Property, Plant and Equipment (PPE)
PPE – Introduction
17.1 Property, Plant and Equipment applies to accounting for property, plant and equipment and accounting for investment property whose fair value cannot be measured reliably without undue cost or effort on an ongoing basis. Investment Property applies to investment property whose fair value can be measured reliably without undue cost or effort.
PPE – Tangible assets
17.2 Property, plant and equipment are tangible assets 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.
No Property, Plant and Equipment
17.3 Property, plant and equipment does not include:
- biological assets related to agricultural activity (see Specialised Activities); or
- mineral rights and mineral reserves, such as oil, natural gas and similar non-regenerative resources.
Recognition – Recognition criteria
17.4 An entity shall apply the recognition criteria in Recognition of assets, liabilities, income and expenses in determining whether to recognise an item of property, plant or equipment. Consequently, the entity shall recognise the cost of an item of property, plant and equipment 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.
Recognition – parts
17.5 Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this section when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.
Recognition – Replacement at regular intervals
17.6 Parts of some items of property, plant and equipment may require replacement at regular intervals (for example, the roof of a building). An entity shall add to 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 if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised in accordance with Derecognition regardless of whether the replaced parts had been depreciated separately. If it is not practicable for an entity to determine the carrying amount of the replaced part, the entity may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed. Depreciation – Major different components provides that if the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life.
Recognition – Regular major inspections
17.7 A condition of continuing to operate an item of property, plant and equipment (for example a bus) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous major inspection (as distinct from physical parts) is derecognised. This is done regardless of whether the cost of the previous major inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed.
Recognition – Land and buildings
17.8 Land and buildings are separable assets, and an entity shall account for them separately, even when they are acquired together.
Measurement at recognition
17.9 An entity shall measure an item of property, plant and equipment at initial recognition at its cost.
Elements of cost
Elements of cost – all
17.10 The cost of an item of property, plant and equipment comprises all of the following:
- its purchase price, including legal and brokerage fees, import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
- 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. These can include the costs of site preparation, initial delivery and handling, installation and assembly, and testing of functionality.
- 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.
Elements of cost – Expense
17.11 The following costs are not costs of an item of property, plant and equipment, and an entity shall recognise them as an expense when they are incurred:
- costs of opening a new facility;
- costs of introducing a new product or service (including costs of advertising and promotional activities);
- costs of conducting business in a new location or with a new class of customer (including costs of staff training);
- administration and other general overhead costs; and
- borrowing costs (see Borrowing Costs).
Elements of cost – Incidental operations during construction or development
17.12 The income and related expenses of incidental operations during construction or development of an item of property, plant and equipment are recognised in profit or loss if those operations are not necessary to bring the item to its intended location and operating condition.
Measurement of cost
17.13 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 cost is the present value of all future payments.
Exchanges of assets
17.14 An item of property, plant or equipment may be acquired in exchange for a non-monetary asset, or assets, or a combination of monetary and non-monetary assets. An entity shall measure the cost of the acquired asset at fair value unless
- the exchange transaction lacks commercial substance or
- the fair value of neither the asset received nor the asset given up is reliably measurable.
In that case, the asset’s cost is measured at the carrying amount of the asset given up.
Measurement after initial recognition
17.15 An entity shall choose either the cost model in Cost-model or the revaluation model in Revaluation model – Revalued amount and regular revaluations as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. An entity shall apply the cost model to investment property whose fair value cannot be measured reliably without undue cost or effort. An entity shall recognise the costs of day-to-day servicing of an item of property, plant and equipment in profit or loss in the period in which the costs are incurred.
17.15A An entity shall measure an item of property, plant and equipment after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation model – Revalued amount and regular revaluations
17.15B An entity shall measure an item of property, plant and equipment whose fair value can be measured reliably 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. Fair value in Basic financial instruments – 3 provides guidance on determining fair value. If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued.
Revaluation model – Increase in OCI unless previous decrease in profit or loss
17.15C 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. However, 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.
Revaluation model – Decrease in profit or loss
17.15D If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, 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.
Depreciation – Major different components
17.16 If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Other assets shall be depreciated over their useful lives as a single asset. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated.
Depreciation – charge in profit or loss
17.17 The depreciation charge for each period shall be recognised in profit or loss unless another section of Property, plant and equipment requires the cost to be recognised as part of the cost of an asset. For example, the depreciation of manufacturing property, plant and equipment is included in the costs of inventories (see Inventories).
Depreciable amount and depreciation period
Depreciable amount and depreciation period – Systematic basis
17.18 An entity shall allocate the depreciable amount of an asset on a systematic basis over its useful life.
Depreciable amount and depreciation period – changes to residual value or useful life
17.19 Factors such as a change in how an asset is used, significant unexpected wear and tear, technological advancement and changes in market prices may indicate that the residual value or useful life of an asset has changed since the most recent annual reporting date. If such indicators are present, an entity shall review its previous estimates and, if current expectations differ, amend the residual value, depreciation method or useful life. The entity shall account for the change in residual value, depreciation method or useful life as a change in an accounting estimate in accordance with Changes in accounting estimates in Accounting Policies, Estimates and Errors.
Depreciable amount and depreciation period – Beginning at availability for use
17.20 Depreciation of an asset begins when it is available for use, ie 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 when the asset is derecognised. 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.
Depreciable amount and depreciation period – Determining the useful life
17.21 An entity shall consider all the following factors in determining the useful life of an asset:
- the expected usage of the asset. Usage is assessed by reference to the asset’s expected capacity or physical output.
- expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle.
- technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset.
- legal or similar limits on the use of the asset, such as the expiry dates of related leases.
Depreciation method – Pattern in line with consumption of benefits
17.22 An entity shall select a depreciation method that reflects the pattern in which it expects to consume the asset’s future economic benefits. The possible depreciation methods include the straight-line method, the diminishing balance method and a method based on usage such as the units of production method.
Depreciation method – Change in consumption pattern
17.23 If there is an indication that there has been a significant change since the last annual reporting date in the pattern by which an entity expects to consume an asset’s future economic benefits, the entity shall review its present depreciation method and, if current expectations differ, change the depreciation method to reflect the new pattern. The entity shall account for the change as a change in an accounting estimate in accordance with Changes in accounting estimates in Accounting Policies, Estimates and Errors.
Impairment – Recognition and measurement of impairment
17.24 At each reporting date, an entity shall apply Impairment of Assets to determine whether an item or group of items of property, plant and equipment is impaired and, if so, how to recognise and measure the impairment loss. That section explains when and how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises or reverses an impairment loss.
Impairment – Compensation for impairment
17.25 An entity shall include in profit or loss compensation from third parties for items of property, plant and equipment that were impaired, lost or given up only when the compensation becomes receivable.
Impairment – Property, plant and equipment held for sale
17.26 Paragraph 27.9(f) states that a plan to dispose of an asset before the previously expected date is an indicator of impairment that triggers the calculation of the asset’s recoverable amount for the purpose of determining whether the asset is impaired.
Derecognition – Disposal or no future benefits
17.27 An entity shall derecognise an item of property, plant and equipment:
- on disposal, or
- when no future economic benefits are expected from its use or disposal.
Derecognition – Gain or loss in profit or loss
17.28 An entity shall recognise the gain or loss on the derecognition of an item of property, plant and equipment in profit or loss when the item is derecognised (unless Leases requires otherwise on a sale and leaseback). The entity shall not classify such gains as revenue.
Derecognition – date of disposal
17.29 In determining the date of disposal of an item, an entity shall apply the criteria in Revenue for recognising revenue from the sale of goods. Leases applies to disposal by a sale and leaseback.
Derecognition – Determine gain or loss
17.30 An entity shall determine the gain or loss arising from the derecognition of an item of property, plant and equipment as the difference between the net disposal proceeds, if any, and the carrying amount of the item.
Disclosures – Movements for each class of PPE
17.31 An entity shall disclose the following for each class of property, plant and equipment determined in accordance with Information to be presented either in the statement of financoial position or in the notes sub (a) in Statement of Financial Position and separately for investment property carried at cost less accumulated depreciation and impairment:
- the measurement bases used for determining the gross carrying amount;
- the depreciation methods used;
- the useful lives or the depreciation rates used;
- the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the reporting period; and
- a reconciliation of the carrying amount at the beginning and end of the reporting period showing separately:
- acquisitions through business combinations;
- increases or decreases resulting from revaluations under Revaluation model – Revalued amount and regular revaluations, Revaluation model – Increase in OCI unless previous decrease in profit or loss and Revaluation model – Decrease in profit or loss and from impairment losses recognised or reversed in other comprehensive income in accordance with Impairment of Assets;
- transfers to and from investment property carried at fair value through profit or loss (see Reporting Transfers – Fair value no longer available);
- impairment losses recognised or reversed in profit or loss in accordance with Impairment of Assets;
- depreciation; and
- other changes.
This reconciliation need not be presented for prior periods.
Disclosures – Pledges, commitments and no fair value disclosure
17.32 An entity shall also disclose the following:
- the existence and carrying amounts of property, plant and equipment to which the entity has restricted title or that is pledged as security for liabilities;
- the amount of contractual commitments for the acquisition of property, plant and equipment; and
- if an entity has investment property whose fair value cannot be measured reliably without undue cost or effort it shall disclose that fact and the reasons why fair value measurement would involve undue cost or effort for those items of investment property.
Disclosures – Revaluation model
17.33 If items of property, plant and equipment are stated at revalued amounts, an entity shall disclose the following:
- the effective date of the revaluation;
- whether an independent valuer was involved;
- the methods and significant assumptions applied in estimating the items’ fair values;
- 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
- the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.