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Accounting For Property Plant And Equipment [IAS 16]

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This post prescribes rules regarding the recognition, measurement, and disclosures relating to property, plant, and equipment (often referred to as fixed assets) that would enable users of financial statements to understand the extent of an entity’s investment in such assets and the movements therein [adapted from IAS 16].

IAS 16 principal issues involved relate to the recognition of items of property, plant, and equipment, determining their costs, and assessing the depreciation and impairment losses that need to be recognized. The requirements of IAS 16 are applied to accounting for all property, plant, and equipment unless another Standard permits otherwise, except:

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  • Property, plant, and equipment classified as held for sale in accordance with IFRS 5
  • Biological assets relating to agricultural activity under IAS 41
  • Mineral rights, mineral reserves, and similar non-regenerative resources

 

Recognition Of An Asset

An item of property, plant, and equipment should be recognized as an asset if and only if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the item can be measured reliably.

Any expenditure incurred that meets these recognition criteria must be accounted for as an asset. The Standard makes reference to individually insignificant items that can be aggregated. However, very often, in practice, entities adopt an accounting policy to expense items that are below a predetermined de-minimis level in order to avoid undue cost in maintaining the relevant records, which includes tracking the whereabouts of the asset. The definition and recognition criteria can also be applied to spare parts, although these are often carried as inventory and expensed as and when utilized. However, major spare parts are usually recognized as property, plant, and equipment.

For many years the issue of replacement of part of an asset (“subsequent costs”), often involving significant expenditure, was a difficult matter to address; merely adding the cost of the replacement part to the cost of the original asset posed certain logical flaws vis-à-vis the preexisting, and the replaced, part. This was particularly the case when the replaced part was not separately identified in the overall cost of the original asset. This problem also existed for major inspection costs, such as those for ships and aircraft, which were usually required to retain sea- or airworthiness.

The matter was further exacerbated by an additional recognition criterion that subsequent costs should add to the utility or useful life of the asset; in some circumstances, this criterion resulted in day-to-day repairs being capitalized. This issue was partly addressed by an interpretation of the Standing Interpretations Committee (SIC) that permitted adding major overhaul or inspection costs to the original asset if an amount representing the major overhaul or inspection component of the original cost of the asset was separately identified on initial recognition and was separately depreciated, and thereby could be written out of the asset records.

The current standard applies the two basic recognition criteria referred to above to all expenditures (and dispenses with the increased utility or increased useful life criteria). If the two basic criteria are satisfied, then the cost should be recognized as an asset. If the cost of the replaced asset was not separately identifiable, then the cost of the replacement can be used as an indication of the cost of the replaced item, which should be removed from the asset record.

 

Recognition Case Example [Subsequent Costs]

Lie Dharma Truckers Inc. has acquired a heavy Lie Dharma transporter at a cost of $100,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-Lie Dharma time required. The remainder of the vehicle is perfectly Lie Dharma worthy and is expected to last for the next four years. The cost of a new power train is $45,000.

The question is: Can the cost of the new power train be recognized as an asset, and, if so, what treatment should be used?

 

The new power train will produce economic benefits to Lie Dharma Truckers Inc., and the cost is measurable. Hence the item should be recognized as an asset. The original invoice for the transporter did not specify the cost of the power train; however, the cost of the replacement—$45,000—can be used as an indication (usually by discounting) of the likely cost, six years previously. If an appropriate discount rate is 5% per annum, $45,000 discounted back six years amounts to $33,500 [$45,000 / (1.05)]6, which would be written out of the asset records. The cost of the new power train, $45,000, would be added to the asset record, resulting in a new asset cost of $111,500 [$100,000 – $33,500 + $45,000].

 

 

Measurement at Recognition

An item of property, plant, and equipment that satisfies the recognition criteria should be recognized initially at its costIAS 16 specifies that cost comprises:

  • Purchase price, including import duties, nonrefundable purchase taxes, less trade discounts and rebates.
  • Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by the entity.
  • Initial estimates of dismantling, removing, and site restoration if the entity has an obligation that it incurs on acquisition of the asset or as a result of using the asset other than to produce inventories.

 
Examples of directly attributable costs include:

  • Employee benefits of those involved in the construction or acquisition of an asset
  • Cost of site preparation
  • Initial delivery and handling costs
  • Installation and assembly costs
  • Costs of testing, less the net proceeds from the sale of any product arising from test production
  • Borrowing costs to the extent permitted by IAS 23, Borrowing Costs
  • Professional fees

Examples of costs that are not directly attributable costs and therefore must be expensed in the income statement include:

  • Costs of opening a new facility (often referred to as preoperative expenses)
  • Costs of introducing a new product or service
  • Advertising and promotional costs
  • Costs of conducting business in a new location or with a new class of customer
  • Training costs
  • Administration and other general overheads
  • Costs incurred while an asset, capable of being used as intended, is yet to be brought into use, is left idle, or is operating at below full capacity
  • Initial operating losses
  • Costs of relocating or reorganizing part or all of an entity’s operations

 

 

Case Example [Directly Attributable Costs]

Dharma Putra Inc. is installing a new plant at its production facility. It has incurred these costs:

1. Cost of the plant (cost per supplier’s invoice plus taxes) = $2,500,000
2. Initial delivery and handling costs = $200,000
3. Cost of site preparation = $600,000
4. Consultants used for advice on the acquisition of the plant = $700,000
5. Interest charges paid to supplier of plant for deferred credit = $200,000
6. Estimated dismantling costs to be incurred after 7 years = $300,000
7. Operating losses before commercial production =  $400,000

The question is: Which costs of Dharma Putra Inc. can be capitalized in accordance with IAS 16?

 

According to IAS 16, these costs can be capitalized:

1. Cost of the plant                                      $2,500,000
2. Initial delivery and handling costs                200,000
3. Cost of site preparation                                600,000
4. Consultant’s fees                                          700,000
5. Estimated dismantling costs
    to be incurred after 7 years                           300,000
Total Cost Capitalized                                  $4,300,000

 

Interest charges paid on “deferred credit terms” (see discussion under the “Measurement of Cost” section) to the supplier of the plant (not a qualifying asset) of $200,000 and operating losses before commercial production amounting to $400,000 are not regarded as directly attributable costs and thus cannot be capitalized. They should be written off to the income statement in the period they are incurred.

 

 
Measurement of Cost

The cost of an asset is measured at the cash price equivalent at the date of acquisition. If payment isdeferredbeyond normal credit terms, then the difference between the cash price and the total price is recognized as a finance cost and treated accordingly.

If an asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value unless the exchange lacks commercial substance or the fair value cannot be reliably measured, in which case the acquired asset should be measured at the carrying amount of the asset given up, where carrying amount is equal to cost less accumulated depreciation and impairment losses. For impairment losses, reference should be made to IAS 36. In this context, any compensation received for impairment or loss of an asset shall be included in the income statement.

 

 

Measurement After Recognition

After initial recognition of an item of property, plant, and equipment, the asset should be measured using either the cost model or the revaluation model. Once selected, the policy shall apply to an entire class of property, plant, and equipment. This means that an entity cannot “cherrypick” those assets to measure at cost or at revaluation, which would result in like assets having different measurement bases.

The cost model requires an asset, after initial recognition, to be carried at cost less accumulated depreciation and impairment losses. The revaluation model requires as asset, after initial recognition, to be measured at a revalued amount, which is its fair value less subsequent depreciation and impairment losses. In this case, fair value must be reliably measurable. Revaluations must be made with sufficient regularity to ensure that the carrying amount is not materially different from fair value. However, if an asset is revalued, then the entire class of asset must be revalued, again to avoid “cherry-picking” and a mixture of valuation bases.

When an asset is revalued, any increase in carrying amount should be credited to a revaluation reserve in equity. Any reduction in value arising from a revaluation should first be debited to any revaluation surplus in equity relating to the same asset and then charged off to the income statement.

The revaluation reserve may be released to retained earnings in one of two ways:

  • When the asset is disposed of or otherwise derecognized, the surplus can be transferred to retained earnings.
  • The difference between the depreciation charged on the revalued amount and that based on cost can be transferred from the revaluation reserve to retained earnings. Under no circumstances can the revaluation surplus be credited back to the income statement.

 

 
Example of Treatment of Revaluation

Putra Assets Inc. has an item of plant with an initial cost of $100,000. At the date of revaluation, accumulated depreciation amounted to $55,000. The fair value of the asset, by reference to transactions in similar assets, is assessed to be $65,000. The entries to be passed would be:

[Debit]. Accumulated depreciation = $55,000
[Credit]. Asset cost = $55,000

Being elimination of accumulated depreciation against the cost of the asset:

[Debit]. Asset cost = $20,000
[Credit]. Revaluation reserve = $20,000

Being uplift of net asset value to fair value. The net result is that the asset has a carrying amount of $65,000: $100,000 – $55,000 + $20,000.

 

 

Depreciation

Each part of an item of property, plant, and equipment with a cost that is significant in relation to the whole shall be depreciated separately, and such depreciation charge shall be charged to the income statement unless it is included in the cost of producing another asset.

Depreciation shall be applied to the depreciable amount of an asset on a systematic basis over its expected useful life. Expected useful life is the period used, not the asset’s economic life, which could be appreciably longer.

The depreciable amount takes account of the expected residual value of the assets. Both the useful life and the residual value shall be reviewed annually and the estimates revised as necessary in accordance with IAS 8.

Depreciation still needs to be charged even if the fair value of an asset exceeds its residual value. The rationale for this is the definition of residual value, detailed above. Residual value is the estimated amount, less estimated disposal costs, that could be currently realized from the asset’s disposal if the asset were already of an age and condition expected at the end of its useful life. This definition precludes the effect of inflation and, in all likelihood, will be less than fair value.

Depreciation commences when an asset is in the location and condition that enables it to be used in the manner intended by management. Depreciation shall cease at the earlier of its de-recognition [sale or scrapping] or its reclassification as “held for sale”. Temporary idle activity does not preclude depreciating the asset, as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence. Useful life therefore needs to be carefully determined based on use, maintenance programs, expected capacity, expected output, expected wear and tear, technical or commercial innovations, and legal limits.

 

 
Example of a Change in Useful Life and Residual Value

Never Mind Inc. owns an asset with an original cost of $200,000. On acquisition, management determined that the useful life was 10 years and the residual value would be $20,000. The asset is now 8 years old, and during this time there have been no revisions to the assessed residual value. At the end of year 8, management has reviewed the useful life and residual value and has determined that the useful life can be extended to 12 years in view of the maintenance program adopted by the company. As a result, the residual value will reduce to $10,000. These changes in estimates would be effected in this way:

The asset has a carrying amount of $56,000 at the end of year 8: $200,000 (cost) less $144,000 (accumulated depreciation).

Accumulated depreciation is calculated as Depreciable amount equals cost less residual value = $200,000 – $20,000 = $180,000.

Annual depreciation = depreciable amount divided by useful life = $180,000 / 10 = $18,000. Accumulated depreciation = $18,000 × no. of years (8) = $144,000.

Revision of the useful life to 12 years results in a remaining useful life of 4 years (12 – 8). The revised depreciable amount is $46,000: carrying amount of $56,000 – the revised residual amount of $10,000). Thus depreciation should be charged in future at $11,500 per annum ($46,000 divided by 4 years).

 

 De-recognition

The carrying amount of an item of property, plant, and equipment shall be derecognized on disposal or when no future economic benefit is expected from its use or disposal. Any gain on disposal is the difference between the net disposal proceeds and the carrying amount of the asset. Gains on disposal shall not be classified in the income statement as revenue.

 

IFRC Interpretation 1

This interpretation applies to changes in the measurement of any existing decommissioning, restoration, or similar liability that is both:

  • Recognized as part of the cost of an item of property, plant, and equipment in accordance with IAS 16; and
  • Recognized as a liability in accordance with IAS 37.

According to the IFRIC 1 “consensus”, changes in the measurement of an existing decommissioning, restoration, and similar liability that result from changes in the estimated timing or amount of the outflow of resources, or a change in the discount rate, shall be accounted differently based on whether the related asset is measured under IAS 16 using the “cost model” or the “revaluation model”:

(a) If the related asset is measured using the “cost model” (under IAS 16) then changes in the liability shall be added to, or deducted from, the cost of the related asset in the current period; the amount deducted from the cost of the asset shall not exceed its carrying amount and if the adjustment results in an addition to the cost of the related asset the entity shall consider whether there is an indication of “impairment” in accordance with IAS 36.

(b) If, on the other hand, the related asset is measured using the “revaluation model” (under IAS 16) then changes in the liability affect the “revaluation surplus” or “deficit” previously recognized on that asset, as set out below:

  • A decrease in the liability shall be credited directly to “revaluation surplus” in equity, except when it reverses a revaluation deficit that was previously recognized in profit or loss, in which case it shall be recognized in profit or loss;
  • An increase in the liability shall be recognized in profit or loss, except that it shall be debited to “revaluation surplus” in equity (to the extent of any credit balance existing in the “revaluation surplus” in respect of the asset). In the event that a decrease in liability exceeds the carrying amount that would have been recognized had the asset been carried under the “cost model,” the excess shall be recognized immediately in profit or loss.

 

Further, a change in the liability is an indication that the asset may have to be revalued in order to ensure that the carrying amount remains closer to fair value at the balance sheet date. Any such revaluation shall be taken in determining the amounts to be taken to profit or loss and equity. (If a revaluation is necessary, all assets of that class shall be revalued together instead of piecemeal revaluations.)

Lastly, as required by IAS 1, change in “revaluation surplus” resulting from a change in the liability shall be separately disclosed in the “statement of changes in equity”. The adjusted depreciated amount of the asset is depreciated over its useful life. Therefore, once the related asset has reached the end of its useful life, all later changes in liability shall be recognized in profit or loss as they occur. [This applies whether the “cost model” or the “revaluation model” is used].

 

Disclosure

Disclosures with respect to each class of property, plant, and equipment are extensive and comprise:

  • Measurement bases for determining gross carrying amounts
  • Depreciation methods
  • Useful lives or depreciation rates used
  • Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period
  • Additions
  • Assets classified as held for sale
  • Acquisitions through business combinations
  • Increases and decreases arising from revaluations and from impairment losses and reversals thereof
  • Depreciation
  • Net exchange differences recognized under IAS 21
  • Other changes
  • Existence and amounts of restrictions on ownership title
  • Assets pledged as security for liabilities
  • Assets in the course of construction
  • Contractual commitments for the acquisition of property, plant, and equipment

Compensation for assets impaired, lost, or given up. If property, plant, and equipment are stated at revalued amounts, these items must be specified:

  • The effective date of the valuation
  • Whether an independent valuer was involved
  • Methods and significant assumptions used in assessing fair values
  • The extent to which fair values were measured by reference to observable prices in an active market, recent market transactions on an arm’s-length basis, or were estimated using other techniques
  • For each class of asset revalued, the carrying amount that would have been recognized if the class had not been revalued
  • The revaluation surplus, indicating the change for the period and any restrictions on distributions to shareholders

54 Comments

54 Comments

  1. adnan

    Sep 11, 2009 at 4:33 am

    dear
    i want to know that
    if first we get surplus revauation reserve after some year then we get devaluation reserve
    we charge deprec.. straight line basis and reducing balanceing too
    second question
    if first we get devaluation reserve and then after 2 year revaluation reserve
    applying deprec.. both method reducing and straight line

    then what will outcome we will get??
    please explain these questions with example

  2. Letea, MP

    Oct 1, 2009 at 7:20 am

    What are the arguments for and against a policy of carrying PPE @ devalued amounts?

  3. Thomas Suzuki

    Oct 16, 2009 at 9:50 pm

    Dear Putra,

    I am new here, but found your posts very helpful. I would be grateful if you could help me on the PPEs’ revaluation reserve.

    Some Indian companies do revaluation, and of course some don’t. If they do, the amount can be very large.

    Now, when I do ROE calculations for comparative purposes, how should I deal with Revaluation Reserve? Should I include it in the denominator?

    Thank you for your help in advance.

    Thomas

  4. Putra

    Oct 17, 2009 at 2:03 am

    Thomas,

    To calculate the ROE you may use this formula:
    Net Profit after Taxes / Stockholder’s Equity

    don’t you?

    For better understanding of your case, you would need to see the relationship between the asset [to come to the revaluation reserve account under the stockholder’s equity] with the ROE. To do this you would need to expand the basic ROE formula to become Modified DuPont formula:

    ROE = ROI x ROI Multiplier

    [Net Profit After Taxes / Total Asset] x [Total Asset / Stockholder’s Equity]

    Note:

    [Net Profit After Taxes / Total Asset] -> this is a basic ROI formula, and
    [Total Asset / Stockholder’s Equity] – > this is be called ROI multiplier

    This is exactly the same formula as the original ROE formula you used, as you can wash the total asset each other, right?. The difference is, now you can see the relationship between the Asset and the ROE.

    Now, back to your case: whether to include the “revaluation reserve” into the denominator of the ROE calculation or not.

    If you don’t want to include the “revaluation reserve”, then you would need to debit/credit this account by crediting/debiting the asset [that was revalued] first which is too much work [I don’t recommend it]. Instead, you should include the reserve account.

  5. AHMAD JAN

    Oct 20, 2009 at 1:18 pm

    Please confirm the following entries, if its OK.

    1.MR. A. INVESTED IN BUSINESS RS.40,000.

    DR. CASH
    CR. MR. A’S CAPITAL

    2. PURCHASED FURNITURE FOR CASH RS. 10,000.

    DR. FURNITURE
    CR. CASH.

    3. PAID SALARIES OF RS.6000 TO STAFF

    DR. SALARIES PAYABLE
    CR. CASH

    4. RECEIVED COMMISSION ON SALE OF GOODS FOR RS.2000

    DR. CASH
    CR. COMMISSION RECEIVABLE

    5. RECEIVED CASH OF RS.2000 FROM MR. AHMAD WHO OWED HIM RS.4000 FOR LAST 60 DAYS ON ACCOUNT OF GOODS SOLD.

    DR. CASH
    CR. ACCOUNT RECEIVEABLE

  6. Vishwesh

    Oct 21, 2009 at 4:15 am

    I have some basic query – whether items like webcam, headphone, additional RAM for computer, stabilizers, small capacity UPS (less than $500) and day to day softwares like MS Office have to treated as capital expenditure and capitalised OR should be written off as revenue expenditure based on materiatlity concept?

    • Shafikul

      Jan 6, 2013 at 6:58 pm

      To avoid complexity, charge it in maintenance (computer).

  7. Putra

    Oct 21, 2009 at 10:54 am

    Ahmad,

    1.Correct, if Mr. A invested in a form of cash [investment could be in a form of fixed asset as well], and the business is structured a private joint venture.

    2. Correct

    3. Correct. Some companies may call the salaries payable just “Accounts Payable”.

    4. Correct. Some companies may call the comissions receivable just “Accounts Receivable”

    5. Correct.

    • Neel

      Oct 10, 2011 at 10:50 am

      please can i know the relationship or link between the revaluation process and the impairment process?

    • Shafikul

      Jan 6, 2013 at 6:39 pm

      No.3
      Why salaries payable,
      Its salary(Dr) to Cash (Cr)

  8. Putra

    Oct 21, 2009 at 11:21 am

    Vishwesh,

    Theoretically, any expenditure to purchase items has future economic benefits that associated with the items will flow to the entity, and the cost of the item can be measured reliably, must be accounted for as an asset, therefore it is capitalized and depreciated over its economic life to respect the matching principle. But in practice, most organizations set an accounting policy to expense items that are below certain level in order to avoid undue cost in maintaining the records and tracking the whereabouts of the asset, for the reasons materiality principle.

    Can I respect the matching principle without being burdened with the depreciation calculations, tracking and the record maintenance? Yes, if the values are truly immaterial! How? Record the small items in a single account under the tools and supplies [just like spare parts] and carry them as inventory, expensed as and when they are utilized.

  9. zeynep

    Oct 22, 2009 at 4:07 am

    Company A built a new plant at the beginning of this year. The plant is brought into use on 1 January 20×6. After 5 years part of the plant will be inspected by environmental regulators and remedial work may be required.

    Company A applies component accounting and has treated the plant as having two parts – the inspection/overhaul and the remaining plant.

    The company intends to use the estimate of the inspection/overhaul costs as an indicator of the cost of the parts of the item.

    Question 1
    What journal entries are required at 31 December 20×6? Ignore taxation.
    The following information is relevant:
    Cost to construct plant 150,000
    Estimated useful life of plant 20 years
    Estimated inspection / overhaul costs after 5 years 20,000

    Question 2
    Refer to company A above. Environmental laws require A to dismantle the plant at the end of its useful life. The initial estimate of the removal costs is 75,000.

    a. Under IFRS, what additional journal entry is required at initial recognition of the plant? Ignore taxation and discounting (if any).

    The installation and testing of A’s plant results in contamination of the ground at the plant. A will be required to clean up the contamination when the plant is dismantled.

    b. Under IFRS, how should the cleaning of the contamination be accounted for?

    hi Putra, what do you think about this question?

    I believe inspection/ overhaul will be capitalized and depreciated. separately from the cost. what about contamination and dismantle?

    thank you

  10. Puru

    Jan 15, 2010 at 11:38 am

    Putra,

    You have maintained absolutely marvellous contents on IFRS. I must admire you for your painstaking efforts. Keep it up

  11. Imran

    Jan 19, 2010 at 6:14 am

    This is really a very useful site for all accounting based student.

  12. Angeline

    Feb 15, 2010 at 10:04 am

    Hi,

    Please help me to answer the following question.

    The property was bought on 1 December 2007 for R1 300 000 (land:
    R500 000; building: R800 000) and was ready to immediately. The building has an estimated useful life of 20 years, with no residual value. Both estimates have remained unchanged. On 28 February 2009 the board of directors decided to revalue the property in future bi-annually. On that date the net replacement value was valued at R1 375 000 (land: R580 000;
    building: R795 000).

    What is the:
    (a) Gain on revaluation of the building
    (b) Deferred tax due to revaluations on both assets if 28% income tax is
    applicable.
    (c) depreciation for the year for building
    (d) total amount transferred to retained earnings for the year

  13. Zarrella

    Mar 22, 2010 at 9:02 am

    i read your notes and they r really good ! i have a question here , it says,May has acquire a new building for $400000.It has incurred incidental costs of $10000 in the acquisition process for legal fees,real estate agent’s fee and stamp duty.Management belives that these costs shoud be expensed because they have not increased the valus of the building and if the building was immediately resold, these amounts would not recouped. In other words, the fair value of the building is considered to still be $ 400000.

    The question is,Explain how May should account for the $410000 it has expended with respect with the respect to the bilding.

  14. Kaydi

    Mar 23, 2010 at 1:57 pm

    Hi,

    I would like to confirm few things regarding recognition criteria of an asset. If a company buys a microwave/braai stand/television etc for use by staff at the office, do we recognise it as an asset even though it does not contribute directly to F-E-B?

  15. lee

    Mar 29, 2010 at 4:41 am

    sir i have some question.

    1. how do you subsequently measure land? at cost or at fair market value?

    2. how do you compute for impairment loss for land. if any? given the purchase price, fair market value nad a decrease in market value.

  16. AAMIR

    Apr 25, 2010 at 1:49 pm

    Q:
    FROM YEAR SEVEN: AT WHAT AMOUNT DEPRECIATION WILL BE CHARGED ?
    ON REVISED COST 111500
    OR ON REVISED BOOK VALUE 111500-60000
    PLZ EXPALAIN

    Recognition Case Example [Subsequent Costs]

    Lie Dharma Truckers Inc. has acquired a heavy Lie Dharma transporter at a cost of $100,000 (with no breakdown of the component parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-Lie Dharma time required. The remainder of the vehicle is perfectly Lie Dharma worthy and is expected to last for the next four years. The cost of a new power train is $45,000.

    The question is: Can the cost of the new power train be recognized as an asset, and, if so, what treatment should be used?

    The new power train will produce economic benefits to Lie Dharma Truckers Inc., and the cost is measurable. Hence the item should be recognized as an asset. The original invoice for the transporter did not specify the cost of the power train; however, the cost of the replacement—$45,000—can be used as an indication (usually by discounting) of the likely cost, six years previously. If an appropriate discount rate is 5% per annum, $45,000 discounted back six years amounts to $33,500 [$45,000 / (1.05)]6, which would be written out of the asset records. The cost of the new power train, $45,000, would be added to the asset record, resulting in a new asset cost of $111,500 [$100,000 – $33,500 + $45,000].

  17. KAZ

    Apr 29, 2010 at 11:53 pm

    When manufactured inventory is issued from stock to a capital project, what portion of the cost is capitalized? One person here says the entire cost is capitalizable and the other says only the material portion of the cost is capitalizable with the overhead portion being expensed.

  18. noemi

    Oct 22, 2010 at 7:52 am

    Hi!
    Topic on Replacement of part of an asset not separately identifiable. In actual practice, where and how will i know the appropriate discount rate for a particular item? Then the new cost of the item will now be equal to this formula:Original Cost-discounted value of the item+new cost of the replaced item. For further depreciation, should it be equal to the (new cost-sV-Accum Deprn)/remaining UL?W/ regards to UL is it the UL of the asset as whole(remaining) or the UL of the replaced item whicheever is shorter?
    thank u

  19. Arun

    Oct 23, 2010 at 12:54 pm

    Can component accounting be used as a financial planning opportunity?

  20. Edmund

    Nov 30, 2010 at 8:10 pm

    Hey Guys,
    Can you all help me to answer this question? Thanks in advance

    How do companies measure the fair value of the assets? Explain your answer by referring to property assets.

  21. taisek

    Mar 21, 2011 at 10:18 pm

    hey guys
    can you please outline for me,thedifferent depreciation methods and appraise them in the context of the definition and objectives of depreciaion

  22. madhulika pandey

    May 2, 2011 at 5:09 am

    Dear Sir i m new to this site. I have a qyery regarding PPE. My co. is a listed co.So it has to converged with IFRS as on 01/04/2011.
    My company is engaged in laying down of power transmission lines. I have to restructure my fixed assets register as per IFRS requirement. My query is that we have TSE machines etc. in our fixed assets register. Historical cost of which is 2 crore and accumulated dep of around 75 lakhs, carrying amount is 1.25 crore and acquistion date is 31/01/1994. and my company want to adopt deemed cost at the time of convergence to IFRS and it will adopt cost model for the accounting of PPE. In that case how i have to do componetisation of machine. Which cost i have to consider as deemed cost. what accounting entries i have to pass at the first time and thereafter. please throw light on all these aspects

  23. jean

    Jul 19, 2011 at 8:36 am

    If engines were purchased and rehabilitated, what expenses should not be capitalized. if scrap materials were sold out of the rehabilitation project, will this be recorded under pl?

    Thank you.

  24. jean

    Jul 19, 2011 at 8:43 am

    Can we captitalize professional fees, consultant fee and travel expenses on due diligence incurred before the actual acquisition of the asset?

  25. igol-man

    Jul 20, 2011 at 2:13 am

    jean,

    in capitalizing costs for acquisition of fixed assets, you have to bear in mind that in order for a costs to be capitalized, the cost must be necessary to prepare the fixed asset for its intended use. professional fees and consulting fees are capitalizable since these cost are necessary for the acquisition. as to the traveling expenses, it a matter of judgement if such cost are necessary for acquiring fixed assets.

  26. nazwa

    Sep 30, 2011 at 10:48 am

    should refurbishment cost of machinery prior to installation be recognised as cost of PPE or should it be recognised as expense? What happens if the refurbishment is done after the istallation?

  27. Khan

    Oct 30, 2011 at 7:06 am

    What will be the double entry for Impairment Loss
    for example
    $100k
    Should we use seperate accounts for the double entry.

  28. srini

    Nov 2, 2011 at 12:48 pm

    Can elevators be capitalised as buildings as these are forming part of service systems and can’t function on their own.?

  29. salman

    Nov 15, 2011 at 1:14 pm

    so very very much for the article help me a lot.

  30. Ephodia

    Mar 14, 2012 at 7:46 am

    i would like to know; when you calculate wear and tear, do you remove the residual value or not?

  31. Aaron

    Mar 30, 2012 at 4:47 am

    I wish to ask,

    If say a joint ownership is established between 3 legal entities, and if all 3 legal entities are working together to build an asset enhancement. for eg, a bridge or canopy to link existing buildings.

    Can this asset enhancement be capitalised? If so, which particular part in FRS 16 can I make reference to?

    Kind Regards

    Aaron

  32. Mohammed Atikuzzaman

    May 8, 2012 at 7:00 am

    Can an entity make provision for CAPEX , for example , If an asset of USD 10 Million which is yet to be received by the entity lying in shipment phase is booked as probisional asset. Is the entry correct ? Is IAS 37 applies for Capital asset

  33. Anju Kaushik

    Jun 5, 2012 at 10:03 am

    What will be the accounting treatment of plants purchased Rs 4000??

  34. Vivren

    Dec 5, 2012 at 6:26 am

    Hi,
    I have series of questions. Please find time to answer.

    1. What will be the treatment of the revenue derived from the test runs while the asset is under rehabilitation stage? Is it an outright revenue? or a deduction to the related cost?
    2. Can we depreciate Construction in Progress? Is there a standard that supports this one?
    3. Can we depreciate an asset although it remains idle or under rehabilitation stage?

    Thanks!

  35. Tevin

    Mar 17, 2013 at 10:48 am

    I would like to ask something about IAS16 PPE, negative internationl critique perceived weakness.

  36. Natasha

    Jul 10, 2013 at 4:25 pm

    Hi

    I am studying final accounting and for my final assessment, I need to do a dissertation on IAS 16 : Property, plant and equipment.

    I have to do research on the following questions:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    Please help, I don’t know where to start looking.

    Thanks

    • sameera

      Jan 31, 2015 at 10:50 am

      Hi There, i am currently doing my thesis on the same topic, any tips of where to obtain the info from?

  37. bsota

    Jul 19, 2013 at 1:47 pm

    thank you

  38. Leo

    Apr 1, 2015 at 4:45 am

    If a Company selects the cost method, is the Company allowed to change to revaluation method? Or they have to stick to the method selected for subsequent measurement.

    THanks

  39. Nobuhle

    Apr 24, 2015 at 12:53 pm

    I am writing my SAIPA Professional Exam in May and this website has helped me so much especially with deferred taxation

  40. Reeshina

    Jul 27, 2015 at 11:04 am

    Hi

    I am also currently doing my thesis on IAS 16, I am struggling to get information on these topics:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    I would appreciate any help as I cannot find much information on the topics mentioned above

    Thank you

  41. Clinton Jonas

    Oct 2, 2015 at 11:20 pm

    i was told to research about how Property, Plant and equipment negative international critique with respect to the standard (perceived weaknesses)

  42. Huma

    Dec 15, 2015 at 6:54 pm

    Hi,
    I need an example of journal entry when to use deferred asset and deferred liability and also i need to know why the long-term equity would go in operating activities of cash flow??

  43. Henry

    Dec 23, 2015 at 5:14 am

    Please help me solve this question.

    On 1/1/2011 Ringo began to construct a supermarket which had an estimated useful life of 40yrs. It purchases a leasehold interest in the site for $25m. The construction of the building cost $9m and fixtures & fittings cost $6m. The construction of the supermarket was completed 30/09/2011 & was brought in to use on 1/1/2012. Ringo borrowed $40m on 1/1/2011 in order to finance this project. The loan carried an interest at 10% p.a. It was repaid on 30/06/2016.

    Required:
    Calculate the total amount to be included at cost in PPE in respect of the development at 31/12/2011.

  44. emmanuel

    May 17, 2016 at 3:31 pm

    please advise;
    a company am working for acquired an asset from abroad. Apart from the invoice value,payment, we also paid out to a clearing agent an amount to the tune of one million.
    my thinking is; since the extra cost has been incurred in order to bring the asset to its useability, then this cost has to be added to the invoice value.

    am stuck on how to post this.

  45. Nosipho

    Jun 12, 2016 at 6:37 am

    Hi

    I am also currently doing my thesis on IAS 16, I am struggling to get information on these topics:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    I would appreciate any help as I cannot find much information on the topics mentioned above

    Thank you

  46. Pam Buckingham

    Sep 2, 2016 at 9:17 pm

    Hi,

    I’m having a very hard time finding an answer to my problem so I’m hoping you can help. We have an impairment as per IAS36 and we need to allocate it. Should a portion be allocated to AUC and therefore, it would not be depreciated until the asset is capitalized or do we allocate the impairment to capitalized assets only.

    Your insight would be greatly appreciated.
    Thank you

  47. juki quinto

    Nov 24, 2016 at 11:16 am

    Good post ! I was enlightened by the information . Does anyone know where I might get ahold of a fillable TX RRC W-3C copy to complete ?

  48. Tiff

    Dec 10, 2016 at 8:19 am

    Hi

    I am also currently doing my thesis on IAS 16, I am struggling to get information on these topics:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    I would appreciate any help as I cannot find much information on the topics mentioned above

    Thank you

  49. Yolande

    Jan 9, 2017 at 9:10 am

    Hi
    NEED HELP PLEASE….

    I am also currently doing my thesis on IAS 16, I am struggling to get information on these topics:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    I would appreciate any help as I cannot find much information on the topics mentioned above

    Thank you

  50. Cher

    Oct 10, 2017 at 7:23 pm

    Hi

    I am also currently doing my thesis on IAS 16, I am struggling to get information on these topics:

    1) Positive international critique with respect to IAS 16 (perceived strengths)
    2) Negative international critique with respect to IAS 16 (perceived weaknesses)
    3) A summary on international recommendations as how IAS 16 can be improved

    I would appreciate any help as I cannot find much information on the topics mentioned above

    Thank you

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