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…is it correct to capitalize the dimantling cost of existing walls and fixtures while renovating an existing office layout? Thanks.Rashmi
I am auditing a Religious Organization. A temple and other associated structures are being constructed with funding from the state. The organization is managed by elected Board members from the community for a term of three years. As the constructions of the buildings take more than the three year terms the decision of one Board varies with the succeeding Board and the certain parts of the temple are demolished and design changed involving huge amount. The head of the state commands the demolition. What should I do with the cost of construction and the demolition?
best regards,
BL Gurung
Hi
I am buying a manufacturing machine of concrete products in Germany, and I am based in South Africa.
Do I capitalize the import duties and clearance cost incurred, if so how do I go above doing that?
Many thanks
Dear Silvia,
I have a question regarding the prepayment of construction work. I read your article about “Accounting for Prepayments in Foreign Currency under IFRS”, but it did not really answer to my question.
I am responsible for the accounting of a multinational company in telco sector and I was also responsible for this area in an other multinational company a couple of years ago. I see two different reporting rules in these companies (the prepayment is part of CAPEX in one case, but in other case it is reported under short term debts), this is why I am asking.
In telco specific construction contracts usually there 3 milestones: design, provisional acceptance and final acceptance. The contract and the milestones include hardwares, software licences and implementation cost. The risk and reward of hardwares passed to the customer at the provisional acceptance, and the customer will be entitled to use the licence at the final acceptance. In normal cases the CAPEX spending (Dr PPE – Cr Creditor/Cash) should be recognised at the relevant acceptances. The issue is that we should pay much higher amount at the dates of acceptances than the delivered services and hardwares. For example we have to pay 65% of the hardware value at the design acceptance, however the risk and reward will be passed at the next phase. The implementation cost is peanut compared to the hardware cost.
Can you please help me how we have to account the hardware, software licence and implementation cost at each milestones? Are they part of CAPEX? How we have to handle the not earned part of the milestones (kind of prepayment)? Is it should be reported as CAPEX or under short term debt?
Thank you
Dear Silvia,
I have a question.
One of our client purchased a Motor Van to use in the business (IAS 16). After 4 months the Motor Van was completely destroyed in a car accident.
My question is: How to treat the loss in value of the car. As an impairment or as a disposal?
Hi Marinos, if the car is totally destroyed and you cannot sell any part of it (for spare parts or something like that), then just derecognize it. However, if you think you would obtain at least some cash from the sale of some parts or so, then just book the impairment loss (because in this case, you would expect at least some economic benefits). S.
Dear Silvia,
I would like to ask regarding advance payment paid to the contractor for construction of asset which is paid before any construction is made but will be repaid by the contractor in a form of deduction to future interim payments of each milestone until the completion of construction. Currently, the construction is at milestone 2 but the amount of advance payment is already recognized in full in construction-in-progress account. Thus, could you please kindly advise on the accounting treatment of this advance payment including basis with reference to applicable standards? Moreover, whether there’s any relation as to whether this advance payment qualifies as a financial instrument?
Hi Opuntia,
I think this article will fully respond your question. S.
Dear Silvia,
The article specifies the delivery of PPE but the case is construction of asset. If the accountant argues that this advance payment is also one of the milestones since it’s also one of the costs of bringing the asset to its current location, etc. So your advice is still to treat this as prepayment?
Thank you in advance for your reply.
Is it okay to group assets with different useful lives in under the same class while disclosing them in the financials and computing depreciation
Hi Jacque, yes, for presentation purposes it’s OK as soon as you depreciate them correctly by their useful lives. S.
How to account for the loss on exchange of assets without commercial substance? It should be recognised the loss or not recognised? Because I found some textbook which mentioned that the loss should be recognised immediately (maybe due to prudent), but another textbook say it should not be recognised like the gain. Which one is correct?
Thanks for your help
Hello Silvia, I have a question regarding land and building. According to IAS 16 they are reported separately. Is there a case when land is capitalized in cost of building? I mean, for example, from 100% of land, 20% is used for construction of a building, and the remainder is free of buildings. That part (20%) should be capitalized or not? Please, provide guidance regarding acquiring land for construction purposes. Building is used for administrative purposes so IAS 16 should be applied. Thank you in advance.
Dear Silvia
We have to undergo integrity testing on some of our infrastructure to determine whether it warrants refurbishment, or if we should demolish and re-build entirely.
Can the integrity testing costs be capitalised?
Hi Susan,
I would say no, this should not be capitalized, because this testing cost is not directly attributable to bringing the asset to its location and condition necessary to operate. As I understood this testing cost should merely help you make some decision, but not to test whether the asset is capable of full operation. S.
Thank you, Sivia!
Hi Mira, can we capitalize as PPE pedestrian way built for office administration near the office which we take under rental?
Yes, and then depreciate over the useful life or rental period (whatever is shorter).
Hi
Can the cost of disposal of an asset be capitalised to the carrying value of the asset?
The carrying value of the asset is nil but there is a cost to dispose the asset. There are also no proceeds. So this will be a loss on disposal. But can I capitalise the cost of disposal? If so, do you mind pointing out in the standard as i cant find it?
Thanks
Dana, you can capitalize the cost of disposal only if you make this disposal to remove obstacles and to prepare the site for the new asset. Otherwise no capitalization, but in profit or loss. S.
Good day Sylvia,
My Company owned some buildings for over 10 years now, one of which had to be demolished because of deterioration. The land is now converted into a carpark.
My question is should the demolition costs be capitalized or expensed. We are planning to rebuild our company headquarters in the near future where the carpark will no longer exist.
Can you point me to the standard to support the answer please.
Thanks.
Hi Karen, removal of obstacles can be capitalized as it represents the indirect cost. S.
what are the recommendations to improve ias 16
Hi Silvia, could you please advise should we capitalize bank interest generated by the fund deposited by company on its bank account? thank you
Hi Silvia M.
I Have a confusion over whether Depreciation of PPE used in the construction of new plant can be capitazed into CWIP or not.
my question is if we depreciate the PPE to zero and capitalize the same into CWIP, We will depreciate the same asset twice when CWIP is transfered to new PPE
Hi Rasel Mia,
yes, you can capitalize it. And no, you will not have a double depreciation charge – the reason is that if you capitalize PPE used to build a plant, that depreciation charge is not recognized in profit or loss, but in the cost of a plant. And, because you will derive economic benefits from the new plant for many years, it means that also PPE used in its construction brings the economic benefits for many years after its depreciated to zero. S.
Dear Sir/Madam,
Thank you for your time. I am currently working in an audit firm as an Audit Manager. Recently, I faced an issue that require view, the issue is as follows:
A land and apartment development company bought a land for sale by way of their regular form of business (i.e. to sale land to customers) at $10m. However, after the purchase of the land they decided to use the land for their own business purpose and so they transferred the land from inventory to Property, plant and equipment. After a few years they revalued the land and thus a revaluation reserve was created for the revaluation surplus. Now, after few more years the company decided to sale the land as their regular form of business, so they transferred the land back to inventory at its original historical cost at the inception at $10m (as inventory is measure at lower of cost and NRV) and after the transfer they sold the land to a customer and recognised the sale and cost of sales and profit on the sale in the statement of profit or loss and other comprehensive income.
Now, I require your assistance on the following:
Is this final transfer of Property, plant and equipment to inventory possible under IAS/IFRS?
Can the profit on ultimate sale be recognised in the statement of profit or loss and other comprehensive income?
What will happen to the revaluation reserve that was created, if the asset is sold as is the case?
Please help me out on this issue. Looking forward to your reply.
Hi sylvia
Good day
where to charge the depreciacion of building under revaluation model, debiting OCI or debiting to profit or loss
thanks
my client is constructing a building for operational use in two phases. in current year, one portion of the building would be operational and other portion would continue to be constructed. My question is, the portion which would be operational at the end would classify as Fixed Assets or continue to disclose under CWIP? Because its being constructed as a single building but my client wants to start the operations in the constructed part of building.
How to account for new asset replaced in bartar trade with additional consideration of PKR20,000. recognition and derecognition
i have a question regarding IAS 16 that
Can we charge depreciation relating to factory machinery or plant into the cost of sales/cost of manufacturing?
Hi Silvia,
In case if a company has received an escalation claim from the contractor for overrun or delay of a capital project, whether that escalation claim should be charged to P&L or sholud be capitalised?
Hai Silvia,
Please explain the accounting treatment of the following,
1. A plant costing $10 million with a useful life of 5 years is used but will cause an environmental damage and to be dismantled at the end of its useful life (5 years)
2. The license to operate the plant is given to a third party.
3.The costs of the restoration works is $8 million (discount rate of 8%)
The environmental provision has been accounted for except the finance charge.
The prevailing market interest rate is 8%.
Hi Andrew, I think the treatment will be similar as described in this article. S.
Many thanks
My company purchased a vehicle valued 100K. Supplier has issued an invoice and payment terms are 25% down payment and balance is payable in six installments by issuing Post Dated Cheques of 12.5K each.
Asset will be available for use after two months as it takes approximately two months for registration and additional work.
keeping in view the above scenario how the down payment and additional acquisition cost will be accounted for.
It depends on when you acquired control of vehicle, i.e. when the vehicle was handed over to you. Until that moment, you should recognize just some advances paid within the receivables. S.
Hi Silvia
I understand IAS 16 allows two accounting treatments for the subsequent measurement of PPE. What if an entity measured their PPE from cost to fair value (using market value), then after few years decided to change from revaluation model (due to inability to obtain reliable estimates for the market value of PPE) to cost model. Also IAS 16 provides no guidance as to the above circumstance. I wonder if the entity is allowed to change the measurement basis under the interpretation of IAS 8. Appreciate your thoughts on this.
Hello Silvia,
I hope you are having a good time. I really enjoy your articles on IFRS and like the way your present them with so much of simplicity. I have one query in IAS 16, In IAS 16 it is written if we use PPE for rental to other then it will be covered under IAS 16, but IAS 40 says the same thing that if we use land, building or equipment for rental purpose then it will be covered under IAS 40. Could you please clarify me in this regard.
Which fixed asset category should sea containers (20 ft. and 40 ft. containers) be placed? What’s the usual estimated useful life used for such containers for the purpose of depreciation?
Hi Slyvia,Here is hypothetical situation,suppose that particular PPE
are designated as Assets held for sale and they are eventually disposed of but some time later after the dipsosal year ,some costs arise that would have ordinarily been capitalized had the assets been existence.How would one go about accounting for such costs?
Carol, this would be expensed in profit or loss. These costs do not represent an asset as such and cannot be attributed to any other asset (as the assets were disposed off).
Dear Silvia M.
In my case, the company is selling the PPE after five year to a vendor. The vendor is not giving any residual value to the company but allowing concession in prices for its services over the five year period. My understanding is we would record services at original cost . The difference between services recorded at original cost and actual discounted amount paid for 5 year will be booking a liability as advance payment received for sale of ppe. This liability will be eventually set off against the receivable in respect of PPE at the end of 5 year. Please advise
Dear Silvia,
Could you please explain what is The Modified Accelerated Cost Recovery System (MACRS) and is it allowable as per IAS-16?
Hi Silvia When does one depreciate an asset over the remaining useful life or over the total useful life ? Especially when based on straight line method of depreciation.!
Hi Abix,
over the remaining useful life that is determined at initial recognition. S.
I have a question about how to register buying new kitchens in real estate investment units is this going to P&L or Balance sheet
Dear Mohamed,
in my opinion, it is a capital expense and you should recognize the cost of new kitchens in the statement of financial position (separately or as a part of the units, but then depreciate them separately if they have different useful life). Don’t forget to derecognize the carrying amount of old kitchens. S.
Hi Silvia,
A company entered into a “contract to sell” with another company wherein the company will acquire a land which shall be paid in installment for 5 years. During the year, the company already paid 3 installment payments equivalent to 23% of the total purchase price of the land. The total purchase price of the land is inclusive of 3.5% interest per annum.
Contract to sell states that the ownership shall be transferred to the company only upon full payment after 5 years. However, upon default of payment, the contract shall be terminated wherein the amounts previously paid will be considered as “rental payments (since the company is already using the said land for the construction of its warehouse).
Is the land capitalizable as Property and Equipment even if the transfer of ownership is only upon its full payment (after 5 years)? Based on the recognition criteria, it seems that an economic benefit will flow to the company due to the usage of the said land.
Thank you and God bless!
Should the demolition cost of old asset be capitalised or expensed?
Capitalized into the cost of a new asset.
Hi,
I have a problem please help me out.
This company won a contract to buy the existing houses for Police & demolish due to a construction of road which is going through that site. Therefore this company bought those building, demolished and moved them to another site. There substantial amount involved in demolishing the building, such as labour cost, machine hire cost, fuel etc.. Please advise whether this expenses be capitalised or no…
Yes, in general, expenses to remove obstacles can be capitalized. S.
Hello
I have a few questions regarding the International Accounting Standards of Property,plant and equipment.
-what are the positive international critique with respect to the standard?
-what are the negative international critique with respect o the standard?
Thank you
Hi Silvia,
I have one question, because I am a little bit confusing. There is a mobile provider, which gives mobile phones freely because the company has a lot of subscriptions. What should be capitalized in that case?
Many thanks.
Hi Silvia.
I have a question regarding revaluation of PPE.
Let assume the company is having 5 items of computer equipment says computer A,B,C,D and E. now after revaluation the company found that computer A, C and E have a surplus of $ 10, 12, and 15 respectively while computer B and D was having revaluation loss of $ 17 and 14 respectively.
Now my question is, does the company allowed to net off revaluation surplus and loss for the above individual items and record (net revaluation gain $6) or it should recognise revaluation gain ($37) and loss ($31) separately?? assume there was no revaluation loss in the prior period.
Thanks.
Hi Silvia
I have a query on the initial recognition of Land & Building.
A Company purchased Land & Building for say USD 450k based on Purchased Agreement (no apportionment shown between Land & Building).
While as per Valuation report, the Land has value of USD 312k (73%) and Building of USD 116k (27%). Total valuation USD 428k.
Hence, the company paid excess of 22k.
My queries:
a) What cost will be capitalized? The actual paid or the one in valuation report?
b) If using actual paid 450k, what would be the basis of apportionment between Land & Building?
Awaiting your prompt response.
Thanks
Dear Jonathan SK,
you need to capitalize PPE at COST, i.e. at what you paid. You can allocate the total purchase price based on their relative fair values. S.
Hi Silvia,
Thanks for the great article.
My company is building a facility in another location. All the costs related to the same are taken to Capital Work in Progress (CWIP) presently.
The Machinery will be relocated to the other facility eventually.
Can the above relocation costs be considered as CWIP and eventually be capitalized or should it be expensed?
If capitalize, should it go to Building cost or to Plant & Machinery and the depreciation policy for the same?
Regards,
Pratik
Hi Silvia
Does sale of Property automatically trigger a revaluation. For example, the original cost of building is $1M, Revaluation Reserve is $500,000. Sale Price is $1.8M.
Please confirm whether the following double entry is correct.
Dr Revaluation Reserve $500,000 Cr Equity $500,000
$300,000 to income statement as profit on sale of property
Also if there is a write off of property improvement due to sale of the property, eg $100,000. Should the profit of sale of property be adjusted to $200,000 or should the revaluation reserve be adjusted to $400,000. Thanks
Is wildlife that is on land that is not fenced are the wild animals considered an asset if so what type of asset?
Dear Kassandra,
interesting question. My question is: Do you have control of the wild animals on the land?
If not, then it’s not an asset, because the definition of an asset in the conceptual framework is: “An asset is a resource CONTROLLED by an entity….”
No control = no asset.
S.
Dear Silvia,
Thank you very much for your article.
Would you please help me on these two questions:
1- When we want to revalue the asset, we should revalue all of the assets at the same class. I am confusing about the class of assets regarding land & building. In paragraph 37 of IAS 16 it states the class of assets and it says (land) and (land & building) are two different classes!! so now what should we do when we revalue a building? we have to also revalue the land or land is in another class of assets?!
2- Is it possible to use the revaluation reserve account to issue bonus shares? As far as I searched(!), it seems there is no paragraph in any IFRS/IAS standard that prohibits us from using the revaluation reserve for bonus issue!Am I right?
Thank you very much in advance
Regards
Hi Silvia
I was wondering if you have any articles on accounting of self constructed assets. The IAS 16 do say The cost of a self constructed asset is determined using the same principles as for an acquired asset. The what about direct costs and indirect costs.
I would appreciate if you could share on costing of self constructed asset.
Thanking you
Sonam Choeden
DGPC
Bhutan
Hi Silvia! IAS 16 allows to transfer revaluation surplus to retained earnings. The entry is: Dt revaluation surplus Cr retained earnings. We show this in the statement of changes in capital. What about statement of other comprehensive income? Should we reflect it in that statement as decrease in revaluation reserves?
Yes, of course 🙂
Hi Sivia,
I guess the accounting entry for revaluation surplus is
Fixed Assets A/c- Dr
Revaluation Surplus A/c – Cr
Is it correct?
Yes.
hi, can i know what is the advantages of PP&E?
Hi Silvia
I am working for this client who owns Fuel Stations.
Under Assets we usually capitlise the total cost of the filling station( Tank, civilian cameras, roof covering the filling station, fuel equipment etc together) then depreciate it as one.
Now our internal auditors have requested that we split the assets eg cameras from the total asset cost. Are they following the Complex Assets Part or Separate Component Part in IAS 16 to come up with the decision.
We have been thinking if you depreciate these parts separately the usage of Filling Station interdependent on operation as a whole. Hence if one part cannot be depreciated individually.
Please help me find out when the Component Asset part part applies to Assets
Hi Zezi,
not sure I understand your question fully. I agree with your internal auditors that you should split and depreciate significant parts with different useful lives separately. This is also done within 1 asset. For example, you have an airplane and you need to change some electronics every 5 years (I’m just making the things up). In this case, you depreciate electronics separately from the rest of the airplane. It’s still one asset, but treated as 2 assets for accounting purposes. You should do the same. S.
The issue a hand is that we have been recognizing the Total Cost of Petrol Filling Station as one and being depreciated over useful life of equipment because logically the buildings on the filling station are dependent on the usefulness of the equipment used to provide fuel to clients.
Filling Stations have Building on them, Petrol Equipment for putting fuel in cars, underground tanker) all this is grouped in one.
Now should these be a separated and be depreciated according to the useful life of each of the assets or we should look at the useful life in totality of the whole filling station when depreciating the assets.
Zezi,
I must repeat what I have written – as soon as individual assets or their parts have different useful life and are significant in value (material), you should depreciate them separately. So YES. Depreciating the whole filling station in total is against IAS 16. S.
Dear Sylvia,
Our project has properties under investment properties as well as PPE such as hotels, gas plant etc. And most of them are still under construction. We couldn’t decide the EWC value for each property at the moment as contract was given to contractors and consultants in phase level (Various properties including infrastructure under each phase). We are still using the cost model as project is still under construction but we requested an independent consultant to do valuation last year. The valuation result has shown that the market value is more than our carrying value in overall level however valuation for assets under PPE are less than our carrying value. Based on this our auditor is challenging us that there is an impairment. And it’s a huge gap. We felt that there is an impairment but not a big difference. And also as per our feasibility model recoverable amount is slightly over than the carrying value. We are planning to use fair value model by next year. Please let me know your view whether these assets are really impaired or not.
Hi Johnnie,
the question is whether these individual assets with potential impairment generate cash flows independent from other assets or not. In other words – what are the assets with potential impairment?
E.g. imagine you have pizza oven in your restaurant and valuator says it’s impaired because it’s fair value is lower than its carrying amount. Overall, pizza restaurant (=cash generating unit, CGU) is not impaired because its market value is higher than its carrying amount.
There is no impairment on pizza oven, because pizza oven itself does not generate cash flows independent from others. Here, it’s market value is irrelevant. You need to look to your CGUs. S.
Hi Sylvia,
Question re: demolition costs as part of a capital project and if they can be capitalized. If this is an existing structure to be demolished, but will not be replaced “in-kind”, i.e. not a direct replacement (removal of a roof to be replaced with another roof of the same type), can the demolition (removal of old, fully depreciated tanks, to make way for a new production building) be considered part of site prep and therefore be capitalized?
Thanks,
Jim
Hi Jim,
yes, it can. It’s a removal of obstacles on the land. Without these expenses, you could not proceed with the building. S.
Dear Sylvia, could you please give few examples of depreciable and non depreciable land improvements? Thanks!