The first area relates to IAS 23, Borrowing Costs, rather than IAS 16, but is still very much linked to which costs are eligible for capitalisation. IAS 16 – Property, plant and equipment. Comparison with IAS 16 AASB 116 Property, Plant and Equipment as amended incorporates IAS 16 Presentation of Financial Statements as issued and amended by the International Accounting Standards Board (IASB). [IAS 16.9] Note, however, that 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. NZ IAS 16 – This version is effective for reporting periods beginning on or after 1 Jan 2019 (early adoption permitted) Date of issue: Nov 2012 Date compiled to: 29 Feb 2020 (excludes NZ IFRS 17) Download. Property, Plant and Equipment IAS 16 Property, Plant and Equipment IAS 16 Level Tested on CPA PEP ExamLevel TestedImportance (low, medium, or high)Core 1 Module Level AHigh Assurance ElectiveLevel AHigh Definition Property, plant and equipment (PPE) are tangible assets that:are held for use to produce/supply goods and services, for rental to others,… Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [7], Depreciation: The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life. According to IAS 16 Para 16 (b) the cost of an item of property, plant and equipment comprises: Cost of property, plant and equipment (‘PP&E’) comprises (IAS 16.16): purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. [IAS 16.40], When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. Revalued assets are depreciated in the same way as under the cost model (see below). [10] In addition, the depreciation in each accounting period of the asset's useful life should reflect the pattern which the asset's economic benefits are expected to be consumed by the entity. IAS 16 requires more than just a cost to be directly attributable before it qualifies for capitalization as cost of the asset or to be included in the carrying amount of the non-current asset or fixed asset. 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. IAS 16 is applied in accounting for property, plant and equipment. This Standard deals with the accounting treatment of Property, Plant & Equipmentincluding the guidance for the main issues related to the recognition & measurement, determination of carrying value, depreciation charges, any impairment loss and de-recognition aspects for the property, plant & equipment in the financial statements of an entity. IAS 16 sets out two models for measuring PPE subsequent to its initial recognition as an asset. International Accounting Standard 16 Property, Plant and Equipment or IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. 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. PPE is initially recognised at its cost, which is the fair value of the consideration given. As per IAS 16.7, Fixed Assets or PPE should be recognized based on the following factors: The cost of items of Property, Plant, and Equipment should be recognized as an asset if and only if. a reconciliation of the carrying amount at the beginning and the end of the period, showing: acquisitions through business combinations, net foreign exchange differences on translation, This page was last edited on 17 December 2020, at 21:03. ... IAS 23 Borrowing Costs details the criteria for the recognition of interest as a component of the carrying amount of a self-constructed asset. [IAS 16.3], The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment Property. reconciliation of the carrying amount at the beginning and the end of the period, showing: acquisitions through business combinations, net foreign exchange differences on translation, restrictions on title and items pledged as security for liabilities, expenditures to construct property, plant, and equipment during the period, contractual commitments to acquire property, plant, and equipment. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. [IAS 16.23], If an asset is acquired in exchange for another asset (whether similar or dissimilar 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 measurable. 7 states that the cost of an item of Property, Plant and Equipment (PPE) 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 ; ... To qualify for capitalization, costs must be associated with incremental benefits. The standard itself defines PPE as "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 [accounting] period. Each word should be on a separate line. Paragraph 20 of IAS 16 requires that costs be capitalized until the asset is in the location and condition necessary for it to be capable of operating in the manner intended by … [IAS 16.31], If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.51], The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. Capitalisation of borrowing costs 4 A: IAS 23 in brief A revised version of IAS 23 IAS 23 Borrowing Costs (IAS 23) addresses accounting for borrowing costs. site preparation, delivery and handling, installation, related professional fees for architects and engineers), and the estimated cost of dismantling and removing the asset and restoring the site. Dust and other residue if not cleaned will cause processors to overhe… Please read, International Financial Reporting Standards, IAS 1 — Presentation of Financial Statements, IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10 — Events After the Reporting Period, IAS 14 — Segment Reporting (Superseded), IAS 15 — Information Reflecting the Effects of Changing Prices (Withdrawn), IAS 19 — Employee Benefits (1998) (superseded), IAS 20 — Accounting for Government Grants and Disclosure of Government Assistance, IAS 21 — The Effects of Changes in Foreign Exchange Rates, IAS 22 — Business Combinations (Superseded), IAS 26 — Accounting and Reporting by Retirement Benefit Plans, IAS 27 — Separate Financial Statements (2011), IAS 27 — Consolidated and Separate Financial Statements (2008), IAS 28 — Investments in Associates and Joint Ventures (2011), IAS 28 — Investments in Associates (2003), IAS 29 — Financial Reporting in Hyperinflationary Economies, IAS 30 — Disclosures in the Financial Statements of Banks and Similar Financial Institutions, IAS 32 — Financial Instruments: Presentation, IAS 35 — Discontinuing Operations (Superseded), IAS 37 — Provisions, Contingent Liabilities and Contingent Assets, IAS 39 — Financial Instruments: Recognition and Measurement, (revised as part of the 'Comparability of Financial Statements' project), Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16), Educational material on applying IFRSs to climate-related matters, IASB publishes proposed IFRS Taxonomy update, IASB issues amendments to IAS 16 regarding proceeds before intended use, We comment on the IASB's proposed amendments to IAS 16, EFRAG draft comment letter on proposed amendments to IAS 16, IASB publishes proposed amendments to IAS 16 regarding proceeds before intended use, EFRAG endorsement status report 23 October 2020, EFRAG endorsement status report 3 June 2020, IFRS in Focus — IASB publishes package of narrow-scope amendments to IFRS Standards, Effective date of IAS 16 amendments regarding proceeds before intended use, IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities, IFRIC 12 — Service Concession Arrangements, IFRIC 20 — Stripping Costs in the Production Phase of a Surface Mine, SIC-6 — Costs of Modifying Existing Software, SIC-14 — Property, Plant and Equipment – Compensation for the Impairment or Loss of Items, IAS 16 — Stripping costs in the production phase of a mine, International Valuation Standards Council (IVSC), Operative for financial statements covering periods beginning on or after 1 January 1983, Operative for financial statements covering periods beginning on or after 1 January 1995, Operative for annual financial statements covering periods beginning on or after 1 July 1999, Effective for annual periods beginning on or after 1 January 2005, Effective for annual periods beginning on or after 1 January 2009, Effective for annual periods beginning on or after 1 January 2013, Effective for annual periods beginning on or after 1 July 2014, Effective for annual periods beginning on or after 1 January 2016, Effective for annual periods beginning on or after 1 January 2022, assets classified as held for sale in accordance with, biological assets related to agricultural activity accounted for under, exploration and evaluation assets recognised in accordance with. IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. Paragraph 17 of IAS 16 specifies examples of directly attributable costs. Such costs neither extend the useful life of the asset nor helps in increasing efficiency or effectiveness of the asset. IAS 16 outlines the accounting treatment for most types of property, plant and equipment. It concerns accounting for property, plant and equipment (known more generally as fixed assets), including recognition, determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. The standard itself defines PPE as "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 [accounting] period." hyphenated at the specified hyphenation points. the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders. This site uses cookies to provide you with a more responsive and personalised service. The transfer to retained earnings should not be made through profit or loss. IAS 16 par. one that necessarily takes a substantial period of time to get ready for its intended use or sale. IAS 16 states that you should capitalise, along with the direct costs, directly attributable costs to construction, including personnel expenses. NZ IAS 16, paragraph 17(e) currently permits the costs of testing whether an asset is working properly to be capitalised into the cost of PPE, after deducting the net proceeds from selling any items produced while bringing the asset to the relevant location and condition. It considers whether borrowing costs should be capitalised as part of the cost of the asset, or expensed in profit or loss. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. IAS 16 is the accounting standards that deal with property, plant and equipment. Further, many bearer plants will require significant costs to be incurred during the growth stage after the initial costs of planting, as well as subsequent costs after they reach maturity. Amendments. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. Some costs may be capital in nature and some may be maintenance expenditure. [IAS 16.41]. [IAS 16.43], IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. Thereafter costs will cease to be capitalized and depreciation will commence. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. [IAS 16.79], If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]. That is, the mark-down in value of the asset should be recognised as an expense in the income statement every accounting period throughout the asset's useful life. [1], IAS 16 was issued in December 1993 by the International Accounting Standards Committee, the predecessor to the IASB. [1], IAS 16 permits two accounting models for measurement of the asset in periods subsequent to its recognition, namely the cost model and the revaluation model. The change was discussed in the May 2017 edition of Accounting and Business , as part of looking at the IASB’s annual improvements process, so the topic won’t be examined in depth again here. Issue. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. These words serve as exceptions. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. Both paragraphs 10 and 16(b) of IAS 16 support the capitalization of depreciation of the RoUA into the cost of the manufacturing facility. Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. [IAS 16.65], An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. Under IAS 23 Borrowing Costs, a company capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset – i.e. Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value Measurement. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. Those items included: Its purchase price of fixed assets; IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. [1] The useful life of the asset is determined by taking into account expected usage, physical wear and tear, technical or commercial obsolescence arising from changes in production or market demand and legal limits on its use. These are the ‘cost model’ and the ‘revaluation model’. IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting treatments, for example: The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [3], IAS 16 prescribes that an item of property, plant and equipment should be recognised (capitalised) as an asset if it is probable that the future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably. IAS 16 outlines the accounting treatment for most types of property, plant and equipment. This means that the enterprise must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. [5], The standard also discusses the accounting treatment of parts of property, plant and equipment which may require replacement at regular intervals and the capitalisation of inspection costs. [IAS 16.36]. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. [1], Items of property, plant and equipment should be measured at cost,[6] which includes its original purchase price, any costs necessary to bring the asset to the location and condition for its intended use (e.g. whether an independent valuer was involved, for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model. it is probable that the future economic benefits associated with the asset will flow to the entity, and. mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. EXAMPLE Capitalisation of pre-opening costs. [11] An entity should recognise any gain or loss on disposal in its income statement. Borrowing costs (IAS 23) Financial instruments (IFRS 9) ... IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates including the replacement of one benchmark rate with an alternative one. [IAS 16.56]. "[2], The standard does not apply to assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations and assets which require more specialised accounting, such as biological (IAS 41 Agriculture), exploration and evaluation assets (IFRS 6 Exploration for and Evaluation of Mineral Resources), mineral rights and reserves such as oil, natural gas and similar non-regenerative resources. [IAS 16.55]. References. It is probable that the future economic benefits associated with the item will flow to the entity; and ; Cost of the item can be measured reliably An item of property, plant, or equipment shall not be carried at more than recoverable amount. 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