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,Please help me to solve this matter ,in IFRF 16 ,how can recognize dismantling cost in account,after 5 years building is dismantled
hi.i wont to know ,how can recognize future land clearing & dismantling cost in present & which will pay in 5 years after cost in present & what are the GE pleas help me
Hi Silvia,
I have a question regarding depreciation of land.
– Can land be depreciated? What circumstances are land depreciable?
Also I have 2 scenarios below.
A: If it is a freehold land, do we depreciate it?
B: What if the land is purchased from the government for a period of 70 years? In this case, do we depreciate the land over 70 years?
For Case B, if we are able to sell the land back at market value at the end of 70 years, can we still depreciate this land usable by company for 70 years?
Kindly advise. Thanks.
Best regards,
Doreen
Please help me solve this question.
On 1/1/2011 Ringo began to construct a supermarket which had an estimated useful life of 40yrs. It purchases a leasehold interest in the site for $25m. The construction of the building cost $9m and fixtures & fittings cost $6m. The construction of the supermarket was completed 30/09/2011 & was brought in to use on 1/1/2012. Ringo borrowed $40m on 1/1/2011 in order to finance this project. The loan carried an interest at 10% p.a. It was repaid on 30/06/2016.
Required:
Calculate the total amount to be included at cost in PPE in respect of the development at 31/12/2011.
Hi Silvia,
Kindly assist me on this, our one month vehicle was involved in an accident. it is insured, and insurance company has replaced it with a new vehicle as it was total destroyed. My question is, how do I derecognise it in my books?
Hi,
Would like to ask a question about the Work in progress(WIP) in fixed asset.
If a company allocate a budget for a project (WIP), and there is an expense of the air ticket for the consultant to come and meeting.
The company will charge out from WIP to Fixed asset after the project is completed. Can the air ticket be capitalize?
Please kindly advise. Thanks!
Hi Xue,
there are different opinions on capitalizing travel expenses. If you conclude that the air ticket was necessary to bring your fixed asset to the desired condition and location, then you can capitalize it. I would say yes, as it is a direct cost of your consultant and you normally capitalize consulting fees. S.
How to account for dismantling Cost? what is the accounting entries at first and during the useful life of the qualified assets?
Dear Amjad,
this is a very broad question and it takes much more to respond than 1 comment can provide. There’s interpretation IFRIC 1 guiding us on exactly this matter and simply speaking – you estimate your dismantling cost, put it to present value and you make a provision as Debit PPE / Credit Liability. It’ very very shortened version. S.
My Question is, suppose contruction asset total cost is 2 million . advance of 1 million is charged to CWIP, now on completion when making final payment of 1 million should i take the final 1 million to CWIP and then pass a jv and transfer it to the ASSET account or can i directly charge the final 1 million to asset account and for the advance paid pass a jv to take it out and transfer to asset account. in short is it necessary to show complete CWIP cost (start to finish) and then transfer ?? please reply
Dear Umair,
I think it’s a matter of choice, because the result is the same, isn’t it? But more logically – I would charge 1 mil. to CWIP first and only then transfer the asset in its full cost into Asset account. S.
Hi Silvia,
May I get your help in the following question?
My company spends the cost on an item which qualifies as PPE, says machine. Can I still debit the cost in P&L instead of capitalizing it?
You should not. IAS 16 doesn’t say that capitalizing is an option – once the item meets the definition, you need to capitalize (if it’s material). S.
Hi. I am currently working as an audit trainee. Recently, while auditing a client I came across an issue regard CWIP. Company A wishes to set up an wind energy plant. In order to do so they need to obtain a ‘letter of intent’ (LOI) from the local govt. Energy Dept. after which they will become eligible for setting up the project. To achieve this, they have signed a contract with a consultancy firm (Company B) which will facilitate them in getting the LOI, perform land feasibility study, negotiate tariffs with the local body, liaison with contractors for constructing the plant, etc etc.
The initial award of work paid the B is $750,000, and further payments will be made as contract milestones are achieved.
Now here is the question. The letter of intent was not approved by govt. until one month after the year end date. So, technically the company is not eligible to establish the plant at the year end. However, the company has capitalized the initial payment of $750,000 as a Fixed Asset, i.e. CWIP. Is this the correct treatment or should the amount be expensed out or should it be recorded in advance payment? I am confused, please help. Thanks
If under the PPE notes to the FS, there is a row “others” after “additions” and “disposal” but before computing for the “cost of PPE as at financial year end”, what are some possible reasons for the negative amount under the row “others”? For example, under the leasehold building there is a negative ($250,000) classified as “others”. Thank you.
Regards,
Jolene
this statements true according to ias 16
“Depreciation on additions is charged from the month the asset is put into use and on disposals up to the month the asset was in use”
Please give me ias 16 reference as soon as possiable
Hi Silvia,
I would like to confirm if revaluation of PPE carried out after the balance sheet date could be considered as a post balance sheet adjusting events.
Regards
Naseem
Naseem, it’s non-adjusting event, as the fair value was established after the balance sheet date. It’s hard to say that these circumstances existed before the reporting date, isn’t it? S.
Please give examples of “for rental to others” under the definition of IAS 16.
Hi Silvia,
A question: when I am selling a significant PPE and I have to pay a significant commission to third parties (helping me to find a buyer and proceed with the transaction), shall I treat this commission expense as a part of the deal and decrease my gain from PPE derecognition/sale? Do I need to disclose it also in my FS notes in the section for PPE movement table?
Yes, Vadims, exactly. But, you do not include it in the PPE movement table, as the commission expense does not adjust any carrying amount of PPE, just a gain (in movement table, there are no gains on disposal reported). S.
Hey Silvia
I really appreciate you helping accountants.
I was having an issue to record the expenses incurred for starting a new product under the same company name, can I capitalize such expense? and I f yes then under which head(line item) in the balance sheet?
and one more thing..
we have given advances to our contractors for construction for extending our production capacity.
should I record them in advances, deposits and prepayments or Capital work in progress?
Hi Chetan,
1) it depends on the nature of expenses for the new product. Maybe you should specify what exactly it is.
2) It depends on the agreement with the contractor. Is the ownership/risks and rewards passed to you as they perform? Or at some point of time? I would keep these payments at advaces paid until the asset is passed to my company. S.
Hi Silvia
i was told to research about Property, plant equipment negative intrnational critique with respect to the standard (percived weakness)
How can i start with this research ?
Dear Silvia,
I am currently doing an assignment in uni regarding IAS 16. I am abit confuse and would like to seek your opinion. If the ppe can last for 15 years but after first 5 years of usage the item would affect the product being produce and can only store forfeited product. My question is the useful life for depreciation should be 15 years or 5 years? Thank you!
Hi Yi Bin,
I’m not sure I fully understand. It means that for the first 5 years, PPE is used in the production and then for another 10 years it is used for the storage? Anyway, if you plan to use PPE for 15 years in total, then its useful life is 15 years. However, it does not mean that you have to depreciate it on the straight-line basis over 15 years. You can depreciate it based on its usage, so your depreciation charges do not need to be the same every year.
Thank you for answering my question =D
Hi Silvia
Two questions:-
1) We have paid an advance to a vendor for the construction of some capital items in sep and the delivery / completion of that project will be sometime in feb/ mar next year. Can we show the advance paid in this year under construction WIP in this years book?
2) we have a site with buildings and other furnitures on it. We àre now going to dismantle those old buildings and furnitures and build a new building on it. Can we capitalize the written down value of the old fixed assets alongwith the cost of the new assets?
Hi Zakir,
1) It depends on the contract, but if no partial delivery has been made, I would rather showed it as advances (receivables).
2) You can capitalize the dismantling cost of the buildings, but not written down value of old assets. The reason is that it would be very difficult to say that the carrying amount of old assets is directly attributable to the acquisition of new assets. At least – I have never seen it in practice.
Hi,
I have couple of queries.
1.Regarding grouping of assets:
you mentioned that if one PPE revalues,entire class need to be revalued. Qns:Is there any specific list of class of assets or we need to figure it out logically?
2.When to start depreciating assets?At the point of “put to use” or “eligible to put to use” & what if machine which is being depreciated broke down & shall not be able to use for next 6 months.Should we charge depreciation then or not?
3.Is these 3 methods only can be used to calculate depreciation?:SLM,WDV & units of production
Silvia,
What if, I have reclassified some PPE from Building to Plant and machinery, or to any other head in PPE.
What para of IAS 16 will be applicable and effect & notes are required in Financial statements.
Silvia,
I am having a debate. I have an existing PPE that is working on developing new PPE. For example, a drilling rig, drilling a well. While drilling, the rig requires maintenance (could be preventative maintenance or repair). My question is whether this maintenance could be capitalized? I see how it can be operating expense if we associate the cost to the drilling rig and treat it as subsequent cost. But the other argument would be if we associate it with the well and treat it as an initial cost. IAS states initial cost includes ALL costs necessary to bring the asset to working condition. And since I can’t create the well without repairing the rig, would that mean it is necessary and therefore requires capitalization. Do you have further insight into this question. Thank you!
Dear Josh,
I would not include cost of rig’s repair into the cost of a well as it is a separate asset.
IAS 16 permits capitalizing major overhaul or maintenance cost into the cost of an asset even if incurred subsequently. So if you plan on major repairs, then you can capitalize them and assess whether capitalized maintenance cost has a different useful life from the rest of the rig. (e.g. if you plan on repairing/major maintenance of the rig every 5 years, then depreciate its cost over 5 years). S.
Great work !!! This is really helpful
hi,
i would like to ask, if the payments of the item of Property, plant and equipment were proceeded but the risks and rewards are not yet transferred to the entity. what is the journal entry.
Hi, it seems like a prepayment for the acquisition of PPE, so Debit Receivables/prepayments Credit Cash. S.
If we are replacing an old asset that is fully depreciated – the vendor will remove the old asset and install the new asset. Can the portion of the cost that applies to the removal be capitalized with the new asset?
Hello, I have an interesting question. Let’s say you are constructing a new mine and the project takes several years, and it’s also in a seperate legal entity so there are no other activities earning income. Then this company sells some of the equipments (trucks, excavators, etc.) to get new and better equipment. Does it matter that the company is still in the construction phase? In that case, would the gain/loss on disposal be credited or debited to the project? Or does it not matter, and the gain/loss on disposal of PP&E always goes to the P&L? Thanks for your time.
Hi Vivian,
IAS 16 strictly says to recognize gain/loss on disposal of PPE in P/L.
I want to know what are the ledger entries for Fixed assets received as a gift
IFRS do not specify it, but analogically as government grant, you should not credit the gift directly to equity, but to P/L.
IAS 16 its very helpful, Guys i have a question please assist. how can i know a useful life of Natural gas pipeline.
Hi Silvia,
One more query regarding ias 16 para 41… What does this mean : “by not allowing transfers from revaluation reserve to retained earnings through p/l the IAS implies that such transfers should not affect net profit attributable to equity shareholders.”
My query is: 1) ultimately dividend is paid from retained earnings so what difference does it make.
2) if we credit p/l we will be increasing our net profit and hence we can pay more dividends.
Please clarify thx.
Oh thanks a lot for justifiying otherwise just learning the rule was not making any sense
Regards.
Hi Silvia,
Could you please explain that as per IAS 16 para41 WHY the transfer of revaluation reserve should not be done through p/l but to retained earnings. Also could you please explain the term recycling in detail.
although the rule is written everywhere but reason is not stated clearly…pls explain in simple terms…thx
Hi Warli,
IASB made this rule as the revaluation is not considered revenue generated in the ordinary course of business, but simply as the other gain. That’s why it is directly in equity and to keep the situation as such, you do NOT recycle.
Recycling currently relates only to some financial instruments and it would require more than 1 comment to elaborate.
S.
Hello Sylvia,
Is it right to capitalize the hotel expenses of incurred by quantity surveyors and other professionals involved in the construction of an asset as part of the cost of the asset?
Hi David,
it depends on the contract with these surveyors, but in fact, if their service cannot be provided without paying them the hotel… then well,these expenses can be regarded as the cost for the professional service (which is eligible for capitalizing).
S.
Dear silvia,
am a bit confused to the definition of PPE. Can we capitalise small items like curtains, cushions, storage boxes ,wall clock,flower pots, bag for camera. The accountant has capitalised them under furniture and fittings as they will use it for more than 1 yr. Is it ok? Or are there other factors that we need to consider? Does materiality affect classification? Does the rule apply for both small and big amount?kindly advise.
Anjoo,
you have a definition of PPE up there in the article – once its useful life is more than 1 year and they are used in the production of other goods/services, for rental to others or for administrative purposes, it’s PPE. There’s nothing about materiality in a definition of PPE, but of course, if it’s immaterial and you don’t capitalize it, your financial statements would still be OK.
Now, I’d like to point you to para 10 of IAS 16 – unit of account. So while it would probably be impractical and immaterial to capitalise each single costume, maybe you should capitalise set of costumes as 1 asset. Similarly with furniture – here, you can capitalize set of furniture instead of each individual chair separately. Hope it helps.
S.
Is it possible to capitalize dredging costs ?
In general, yes, but it depends on what you do.
Is it possible to capitalize asphalt works done at a customer’s premises ?
Are they yours? Are you going to use them? Or are they a part of some project for that customer?
Hi Silvia,
can we treat costumes as fixed assets. They will be used in spectacles for use in the business and can be rented.
Hi Anjoo,
sure, if useful life of costumes is more than 1 year, then why not? 🙂 S.
Hi Silvia,
I recently got some manufacturing equipment for nil cost with an original purchase for its seller of $150k – Can I show this as gross cost and gross accumulated depreciation of $150k and NBV Nil or just show on my fixed asset register as nil
Thanks,
P
Hello Silvia,
I have a question. I work in a elevator service providing company. Every year few valuable assets i.e.laptop etc are lost because of hijacking. We usually accounted for depreciation for those lost assets. But at the moment we lost it, our accountant posts it as “Loss on disposal” for the remaining amount if the asset. Is it logical? Is there any other way to show these assets lost as “Unusual Loss”?
Thank You
Hi Masum,
the thing is that IFRS do not specify any “unusual” or “extraordinary” items. Everything must be reported under ordinary activities, so yes, I guess it sounds weird, but it’s logical. S.
hi, i have a problem.
We are a passenger transport company and we use buses to transport passengers. Our depreciation policy for buses is 12.5% (8years). However after 1st five years we have to replace the engine of the bus at a cost of RM2,000,000. so what we are currently doing is that we depreciated original cost of the buses (RM4,500,000) over the 8 years and new engine (RM2,000,000) 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 RM1,687,500 and plus cost of the new engine of RM2,000,000 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.
Hi Silvia,
I just came across your website which is amazing!
My question is related to capitalization of costs directly related to acquisition or construction of an asset.
Would the following be part of those costs when a construction project is contracted to a third party?
1- Salaries of in house engineers
2- Salaries of in house project team
3- Salaries of in house operations team
Further, can we capitalize some of the admin expenses to be allocated to the construction of an asset?
Thank you in advance,
Ahmed
Hi Ahmed,
IAS 16 states that you should capitalise, along with the direct costs, directly attributable costs to construction, including personnel expenses. Therefore, if some work of these engineers, project team and operations team is directly attributable to the construction of your asset, you can capitalise it (it does not matter that the construction is outsourced – if you still incur your own costs, then do it). Just be careful because you cannot capitalise general and admin expenses – so careful about the activities of in house operations team.
i need to know if i required asset for 10000 USD and from my side i put penalty for 1000 to deduct from the vendor as late of delivery so at what amount can i capitalize asset and the accounting treatment of penalty.
Hello,
I have a small exercise about WIP to resolve but I would need some help. Could you please help me?
Costs incurred at 31/12/2011: EUR 200
Estimated remaining costs to complete the project: EUR 400
Contract price (fixed price): EUR 580
Amount invoiced at 31/12/2011: EUR 380
Remaining amount to be invoiced: EUR 200
What is the value of WIP at 31/12/2011?
Thank you very much!
Best regards,
Maxime
Hi Silvia, I know that under IAS 16, if an asset is acquired in exchange for another non-monetary asset, the cost will be measured at the fair value. However, is it measured at the fair value of the asset given up or the fair value of the asset received?
Thanks again!
Daniel
Hi Daniel,
if the transaction has the commercial substance, then the fair values of asset given and asset received should be about the same, isn’t it? Otherwise the transaction has no commercial substance 😉 S.
You have to give priority for the fairvalue of the asset given up unless the fairvalue of the asset recived is more reliable or evident
Sylvia, can u expain following case:
company A damaged assets of Company B while undertaking its own construction works.
Company A hired a consultation firm in order to determine the fair value of loss that it would have to pay.
Should the amount that Company A paid to Consultation firm be capitalized?
Looking forward for your reply,
Hmmm, I don’t think so, there’s no asset to capitalise these valuation costs to. In other words – the valuation was made in order to determine the damages and the amount of provision, not due to increasing some economic benefits of an asset. S.
Hi Silvia.
Question: My company has a fully depreciated big truck, and it is destroyed. If it is repaired (overhaul, new engine) and put into conditions where economic benefits associated to the asset will flow to the entity, the cost of the reparation can be capitalized or it must be recognized as cost.
After the reparation the usueful life will extend to 2 years. The original useful life was 5 years.
Thanks in advance,
Pablo
Hi Pablo,
in this case, I would capitalise it, as effectively, you are adding the economic benefits to the asset. S.
We own a shopping mall. Are malls are treated as investment property. We are contructing a road that will give easy access to our mall and consequently improved footfall is expected. We assume that increased footfall will bring future economic value to our property. The road is being constructed with the permission of the government authority but will not bring ownership rights to us for sure. Can we capitalize this road as part of our investment property? Or as property plant and equipment seperately? Will appreciate if you can provide IFRS references as well.
Hi Simon,
normally, you would capitalise the expenditures for roads as for a separate asset, as they usually have different useful life than buildings. In your specific circumstances, it is necessary to assess who will carry the risks and rewards of ownership? IAS 16 does not necessary says you need to legally own the asset, but if you can control the asset and have future economic benefits, then you should recognise it as such. S.
HI, can you please explain the accounting treatment for a PPE(land) that was once revalued (revaluation surplus taken to Other comprehensive income)but the asset(land) in now disposed at a Profit. do we just account for the profit (based on the difference between sale price and the revalued carried amount)to profit or loss? what about the revaluation surplus in OCI should it be recycle to profit or loss?
If we consider land that cost $10m which is treated in accordance with IAS 16 PPE. If the land is subsequently revalued to $12m, then the gain of $2m is recognised in OCI and will be taken to OCE. When in a later period the asset is sold for $13m, IAS 16 PPE specifically requires that the profit on disposal recognised in the P/L is $1m – ie the difference between the sale proceeds of $13m and the carrying value of $12m. The previously recognised gain of $2m is not recycled/reclassified back to P/L as part of the gain on disposal. However the $2m balance in the OCE reserve is now redundant as the asset has been sold and the profit is realised. Accordingly, there will be a transfer in the Statement of Changes in Equity, from the OCE of $2m into RE.
Hi Junior,
I think you answered your own question perfectly 🙂
You are right, no recycling via P/L, you just remove “redundant” revaluation surplus by making direct reclassification within equity. S.
Dear All
Can any one tell me how to handle the below situation
We are a hospitality company and we outsource our restaurant to an outsourcing company.The outsourcing company have a condition that we will provide them furniture and fixtures all and they will pay us for that when they will leave the restaurant but they will deduct the depreciated amount during the period and they will take other furniture with them. But i need to clear that if any damages they made to the furniture during this tenure they have to pay us for that as well other than the net book value of the furniture. They need any standard proof from ifrs for that . so any one can explain how to treat and from where i can get the proof of standard.
Thanks
Hi Silvia,
What is an appropriate discount rate to use to when there are deferred payment terms? We are buying an asset, paying 10 annual installments. Would a cost of debt or a risk free rate (like under IAS 37) be more appropriate in your opinion? If we were to pay the full amount today, we would likely take out a loan to finance this.
Thanks for your help.
Kind regards,
Sarah
Dear Sarah,
in my opinion, risk-free rate is not really appropriate. I would rather go for interest rate on similar instrument on the market, e.g. similar debt or loan. This is also consistent with IAS 18 for measuring deferred revenue (thus your counterparty should do the same, just vice versa).
Hope it helps!
S.
Hi Silvia, can you plz tell me how interest is accounted in case of money borrowed to finance a PP&E?
Hi Usita,
try to look to IAS 23 for the closer guidance, but in general, if your PPE is a qualifying asset (in most cases, it is when it takes a long time to construct), then the interest should be capitalized. However, when you purchase the asset with the loan money and start using it, then you should expense this interest. S.