IAS 16: PROPERTY PLANT AND EQUIPMENT
OBJECTIVE OF IAS 16: The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are; – the timing of recognition of assets – the determination of their carrying amounts, and – the depreciation charges to be recognised in relation to them Scope The requirements of IAS 16 are applied to accounting for all property, plant and equipment but there are certain exceptions as follows:
Property, plant and equipment classified as held for sale
Biological assets
PROPERTY, PLANT AND EQUIPMENT: – Tangible assets that are held for – use in production or supply of goods and services – for rental to others, or – for administrative purposes and are – expected to be used during more than one period. COST: The amount paid or fair value of other consideration given to acquire or construct an asset.
USEFUL LIFE: – The period over which an asset is expected to be utilized or – the number of production units / hours expected to be obtained from the use of the asset Residual Value: The estimated amount, less disposal cost that could be currently realized from the assets disposal if the asset were already of an age and condition expected at the end of its useful life.
DEPRECIABLE AMOUNT: Total cost – Residual value Depreciation: The systematic allocation of the depreciable amount of an asset over its expected useful life.
RECOGNITION CRITERIA: Items of property, plant, and equipment should be recognised as assets when it is probable that:
the future economic benefits associated with the asset will flow to the enterprise; and
The cost of the asset can be measured reliably
INITIAL MEASUREMENT: An item of property, plant and equipment that satisfies the recognition criteria should be recognized initially at its TOTAL COST.
COMPONENTS OF TOTAL COST:
Purchase price, including import duties non-refundable purchase taxes, less trade discount and rebates.
Costs directly attributable to bringing the asset to asset to the location and condition necessary for it to be used in a manner intended by the entity
Initial estimates of dismantling, removing, and site restoration if the entity has an obligation that it incurs on acquisition of the asset to the extent that it is recognized as a provision under IAS 37.
EXAMPLE OF DIRECTLY ATTRIBUTABLE COSTS INCLUDES:
Cost of site preparation
Initial delivery and handling costs
Cost of testing, less the net proceeds from the sale of any product arising from test production
Borrowing costs to the extent permitted by IAS 23
Professional fees
EXAMPLES OF COSTS THAT ARE NOT DIRECTLY ATTRIBUTABLE COSTS AND THEREFORE MUST BE EXPENSED IN THE INCOME STATEMENT INCLUDE:
Costs of opening a new facility
Costs of introducing a new product or services
Advertising and promotional costs
Costs of conducting business in a location or with a new class of customer
Training
Administration and other general overheads
Initial operating losses
Costs of relocating or reorganization part or all of an entity’s operations.
If an asset is acquired in exchange for another asset, then the acquired asset is measured at its value unless the exchange lacks commercial substance or the fair value cannot be reliably measured in which case the acquired asset should be measured at the carrying amount of the asset given up.
