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:
JOIN OUR FREE NEWSLETTER AND GET
report "Top 7 IFRS Mistakes" + free IFRS mini-course
Please check your inbox to confirm your subscription.
533 Comments
Leave a Reply
Dear Sylvia,
after the construction of the building was finished, our company was not satisfied with the work performed in total, so the constructing company reduced the price of construction. The construction was over in previous years, and the price reduction came during the 2016. What should we do? Decrease the value of the building? I assume, no revenue should be recorded?
Thank you!
My business has a choice of purchasing a used aircraft in great condition or one that could use a paint job and is well behind on its routine maintenance. If I get the good condition aircraft, it is obviously an item to capitalize. If we buy the poor aircraft and have a company catch up on the overdue maintenance and paint the aircraft, am I required to expense those costs or can they be rolled into the capital value of the asset
Hi Mike, you can capitalize. S.
if a company purchase the part of an asset which do not increase the efficiency/capacity of the asset. how should that be treated? suppose these parts value 30% of the net book value of the asset. Should they capitalized?
Dear Faizan,
you should capitalize subsequent expenditure if it’s probable that the future economic benefits will flow to the entity and its cost is reliably measurable. So there’s no criterion “to increase the efficiency/capacity of the asset”. Yes, it was there some years ago, but not anymore. It means that if you are replacing major parts, or performing some major maintenance, then you should capitalize. Day-to-day servicing should be expensed. S.
Accounting treatment of demolition cost and net book value of Property at the date of demolition?
Hi,
If a company shares the cost of constructing an asset (50% each) with another company, of which both will derive economic benefits for use, who capitalises the asset? Do each company capitalise only 50%?
Basically, yes (if they share control of that asset).
Hi Silvia,
I have a question to legal cost incurred during a plant construction project by the general contractor with a subcontractor. Are those legal cost forming part of cost to be capitalized.
A Company x has ordered a complete factory with a general constructor. The general constructor is involving other suppliers as subcontractors by ordering specific works with them. One of the subcontractors has difficulties to supply in time and in full which leads to a legal claim which incurs legal cost to solve the case. This legal cost are invoiced as part of cost of works from the general contractor to the Company x. Are those cost forming part of cost to be capitalized by company x for the assets deliverd?
Thank you for your Support.
Best regards
Ulli
Hi
What are fundamental differences between ias16 and ias40?
thanks
Hi Boakye,
I think this article would explain it. S.
Hi Silvia
My client installed a ETP plant for water treatment it has lot of component like piston pumps,pips etc. He capitalised all of component as ETP (Plant and machinery).I am confused that he should do component accounting. I want to know component accounting is based on life of assets or cost of assets
Hi Chaman, sure, you are right, I agree, especially if these components are significant and have different useful lives.
Hi Silvia
I have a client that has a house that he bought for R500 000, he demolished the house to build a Guest house, which will probably be investment property.
1. Would client be able to impair/fair value adjustment on the house or should be treated as part of the cost?
Dear Tony,
IAS 16 requires that the building and land should be classified as two separate items (IAS 16.58). However, if your client wants to redevelop the land and an old house is an “obstacle” on the land that needs to be removed, then it is appropriate to allocate the full purchase price to the land. Also, it is appropriate to consider demolition costs as attributable to the costs of land. Many developer companies do it this way.
Hope it helps S.
Hi Silvia,
The company did a re-fit at one of its offices, and this cost was capitalised as fixed assets. Years later, this particular office is now no longer in use (colleague were relocated elsewhere) but with lease still running. Should this re-fit be disposed as the asset no longer has future economic benefits at this office and it’s not transferable (the asset are not fully depreciated as the expected useful life is the length of the lease)? Any reference to IAS 16 that the company can use to justify the disposal?
Hi Irene,
yes, I think you should derecognize this asset, because no future economic benefits are expected – and that’s 100% sure as you relocated. Reference: IAS 16, paragraph 67(b)
hi,
have any time period is determined in standard of work in progress to fixed asset. i having a client which one of building is coming in the books as work in progress since last 5 years and no further work is doing because of insufficient finance.
what is the standard say about this scenario? please guide me.
Hi Syed,
then your client should test this asset for impairment under IAS 36, because there’s a clear indication that an assets carrying amount can be lower than its recoverable amount. S.
IF THE COMPANY DOES NOT WANT TO SALE THE ASSET AND ONLY DERECOGNISES IT, HOW CAN IT BE SHOWN IN BOOKS TO PROTECT THAT ASSET FROM BEING THEFT ETC. IN THAT CASE CAN A PROFIT OR LOSS BE RECOGNISED.
Dear Majid,
once you derecognize the asset, then it’s no longer in your books. But maybe if the company still wants to hold the asset (protecting against theft is an indicator), then why derecognize?
Hi Silvia,
Thank you for your valuable comments.
One thing that i can’t find a written statement about it, is the Advance payments for PP&E as the i found a couple statements that says it should be under PP&E section but with a separate line (advance to pp&e) as for the “Substance over Form”.However in my opinion it should be classified under non-current asset but not under PP&E section.
Can you please advise with a written statement/standard to justify the above.
Thank you in advance.
If an asset with book value of 100 is revalued in an accounting period to 150 and the same asset is sold in the same accouting period for 200. What should do with gain? 50 in OCI and 50 in income statement? or 100 in the income statement? IAS refernece?
Dear Moazzam, to be absolutely precise, you would first revalue an asset via OCI (50) and then book a profit from its sale (50). In this case, you should not forget to transfer revaluation surplus to retained earnings (Dr. Reval.surplus/Cr. Retained earnings). S.
Thankyou Silvis M. One thing which is in my case distrubibg me. In a same accounting period, both revlaution and sales was done but In income (profit and loss account), the effect was 50. in case no revaluation was there, the effect was 100. Normally profit for the year is a major concern for sahreholders. But in this was we have diverted some of the gain on sales of assets towards OCI.
Hi there,
My question regarding Capital Work in Process,
Some Property was under construction on our land at that time we were recording all the expenses and payments for that project to “Capital Work in PRocess”
Now Building construction work is completed. and Building is now under our possession.
Please let me know the accounting treatment of this as per Standard
Dear Abbabva, if the work is completed and your newly constructed building is available for use, it’s time to start depreciating it. Then you’ll be fine. S.
Hi there, I’m currently busy with a dissertation on IAS 16. Can you maybe please help a bit with positive and negative critique regarding the standard? And also ideas on how the standard can be improved.
If you can maybe please just help with pointers on these critiques it will help a lot.
Thank you.
Please advise about the following two items can be capitalized or not
1..Loss on exchange if purchased from foreign country
2… Interest on loan if borrowed for this specific purpose
thanks
Hi there, quick question. So in a state across different orgs PPE is often transferred by State allocation statements.
Question: If 50 vehicles are transferred from org A to Org B (remember they prepare separate FS) then Org B should record this vehicles at WDV in books under cost or should they record full initial cost and full Acc dep existing at the time of transfer? Overall impact is Nil but impacts the disclosure of PPE in FS. Appreciate if you could quote the relevant section of IAS 16 in your response.
thanks.
in case additional spares are given with a Machinery what time shall it be capitalised?(Ex: one spare is already fitted in and another is given in addition for use say after a while) immediately or shall it be treated as inventory as on arrival and then capitalised on usage?
IN PPE what is the meaning of initial estimate of the costs of dismantling, removing…..etc.
Suppose I assume that such cost is 50000 to be incurred after 10 years. What is the accounting entry today
Dear Hemant,
not an easy question 🙂 First, you need to discount the cost of 50 000 to the present value and then account for a discounted value as Debit PPE/Credit Provision for dismantling of assets. Each year, you need to unwind the discount (charge an interest) to the provision: Debit P/L-interest charge/Credit Provision. S.
Hi Silvia
What about gain/ loss in exchange? I get it that where there’s commercial substance, there’s no gain/ loss. But what if there’s no commercial substance? do we take the gain/ loss to P&l
Hello Silvia,
Could you please advise with this issue.
For example:
Asset is recognized at 100,000€ in the books of the Bank 01/01/2014 and is amortized during 10 years.
Let’s say that for Finrep it is valued according to the Fair value method (IPR)
This means that for BEGAAP on the 01/01/2016 the carrying amount is 100,000 – (2* 10,000) = 80,000 but according to the Fair Value is 95,000.
What happens when the asset is said to be transferred to PPE in 2016 under the cost model. Do we have to account an amortization of 20,000 on top of the 95,000?
Thanks for your feedback
Does the residual value of property, plant and equipment have to be determined if you use IFRS for SME’s
Hi Silvia.
My client received a donation of animals that can be classfied as PPE. What is the credit entry for the entity to recognise these animals?
Hi Gerry, if it’s indeed PPE (and not biological assets under IAS 41), then it’s Debit PPE/Credit Deferred income (grant). It strongly depends on who the donor of animals is – is it some governmental agency? In this case, the entry is as I showed you. For more info, please refer to this article. S.
A company received free of cost generators … These are used generators. what should be the accounting treatment?
Hi Maria, IFRS is silent about accounting for items received for free (from entities other than government related), but in most cases, the accounting treatment is often similar. You can book the generators in their fair value: debit PPE/Credit deferred income and then, you depreciate generators over their useful life and recognize deferred income in profit or loss accordingly. You should not book the receipt of generators directly to equity. S.
Dear Silvia,
Our Audit Client is a company that sells agrobased commodities, they purchased a vast area of land to cultivate-at the end of the financial year the land is’nt cultivated(harvest period has’nt arrived yet)-is the land a capital work in progress?
Dear Jeyam,
it does not matter on the classification that much, as you will still present the land in property, plant and equipment. If you ask due to depreciation of a cultivation, then it should start when the cultivated land is ready to use. S.
Dear Silvia,
Thanks…so is the land a depreciable asset at year end already, as the method of irrigation and crops to be harvested have determined already before year end
Hi Sylvia.
One of my friends has several investment properties and is in the process of acquiring more. To this end, almost the entire cost of a property has been paid before the year end, but title has not yet been transferred. I am not sure who bears the risks at this point in time. How can this be treated in the books?
Dear Madhavan, it also depends on who has control over the property. If it’s not your client and control passes together with a legal title, then I would treat the amount paid as some prepayment. S.
If we purchased a plant and it was available for use on 01.01.2015 then we determined the useful life to be number of units produced. but in the same time the machine was idle till 31.12.2015.
I know that we should charge a depreciation as the machine was fixed and ready but how can we charge a depreciation in this case as there is not itmes produced ?
Hi Khaled,
please read THIS ARTICLE, maybe it will help. S.
Depreciation on additions to property, plant and equipment is charged for the whole year in the year in which an item is available to use while no depreciation is charged for the year in which the item is derecognized.
If a company adopt above policy and charged depreciation on month basis not on whole year is this treatment is correct?
Dear Hasnain,
I would say the second treatment is more appropriate for IFRS, because it reflects the pattern of asset’s usage in more precise way. S.
what are the perceived strength regarding PPE?
thank you.
Hi Silvia,
Suppose a revaluation is done as at 25th May 2016 for company assets. Can we incorporate the revalued values in to 2015/2016 Financial statements ?? As 2015/16 Financial period ends from 31st March 2016 i feel like we cant take it in to 2015/16 Financial period. Please advise me
Thanks
Need your help with the following directly attributable cost :
a) repainting cost for a warehouse – expenses?
b) 3 years fire insurance for the purchase of building – expenses?
c) material cost £200 with refundable VAT £50. – cost = £150?
d) 5 years maintenance contract – expense?
Hi Silvia,
I work within the retail industry and have a question regarding assets that are being constructed, which are then sold to a franchisee. Under the main company, would these assets be classified as Fixed Assets (Assets under construction) or Non current assets held for sale? The Franchisee’s are considered a separate legal entity for tax purposes but are consolidated for accounting purposes. Once the asset is sold to the franchisee – the franchisee would record it as an asset and start depreciation.
Hi Silvia
we are in our company currently having a huge debate as to what is meant by direct costs in reference to employee costs. If you could explain as to what is meant be direct costs in reference to employee costs, what kind of employee costs are considered as direct costs for capitalization as part of assets and also example of any costs directly .If you could please explain the above in reference to elements of cost as per IAS 16, 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. Here if you could also explain as to how to determine direct costs.
Thanking you as always
Sonam Choeden
DGPC
Bhutan
Dear Sonam,
I can understand your concerns. Directly attributable practically mean that these costs arise directly from the construction/acquisition of an item. In other words – they would not have been incurred without that asset. For example: site workers, in-house architects, surveyors, but also salaries of production supervisors (if that supervisor supervises a construction) apportioned on some reasonable basis.
On the other hand, costs not related to a specific asset cannot be capitalized, for example: general management salaries, accounting officer salary, selection of site costs, etc.
I think that some items of costs need to be assessed individually.
Kind regards, S.
Thanks Silvia
Dear Silvia
The confusion is mainly on costs related to specific projects. For eg construction of hydro-power power projects. For the construction of hydro power project , we would have formed separate management , recruited accounting personnel,HR and ADM personnel etc, can we consider these costs and any other costs incurred during the construction phase as direct cost and capitalize as part of assets since those costs would not have been incurred if there was no construction.
Thanking you for your continuous support.
Sonam Choeden
Bhutan
I understand. However, you can’t really capitalize management, recruiting, HR and admin personnel, even if the purpose of your company is just to build 1 asset. These expenses are business expenses and simply do not meet a criteria for capitalizing (IAS 16 explicitely prohibits certain types to be capitalized).
It’s analogy to a company which was set up to develop more real estate projects and sell them. They also cannot capitalize their own admin, marketing and other expenses to these buildings. And let me add that without the planned real estate projects, the company would not have been set up and these expenses would have never been incurred. Hope you get my point here.
If we treat advance paid before any construction is made as advance payment – receivable, then does this receivable qualify to be treated as a financial asset under IFRS 9?
Dear Silvia
What are the requirements for property, plant and equipment IFRS standard??
Rolland, I think that the whole article is about it, so please read it. S.
Dear Silvia,
When using Revaluation model for PPE do we have to take into considaration the estimated selling cost or not?
Thanks!
Dear Silvia,
When we use the revaluation model, or fair model under IAS 40, when the professional valuator tells us that the FV of property is say $50.000, but the company is obliged to pay VAT when selling the property – in books, should the company record gross FV or VAT excl?
Karol
Dear Karol,
interesting question. However, are you sure you will NOT sell to VAT payer?
In fact, both standards refer to fair value under IFRS 13, not the fair value less cost to sell – in your case, I guess, if you sell to non-VAT payer, then your net price should be before VAT. But the standards are as they are – therefore, I would go for fair value. S.
Dear Silvia,
Thank you for your response. I am not in this situation, I am just wondering if the fair value should include VAT.
E.g. the Company buys a property, and records it at historical cost (so the value is net amount taken from invoice), and it looks like at the same day, the Company can say “ok, we revalue, because FV is 20% higher [VAT tax rate] – this is what we paid today”. Would it be ok with the standards?
the accounting treatment of Capital working in progress for a ceased contract?
I have a question regards the cases when you buy a fixed asset and receive extra one for free…how should it booked? Fair value? Estimated?
Amira i think it should be booked at fair value
dr Fixed assets
cr Other income
Hi,
I need help regarding the machinery which is not yet installed but it is in place of the company. In financial where should I will show, and what about interest either it will be part of capitalized asset or not. One machinery has been mortgaged against the loan received from bank for purchased of this machine.
Hope u all understand my question.
Thanks,
Is Input VAT on Purchase of PPE can be capitalized as part of the cost when the said company cannot claim the said input VAT since it is VAT Exempt company? What provision in the standard to cite in order to support the assertion?
hi
please i want to know if IFRS allows rent and depreciation to be charged on asset own by the company . please i need a fast respond
Hi Silva,
My company has a piece of land and intends to build a factory building. Can property tax incurred on the land be capitalised as cost of fixed asset during construction period?
Hi Kelvin,
in most cases no. It’s an expense of the current year. S.
I also have the same question. Do you have any supporting document or news that could explain and help me understand the reason?
Vivian, the main reason is that the property tax is usually paid every single year and it relates to the holding of the land and not directly to its acquisition. However, if you incur some initial tax, such as “registration tax” or something similar that is paid solely at acquisition, then yes, you can capitalize it.
Hi.
Can a CWIP be sold? Say I have a building shown under CWIP for 500K since there’s still some pending work to be done. But I have a buyer who’s ready to buy it at its present condition for 550K. Could I sell the CWIP building without having capitalised it? and also record the necessary profit on sale of asset?
Hi Silva,
I work for an education institution whose major is in early years,
The company acquires books and all.
The question is that can i classify the books and educational materials as part of PPE. To me the standard said for an to be classified under IAS 16, it should be measured reliably and must be capable of bringing future economic benefit to the entity.
Also purchases for this asset were made from a personal account but the asset was meant for the company. How do i effect this transaction into the company’s books as the asset bears the name of the company?
Please i need your opinion on this…
Dear Silvia,
I just need a small clarification regarding the initial insurance cost. The insurance amount that we pay when procuring the vehicle is essentially a cost that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating. So I am capitalising this cost. From the next year, the insurance cost will be treated as a revenue item (taken to P/L). Is this approach in line with IFRS? Please confirm. Expecting your reply.
Thank you:)
Dear Jai,
you can find differing opinion about insurance. In my opinion, if that’s absolutely necessary and you can’t really acquire the asset w/o insurance, then OK, capitalize the cost, BUT – depreciate it separately from the rest of an asset over its useful life – i.e. over 1 year. The reason is that the insurance covers just 1 year and it’s not appropriate to depreciate it together with your asset over asset’s useful life.
S.
Dear Silvia,
I want to ask one question.
Can expenses of subsidiary be charged in parent financial statements?
Dear Silvia,
I want to ask if my company purchased a car near the year end, say Dec 20×1. We received the car before year end and booked according to the quotation (i.e. Dr. PPE $100 & Cr. AP $100). However, next year, the vendor offered a discount and eventually, the car only costed $80 (a $20 discount). I booked Dr. AP $20 & Cr. PPE $20 in 20×2. The problem is, how should I present this movement? In the PPE note to the financial statements, it appears impossible to revise the cost b/f. So I can only adjust through addition or disposal. Which one should I use?
Dear mars,
I guess this would not be material for the financial statements of the company, so I would simply make a cost correction in the current year (20×2). S.
we ordered a customized manufacturing line and is required to pay a 30% down payment after contract signing. what is the correct treatment of down payment? Is it construction in progress or an Accounts Receivable?
Susie,
this depends on what the contract says. But if that’s just an up-front payment and nothing has been delivered yet, it’s simply an advance payment or a receivable. In some countries, this is however shown right after PPE.
Dear Silvia, if we would make a down payment for an asste you described above that in some countries it is shown right after PPE. Does this mean that a separate category like other long term non financial assets? or as an advance payment for assets and included then under PPE category? Thanks for this clarification
Can we capitalise the rent during a renovation of an area of the building, where the building is on long term lease/rental agreement. What is the treatment as per IAS 16 on this case. The building was constructed by Lessor and lessee is using the building to carry his business. The lease term is around 25 years. The building is not capitalized in the books of lessee. But improvements are capitalized. Under such circumstances can lessee capitalize the rent during a renovation of a part of the building.
Hi Silvia
If we overhaul an asset and replace a part of it, we then derecognise the part replaced.
Do we depreciate the new part separately or do we tie its estimated useful life with that of the existing asset?
BR
Toyin
Toyin, it depends on what you plan to do with the depreciated part, but basically yes, you can depreciate it separately. Its useful life then depends on several factors, like: is there going to be the next replacement and when? Are you going to use this part until the end of asset’s useful life? Can and will you use this part after the end of asset’s useful life?
S.
Plz advise how we can test work in progress for impairment?
Scenario:
Making a building to sell, 50% is completed!