IAS 16 Property, Plant and Equipment

Objective

The objective of this standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investments. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them.

Definition

Property, plant and equipment are 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 period.

Recognition

The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

• it is probable that future economic benefits associated with the item will flow to the entity; and
• the cost of the item can be measured reliably.

Initial recognition

Property, plant and equipment shall be measured at its cost. The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. The cost of an item of property, plant and equipment comprises:

• its purchase price, including duties and non-refundable purchase taxes, after deducting trade
  discounts,
• 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, and
• the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired.

Subsequent measurement

An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.

Cost model

After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation model

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. The increase should only be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, if that asset has previously been increased in value due to a revaluation then the decrease shall be recognised first against any credit balances existing in the revaluation reserve relating to that asset. Once this has been consumed any remaining loss must be recognised in profit or loss.

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life, i.e. spreading the cost of the asset over the period it will be used to generate benefit.

Depreciable amount is the cost of an asset, less its residual value.

The depreciation charge for each period shall be recognised in profit or loss. The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

The residual value of an asset is the estimated amount that an entity would obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were at the end of its useful life.

Rating :	Ratings & Comments  (Click the stars to rate the page)

Tags:	IAS 16;depreciation;property;plant and equipment;revaluation