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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Hello,
I just wanted to know if Foreign Exchange differences costs can be capitalized or not. Usually additional costs incurred for the purchase of an imported machinery/fixed asset (PPE) are included during its capitalization as well during when the accountant has to report the total costs incurred to the shareholders or senior management. If during an import of machinery , there is a fluctuation of foreign currency rates, and the entity ends up paying more than the initial transaction price , can we capitalize the FX differences or shall it be reported separately as Foreign exchange gain/loss?
Thank you.
Hello Siliva,
I have gone through IFRS 16, but it is slightly confusing. Am aware it is with regards to lease, but can you please elaborate how exactly the accounting need to be done for land which is on long term lease and construction has been done.
Hi Silvia
Hope you are keeping well and safe.
Will CWIP require restatement in the subsequent year if the previous years had a figure which have been added to CWIP in the current year as there is no depreciation but only built up(capitalisation of Cost)?
For example CWIP should have been $2000 in 2018 but 10 was booked so the balance was $2010. But the $10 would have been booked in 2019 to bring the balance to $2010. Will that require restatement in 2019?
Thank you so much for your help.
Dear Silvia, am your big fun.
The way you explain each IAS and IFRS is unique, simple and very easy to understand.
I have a question related to the recognition of PPE received for use by a state-own company.
The company received from Government PPE’s which are used by the company to provide services to the public. For these PPEs, the company is not paying any rentals, and it does not have the ownership, as well, the Government can any time to request the PPEs back. When the PPE’s were received, the Company made the following book record:
DR PPE received in use
CR Payables due to Government (at the fair value of PPE transferred at the date of transfer)
During the last 3 years, Company had repaired these received PPEs and all related costs were capitalised. in the cost of these PPEs.
Additional at the of 2019, these PPEs were revalued and the market value is below their net book value.
I have doubts that the accounting treatment for these PPEs applied by the Company is correct.
Could you please advise me how these PPEs should be accounted for?
Thank you!
If you purchase a fixed asset, at a cost of $ 100 and value added tax of $18 , should you capitalize $100 or $118 ….
It depends on whether you can claim VAT paid back from your tax office or not. If yes – then 100, if not – then 118.
Hi there.
If a building is split 50/50 between investment property and property, plant and equipment, do we apportion calculations accordingly?
For example, I calculate depreciation for the entire year and then multiply by 50%.
Kind regards
James Morris
Hi James, yes, you need to account for these portions separately.
Hi Silvia,
Hope you are doing well, I have small query if you can help. I am confused over the application of IFRS and IAS 16 on one of the case which is as below.
We are contractually in a lease agreement of land for 20 years with built in buildings, warehouse etc, 5 years already passed and remaining 15 years are there. Currently we have asked the landlord to do a major construction on site, the payment of which landlord has given us 2 options,
1. to pay upfront payment
2. or to pay monthly rentals with the existing lease rents.
we are most like to go for upfront payment, in this regards can you please explain how we will treat this upfront payment initially and how we are going to amortise is over remaining 15 years. Which accounting standard will it fall.
Thanks in Advance
Hi Silvia
Thanks for your articles, I find myself turning to them time and time again even after 15 years of financial reporting. I have a conceptual question on IAS 16: is there a good answer to the question “Why do we post revaluation increases above cost to Other Comprehensive Income, but decreases below cost to the P&L”? In other words, why don’t we post all revaluation movements, positive and negative, to Other Comprehensive Income? (or conversely, why don’t we simply post all movements to the P&L?) The only answer I can think of is the accounting principle of conservatism, but that’s not very satisfactory! Any help you can provide on this question would be greatly appreciated!
Hi Matthew, this is a great question that I am asking myself sometimes. Well, that is the decision of the Board – the standard setters, so this is more a question for them. As far as I understand, the changes in fair value are not automatically recognized in profit or loss (as with fair value model for investment property), because the purpose of holding the PPE is NOT a capital appreciation, thus it would be inappropriate to show upward revaluations in profit or loss (they do not come from primary activity). And, to be prudent, downward revaluations are shown in profit or loss. I have no other explanation and to me it also seems incomplete. Please read the basis for conclusion of IAS 16, maybe you will find more satisfactory reasoning there.
Hello Sylvia,
A piece of leasehold land that was purchased should be capitalised and depreciated according to the leasehold period set by the government, even though it is still left vacant now (not commercially in use yet) ? The purpose of the land is to expand the existing manufacturing operations.
Thanks and regards,
Hi Silvia,
The construction of a plant is ongoing. Now, is it possible to capitalize the electricity bills, salary of the engineers and other expenses incurred for the civil construction and installation of the machinery? I will really appreciate your answer with the reference of IFRS.
Regards
Masud
Yes, as soon as all these bills relate to construction itself and not to ongoing operations. They are all directly attributable.
If we perform the first revaluation, and one property’s market value is above NBV, and the other one is below NBV, do we show this separately? We create revaluation reserve (OCI) for the property above NBV, and the one with loss we present through P&L?
Hi Silvia,
Please assist we have a situation where two of our assets were erroneously disposed of in 2013 & 2018 respectively and when these asset were disposed their carrying amounts were zero. I have just discovered that the assets are in use and producing goods. How do I reverse these disposals and what are implication of standard.
I would really appreciate your response.Thank you
Hi Nompilo, if this is a material error, then you need to reverse it retrospectively. See more information here.
Thanks Silvia, I have read through IAS 8 standards errors, in my understanding the error is immaterial as the asset were disposed at zero value or does it means that the assets useful live were erroneously estimated ?, I would like to get more clarity.
Well – if assets were disposed at zero value – that does not mean that the error was immaterial. Yes, it is the error in the assets’ useful lives. Maybe you should try to get backwards, calculate assets’ carrying amount and depreciation charges using new estimated useful life and it the difference is material, then correct it retrospectively. If not material, then either correct it to the current reporting period (you would estimate the current carrying amount and simply book debit PPE/Credit Profit-loss and then depreciate), or don’t correct at all – depends on your own thresholds.
Thank it is clear now S
Hello Silvia,
Would you have an idea on how to account for replacement reserves & the utilisation of it under IFRS? we have few investment properties which generate rental income. The management has decided to set aside a reserve for future capital needs of the buildings. I’m having confusion on how to treat it in the P&L and the BS presentation.
Appreciate if you can shed light on this
Regards
Jude
hello,
suppose, My company has purchased an fixed asset (equipment) by amount $ 10,000. the supplier has delivered the equipment after 10 days from required delivery date as per purchase order. my company has deducted 2% ($200) penalty for delay delivery as per condition of purchase order. now how mach amount we should show as purchase and recognize as equipment cost and charge as depreciation on which amount ?
Please send me the required answer as your earliest !
Best regards
Sujit
Hello Silvia
We took up on a settlement discount on a non-current asset. This would have deducted from the initial cost had it been a trade discount. Should I treat it as a normal discount and put it through the P&L account?
Thank you for your kind help.
Hi Arv, if you planned taking the settlement discount at the time of acquisition, then deduct it from the cost of PPE. Please read this article – this is from the point of view of a seller (not buyer), but the arguments are similar.
in the above, its’s written as “IFRS16 lists several factors that shall be considered when establishing item’s useful life:”, I hope this is a typo and it should have been IAS 16 right?
Please give me your advice. Our company has freehold land but in the country’s law (Ethiopia) all lands are owned by the government, how can we account the free hold land based on IFRS requirement? In local GAAP it was not allowed to record lands.
If advance is paid for asset to be acquired, how will the same be treated? Whether it will be transferred to CWIP A/c or normal advance? Further, if one part of the asset has been received, will the treatment change of the above advance? Please explain both scenarios
Please help me
We live in IRAN and we prepare local financial statements after that the company ask us we have to prepare IFRS financial statements .This report is first time adoption and for 3 years.we do not use IFRS 1 for exemption and we use IAS 16 AND We conducted a formal expert report on reassessment (evaluation method)for 3 years and returned the accumulated depreciation each year. We calculated depreciation expense of asset for each year and identify in profit and loss .and we use ias 16 article 34.it is right?It is very necessary, please reply early
Yes, it seems OK, as soon as the expert set the depreciated value.
What if the payment of purchasing cost of an asset done in next financial year(say 2019-2020). although we have started using it in the current Financial Year (say2018-2019).
In which year the cost will be capitalized and depreciation will be calculated?
even if the payment will be made in the next year ,If the company have control of the asset in the current year it shoud be recorded in 2018/19 and start deprecition calculation. Becouse Ias 1 requres to use accural bases of accounting
Hi Sylvia,
If a new office is rented in Dec 2018 but the company continued to use old office until Feb 2019 because of the leasehold improvement and staff reorganizing to new office during the period.
Shall the reinstatement cost be capitalised and start depreciation from Dec 2018 or Feb 2019?
Thanks!
According to Ias 16 depreciation calculation is started when the asset is ready to use.so It is not permited to calculate Dep exp on Dec 2018 .
Hi Silvia
Please help me to solve below matter.
I am working in company which rent out the Vessels. recently we bought a new vessel and Rent it out.We purchase it 17th and rent it out on 24th .During the period we have to bear fuel cost.Can we capitalize that fuel expense according to IAS 16 ???
Hi Dinith, no. This is a clear consumption of fuel. S.
Hi Silvia,
I have a question regarding revaluation model.
What is the difference between the Revaluation loss and the impairment loss? both decrease the value of Asset.
Now, what I understand is Revaluation model has some criteria like asset valuation must be assessed at regular interval and it must be applied to whole class of Asset.
For example, if company follows revaluation model(revalue it’s assets every two years) and in between if one of asset appears to have impairment indication then IAS 36 applies and asset value is decrease.
Means, IAS 36 helps/guide the preparer to faithfully represent financials of reporting entity.
Thanks. Looking forward to your comment.
Hi Silvia,
We have few Japanese machines which we have already depreciated in straight line method considering 10 years useful life. These machines are 4-7 years old. Now we feel that the machine can be easily used for 15 years. Now my questions are –
1. What process we need to follow for revaluation of the useful life only and depreciate accordingly?
2. Any documentation required for the same?
3. How we can establish the fact that the machines will be useful for 15 years instead of 10 years? Is our internal technical peoples certification suffice?
Thanks in advanced for your answer.
Dear Ms. Silvai,
why excess depreciation goes to retained earnings ? I really don’t know the logic. any comment and idea would be highly appreciated from any one here.
Thanks
Please, can you specify what you mean? Are you referring to the depreciation under revaluation model? Well, please try to browse the answers above, this issue has already been tackled, for example look to junior’s answer from 2 May 2015.
The excess depreciation on revaluation depreciation of non-current asset over depreciation of cost model. As per IAS 16 the excess amount treats:
Debit: revaluation surplus
Credit: retained earnings
but why it treats like that? why not to income statement ?
Please, refer to the answer above. I have explained that many times in the above comments.
Hello Silvia,
May I ask you whether we can (on the group level) recognize VAT tax as a subsequent expenditure included in the carrying amount of PPE in the following case:
Parent company is not VAT payer
Its subsidiary is VAT payer
Subsidiary sells its PPE in the carrying amount of 10 MEUR to its parent company for 10 MEUR plus 2 MEUR value added tax.
Can we on the group level recognize PPE in the amount of 12 (subsequent expenditure 2MEUR as a part of the cost of PPE) or the PPE in the amount of 10 MEUR and the expense in the amount of 2MEUR?
Thank you
Hello Silvia
My company is currently undergoing expansion (construction roads, buildings, storage tanks ect)
I have consulted IAS 16 on which costs can be capitalized.
I would just like to confirm, the costs of the materials needed to construct these assets, do they form part of the asset base or do they get expensed?
Also an in house project manager has been hired, his salary should form part of the cost of the asset right? When does capitalization commence?
I would assume we have a capital work in progress account which accumulates all these costs and once the ENTIRE project/expansion is complete do we capitalize i.e employee benefits relating to the workers and project manager to the asset once its available for use?
Hello Silvia,
If the impairment results are uncertain within the prior accounting period (say a building is damaged by fire in mid 2018 and the insurance says that it is repairable) but then they become certain in the current accounting period (in early 2019 the insurance says we don’t have sufficient money to reconstruct the building because we had to remove the asbestos found and we had to demolish 95% of the building in the process) – how is that recorded? Can you use the Revaluation Model in 2018 to capture the change in value prior to impairment and then the change in value after impairment? or you have to continue to use the Cost model since that is how the building value was recorded in the accounting periods prior to impairment? But then you have the building insurance which provides coverage to market value and/or replacement cost, whatever is higher. Essentially, you are in a situation where you had a property of a higher market value when the impairment occurred than when it was purchased, then you may either reconstruct if you invest some more or recover some value from insurance proceeds.
hi,
Is Deferring expenses on certain small items and showing them as other receivables on balance sheet allowed under IFRS?
for example expenses on gondolas,signboards etc which aren’t considered as assets but are written off within 1 year from date of purchase.
Or is the right treatment to expense the costs as incurred.what if they are purchased on December 31?
IS RFD needed for changing its estimated useful lives for equipment under IAS 16?
What is RFD, please?
Hi Slivia,
kindly resolve my point, is Vehicle is capitalized at the date when registeration charges of vehicle are paid ?
If the payment of registration charges is a MUST before you can actually use the vehicle, and you already have control of that vehicle, then yes, that’s the moment.
“If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A] – kindly explain this para thanks
When an advance payment made to a vendor for construction of a building which will be set off against over two years how it should be trated in balance sheet. Should it be a current asset or non current asset?
By definition, non-current asset but you need to examine the conditions of potential refund of the advance, etc.
I want to know about how to recognize depreciated chargers of an asset which revalue under “depreciated replacement cost”
Other than this, Thank you, this article is more help full ……
Hi Silvia, what standard should I check for construction in progress? The company I am working for recognizes the materials to be used for construction in the plant as prepaid assets since the construction has not started yet. Is that correct or should it form part of PPE or CIP? thank you so much!
Dear Sylvia,
how to recognize the artificial grass for stadium? PPE or expenses?
Thanks!
Try looking to the recognition criteria 🙂
Hi Silvia, what does standards say for asset with zero carrying amount (full depreciated) which are not being used and have been in store , should we remove them from FA register , scrap them or both ? plz refer from standard and guide
Hi Sammy, if there are no future economic benefits expected from the asset, then you should derecognize it (i.e. remove from FA register). Par IAS 16.67.b
thanks a lot , really helpful
Dear Silvia,
We had an earthquake which damaged some of our buildings. We are currently working on a building to bring up to standard. The work is in progress, some in WIP account and $200k committed not spend. We had a valuation done as part of year end. The valuation was done based on the completed work. How do I now account for this. Is the cost of the building the initial cost, the cost plus WIP or Cost plus WiP plus committed towards end of project?
For group consolidation, if let say my Singapore office (Holding company) depreciable amount = cost, while my subsidiaries in China = Cost – 5% residual value. Do I need to make consolidation adjustment to align to holding company’s policy, which is no residual value. Thank you.
Alan, residual value is simply accounting estimate, not an accounting policy. You have to apply uniform accounting policies, but not estimates. Maybe it’s reasonable to sell your assets at 5% of cost in China, but for 0 in Singapore. S.
In table wrote “Revolution surplus” …….. Please correct spelling.
Hi silvia,
noted a small mistake
you have said “IFRS16 lists several factors that shall be considered when establishing item’s useful life:”
it should be IAS 16 i believe 🙂
Yes, of course – thank you!
Hi Silvia,
Our company periodically purchases satellite images on disks in order to monitor ice movement on the sea. Could you please advise should we treat as asset such Satellite imagery. should it such assets be treated as intangible assets. or such costs should be expensed as real picture on images are changes every time. Could you please support to clarify this, thank you
Hi Mira, this is very unknown area of business for me, but in general, you should just stick to the basic definition of an intangible asset. Is it identifiable? So, can you really separate the images and sell it – just hypothetically? Is it considered as set of images? Did you pay one-off fee or do you pay the annual fee? Do you pay the fee per image or on what basis? For me, it’s very difficult to answer as I don’t know the substance of the contract – but I really like this question, so if you can give me more details, I will elaborate an answer either in podcast or in the separate article. Thanks! S.
HI Silvia, thank you for your feedback. For example such companies as Spatial Energy provide a collection of high resolution satellite and aerial imagery, topographic maps, and digital elevation models (DEMs) for use by oil and gas companies to increase speed to drilling, maximize production, and monitor and protect their assets. Its imagery and data solutions include high resolution optical satellite imagery; radar satellite imagery; aerial photography. can we consider such type of images as intangible assets? But Information on Satellite image will be for short period, and situation on image will not be valid after season or years.Original image can be be re-processed by Buyer in order to see the proper situation on satellite of ice and native format of image is not valuable than post processed image using soft.
And on what basis do you pay? Per image? Or is it an annual fee?
Sorry, per Image, Silvia
Hi Silvia,
Our bank is adopting IFRS for first time and fair value as deemed cost is selected for class of asset, as per the the consultant advise the revaluation gain( surplus) goes through directly through retained earning by refereeing the following “Paragraph 11: The accounting policies that an entity uses in its opening IFRS statement of financial position may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions before the date of transition to IFRSs. Therefore, an entity shall recognise those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to IFRSs.” How ever , they have a difficulty to address the tax consequence. In Ethiopia, tax authority allows us to use the cost of the asset as a deduction for deprecation. Can you please describe the tax treatment as per IFRS.
Thank you
Can I switch from revaluation model to cost model for Property, Plant and Equipment after 5 years’ adoption of revaluation model? I do not find any paragraph in IAS 16 in regard to change in accounting model . Please comment.
Hi Silvia,
We are conducting out a feasibility study for the expansion of our project. We are currently debiting the cost to WIP. Please advise if the expenses incurred towards this study be capitalized after the project is successful completed. OR What happens to the cost is case we decide not to go ahead with the expansion after the feasibility study is done.
Hi Vicky,
well, feasibility study is here just to assess whether the project is viable, the location is OK, etc. In general, you cannot capitalize the feasibility study, because it is equivalent to research and in most cases it is not specifically attributable to the individual asset (as relates to assessment of many locations…). Maybe if you describe what it relates to, I would be able to assess it better. S.
Hi Silvia. Perusing through the IAS 16 and I need advise on treatment of asset received from trade debtor to offset debt in our books. There was no exchange of asset however one of our trade debtors repaid their debt by giving up one of their asset ( RO Plant with Water storage facility). We will need to book this asset at FV? What treatment do we apply to the difference between the FV of the asset & amount of debt that was agreed to be settled from this agreement?
Hi Silvia, could you please advise should we include cost of Operating manual and Maintenance manual for equipment purchased together with equipment to the cost of this asset? thank you
Hi Mir,
similar items are always assessed based on the specific situation, but in general yes, that could be included with the equipment, because I guess that these manuals can be used only in relation to this equipment and they are of no use separately. S.
Hi Silvia
Greetings from my end!
Most companies use to have a capitalization threshold that is an asset equal and above the threshold will be capitalize and an asset less than threshold will be account for as revenue expenditure. Now if a company revise it capitalization threshold from $1000 to $1500 will be accounted for as change in accounting policy and will be applied retrospectively
Hi Muhammad, no, it’s not a change in accounting policy. S.
Hi Silvia,
could you please advise should we treat as asset Satellite imagery. this image is used to monitor ice movements on sea, etc.
Hi Silvia,
Thanks in advance for considering this question. What is the fine line between changing an estimate in useful lives and accelerating the depreciation vs. recognizing a loss on disposal. For example, what if we identify a change in the use of an asset in the next month or two…would you recognize depreciation for the remaining two periods (therefore accelerating all remaining depreciation)? Would you ever see someone accelerate depreciation in the same month the disposal occurs?
Hai
I’m auditor, we need your advice on the following situation for my client’s account:
1. freehold land & building cost RM16M
2. Partly demolish the building before the client financial year end
3. after the financial year end, completely demolish and intend to sell the land
4. the Land & building was purchase in 2015 and until now, we never segregate the cost & charge depreciation on the buildling:
?Based on the above situation, must we:
– Segregate the building cost by 2/3 method and charges depreciation on the building?
– AND in subsequent year write off the building cost?
Please advice us on how to determined the cost of building alone?
Hi Zareena,
the question is what the original intention with the land+building was. If the client acquired land plus building together with aim to remove the building and sell the land, well, this could be a good argument to say that these removal costs can be capitalized into the cost of land as they are necessary for preparing the land for the intended use/sale. But if the client used the building itself and only then decided to demolish, then it’s necessary to split it and account for the building/land separately. S.
Good day. Would you be so kind to explane the difference in derecognition of inspection and physical parts, for example aircraft’s major inspection and replacement its seats. Because p.14 of IAS16 notices, that derecognition of previos inspection have to be done “as distinct from physical parts”, and I can’t comprehend it:)