Property plant and equipment

Property plant and equipment (formerly know as tangible fixed assets, in short PPE) are tangible items that:

  1. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
  2. 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:

  1. it is probable that future economic benefits associated with the item will flow to the entity; and
  2. 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: Property, plant and equipment

  • Land Property plant and equipment
  • Land and buildings Property plant and equipment
  • Machinery Property plant and equipment
  • Ships Property plant and equipment
  • Aircraft Property plant and equipment
  • Motor vehicles Property plant and equipment
  • Furniture and fixtures Property plant and equipment
  • Office equipment, and Property plant and equipment
  • Bearer plants. Property plant and equipment

This list is not exhaustive! An other class that is useful in certain cases is the class ‘Assets under construction’. When looking at the examples below it shows that the naming of classes of property plant and equipment is many times tailored to the type of industry in which a reporting entity is active. Property plant and equipment

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:

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

Investment property

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 property, plant and equipment 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 property, plant and equipment. For example, a tangible item of insignificant amount although satisfying the definition of property, plant and equipment may be expensed.

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.

Replacement parts:
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.

Major inspections:
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.

Measurement at recognition

An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. The cost of a self-constructed asset is determined using the same principles as for an acquired asset. Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management

The cost of an item of property, plant and equipment comprises:

  1. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  2. 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.
  3. 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 or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

Examples of directly attributable costs are:

  1. costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment;
  2. costs of site preparation;
  3. initial delivery and handling costs;
  4. installation and assembly costs;
  5. costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and
  6. professional fees.
Examples of costs that are not costs of an item of property, plant and equipment are:
  1. costs of opening a new facility;
  2. costs of introducing a new product or service (including costs of advertising and promotional activities);
  3. costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
  4. administration and other general overhead costs;
  5. incidental operations may occur before or during the construction or development activities and as incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss

Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item.

For example, the following costs are not included in the carrying amount of an item of property, plant and equipment:

  1. costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity;
  2. initial operating losses, such as those incurred while demand for the item’s output builds up; and
  3. costs of relocating or re-organising part or all of an entity’s operations.

Cash price equivalent

The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23 Borrowing Costs.

Asset exchange

One or more items of property, plant and equipment may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The following discussion refers simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence.

The cost of such an item of property, plant and equipment is measured at fair value unless:

  1. the exchange transaction lacks commercial substance or
  2. the fair value of neither the asset received nor the asset given up is reliably measurable.

The acquired item is measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:

  1. the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
  2. the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange; and
  3. the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without an entity having to perform detailed calculations.

The fair value of an asset is reliably measurable if:

  1. the variability in the range of reasonable fair value measurements is not significant for that asset; or
  2. the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value.

If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident.

Government assistance

The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

Measurement after recognition

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.

When an item of property, plant and equipment is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways:

  1. the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The gross carrying amount may be restated by reference to observable market data or it may be restated proportionately to the change in the carrying amount. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account accumulated impairment losses; or
  2. the accumulated depreciation is eliminated against the gross carrying amount of the asset.

Revaluation changes shall be accounted for as follows:

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; or
  • the increase shall 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; or
  • the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes.

The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of.

However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

Depreciation

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 shall be depreciated separately.

The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. The depreciable amount of an asset shall be allocated on a systematic basis over its useful life and shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include:

  • straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change.
  • diminishing balance method results in a decreasing charge over the useful life.
  • units of production method result in a charge based on the expected use or output.

The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount.

The residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.

Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not negate the need to depreciate it.

The useful life of an asset is defined in terms of the asset’s expected utility to the entity. The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset.

Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets.

Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) and the date that the asset is derecognised.

Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.

The residual value and the useful life and depreciation method of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset.

For example, revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed.

Impairment

The impairment process begins by identifying the possible impaired assets. An asset is considered impaired if the recoverable amount (RA) is lower than the carrying amount (CA).

At each reporting date, an entity should assess whether there is any indication that an asset may be impaired. According to the circumstances, impairment analysis should be performed at an asset level or at a cash-generating unit level. Property plant and equipment

The assessment should take into consideration, as a minimum, the following external and internal sources of information (IAS 36 12):

External sources of information

(a) there are observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.

(b) significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. Property plant and equipment

(c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially. Property plant and equipment

(d) the carrying amount of the net assets of the entity is more than its market capitalisation. Property plant and equipment

Internal sources of information

(e) evidence is available of obsolescence or physical damage of an asset. Property plant and equipment

(f) significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. Property plant and equipment

These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite1. Property plant and equipment

(g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that:

  1. the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or Property plant and equipment Property plant and equipment
  2. the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.

Reversal of impairment

After a charge for impairment has been made, this is reversed for assets other than goodwill (that is, capitalised exploration and evaluation of mineral resources (E&E) assets and property, plant and equipment) if there is a subsequent increase in the recoverable amount calculated in accordance with IAS 36 Impairment of Assets.

Example 1
Company B is carrying out E&E activities in country X. A requirement of the licence to carry out E&E activities is that Company B incurs a specified minimum amount of exploration expenditure in each year. Due to a collapse in investor confidence, Company B determines the end of its financial year that it is unlikely that it will be able to raise sufficient funds to meet the minimum spending requirement. Consequently, a charge for impairment of its E&E asset is included in its financial statements.

Shortly after the financial statements have been approved, the government of country X grants a three year exemption from the minimum spend requirement.

In this case, the reason for the original charge for impairment has been eliminated. Provided Company B now expects to continue to carry out E&E activities and there are no other indicators of impairment that need to be considered, the original charge for impairment is reversed. Property plant and equipment

However, the ability to reverse an impairment loss is dependent on the original asset not having been derecognised. In some circumstances, E&E activities may not result in the discovery of mineral reserves and E&E activities are abandoned. In these circumstances, the E&E assets are derecognised and any subsequent developments, such as the discovery of mineral reserves due to improved technology, will not result in a reversal of the impairment charge for the previous E&E assets that have been derecognised.

E&E assets are also derecognised if, for example, an entity loses the right to explore in a specific area. Property plant and equipment

Example 2
Company A is carrying out E&E activities in country Z. Due to a change of government, all existing licences for E&E and mining activities are cancelled and the State takes control of all projects. Consequently, Company A abandons its E&E projects in country Z, and impairs and derecognises the related E&E assets. Property plant and equipment

Five years later, following another change in government, Company A secures new rights to carry out E&E and mining activities. Although future E&E expenditure is eligible for capitalisation (assuming that this is Company A’s accounting policy), the impairment of the original E&E asset cannot be reversed, even if the area being explored is the same, as the original E&E asset was derecognised. Property plant and equipment

Derecognition

The carrying amount of an item of property, plant and equipment shall be derecognised:

  1. on disposal; or Property plant and equipment
  2. when no future economic benefits are expected from its use or disposal. Property plant and equipment

The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item.

The gain or loss shall be included in profit or loss when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback).

Gains shall not be classified as revenue.
However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale.

The proceeds from the sale of such assets shall be recognised as revenue in accordance with IFRS 15 Revenue from Contracts with Customers. IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories.

Presentation and disclosure

An entity shall present and disclose information that enables users of the financial statements about the entity’s investment in its property, plant and equipment and the changes in such investment.

In the Notes to the financial statement:

  1. The financial statements shall disclose, for each class of property, plant and equipment:
    1. the measurement bases used for determining the gross carrying amount;
    2. the depreciation methods used; Property plant and equipment
    3. the useful lives or the depreciation rates used; Property plant and equipment
    4. the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and
    5. a reconciliation of the carrying amount at the beginning and end of the period showing:
      • additions; Property plant and equipment
      • assets classified as held for sale or included in a disposal group classified as held for sale and other disposals; Property plant and equipment
      • acquisitions through business combinations; Property plant and equipment
      • increases or decreases resulting from revaluations and from impairment losses recognised or reversed in other comprehensive income;
      • impairment losses recognised in profit or loss; Property plant and equipment
      • impairment losses reversed in profit or loss; Property plant and equipment
      • depreciation; Property plant and equipment
      • the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
      • other changes. Property plant and equipment
  2. The financial statements shall also disclose: Property plant and equipment
    1. the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
    2. the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction;
    3. the amount of contractual commitments for the acquisition of property, plant and equipment; and
    4. if it is not disclosed separately in the statement of comprehensive income, the amount of 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.
  3. If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed in addition to the disclosures required by IFRS 13 Fair Value Measurement:
    1. the effective date of the revaluation;
    2. whether an independent valuer was involved;
    3. for each revalued class of property, plant and equipment, the carrying amount that would have been recognised had the assets been carried under the cost model; and
    4. the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

Users of financial statements may also find the following information relevant to their needs:

  1. the carrying amount of temporarily idle property, plant and equipment;
  2. the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
  3. the carrying amount of property, plant and equipment retired from active use and not classified as held for sale; and
  4. when the cost model is used, the fair value of property, plant and equipment when this is materially different from the carrying amount.

External information:

https://en.wikipedia.org/wiki/Fixed_asset

Property plant and equipment

Property, plant and equipment Property, plant and equipment Property, plant and equipment Property, plant and equipment


Property plant and equipment

Property, plant and equipment

Property, plant and equipment

Property, plant and equipment Property, plant and equipment Property, plant and equipment Property, plant and equipment Property, plant and equipment

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