with the depreciation please do have 3 basic things in mind:
- Depreciable amount: Depreciable amount is simply HOW MUCH you are going to depreciate. It is the cost of an asset, or other amount substituted for cost, less its residual value.
- Depreciation period: Depreciation period is simply HOW LONG you are going to depreciate and it is basically asset’s useful life.
Useful life is the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity.
IFRS16 lists several factors that shall be considered when establishing item’s useful life:
- expected usage of the item,
- expected physical wear and tear,
- technical or commercial obsolescence of the item, and
- legal or other limits on the use of the asset.
Useful life and asset’s residual value (input to depreciable amount) shall be reviewed at least at the end of each financial year.
If there is a change in the expectations comparing to previous estimates, then change shall be accounted for as a change in an accounting estimate in line with IAS 8 (no restatement of previous periods).
- Depreciation method: Depreciation method is simply HOW, IN WHAT MANNER you are going to depreciate.
The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
An entity may select from variety of depreciation methods, such as straight-line method, diminishing balance method and the units of production methods.
Selected method shall be reviewed at least at the end of each financial year. If there is a change in the expected pattern of asset’s usage, then the depreciation method shall be changed and be accounted for as a change in an accounting estimate in line with IAS8 (no restatement of previous periods).
Depreciation shall be recognized in profit or loss unless it is capitalized into the carrying amount of another asset (for example, inventories, or another item of property, plant and equipment).
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. For example, aircraft interior cost might be depreciated separately from the remaining airplane cost.
Impairment
Here, IAS 16 refers to another standard, IAS 36 Impairment of Assets that prescribes rules for reviewing the carrying amount of assets, determining their recoverable amount and impairment loss, recognizing and reversing impairment loss and more.
IAS 16 states that compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable.
For example, claim for compensation of damage on insured property from insurance company is recognized to profit or loss when insurance company accepts claim, closes the case and agrees to compensate (or after whatever procedure is agreed in the insurance contract).
Derecognition
IAS 16 prescribes that the carrying amount of an item of property, plant and equipment shall be derecognized on disposal; or when no future economic benefits are expected from its use or disposal.
The gain (not classified as revenue!) 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 derecognized. The gain or loss from the derecognition is calculated as the net disposal proceeds (usually income from sale of item) less the carrying amount of the item.
Further reading
The following articles about IAS 16 were published on CPDbox (worth to read):
- Fully depreciated assets still in use – what to do? – If you own assets with zero carrying amount, but they are still in use, there’s something wrong about it. Learn more in this article.
- How to account for spare parts – spare parts are a difficult area and the accounting depends on their character.
- How to account for artwork – as there’s no standard specific for artwork, sometimes it’s necessary to develop your own accounting policy.
- What are directly attributable costs? – what can you capitalize? What can you not capitalize?
- When to start depreciation? – If you don’t use an asset, but it’s available for use, it’s the right time. This article explains it all.
- How to capitalize borrowing costs?
- 3 biggest myths in accounting for PPE
- Can you capitalize it as PPE or not?
- Podcast 003: Can we capitalize demolition cost and carrying amount of old buildings?
Please check out IAS 16 in the following video:
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533 Comments
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Hi Silvia,
I have gone through you videos and they are very informative. I have couple of queries if you can help me out with it.
Firstly, I want to know how depreciation is treated when fixed assets are revalued under revaluation model for accounting of PP&E?
Secondly, lets say X ltd has a CGU which is found to be impaired by certain amount say 30,000 and PP&E includes Goodwill of say 20,000, Machine A of say 2,00,000 and Machine B of say 3,00,000. Then how will the impairment be allocated to various assets?
Hi Guru,
1) When you revalue your asset, you depreciate the new carrying amount over remaining useful life.
2) In this case, you reduce goodwill to zero first, and remaining 10 000 are allocated to other assets by the proportionate share.
S.
Hi Silvia,
Thank you replying. I think it’s clearer for me now.
Thank you so much and God bless.
Hi Silvia,
I am really confused with the treatment of where to charge the demolishing costs if such old building be demolished and another building will be constructed. Also, for the building which was demolished for the purpose of preserving the land only. In both cases, Will be the demolishing costs be part of the land where the building is located or to the old building demolished? And how will be the value received for selling the scraps be treated?
Thank you and God speed. 🙂
Dear Jack,
your question leaves me a bit confused.
What is the true purpose of demolishing cost?
1) Is it to free the land in order to build a new building on it? In this case, you can include the demolishing cost into the cost of new building, as this cost is necessary to bring the asset to its desired condition and location (i.e. without demolishing, you can’t build a new building, right?)
2) Is it related to the land only? To preserve it? And what is the purpose of preservation – required by the law? And also, when was the land acquired – is it now? If it’s a new acquisition of a land and your purpose is just to clean it and leave it as it until you sell it further, then it’s appropriate to include these costs into the cost of land (net of revenues from selling the scraps). But then based on the purpose of land, the question is whether the cost model is really appropriate for your case.
if we have a machine with total amount 50,000$
and we apply the F.V model
by the end of the first year and after re-valuation
we found that the F.V =49,000$
and by the second year the machine became 51,000 $
what are the accounting entries for this case?
thanks in advance.
Hi Ahmed,
the first year: Debit P/L / Credit PPE 1 000
the second year:Debit PPE 1 000 / Credit P/L 1000 and credit Revaluation surplus in OCI 1000
Hi Silvia,
In this example, for year 2, why wouldn’t the revaluation surplus be 2,000 – because in year one, there was a write down of 1,000. I am referring to Ahmends example and your response of March 12, 2015
Thanks,
Jenny
Hi Jenny,
please look to para 40 of IAS 16. It says that when the carrying amount of an asset goes up as a result of the revaluation, then you should recognize in other comprehensive income. BUT – the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.
Of course, I totally ignored depreciation charges in this short demonstration, but these are just comments and it should give you a picture. S.
Thank you for responding and for presenting IFFS in such a way that it is understandable.
Jenny
Hi Silvia,
Appreciate if you could advise on the debit leg for credit Revaluation surplus in OCI 1000 in the 2nd year. If on PPE, say useful life of 10 years, depreciate 510, additional PL impact is 10. Realized gain of 10: dr OCI, cr RE. The effect is the same if the debit leg goes to the accumulated depreciation (instead of PPE)? Are the above all the postings needed for this event? It seems to me the higher FV revaluated, the worse the impact on PL is even though equity gets better. Thank you very much in advance, Helen
Hi Helen, it is technically the same effect whether the credit leg goes to PPE or accumulated depreciation. Not why are you speaking about debiting accumulated depreciation in this case – it does not happen. OK, let me give you the numbers: regular depreciation charge is CU 100, depreciation charge based on revalued amount is CU 110. Your entries are:
– Debit Profit or loss: CU 110 / Credit Accumulated depreciation (PPE): CU 110
– Debit Revaluation surplus: CU 10 (110-100) / Credit Retained earnings: CU 10
Hi Silvia,
My comment is not displaying (yet?) 🙂 If dr accumulated depreciation, then no impact on PL. This is the way? Thank you. Helen
Hi Silvia, Thank you 🙂
S: “Not (sure) why are you speaking about debiting accumulated depreciation in this case”
H: It is question on your reply to Ahmed’s example above: “the second year: Debit PPE 1 000 / Credit P/L 1000 and credit Revaluation surplus in OCI 1000” The debit leg for the 1000 going under OCI should be accumulated depreciation (if there is)? if this way, the impact of increased depreciation charge on PL can be avoided.
Hello Silvia,
If a company buy a computer for official use and than purchase Internet cable to connect that computer than whether the cost of purchasing cost of Internet cable can be capitalized or should be treated as revenue expenditure.
Thanks for your time.
Hi Bayezid, well, this is more question of materiality. In substance yes, because without the cable, there’s no connection to Internet, right? But is it material?
In practice, companies normally capitalize everything including cables at initial recognition (when they buy cables with computer). But normally, they simply expense cables when acquired subsequently – and I basically agree if it’s not material.
S.
Hi Silvia……….
I am doing Research work on non financial assets in ifrs…..and I generally see that companies are using cost model for valuation of their assets….and they are very reluctant to the use of fair value i.e. revaluation model..as compared with the fair valuation used for financial instruments….why is this so?
Hi Neha,
hard to say. In my opinion, the reasons are the following:
1) Non-financial assets are mostly used in the production of other assets and therefore, cost model is more suitable as reflects the reality in a better way. Opposed to that, financial assets are used more often as an investment (although it’s not the strict rule)
2) It’s much more difficult to get the fair value of non-financial assets, because in most cases, there’s no active market. How would you set the fair value of some specialized building, or a machine, moreover in worn-out state? It’s much easier with financial assets.
Hope this helps
S.
wow excellent answer you have given your answer perfectly thank you very much
Can we capitalized a road which is situated in side the factory?
Sure 🙂
What is the rational behind that? How can we prove that?
Isn’t the road an asset that you’ll use longer than 1 reporting period, for the production of other assets/administrative purposes/rental to others? I think that the road perfectly meets the definition of PPE.
I think the question touches upon on the ownership as well. The road might have been constructed for the company’s convenience on a land which is otherwise Govt. property or someone else’s property with a permission to lay the road till that land is allotted to someone else or till the owner does not have any other use of that land. In which category the road will be capitalised then?
Dear Kapil, I know what you mean, but as I wrote above, it depends on whether the company is able to control the asset (i.e. get the economic benefits out of its use). If yes, and all other conditions are met, then it does not matter that much on who owns the land. But of course, if the land is owned by someone else who restricts the use of the road, then you need to assess it carefully. S.
Hi Silvia, How can the road owned by the government, repaired by the company for ease of access be accounted for? WIll that fall under leasehold improvements even if the area is not included in the leased property of the Company?
Hi Juan,
that really depends on the arrangement with the government. If there is none and you made the repairs on your own, then you need to assess to which extent you control the asset. If you do, then you can recognize it as an asset. S.
Hi Silvia!
This is quite an impressive site with very impressive answers by yourself!
I was hoping you can help me sort out a problem I am having regarding assets of the company that I work for.
So the owner of the company acquired office furniture and PCs in 2011 when he started his first business. By 2013 he discontinued the business and ventured into a new kind of business in 2014 that is still continuing now (and for which I work). This new business has its own licensing and incorporation certificate; you can imagine him sort of starting all over again since 2014.
Now All the furniture and PCs acquired since he started off in 2011 are now being used for the new business in 2014. My question is how should I value these fixed assets now? & how should I treat the depreciation and accumulated depreciation? Please note the assets were acquired in 2011 but the business began in 2014.
Tentatively, I took the value of assets to be the book value as of 2014. I am unsure on what amount to take for accumulated depreciation though.
The owner also spent about 20,000 on renovating, partitioning and flooring of his office on rented property. Should I capitalize this? I know as per IFRS I should not capitalize painting, tiling etc. The renovation itself though involved changing the look of the office entirely. This also was done in 2011 while the business began in 2014.
I will really appreciate any feedback on this. Thank you in advance!
Hi Nadine,
this is typical question for which there’s no precise accounting policy. What I would suggest is to measure cost of your “newly acquired assets” at deemed cost, as outlined by IFRS 1. I know this is not your situation precisely, but in this case it is acceptable, in my opinion. So just take your previous carrying amount as cost of your new assets, set the useful lives and depreciate your new cost = previous carrying amount over the new useful life. Alternatively, you can try to set the fair value of these assets, but this can be hard.
Renovating – well, why not capitalize it? The question is whether it brings the asset to its desired condition or location, or not. It all requires careful assessment. Can you consider these costs as day-to-day servicing? I guess not because it changed the look of the office entirely. Maybe these costs not only maintained the asset in its current conditions, but actually improved it and increased their capacity, or useful life. In this case, capitalization is appropriate.
Hope it helps S.
We are a passenger transport company and we use buses to transport passengers.
Our depreciation policy for buses is 12.5% (8 Years)
However after 1st five years we have to replace the engine of the bus at a cost of 2,000,000
So what we are currently doing is that we depreciated original cost of the buses ( 4,500,000) over the 8 years and new engine (2,000,000) which bought after year 5 separately for next five years (20%)
But our auditors say that don’t use this method and they say after five years take written down value of the bus which is 1,687,500 and plus cost of the new engine of 2,000,000 and then reassess the useful life of the bus and then depreciate for that time.
So please kindly tell me which method is most suitable and correct.
Dear Nayani,
from the way you depreciate buses it appears that you knew from the start that you would have to replace the engines of the buses after 2 years, am I right?
In this case, IAS 16 asks you to depreciate separately significant parts of your assets, mainly when they have different useful life (see para 44 of IAS 16). So what you should have done when you bought the buses, was to depreciate the cost of engines over 2 years and the remaining cost of buses over 8 years. I know that the cost of engines was probably not separately stated, but you should have looked to the prices of similar engines when sold separately.
If you haven’t done so, I recommend:
1) Derecognize written-down value of your original engines (so in fact, you estimate their initial cost and depreciate them over 2 years).
2) Recognize cost of your new engines.
3) If necessary, you can estimate new remaining useful life.
Please look to IAs 16 para 13 and 14.
The suggested treatment of your auditors does not take into account the fact that the written down value of your buses includes some residual value of engines were depreciated over 8 years – this should be removed.
There’s the same problem with yours. If you depreciate full initial cost of buses over 8 years, it means that when you replace engines, there are still some old engines included in the carrying amount of your buses.
Hope it helps
S.
We are a state owned public enterprise doing commercial business and we do have huge number of assets some of these assets we don’t have actual figures like date of purchase, cost separately, etc. we are in the process of preparing our financial statements according to new IFRS (this is the first time we are going to adopt IFRS)
so I need to know whether we should revalue all the assets and take those revalued amount as deemed cost or can we go with our previous WDV as it is. Because due to the huge number of assets and difficulty on verify those we can’t do a revaluation as at the transition date.
please kindly give your answer as soon as possible
guys i need your help on this question : what is the positive and nagetive international critique with respect to the international accounting standard 16
Hi Abraham, it seems that you are writing some thesis. 🙂 Good luck with that, as I am more focused on the practical application of IAS 16. Thank you! S.
We are a state owned public enterprise doing commercial business and we do have huge number of assets some of these assets we don’t have actual figures like date of purchase, cost separately, etc. we are in the process of preparing our financial statements according to new IFRS (this is the first time we are going to adopt IFRS)
so I need to know whether we should revalue all the assets and take those revalued amount as deemed cost or can we go with our previous WDV as it is. Because due to the huge number of assets and difficulty on verify those we can’t do a revaluation as at the transition date.
please kindly give your answer as soon as possible
What you did?
my question is we have are preparing one site
and we have some expenses we need to know is
it possible added in work in progress to be capitalized later one like we preparing office
and some expenses ( tools for cafteria ) stickers for
office glass .
REGARD ,,
Hi Silvia,
Just wanted to clear some points regarding CWIP. In case we have started a project(seperate division) and we have purchased some non current assets such as laptops and incurred some revenue expenses in relation to that project. What should be the treatment? Should we record Non Current Assets and revenue expenses in CWIP account? or should we record them as expenses and non currents assets in our company’s accounts?
Please note that those non current assets are not of constructive nature, they are like laptops, furniture etc.
Thank You
Hi Silvia, how can i calculate the depreciation of a PPE bought for =N= 200,000 in the month of March and with 5years useful life on monthly basis.
Hi Silvia, I have used the summary of IAS 16 from your website for my thesis. How should I reference your article ?
Hi Arlene, thank you for letting me know 🙂 The author of this article is Silvia Mahutova FCCA, founder of ifrsbox.com – is that sufficient?
Sometimes, a transport company may get base spares free of cost, alongwith the main vehicle at time of acquisition. These spares are costly, and have a much lesser useful economic life than the vehicle itself, though not a regular use inventory.
1. Issue: With regard to initial accounting, in which the Company does not want to allocate a part of capital cost [invoiced value] to these fixed assets.
2nd Issue: If these base spares are distinctively identified and accounted as inventory, there is a problem with arriving at weighted average costs when co-mingled in stores with identical spares purchased for inventory.
3rd issue: If these spares are not separately accounted, there is difficulty in physically controlling these assets, which is susceptible to theft and misuse, as it is of nil value as it does not have a specific inception cost.
YOur views on accounting and controlling the base spares would be appreciated.
Hi George,
well, this is very practical question and in order to respond, I would need to get more info on your internal processes and accounting, to arrive at the best and still acceptable accounting treatment.
This is exactly the situation in which you simply need to establish your own accounting processes in the internal regulations (but still in line with IFRS). Sorry, I can’t do it from my desk / PC 🙂
what is the treatment of travelling cost incurred in relation to purchase of land? What is the correct traeatment of payments made to contractors in relation to unfinished resort project? Capital wip or capital advance?
Same question. A client has given advances to contractors for purchase of capital assets (buses). Currently, these are recorded under prepayments. Under IFRS, are these recorded under CWIP till assets are received and then moved to respective FA category? What if these advances are not refundable?
It depends on the contract, or at the moment WHEN the control over the asset (partially finished) passes to a client. As we are speaking about the buses, I assume that you have no control of the buses until they are physically delivered to you, is that right? In this case, it’s still a prepayment, because at that stage, it does not meet the criteria for recognizing as an item of PPE.
Thanks Silvia.
By net replacement cost, could we say net book value.
Thanks
Almost 🙂 It’s the cost for which you would get the same asset now on the market, less accumulated depreciation. S.
Hi Silvia,
Please could you indicate the following accounting treatment:
In case of merger of five public entities into one entity through the passing of a regulation, how should be PPE of the merged organisation be accounted for in the first year of accounts.
Could you please indicate if this type of merger could be considered as Business combination under IFRS 3.
Thank you
Hi Naseem, in the case of merger, you should recognize all assets at fair value at the acquisition (merger) day. If it does not exist, then use net replacement cost. And yes, it can be considered as BC under IFRS 3 (I would need to see the details).
Dear Silvia, what happens in the in the opposite situation? One public entity(1) is separated from another(2) and some fixed assets are transferred from the 2nd one to the newly established 1st one. Both are state agencies owned by Government. The question is: The fixed assets seem to be recognized at fair value as at acquisition/ (transfer) date (and as an in-kind contribution). Is it right? And as per IFRS under which standard is this regulated?
Hi Gunel, I recommend this article. S.
Dear Silvia,
Require your guidance on the below issue.
This is an old issue whcih might have discussed earlier.
We need to make decoration for the building we have reneted. Now, we will make advance payment to vendors for this decoration required for office use. We need this decoration to use the space for “Office Use”
Now my question is,
1. Do we consider it under property Equipment.
or
2.Do we consider this as advance payment.
Thanks in advance for your time.
Regards,
Mehdi
Hi Mehdi, in my opinion, it is a receivable = advance payment, until your decorators actually make decorations. When you pay the advance, there’s no decoration, so you should not recognize it as such. After the decoration is ready, then recognize it and derecognize advance. S.
Hi Silvia, your knowledge is impressive. I have a similar question as the above.
If you contract out construction of fixed assets (tooling) to an external company and pay them upfront, do you need to do an assessment of completion at the end of each year and then make an adjustment between prepayment and assets under construction?
Wondering whether you need to Dr. AUC and Cr. Prepayment. Any help you can give would be great. Do you know where in the standard this is covered?
Hi Scott, in my opinion, you need to leave it in prepayments until you gain a control over that asset.
Just ask yourself: who is in charge of semi-finished tooling? Who bears losses when earthquake (war, asteroid…) strikes? Look to risks and rewards of ownership and then make your conclusion. I know that there are not many rewards resulting from ownership of semi-finished tooling, therefore I tried to point you to look at risks = potential damages and losses. It depends on the specific terms of your contract with supplier.
By the way, it’s inherent in the definition of an asset in the Conceptual Framework (=resource controlled by an entity…).
Hope it helps S.
When could I see your “IAS 38 Intangible Assets” summary?
I want to see another standards IAS 40 as well.
Me too! 🙂
Hey, if an asset was acquired at no cost, but there are maintenance costs and the asset produces economic benefits would this be capitalized or disclosed in the notes? The asset would not be replaced if destroyed unless it was seen as commercially viable but it has a reliable replacement cost.
Also how should the costs of maintenance of the asset be accounted for?
Hi Josh, even assets acquired at no cost need to be recognized in the financial statements at some circumstances. For example, it can be recognized under IAS 20 Government grants if received as a subsidy. Or, it can be received from some customer for the purpose of providing the services – in such a case, you need to apply IFRIC 18 for the initial recognition. You need to examine the substance of the free transfer.
Maintenance cost is then treated as a subsequent cost in line with IAS 16. S.
What happen with the depreciation of the fixed assets used in pre-operative stage or start up? can we capitalize that cost too?
Dear Dan, you can’t capitalize pre-operating costs as some separate intangible asset, including depreciation. However, if you use fixed assets to construct some other assets, like another PPE or inventories, you can capitalize depreciation to the cost of that asset.
Hi Silvia.
Please can someone charge depreciation on asset that he has not started using, even though the assets is already at his premises?
Thanks
Hi
Based on IAS 16:55
“Depreciation of an asset begins when it is available for use, ie when it is in the
location and condition necessary for it to be capable of operating in the manner
intended by management.”
I’d like to understand why you say so.
BR
Hi Toyin,
I apologize, but somehow original comments got deleted. In short – someone asked whether we should charge a depreciation on an asset which is not in use, but available, or in the premises of the owner and I responded that except for some spare parts, normally not.
So why I said so?
Yes, your argument is right – depreciation should start when an asset is available for use. But it’s also truth, that depreciation charges should reflect asset’s consumption. When an asset is in the premises but not used, then it’s appropriate to charge zero for that period, isn’t it? Please see this article for more details. S.
Hi Silvia
I actually agree with you, but the standard says another thing.
So in this instance how do we follow the standard and do what is right at the same time.
BR
T
Toyin,
the standard does not say another thing. It says that you can depreciate by some systematic way reflecting the pattern of the consumption of your asset. Therefore zero depreciation charge is OK when there’s zero consumption. S.
Hi Silvia!
Can you please assist me with the perceived weaknesses and strengths of IAS16 as well as recommendations on how the Standard can be approved?
Kind regards,
Maryna
Hi, I have a question on PPE too! My company have bought a property which is current still in the process of construction. I paid the developer money based on the progress billing that they have billed to me. Says, my property cost is 300,000 and the payment made to the developer up to date is 100,000. My accounting record for this transaction would be:
Dr PPE 300,000
Cr Liability 200,000
Cr Bank 100,000
Initially, I thought since my company has signed the Sales & Purchase agreement with the developer, that gave rise to a present obligation and we shall account for the liability in our accounts as the estimated payment can be measured reliably according to the agreement.However, my auditor asked me to record it as:
Dr PPE 100,000
Cr Bank 100,000
Please comment….
Hi Carmen, without having details of your contract and based on my experiences with the similar things I would say your auditors are right. Unless there’s some huge penalty for cancelling the contract, you should not book PPE and liability, because you have no PPE yet. You just have progress billings of 100 000.
Also, it’s questionable whether 100 000 should go to PPE and not some advances or receivables. It depends on how the ownership and work in progress is transferred – but that’s another story. S.
Hi, so the company i work for hired someone to revalue all the its property. im not quite sure on how to account for this fee. im thinking i should expense it and charge it to HQ as the cost center.
Hi, yeah this post is genuinely nice and I have learned lot of things from it concerning blogging.
thanks.
Hi Silvia,
I have gone through, seems to be a huge task as we might need to apply IAS8.
Here is the practical situation and would like your opinion in accounting entries and disclosures needed for this
The company revalued its land and buildings say at USD10,000 3 years ago. The surplus of say USD40,000 recorded in revaluation surplus in equity. Each year this USD40,000 is being amortised to revenue reserves, this was so to happen for over 50years. Now since the company have decided change to cost model, what would be the accounting entries and necessary IFRS disclosures.
Your help is highly appreciated Silvia
Hi, Could you advise Advise what does IFRS say when a company decide to change policy from revaluation model to cost model.
Here is the situation Entity X valued its property some years ago and revaluation surplus recorded in equity and being amortised to revenue reserves every year. Now the entity would want to go back cost model.
Hi, in this case, it is necessary to follow standard IAS 8 and account for a change in accounting policy. Please read more in this article: http://www.cpdbox.com/machines-fully-depreciated-still-in-use/
Thanks Silvia,
Will go through this and get back if need be. We really appreciate your help
Regards
Prime
Thank you very much for the web site!
Could you please advise,if there is any requirements under any IFRS standard to calculate depreciation in days? For example, if we bought a fixed asset on the 3rd of march, should we calculate depreciation for march as for 29 days?
Thank you.
Hi, Olga! No, IFRS do not require calculating the depreciation in days. In fact, you should calculate the depreciation based on the pattern that reflects the consumption of an asset in the most appropriate way. But of course, if you decide to do it based on days, then here you go, it’s justifiable. S.
Thank you for the help!
Hello.
My company has a letter of credit with bank which guaranties supply of PPE.
Now we paid money to the bank, but PPE were not yet supplied to us.
Based on “substance over form” we would like to recognise money paid to the Bank as advance for PPE, but KPMG auditors insist on treating it as restricted cash.
Meanwhile, there are other companies which treated such things as advance for PPE (they were audited by Deloitte and PWC). I’d like to know, if there is anything in the standards that could support or disprove our position.
I’ve not found anything clear.
Thank you.
Hello, Sergey!
What is the basis for KPMG’s opinion? And also, where is that cash? Is it sitting in your account but frozen in order to pay for PPE? Or did it actually leave the bank account?
Because if you have a letter of credit which says that the bank will pay the supplier AFTER PPE is supplied to you, and at the same time, PPE was not supplied, that would mean that the condition for paying the cash was NOT MET, so the cash is still yours, but you cannot really use it (= restricted). Substance of this transaction is that the CASH is yours and PPE is NOT yours.
Maybe Deloitte and PWC dealt with the different conditions – I can’t really assess. Hope it helps! S.
It is frozen on bank account in order to pay for PPE. PPE was not yet supplied to us.
At first management wanted to pay advances, but later decided to use l/o as more safe.
KPMG say that for this moment it is rather our relationship with the bank rather than counterparty. The counterparty will not confirm the receit of money, it can only confirm the existence of letter of credit.
But when I pay advance PPE is still not in my ownership and I can treat them as long-term part of PPE.
Many thanks!
After reading that, Sergey, I have the same position as KPMG – as I wrote above. You really did not send any cash to your supplier, but it sits on your account. Anyway, thanks for the question and good luck! 🙂
Thank you very much Silvia for your prompt response.
I will go through it once again and surely I will come back. Mean while please let me know, will it apply same principle for Software assets (IAS 38 intangible)
Yes, basically.
Hi Silvia, Thanks for information.
Please clarify few things.
1. If Assets is fully depreciated in books and still in use . Is it right procedure. As you said you right said there is incorrect estimation of useful life. But what is the corrective action now. Can we do any thing for already fully depreciated assets..
If we follow cost method what would be the treatment in the above case. Please suggest corrective action if we follow the above situation in cost modes. Asset is showing original value against Provision for Dep and WDV showing Zero what would be the value.
Hello, Laxmana. I have just published the newest article about it http://www.cpdbox.com/machines-fully-depreciated-still-in-use/. Hope it helps!
S.
Are professional fees related to contracts formulation for suppliers providing the equipment and suppliers in charge in the plant construction also capitalisable?
Yes, you can capitalize legal fees – they would not have been incurred without the acquisition of this equipment, right? 😉
Can you elaborate more…
???
Hi
Can you give a breif introduction about the application for the fully depreciated assets?
1)What options are available for fully depreciated assets?
2)What are the accounting entries under each method
Hi Poshi, could you please clarify your question?
If the assets are fully depreciated and you are still using them, then your estimate of their useful lives is incorrect. Maybe you should revise your accounting estimates for your other assets that are not fully depreciated.
For all the existing assets, IAS 16 was not applied correctly in the past and if error is material, then it is necessary to apply IAS 8 and restate. S.
You actually misunderstood her question, She asked the treatment of fully depreciated asset that is still in use,
Solution: Asset should be recorded at cost lets say $100,000 with accumulated depreciation of $100,000 so the Net Book Value is 0.
Asset cannot be depreciated further, because 100% cost has been depreciated already in the profit and loss.
Hi Sanjay, I have published an article with the video exactly on this topic here: http://www.cpdbox.com/machines-fully-depreciated-still-in-use/
The article says that in that case, IAS 16 was not applied properly, because the company forgot to revise asset’s useful lives in the previous reporting periods. If as a result there is a material misstatement, then the company should go back and make correction. There is a full video with a case study there – exact step by step process what to do. S.
Apply IAS 8
Hi Silvia,
Thank you for very helpful post and video.
In regard to subsequent measurement an entity may choose either cost model or revaluation model.
Which model would present the useful information for users of financial statements
Hi Olivia,
I think both models can present useful information for users of financial statements – that’s why both are permitted by IAS 16. In my own personal opinion – revaluation model is more suitable for assets that can be traded on the market, because carrying amount should reflect asset’s fair value.
Cost model is more suitable for assets that are used in the production process as depreciation reflects their wear and tear. It’s up to you what you select – but have a basis and be consistent.
Much appreciated Silvia
Hi Sylvia.
As regards pre-producting testing costs:
I’m aware that these can be capitalised, but how are the costs that are capitalised measured ?
Would we account for the costs based on an estimation of material and labour costs ?
Is there an example that I could access somewhere ?
Hi Chris,
what do you mean by “estimation”? You should capitalize only the costs that you have actually incurred and not the costs that you estimate to incur in the future.
If you have already incurred some material and labour costs , then you can capitalize them as your testing costs provided you have a system for allocating these costs to testing (some reasonable basis). Don’t forget to deduct any proceeds from sale of items produced when testing.
Silvia
Thanks, Silvia.
Hi Sylvia,
What if we have 2 parcels of land, one which is in preparation for construction of a building and one which the company has undetermined future use. In the process of excavation of the first land, the company extracted gravel and sold it for let’s say 1,000 CU. Would that 1000 CU be deducted in the cost of PPE? (given that we have amendments in the standard IAS 16)
Thanks for answering!
Hi Silvia,
I have one confusion,earlier I used to depreciate assets as per tax rule but now I changed to depreciate as per Accounting rule (based on useful life ).Tax rule had their one policy to determine rate but now switched to calculate depreciation on the basis of useful life.For this What would be applicable as per IAS 8? Is it Change in Accounting policy or Change is accounting Estimate??
Can you clarify me ?
Hi Suman,
this is typical example as change in accounting estimate in line with IAS 8 – it means you need to account for the change prospectively without restating previous periods. I think there is a video with example related to change in accounting estimate on my YouTube channel, so please check it – http://www.youtube.com/ifrsbox
Kind regards
S.
Thank you for your reply.
It is a worth reading piece of work. Thanks for the effort
>
Dear Silvia,
I possible please help me to solve below issue.
I’m an accountant of an investment company. We do consolidation and have adopted IFRS for the first time from year 2012/2013. In my country (Sri Lanka) reporting period ends on 31-Mar.
Our auditors (KPMG) are demanding one of our subsidiary companies (beer) to record it’s bottle containers under Property, Plant and Equipments which now recorded as inventory. What are the criterias that I should consider in deciding whether they are inventory or Property, Plant and Equipments.
Thnaks
Pricilla
Sri Lanka
Dear Pricilla,
there are more criteria to consider in deciding whether the item is PPE or inventory.
Here, you need to examine how long your company plans to use individual containers. Is 1 container used just for a couple of times? Or can it be used for longer period of time and reused many times? Can you use the same container for more than 1 year?
If yes, then basically containers might be classified as PPE in line with IAS 16, because you need to match costs of these containers with revenues over their useful life.
Of course, this issue requires more information and analysis – but just to give you a hint 🙂
Best regards
Silvia, IFRSbox.com
Dear Sivia,
Thanks a lot for the reply. It helped a lot. I think we will have to capitalise them under PPE.
It is used for a longer period and as per the information I have, it’s a considerable cost.
Again, thanks a lot for the information.
Pricilla
Hi Priscilla:
With regard to your containers in a beer company, you should record it as part of PPE. Deposit value + deferred value bottle bottles and shells, pallets are included to.
Best Regards,
Ric
Thanks for your reply. What about advance payment to Furniture & fitting (Already delivered )? is CWIP?
Poshi, if you are not sure, then try to ask yourself: Who carries the risk associated with the asset? So, if some damage happens to the furniture & fittings, who bears the costs for fixing it? If the partial delivery occurred and you carry all the risks associated with partially delivered furniture, then you have the asset and you should recognize it. I know that in this point, you probably don’t have any rewards from it yet – but then look to your risks. Best regards, Silvia
Hi Silvia
My query is if we can revalue CWIP [in this case a building that under construction and is substantially complete (80%)]. My understanding it that we cant revalue but only check for impairment.
Please clarify. Thanks in advance
Can you please explian me what exactly we can categorized as Capital Work in Progress?
The reason is there is a confusion about advance payments & capital work in progress.
Eg;
1) Advance payment to building construction?
2) Advance payment to Accounting softwear?
3) Advance payment to machine instalation?
4) Advance payment to furniture & fittings?
pls explain what i sthe best area to put above expenses?
Hi there, sorry for the late response. It all depends on the point of delivery. If the partial delivery occurs, you can put the expense as capital work in progress. But if it is just advance paid before any construction is made, well then, it’s advance payment – receivable.
Best regards
Silvia
Kindly provide the reference of IAS/IFRS???
Hi Qazi, what do you mean? I don’t understand your question. Please explain. S.
Hi Silvia,
Do capital work-in-progress (eg. leasehold improvement under construction) qualifies as PPE? Since, future economic benefit is not yet probable?
If not, then what is the required disclosure and which standard deals with capital work-in-progress?
Hi Bikesh,
I would say in most cases yes, it qualifies for PPE, because even if it’s under construction, the future economic benefit is probable (you just don’t have a present economic benefit, as it’s in progress). Also, if you have a control over capital WIP and you can measure its cost reliably – then no problem to report it under PPE.
S.
I m agree with ur point.. please give me standard refrence.
We are building a warehouse on our own company land. For Advance payment done to contractor whether i should do provision for depreciation now or wait till full payment is done at the end of construction and at what rate should i depreciate.. The period of construction is 1 year starting from Mar’17 and our year end is Sept’17
Dear Sameer,
I would not depreciate “NOW”, only when the asset is available for use – and, semi-finished warehouse is not available for use, is it? Please read more in this article. S.
If an Asset is revalued how is the differed tax entry should be passed?
For the property, plant and equipment, the entry for asset revaluation is Debit Property, plant, equipment / Credit Revaluation surplus in equity. The entry for deferred tax related to this revaluation is Debit Revaluation surplus in equity / Credit Deferred Tax Liability.
Silvia, IFRSbox.com
Thank you. I have passed this entry already but had a doubt on this weather this differed tax could effect my income statement.
That entry is correct, don’t worry. It should NOT affect your income statement (only statement of comprehensive income), because posting revaluation DID NOT affect your income statement.
Silvia, IFRSbox.com
thanks for all the videos
very good… thanks.
Nice informative video, I have one question regarding the depreciation method.Can we depreciate a machine based on the actual hours used( depreciation will be charged on used hours only)
Yes, sure you can – it is unit of production method and in my opinion, this method reflects the pattern of usage in the best way.
But this method might not be allowed in tax legislation – so you need to check this. In such a case, you would need to recognize deferred tax.
Hope it helps.
Silvia, IFRSbox.com
Thanks.But one might argue that this is against the principal of consistency, since we will have different depreciated amounts in each year.Do you think so?
Nope. I think it is perfectly consistent with the economic reality and that’s important in IFRS. You are not changing method of depreciation from year to year (this would be inconsistent reporting) – you are just depreciating in line with the machine’s utilization.
And this is perfectly consistent also with revenues derived from machine’s use.
Because if you do not use machine, you do not have revenues – but you also do not depreciate, so it’s OK. If you use machine very much, you charge high depreciation expense but hopefully you produce high revenues from it.
On the other hand, if you depreciate straight-line even if you do not use the machine and do not produce revenues – now that’s problem, because you have costs and no matching revenues.
Silvia, IFRSbox.com
Thanks for your advice.I agree
I disagree because we have to make accounting for share shoulder a not for taxes
Well, I don’t understand your comment… can you explain what you mean?
Silvia
Charging dep based on hours of operation is not allowed. As the Standard clearly speaks about charging dep even if , initially machinery is not utilized to recover full economic benefits , or the production is below normal production capacity. If we charge dep based on actual machinery hours used, it will be a wrong accounting practice . Yes we can charge dep based on normal operating hours.
Dear Jain, I do not agree with the first sentence – you can charge depreciation based on some systematic pattern according to which the economic benefits are obtained (that can be operation, too). In practice, many companies charge depreciation based on actual operation. For example – a car producer operates pressure machine and the pressure machine can produce XY units, then with each press, the depreciation of 1/XY is charged. S.
Hello Silvia. I am a bit confused here. what i understood before was depreciation can be charged based on normal operating hours. If it’s allowed on actual operating hour, wouldn’t it lead to non charging of depreciation if kept idle? Also, there would be no depreciation for assets ready to use but not put to use if we use actual operating hour. Kindly elaborate.
Yes, you understood it well.
helpfullll…
Hello friend i look this and i think your idea is nice!