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Recognition of property, plant and equipment
An entity should recognise PPE when it has control
of it, expects it to provide future economic benefits,
and the cost of the asset to the entity can be measured
reliably [IAS16.7(R.05)].
An entity has an expectation of future economic
benefits when the risks and rewards of the asset's
ownership have passed to the entity .
Difficult questions can arise about control when
assets are leased. Once lease classification issues
have been addressed and capitalisation of the asset as PPE is
determined appropriate, the general rules for PPE
are followed as if the asset was owned
[IAS17.20,27(R.05)].
An asset, previously held by an entity and classified
as inventory or investment property, may subsequently
be reclassified as PPE [IAS2.35(R.05)] [IAS40.57(R.05)] .
Initial measurement
PPE should initially be measured at cost [IAS16.15(R.05)].
Cost is the fair value of consideration given for
the asset [IAS16.6(R.05)] . This applies
equally to assets purchased from a third party and
to assets constructed by the entity itself.
All directly attributable costs necessary to bring
the asset to its required working condition should
be capitalised [IAS16.16(R.05)] . These include external
costs such as delivery and installation costs, architects'
fees and import duties [IAS16.16-17(R.05)]. All costs
incurred in identifying specification requirements
and in the selection process should be expensed
because these costs do not meet the definition of
an asset . Where relevant, these costs should include
borrowing costs [IAS16.23(R.05)].
Internal costs capitalised should include directly
attributable overhead costs where applicable [IAS16.22(R.05)]
[IAS2.12(R.05)]. Overhead costs relating to unproductive
or inefficient use of resources should be expensed
as incurred [IAS16.22(R.05)] . General administrative
costs not directly attributable to the acquisition,
construction or commissioning of the asset should
also be expensed as incurred [IAS16.19,20(R.05)] .
Incidental income earned during the pre-production
phase, which is not necessary to bring the asset
into working condition, should be recognised in
the income statement rather than offset against
the cost of the asset [IAS16.21(R.05)] .
Decommissioning and site restoration costs
Environmental and safety concerns are increasingly
important. When an entity purchases or constructs
an asset, it may take on a contractual or statutory
obligation to decommission the asset or restore
the asset site to certain minimum standards or both,
at the end of the asset's life. The decommissioning
and site restoration costs are necessary expenditure
in order to access the economic benefits expected
to flow from the asset [IAS16.11(R.05)]. These costs
should therefore be capitalised at the date on which
the entity becomes obligated to incur them [IAS16.16,18(R.05)]
[IAS37AppendixC.Ex3] .
One of the key differences between decommissioning
costs and other costs of acquisition is the timing
of the costs. Decommissioning costs will not become
payable until some future date, possibly several
decades in the future. Consequently, there is likely
to be uncertainty over the amount of costs that
will be incurred. Management should record its best
estimate of the entity's obligations [IAS16.16(c)(R.05)].
Discounting is used to address the impact of the
delayed cash flows. The amount capitalised as part
of the asset's cost will be the amount estimated
to be paid, discounted to the date of initial recognition.
The related credit is recognised in provisions .
Directly attributable and necessary decommissioning
and site restoration costs should be capitalised .
The principles to be applied are the same as those
described earlier for other costs of acquisition
and construction.
There may be significant changes in the initial (and subsequent) estimates of decommissioning costs of an asset, particularly where asset lives are long. These changes in estimate may be due to changes in legislation, technology, timing of the decommissioning and or management’s assumptions. How should these changes in estimates be reflected?
An entity that uses the cost model records changes in the existing liability and changes in the discount rate as follows [IFRIC1.5]:
| a) |
Changes arising from changes in cash flows or changes in the discount rates are added to, or deducted from, the cost of the related asset in the current period ; |
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| b) |
The amount deducted from the cost of the asset must not be greater than the asset’s carrying amount. If the decrease exceeds the carrying amount, the excess is recognised immediately in profit or loss. |
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| c) |
Adjustments that result in an addition to the cost of the asset are assessed to determine if the new carrying amount is fully recoverable or not. An impairment test is required if there is an indication that the asset may not be fully recoverable. |
An entity using the revaluation model accounts for changes effectively through the revaluation reserve [IFRIC1.6]:
| a) |
An increase is recognised in profit or loss, except that it is debited to equity to the extent of any existing revaluation surplus in equity in respect of the asset. |
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| b) |
A decrease is credited directly to the revaluation surplus in equity, except that it should be credited to profit or loss to the extent that it reverses a revaluation deficit on the same asset that was previously charged to profit and loss. |
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| c) |
Any decrease in the liability that results in a carrying amount lower than the cost that would have been recognised had the asset been measured under the cost model should be recognised in profit or loss immediately. |
Leased assets
PPE under a finance lease is recognised by a lessee
at the lower of the present value of the minimum
lease payments and the fair
value of the asset [IAS17.20(R.05)].
An asset leased under a finance lease should be
recognised by a lessee from the date from which
it obtains control over the asset's risks and rewards
[F.49(a)].
Government grants
The cost of an asset may be met in part or in whole
by way of a government grant. The recognition and
measurement of an asset financed by a government
grant should follow the principles described above
for other purchased assets.
The grant should either be recognised as deferred
income, or be deducted from the asset's carrying
value [IAS20.24]. The deferred income is recognised
as the asset is used. The usual treatment is to
record deferred income, although the net effect
of both methods is the same.
Exchange of assets
An entity may acquire an asset through the exchange
of another asset rather than the payment of cash.
The cost of the asset is its fair value unless the
transaction lacks commercial substance or the fair
value of neither asset exchanged is readily measurable.
If the acquired asset is not recorded at fair value,
its cost is the carrying amount of the asset given
up [IAS16.24(R.05)].
An exchange of fixed assets has commercial substance
if [IAS16.25(R.05)]:
| a) |
the cash flows related to the
asset received differ from the cash flows of
the asset transferred, or |
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| b) |
the entity's operations affected by the
transaction changes; and |
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| c) |
the difference in a) or b) is significant
to the fair value of the assets exchanged . |
Subsequent expenditure
The recognition criteria for subsequent expenditure on existing assets are the same as initial recognition criteria.
Subsequent costs should be capitalised, that is recognised as an asset, only if they meet the recognition criteria that:
| a) |
It is probable that future economic benefits associated with the item will flow to the entity; and |
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| b) |
The cost of the item can be measured reliably. [IAS16.7(R05)] |
The addition of a new wing to a hotel should be capitalised as the additional rooms increase the revenue earning capacity of the hotel and would meet the recognition criteria in their own right.
The costs of the day-to-day servicing of PPE are repairs and maintenance, and are expensed [IAS16.12(R.05)]. Some components or items of PPE may require replacement
at regular intervals. The replacement cost of such
items are included in the carrying amount of PPE
if the recognition criteria are met. Any remaining
carrying amount of the replaced item or component
is derecognised [IAS16.13(R.05)].
The costs of a major inspection are included in
the carrying amount of PPE if the recognition criteria
are met. The cost of the previous inspection may
or may not have been separately identified in the
transaction in which the item was acquired or constructed.
Any remaining carrying amount of the previous inspection
is derecognised. The estimated cost of a similar
inspection can serve as a proxy for the cost of
the component when the item was acquired or constructed
[IAS16.14(R.05)] .
Measurement subsequent to initial recognition
An entity has two options for subsequent measurement.
The asset is carried
at cost less any subsequent accumulated depreciation
and impairment losses under the cost model [IAS16.30(R.05)]. An asset is carried at revalued
amount, less any subsequent accumulated depreciation
and impairment losses under the revaluation model
[IAS16.31(R.05)].
Depreciation: cost model
Consumption of the economic benefits in an item
of PPE, other than land, is reflected by a depreciation
charge [IAS16.60(R.05)]. The cost of an asset is depreciated
to reduce the asset's carrying value to its residual
value over its useful life [IAS16.6,50(R.05)].
Revaluation model: basic requirements
The basis of revaluation is the asset's fair value
at the date of revaluation [IAS16.6,31(R.05)].
The fair value of land and buildings is its market
value [IAS16.32(R.05)]. A professionally qualified valuer
normally undertakes the valuation. Disclosure should
be made of whether or not the revaluation was performed
by an independent valuer [IAS16.77(b)(R.05)].
The same basic rule for revaluations applies to
plant and equipment [IAS16.32(R.05)]. However, the practical
difficulties of obtaining a market value for plant
and equipment is recognised in IFRS. Valuation at
depreciated replacement cost is allowed when there
is no real market value measure, for instance because
of the specialised nature of the assets and because
they are rarely sold [IAS16.33(R.05)].
When assets are revalued, all assets of the same
class should be revalued at the same time [IAS16.36(R.05)].
Examples of separate classes of asset include land
and buildings, machinery, motor vehicles, office
equipment [IAS16.37(R.05)] .
Revaluation model: depreciation
The consumption of a revalued asset is reflected
through a depreciation charge [IAS16.31,50,60(R.05)].
An element of the revaluation surplus may be
transferred to retained earnings in each period,
being that part of the depreciation charge in respect
of the revaluation uplift on the asset [IAS16.41(R.05)].
Thus, the additional depreciation is systematically
treated as realised over the estimated remaining
life of the asset. When the asset is sold or scrapped,
the balance in the revaluation reserve in respect
of that asset is transferred to retained earnings
[IAS16.41(R.05)] .
Revaluation model: treatment of accumulated
depreciation
The revaluation of a depreciable asset requires
an adjustment to the accumulated depreciation as
well as the gross carrying amount [IAS16.35(R.05)]. The
accumulated depreciation may be restated proportionately
with the change in the gross carrying amount of
the asset [IAS16.35(a)(R.05)]. Alternatively the accumulated
depreciation can be eliminated against the gross
carrying amount of the asset [IAS16.35(b)(R.05)]. Each
method results in a carrying amount of the asset,
after revaluation, equal to the revalued amount
.
Revaluation model: frequency of revaluations
Revaluations should be made as frequently as necessary
to ensure that the carrying value of the revalued
assets and the current values are not materially
different at each balance sheet date [IAS16.31(R.05)].
The frequency of revaluations required depends on
the movements in fair values of assets subject to
valuation [IAS16.34(R.05)]. Items that experience significant
and volatile movements in fair values would require
annual revaluations [IAS16.34(R.05)]. Once an entity
has opted for the revaluation model, it has an obligation
to keep the valuations up to date [IAS16.38(R.05)] .
Revaluation model: treatment of surpluses
and deficits on revaluation
The surplus or deficit arising on revaluation should
be recognised either in the income statement or
directly in reserves in accordance with the following
table [IAS16.39-40(R.05)]:
| |
Surplus |
Deficit |
| First revaluation |
Credit to equity (revaluation
surplus reserve) |
Charge to income statement |
| Subsequent revaluation |
Credit to equity (revaluation
surplus reserve) unless the surplus reverses
a previous deficit, then credit to income statement
up to amount of previous deficit and then to
equity. |
Charge to income statement unless
the deficit reverses a previous surplus, then
charge to equity up to amount of previous surplus
and then to income statement. |
An impairment loss under the revaluation model is treated as a revaluation
decrease to the extent of previous revaluation surpluses. Any loss that takes the asset below historical depreciated cost is recognised in the income statement [IAS36.60(R.04)]. The reversal of an impairment
loss should be treated as a revaluation increase to the extent it does not reverse an impairment previously recognised
in the income statement
[IAS36.119(R.04)].
Impairment
An asset's carrying amount may not be recovered
from future business activity. Wherever indicators
of impairment exist, a review for impairment should
be carried out [IAS36.9,12(R.04)]. Where impairment is
identified, a write-down of the carrying value to
the recoverable amount should be charged as an immediate
expense in the income statement [IAS36.60-61(R.04)]. However,
to the extent that it reverses a previous revaluation
uplift, it should be charged directly against the
revaluation surplus [IAS36.60-61(R.04)].
Reversal of impairment losses
A reversal of the previous write-down should be
made if there is a recovery from the impairment.
Such reversal should be recognised if, and only
if, there has been a change in the estimates used
to determine the asset's recoverable amount [IAS36.114(R.04)].
Further guidance in assessing indicators of impairment
reversals is provided in IAS 36 [IAS36.111(R.04)]. Impairment reversals
for assets accounted for at historical cost are
based on a recovery in value up to the amount of
the original cost, but reduced by the amount of
depreciation that would have been charged had the
original write-down not been made [IAS36.117(R.04)].
A different rule applies for revalued assets. The
reversal of an impairment loss on a revalued asset
should be treated as a revaluation increase in accordance
with IAS16 [IAS36.119(R.04)]. The reversal should therefore
be accounted for according to where the original
write-down was made. To the extent that the write-down
was made to the income statement, the reversal is
recognised in the income statement. To the extent
that a write-down was charged to the revaluation
reserve, the reversal would be credited to the same
place [IAS36.120(R.04)].
Compensation for impairment losses
Compensation may be received in the form of reimbursements
from insurance companies, governmental indemnities
related to expropriated assets or involuntary relocation
or conversion of items of PPE that have been impaired.
Monetary or non-monetary compensation from third
parties is recorded in the income statement when
the compensation becomes receivable [IAS16.65(R.05)].
Impairments or losses of items of PPE, related claims
for or payments of compensation from third parties,
and any subsequent purchase or construction of replacement
assets, are separate economic events and should
be accounted for as such [IAS16.66(R.05)].
Derecognition
When an asset is disposed of, it should be eliminated
from the balance sheet. Derecognition is also required
when no future economic benefits are expected from
the use or disposal of the asset [IAS16.67(R.05)]. Any
gain or loss arising, being the difference between
any disposal proceeds and the carrying amount, is
recognised in the income statement [IAS16.68,71(R.05)].
Gains on derecognition are not classified as revenue
[IAS16.68(R.05)]. An inter-reserve transfer may be
made for any element of the revaluation reserve
relating to the asset. The amount transferred will
not pass through the income statement [IAS16.41(R.05)].
When an asset ceases to meet the recognition criteria
of PPE, it should be derecognised.
When an asset's carrying amount is expected to
be recovered principally through a sale rather than
through continuing use, it should be classified
as held for sale, within current assets [IFRS5.6].
Reclassification to held for sale requires the fulfilment
of certain criteria set out in IFRS 5 [IFRS5.7-12] .
Presentation and disclosure
An entity should disclose, in its accounting policies,
the measurement bases used for determining gross
carrying amount. Depreciation methods and useful
lives (or depreciation rates) should also be disclosed
[IAS16.73-74(R.05)].
There should be detailed numerical disclosures
about the balances of each class of PPE at the beginning
and end of the year, and the movements during the
year for all periods presented [IAS16.73(R.05)]. Many
entities prefer to present separate tabulations
of gross assets and accumulated depreciation, with
each separately reconciled.
Restrictions over the PPE, the amount of expenditure
relating to assets under construction and the amount
of commitments for the acquisition of PPE are required
disclosures. Any compensation from third parties
in relation to PPE is disclosed separately on the
face of the income statement or in the notes [IAS16.74(R.05)].
Additional disclosures for revalued PPE
The following disclosures are required in respect
of PPE carried at revalued amounts [IAS16.77(R.05)];
| a) |
the effective date
of the revaluation; |
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| b) |
whether an independent valuer was involved; |
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| c) |
the methods and significant
assumptions used in estimates; |
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| d) |
how much of fair values were
determined directly by reference to an active
market or were estimated using valuation techniques; |
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| e) |
for each class of property,
plant and equipment, the carrying amount that would have been recognised had the assets
been carried under the cost model; and |
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| f) |
the revaluation surplus, indicating
the movement for the period and any restrictions
on the distribution of the balance to shareholders. |
Additional disclosures for lessees in respect
of owned PPE leased out under operating leases
A lessee of PPE leased under a finance lease should
provide additional disclosures, including the net
carrying amount of PPE held under finance leases.
A reconciliation between the total minimum lease
payments at the balance sheet date and their present
value, the present value of minimum lease payments
(in aggregate and analysed by maturity), the contingent
rents recognised in the period and a general description
of the entity's significant leasing arrangements
should be given. Disclosure of any sub leases should
also be given [IAS17.31(R.05)].
Additional disclosures for lessors in respect
of PPE held under finance leases
A lessor of PPE leased under a finance lease should
provide additional disclosures, including the future
minimum lease payments under non-cancellable operating
leases (in aggregate and analysed by maturity),
the total contingent rents recognised in income
and a general description of significant leasing
arrangements [IAS17.56(R.05)].
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