Property, plant and equipment (formerly know as Tangible fixed assets, in short PPE) 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 of property, plant and equipment
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.
Classes or Property, plant and equipment
A grouping of assets of a similar nature or function in an entity’s operations that is shown as a single item for the purpose of disclosure in the financial statements.
According to IAS 16 37, the following are examples of separate classes:
- Land and buildings
- Motor vehicles
- Furniture and fixtures
- Office equipment, and
- Bearer plants.
This list is not exhaustive!
Initial recognition of indirect costs
Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets.
Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired.
Subsequent recognition of indirect costs
Day to day servicing:
An entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ are primarily the costs of labour and consumables, and may include the cost of small parts. These costs are expensed through profit and loss.
Parts of some items of property, plant and equipment may require replacement at regular intervals or acquired to make a less frequently recurring replacement, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred provided that the recognition criteria are met.
Costs incurred for major inspections for faults regardless of whether parts of the item are replaced are recognised to the carrying amount of the item of property, plant and equipment. Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed.
Certain properties which are used on rental are classified as an investment property in which case IAS 40 Investment property will apply. Only tangible items which have a useful life of more than one period are classified as PPE as per IAS 16. But refer to the words “ more than one period” as more than one accounting period of 12 months.
Also, an entity shall determine a threshold limit commensurate to its size for recognizing a tangible item as PPE. For example, a tangible item of insignificant amount although satisfying the definition of PPE may be expensed.
Property, plant and equipment
Property, plant and equipment
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