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Objective of IAS 16=
The
objective of IAS 16 is to prescribe the accounting treatment for proper=
ty,
plant, and equipment. The principal issues are the timing of recognitio=
n of
assets, the determination of their carrying amounts, and the depreciati=
on
charges to be recognised in relation to the=
m.
Scope
While =
IAS 16
does not apply to biological assets related to agricultural activity (s=
ee
IAS 41) or mineral rights and mineral reserves such as oil, natural gas=
and
similar non-regenerative resources, it does apply to property, plant, a=
nd
equipment used to develop or maintain such assets. [IAS 16.3]
Recognition
Items =
of
property, plant, and equipment should be recognise=
d
as assets when it is probable that: [IAS 16.7]
- the future economic be=
nefits
associated with the asset will flow to the enterprise; and
- the cost of the asset can=
be
measured reliably.
This
recognition principle is applied to all property, plant, and equipment
costs at the time they are incurred. These costs include costs incurred
initially to acquire or construct an item of property, plant and equipm=
ent
and costs incurred subsequently to add to, replace part of, or service =
it.
IAS 16=
does
not prescribe the unit of measure for recognition – what constitu=
tes
an item of property, plant, and equipment. [IAS 16.9] Note, however, th=
at
if the cost model is used (see below) 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 must be depreciated separately. [IAS 16.43]
IAS 16=
recognises that parts of some items of property, =
plant,
and equipment may require replacement at regular intervals. The carrying
amount of an item of property, plant, and equipment will include the co=
st
of replacing the part of such an item when that cost is incurred if the
recognition criteria (future benefits and measurement reliability) are =
met.
The carrying amount of those parts that are replaced is derecognised
in accordance with the derecognition provis=
ions of
IAS 16.67-72. [IAS 16.13]
Also,
continued operation of an item of property, plant, and equipment (for
example, an aircraft) may require regular major inspections for faults
regardless of whether parts of the item are replaced. When each major
inspection is performed, its cost is recognised
in the carrying amount of the item of property, plant, and equipment as=
a
replacement if the recognition criteria are satisfied. If necessary, the
estimated cost of a future similar inspection may be used as an indicat=
ion
of what the cost of the existing inspection component was when the item=
was
acquired or constructed. [IAS 16.14]
Initial Measurement=
They s=
hould
be initially recorded at cost. [IAS 16.15] Cost includes all costs
necessary to bring the asset to working condition for its intended use.
This would include not only its original purchase price but also costs =
of
site preparation, delivery and handling, installation, related professi=
onal
fees for architects and engineers, and the estimated cost of dismantling
and removing the asset and restoring the site (see IAS 37, Provisions,
Contingent Liabilities and Contingent Assets). [IAS 16.16-17] =
If pay=
ment
for an item of property, plant, and equipment is deferred, interest at a
market rate must be recognised or imputed. =
[IAS
16.23]
If an =
asset
is acquired in exchange for another asset (whether similar or dissimila=
r in
nature), the cost will be measured at the fair value unless (a) the
exchange transaction lacks commercial substance or (b) the fair value of
neither the asset received nor the asset given up is reliably measurabl=
e.
If the acquired item is not measured at fair value, its cost is measure=
d at
the carrying amount of the asset given up. [IAS 16.24]
Measurement Subsequent to Initi=
al
Recognition
IAS 16
permits two accounting models:
- Cost Model.=
The asset is carried =
at
cost less accumulated depreciation and impairment. [IAS 16.30]
- Revaluation Model. The asset is carried =
at a
revalued amount, being its fair value at the date of revaluation l=
ess
subsequent depreciation, provided that fair value can be measured
reliably. [IAS 16.31]
The Revaluation Model
Under =
the
revaluation model, revaluations should be carried out regularly, so that
the carrying amount of an asset does not differ materially from its fair
value at the balance sheet date. [IAS 16.31]
If an =
item
is revalued, the entire class of assets to which that asset belongs sho=
uld
be revalued. [IAS 16.36]
Revalu=
ed
assets are depreciated in the same way as under the cost model (see bel=
ow).
If a
revaluation results in an increase in value, it should be credited to
equity under the heading "revaluation surplus" unless it
represents the reversal of a revaluation decrease of the same asset
previously recognised as an expense, in whi=
ch
case it should be recognised as income. [IAS
16.39]
A decr=
ease
arising as a result of a revaluation should be rec=
ognised
as an expense to the extent that it exceeds any amount previously credi=
ted
to the revaluation surplus relating to the same asset. [IAS 16.40]
When a
revalued asset is disposed of, any revaluation surplus may be transferr=
ed
directly to retained earnings, or it may be left in equity under the
heading revaluation surplus. The transfer to retained earnings should n=
ot
be made through the income statement (that is, no "recycling"
through profit or loss). [IAS 16.41]
Depreciation (Cost and Revaluat=
ion
Models)
For all
depreciable assets:
The
depreciable amount (cost less prior depreciation, impairment, and resid=
ual
value) should be allocated on a systematic basis over the asset's useful
life [IAS 16.50].
The re=
sidual
value and the useful life of an asset should be reviewed at least at ea=
ch
financial year-end and, if expectations differ from previous estimates,=
any
change is accounted for prospectively as a change in estimate under IAS=
8.
[IAS 16.51]
The
depreciation method used should reflect the pattern in which the asset's
economic benefits are consumed by the enterprise [IAS 16.60];
The
depreciation method should be reviewed at least annually and, if the
pattern of consumption of benefits has changed, the depreciation method
should be changed prospectively as a change in estimate under IAS 8. [I=
AS
16.61]
Deprec=
iation
should be charged to the income statement, unless it is included in the
carrying amount of another asset [IAS 16.48].
Deprec=
iation
begins when the asset is available for use and continues until the asse=
t is
derecognised, even if it is idle.
Recoverability of the Carrying =
Amount
IAS 36 requires
impairment testing and, if necessary, recognition for property, plant, =
and
equipment.
Any cl=
aim
for compensation from third parties for impairment is included in profi=
t or
loss when the claim becomes receivable. [IAS 16.65] <=
/p>
Derecognit=
on (Retirements and Disposals)
An ass=
et
should be removed from the balance sheet on disposal or when it is
withdrawn from use and no future economic benefits are expected from its
disposal. The gain or loss on disposal is the difference between the
proceeds and the carrying amount and should be rec=
ognised
in the income statement. [IAS 16.67-71]
Disclosure
For ea=
ch
class of property, plant, and equipment, disclose: [IAS 16.73]
- basis for measuring ca=
rrying
amount;
- depreciation method(s)=
used;
- useful lives or deprec=
iation
rates;
- gross carrying amount =
and
accumulated depreciation and impairment losses; =
- reconciliation of the
carrying amount at the beginning and the end of the period, showin=
g:
- additions;
- disposals;
- acquisitions through
business combinations;
- revaluation increases=
;
- impairment losses;
- reversals of impairme=
nt
losses;
- depreciation;
- net foreign exchange
differences on translation;
- o=
ther movements.
Also disclose: [IAS 16.74]
- restrictions on title;=
- expenditures to constr=
uct
property, plant, and equipment during the period;
- commitments to acquire property, =
plant,
and equipment.
- compensation from third parties for
items of property, plant, and equipment that were impaired, lost or
given up that is included in profit or loss.
If property, plant, and equipment is stated at revalued
amounts, certain additional disclosures are required: [IAS 16.77] =
- the effective date of =
the
revaluation;
- whether an independent=
valuer was involved;
- the methods and signif=
icant
assumptions used in estimating fair values;
- the extent to which fa=
ir
values were determined directly by reference to observable prices =
in
an active market or recent market transactions on arm's length ter=
ms
or were estimated using other valuation techniques;
- the carrying amount th=
at
would have been recognised had the ass=
ets
been carried under the cost model;
- the revaluation surplus,
including changes during the period and distribution restrictions.=
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