Property, Plant &

Equipment
IAS 16
 Property, plant and equipment
• Property, plant and equipment are tangible assets with the following
• properties (IAS 16: para. 6):
• a) Held by an entity for use in the production or supply of goods or services, for
rental to others, or for administrative purposes
• b) Expected to be used during more than one period
 Recognition
An item of property, plant and equipment should be recognised as an asset when:
it is probable that future economic benefits associated with the asset will flow to the entity;
and
the cost of the asset can be measured reliably.
These recognition criteria apply to subsequent expenditure as well as costs incurred initially.
IAS 16 provides additional guidance as follows (IAS 16: paras. 12–14):
Smaller items such as tools may be classified as consumables and expensed rather than
capitalised. Where they are capitalised, they are usually aggregated and treated as one.
 Measurement at recognition
Property, plant and equipment should initially be measured at cost, which includes
(IAS 16: para. 15):

Directly attributable
Finance costs: capitalised
Purchase price, costs
for qualifying assets
less trade of bringing the asset to
(IAS 23)
discount/rebate working condition for
intended use
Including: Including:
❑ Import duties ❑ Employee benefit costs
❑ Non- ❑ Site preparation
refundable ❑ Initial delivery and handling costs
purchase taxes ❑ Installation and assembly costs
❑ Professional fees
❑ Costs of testing
❑ Site restoration provision
 Dismantling costs
Dismantling costs – the present value of these costs should be capitalised, with an
equivalent liability set up. The discount on this liability would then be unwound over the
period until the costs are paid. This means that the liability increases by the interest rate
each year, with the increase taken to finance costs in the statement of profit or loss.

You may need to use the interest rate given and apply the discount fraction where r is the
interest rate and n the number of years to settlement.
Present Value = Future Value (1 + r)^ -n or PV= FV/(1+r) ^n
◦ r = rate of interest
◦ n = number of years
 Example
If an oil rig was built in the sea, the cost to be capitalised is likely to include the cost of
constructing the asset and the present value of the cost of dismantling it. If the asset cost
$10million to construct, and would cost $4million to remove in 20 years, then the
present value of this dismantling cost must be calculated. If interest rates were 5%, the
present value of the dismantling costs is calculated as follows:
$4million × 1/1.05^20 = $1,507,558
Dr Asset $1,507,558
Cr Provision for Dismantling $1,507,558
The total to be capitalised would be $10million + $1,507,558 = $11,507,558.
This would be depreciated over 20 years. Each year, the liability would be increased by
the interest rate of 5%. That is $1,507,558 * 5% = $75,378
Dr P or L $75,378
Cr Provision for Dismantling $75,378
In year 1 this would mean the liability increases by $75,378 (making the year end
liability $1,582,936). This increase is taken to the finance costs in the statement of
profit or loss
 Example
An entity builds a research centre in the rainforest at a cost of $250,000, having
signed a contract with local government to dismantle the centre and restore the land
after 10 years at an estimated cost of $100,000. Assuming a discount rate of 5%, a
provision is made for: $100,000/1.05^10 = $61,391.
Dr Asset $61,391
Cr Provision for Dismantling $61,391
The debit entry is to the non-current asset cost account, such that the total cost of the
research centre is:
• The measurement of the non-current asset is not affected by the unwinding of the discount.
$
• Building cost 250,000
• Restoration cost 61,391
311,391
Each year, the discount is unwound, and recorded as interest: Year 1 $61,391 x 5% = $3,070
Dr P or L (Interest expense) $3,070
Cr Provision $3,070

The measurement of the non-current asset is not affected by the unwinding of the discount
 Should not be Capitalised
The following costs will not be part of the cost of property, plant or equipment unless
they can be attributed directly to the asset's acquisition, or bringing it into its working
condition.
◦ Administration and other general overhead costs
◦ Start-up and similar pre-production costs
◦ Initial operating losses before the asset reaches planned performance
All of these will be recognised as an expense rather than an asset.
In the case of self-constructed assets, the same principles are applied as for acquired
assets. If the entity makes similar assets during the normal course of business for sale
externally, then the cost of the asset will be the cost of its production under IAS 2
Inventories. This also means that abnormal costs (wasted material, labour or other
resources) are excluded from the cost of the asset.
An example of a self-constructed asset is when a building company builds its own
head office.
 Revaluation of non-current assets
IAS 16 allows a choice of accounting treatment for property, plant and
equipment:
the cost model
the revaluation model.
The cost model
Property, plant and equipment should be valued at cost less accumulated
depreciation.
The revaluation model
Property, plant and equipment may be carried at a revalued amount less
any subsequent accumulated depreciation.
If the revaluation alternative is adopted, two conditions must be complied with:
Revaluations must subsequently be made with sufficient regularity to ensure that the
carrying amount does not differ materially from the fair value at each reporting date.
When an item of property, plant and equipment is revalued, the entire class of assets to
which the item belongs must be revalued.
Accounting for a revaluation
Steps:
(1) Restate asset's cost to the new valuation.
(2) Eliminate any existing accumulated depreciation for the asset.
(3) Show the total increase in Other Comprehensive Income, at the foot of the
statement of profit or loss. This would then be taken to the revaluation surplus (much
like the profit for the year gets taken to retained earnings).
Journal (assuming revalued amount is greater than original
cost):
$ $
Dr Non-current assets cost/valuation (revalued amount – cost) X
Dr Accumulated depreciation (eliminate accumulated balance) X
Cr Other Comprehensive Income (revaluation surplus) X
 Recognising revaluation gains and losses
Revaluation gains are recorded as a component of other comprehensive income
either within the statement of profit or loss and other comprehensive income or in a
separate statement. This gain is then carried in a revaluation surplus within equity.
This revaluation surplus is a capital reserve and is therefore not permitted to be
distributed to the shareholders.
Revaluation losses, which represent an impairment of the asset value, are recognised
in the statement of profit or loss. When a revaluation loss arises on a previously
revalued asset it should be deducted first against the previous revaluation gain and
can therefore be taken to other comprehensive income in the year. Any excess
impairment will then be recorded as an impairment expense in the statement of profit
or loss.
Note that offset of gains and losses between different properties is not permitted.
 Recognition of revaluation gain
An entity revalues its buildings and decides to incorporate the revaluation into its financial
statements.
Extract from the statement of financial position at 31 December 2017: $000
Buildings:
Cost 1,200
Depreciation (144)
–––––
1,056
–––––
The building is revalued at 1 January 2018 at $1,400,000. Its useful life is 40 years at that date.
Show the relevant extracts from the financial statements at 31 December 2018.
 Workings
(W1) PPE Note
Land and buildings $000
1 January 2018 1,056
Revaluation (β) 344
–––––
Valuation 1,400
Depreciation (1,400/40 years) (35)
–––––
31 December 2018 1,365
–––––
 Solution

The relevant extracts from the financial statements at 31 December 2018 are as follows:
Statement of profit or loss and other comprehensive income (extract)
$000
Depreciation (W1) (35)
Other comprehensive income:
Gain on revaluation (W1) 344
Statement of financial position (extract)
$000
Non-current assets
Land and buildings (W1) 1,365
Equity
Revaluation surplus (SOCIE) 344
Statement of changes in equity (extract)
Revaluation surplus
$000
1 January 2018 b/d –
Revaluation gain (W1) 344
––––
31 December 2018 c/d 344
––––
 Depreciation of revalued assets
Once an asset has been revalued the following treatment is required.
Depreciation must be charged, based on valuation less residual value, over the
remaining useful life of the asset
The whole charge must go to the statement of profit or loss for the year.
An annual reserves transfer may be made, from revaluation surplus to retained
earnings, for the additional depreciation charged on the revalued amount compared
to cost. This permitted treatment under IAS 16 is to address the imbalance between
a non-distributable gain held in revaluation surplus and the reduction in retained
earnings due to the increased depreciation charge.
This transfer would be shown on the SOCIE.
 Journals
Dr Statement of profit or loss – depreciation charge X
Cr Accumulated depreciation X
And:
Dr Revaluation surplus (depreciation on valuation – depreciation on original cost)
X
Cr Retained earnings X

Note: This transfer is not part of other comprehensive income, it is shown on

the SOCIE only.
 Example
On 1 April 2018 the fair value of NUST's property was $100,000 with a remaining
life of 20 years. NUST’s policy is to revalue its property at each year end. At 31
March 2019 the property was valued at $86,000. The balance on the revaluation
surplus at 1 April 2018 was $20,000 which relates entirely to the property.
NUST does not make a transfer to realised profit in respect of excess depreciation.
Required:
1 Prepare extracts of NUST's financial statements for the year ended 31 March 2019
reflecting the above information.
2 State how the accounting would be different if the opening revaluation surplus did
not exist.
 Workings
(W1) Depreciation
$100,000/20 years = $5,000
(W2) Revaluation
Carrying amount of leasehold at 31 March 2019 (100,000 – 5,000 (W1)) 95,000
Leasehold valuation at 31 March 2019 86,000
––––––
Loss on revaluation (9,000)
––––––
 Solution
1 Extracts of the financial statements for NUST at 31 March 2019
Statement of profit or loss and other comprehensive income (extract)
$
Depreciation (W1) (5,000)
Other comprehensive income:
Revaluation loss (W2) (9,000)

Statement of financial position (extract)

Non-current assets
Property (at valuation) 86,000
Equity
Revaluation surplus (20,000 – 9,000) 11,000
Statement of changes in equity (extract)
Revaluation surplus
Balance at 1 April 2018 20,000
Revaluation of leasehold (W2) (9,000)
––––––
Balance at 31 March 2019 11,000
(2) If the opening revaluation surplus did not exist, then the revaluation loss of $9,000
would need to be taken through the statement of profit or loss as an impairment
expense.
 Example
An entity revalued its land and buildings at the start of the year to $60
million ($15 million for the land). The property cost $30 million ($6
million for the land) ten years prior to the revaluation. The total expected
useful life of 40 years remained unchanged. The entity's policy is to make
an annual transfer of realised amounts to retained earnings.
Show the effects of the above on the financial statements for the year.
 Workings
(W1)
Land Buildings Total
Cost 6,000 24,000 30,000
Depreciation (10/40) (6,000) (6,000)
–––––– –––––– ––––––
Carrying amount 6,000 18,000 24,000
Revaluation gain (bal) 9,000 27,000 36,000
–––––– –––––– ––––––
Revaluation 15,000 45,000 60,000
Depreciation (1/30) (1,500) (1,500)
–––––– –––––– ––––––
15,000 43,500 58,500
(W2)
Annual transfer
New depreciation (W1) 1,500
Old depreciation ($24m/40 years) (600)
––––––
Annual transfer 900
––––––
Statement of profit or loss and other comprehensive income (extract)
$000
Depreciation (W1) (1,500)
Other comprehensive income:
Revaluation gain (W1) 36,000
Statement of financial position (extract)
Non-current assets $000
Land and buildings (W1) 58,500
Equity
Revaluation surplus (SOCIE) 35,100
 Disposal of revalued non-current assets
The profit or loss on disposal of a revalued non-current asset should be
calculated as the difference between the net sale proceeds and the
carrying amount.
There are two steps to disposing of a revalued asset:
(1)It should be accounted for in the statement of profit or loss of the
period in which the disposal occurs.
(2)Any balance on the revaluation surplus relating to this asset should
now be transferred to retained earnings.
Note: This does not affect other comprehensive income, which is only
altered when the asset is actually revalued upwards or downwards.
 Example
Derek purchased a property costing $750,000 on 1 January 2014 with a
useful life of 10 years. It has no residual value. At 31 December 2014 the
property was valued at $810,000 resulting in a gain on revaluation being
recorded in other comprehensive income of $135,000. There was no
change to its useful life. Derek does not make a transfer to realised profits
in respect of excess depreciation on revalued assets.
On 31 December 2016 the property was sold for $900,000.
Required:
How should the disposal on the previously revalued asset be treated in the
financial statements for the year ended 31 December 2016?
 Solution
Profit on disposal
$000 $000
Sale proceeds 900
Valuation at 31 December 2014 810
Less: Depreciation ((810 ÷ 9 yrs) × 2 yrs) (180)
––––
Carrying amount at 31 Dec 2016 (630)
––––
Profit on disposal 270
––––
Transfer remaining balance on revaluation surplus
$000
Dr Revaluation surplus 135
Cr Retained earnings 135