CHAPTER 5

PROPERTY, PLANT AND EQUIPMENT

Presented by

GROUP 2
 GROUP MEMBERS
Ma Thet Thet Htwe စဇ - ၃
Ma Nandar Lwin စဇ - ၆
Mg Pyae Sone Phyo စဇ - ၁၃
Ma Hnin Myint Mo Aye စဇ - ၂၅
Ma Yunn Phuu Myat Min စဇ - ၂၇
Ma Cho Than Thar စဇ - ၃၁
Ma Linn Latt Myoe Thwe စဇ - ၃၇
Ma Mya Mon Phoo စဇ - ၄၂
Ma San Shwe Yee Htun စဇ - ၄၃
Ma Htet April Lwin စဇ - ၆၂
Ma Yoon Thinzar Naing စဇ - ၇၅
 Introduction

IAS 16 sets the guidelines for the accounting of Property, Plant and Equipment (PPE), focusing on

1. Recognition Criteria for PPE as assets

2. Measurement at initial recognition and subsequently

3. Depreciation calculation and accounting

Exclusion: IAS 16 does not apply to PPE classified as held for sale (covered under IFRS 5)

Objectives

The objectives are to understand -

 The definition and recognition criteria of PPE
 Measurement Methods (cost and revaluation model)
 Depreciation calculation and key disclosures
 Application of related standards (IAS 23, IAS 20, IFRS 13, IAS 40)
Definition Of Property, Plant And Equipment

IAS16 defines property, plant and equipment as "tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and

(b) are expected to be used during more than one period."

Carrying Amount
The value of an asset in the financial statements after deducting depreciation and impairment
losses.
Recognition Of Property, Plant And Equipment

An item of property, plant, and equipment (PPE) should be recognized as an asset if:
 Future Economic Benefits: It is probable that future economic benefits will flow to the entity.

 Reliable Measurement: The cost of the item can be measured reliably.

 Items should be recognized if they meet both conditions above.

 Spare parts and major replacements are treated as assets if they meet the criteria; otherwise, they
are expensed.
 Small tools may be grouped for recognition if individually insignificant.
Subsequent Costs Derecognition of Assets
 Routine Servicing, Repairs, and Maintenance are
not considered capital expenditures. When to Derecognise
 They are treated as expenses for the period they
occur.  If the asset is disposed of.
 Replacing major parts (e.g., interior fittings of
 If no future economic benefit is expected.
aircraft) is treated as capital expenditure.
 The cost is added to the carrying amount of the
asset.
 The old part is “derecognised” (removed from IAS 16 Requirements
the books).
Major Inspections  Any gain or loss from derecognition is recorded
 The cost of inspections is added to the asset’s in the profit or loss statement.
carrying amount.  Gain/Loss = Disposal proceeds (if any) -
 The cost of previous inspections is derecognised Carrying amount of the asset.
when a new inspection is done.
 EXAMPLE 1

(a) On 1 September 2019, a company paid £80,000 to replace the wall lining of one of its furnaces. The

furnace had been acquired several years previously and its carrying amount on 1 September 2019

(before accounting for the replacement of the lining) was £320,000. Of this amount, £10,000 related to

the original wall lining.

(b) On 1 September 2019, a company paid £250,000 for a major inspection of one of its aircraft. It is a

legal requirement that such an inspection is carried out at least once every three years. The previous

inspection took place in March 2017 at a cost of £210,000. The carrying amount of the aircraft on 1

September 2019 (before accounting for the new inspection) was £1,200,000. Of this amount, £70,000

related to the previous inspection. Explain how each of these transactions should be accounted for in

accordance with the requirements of IAS16.

 Solution

(a)  The cost of the replacement wall lining furnace £80,000 is capitalized as an asset according to IAS

16.
 The carrying amount of the old lining £10,000 is derecognized.

 Therefore, the furnace’s new carrying amount becomes £390,000 (320,000+80,000-10,000).

 Any gain or loss arising from the disposal of the old lining is recorded in the statement of profit or

(b) loss.

 The new inspection cost £250,000 is capitalized as part of the aircraft asset according to IAS 16.

 The carrying amount of the previous inspection £70,000 should be derecognized and written off as an
expense.
 Therefore, the aircraft’s new carrying amount becomes £1,380,000 (1,200,000+250,000-70,000).
 Initial Measurement Of Property, Plant And
Equipment
 On initial recognition, IAS16 requires that items of property, plant and equipment should be measured at
cost. The cost of an item of property, plant and equipment comprises:
 the purchase price of the item, including import duties and non-refundable purchase taxes, less trade
discounts or rebates.
 costs that are directly attributable to bringing the item to the location and condition.
 the estimated costs of dismantling and removing the item and restoring the site on which the item is
located.
A "self-constructed asset" refers to an asset
In general, administrative costs that a company builds or creates for its own
and other general overhead use, rather than purchasing it from an
expenses are not part of the cost external source; essentially, an asset
of an item of property, plant and constructed under the company's own
equipment. management.
 EXAMPLE 2
On 31 July 2019, a company which prepares financial statements to 31 March each
year bought a machine for £648,000. This amount was made up as follows:

The company is VAT-registered and reclaims VAT charged to it by its suppliers. Calculate the cost of the
machine in accordance with the requirements of IAS16.
Solution

 Small spare parts (£5,200) are treated as inventory and expensed when used.

 Servicing contract (£36,000) is split: £24,000 is an expense for the year to 31 March 2020(8

months) and £12,000 is a prepaid expense for the next year (4 months).

 VAT (£108,000) is ignored since the company reclaims it.

Subsequent Measurement Of Property, Plant And

IAS16 allows two different ways of measuring property, plant and equipment subsequent to its
initial recognition as an asset. These are the "cost model" and the "revaluation model".
Equipment
(a) The cost model. After initial recognition, items of property, plant and equipment are carried at
cost less any accumulated depreciation and less any accumulated impairment losses.

(b) The revaluation model. After initial recognition, items of property, plant and equipment are
carried at a revalued amount. The revalued amount of an item consists of its fair value at the
date of revaluation, less any subsequent accumulated depreciation and less any subsequent
accumulated impairment losses.
 Accounting For Revaluation Gains And Losses
If the carrying amount of an item of PPE is increased as a result of a revaluation, the increase must normally be
credited to a revaluation reserve and shown as "other comprehensive income" in SOCI.

If the carrying amount of an item of property, plant and equipment is decreased, the decrease must normally
be recognised as an expense when calculating the entity's profit or loss.

(a) a revaluation increase must be recognised as income that it reverses any revaluation decrease in respect of
the same item that was previously recognised as an expense
(b) a revaluation decrease must be debited to the revaluation reserve.

Disposal of a revalued item of property, plant and equipment

 When an item of property, plant and equipment is disposed of, any revaluation gain which is included in the
revaluation reserve in respect of that item may be transferred to retained earnings.
 The transfer is recorded in the statement of changes in equity and does not affect the statement of
comprehensive income.
 EXAMPLE 3
(a) Company X prepares financial statements to 31 May each year. On 31 May 2019, the
company acquired land for £400,000. This land was revalued at £450,000 on 31 May 2020
and at £375,000 on 31 May 2021.

Solution
Dr (£) Cr (£)
Revaluation Increase- £50,000

Land 50,000

Revaluation Reserve/Other comprehensive income 50,000

Revaluation Decrease- £75,000

Revaluation Reserve/ OCI 50,000

SOPL-Expense 25,000
Land 75,000
(b) Company Y prepares financial statements to 30 June each year. On 30 June 2019, the company
acquired land for £600,000. This land was revalued at £540,000 on 30 June 2020 and at £620,000 on
30 June 2021. Assuming that both companies use the revaluation model, explain how each
revaluation should be dealt with in the financial statements. Ignore depreciation.

Solution

Dr (£) Cr (£)
Revaluation Decrease- £60,000

SOPL- Expense 60,000

Land 60,000
Revaluation Increase- £80,000

Land 80,000
SOPL-Income 60,000
Revaluation Reserve/ OCI 20,000
 [Link] Amount
Depreciation The cost of an asset, or other
amount substituted for cost,
less its residual value.

 IAS16 defines depreciation as "the systematic allocation of

the depreciable amount of an asset over its useful life".
2. Residual Value
The estimated amount an entity
 Depreciation charges reduce profits but have no direct effect would obtain from disposal of the
on an entity's cash resources and do not ensure that cash is asset, after deducting disposal
costs, if the asset were at the
"saved up" to buy replacement assets. end of its useful life.

 If an item of property, plant and equipment is revalued

3. Useful Life
upwards and a revaluation gain in relation to that item is The period over which an asset is
credited to revaluation reserve, subsequent depreciation expected to be available for use
by an entity, or the number of
charges will exceed depreciation based on the item's original production or similar units
cost. expected to be obtained from it.
 IAS16 Requirements With Regard To
IAS 16 establishes general requirements for the depreciation of property, plant, and equipment and
outlines the methods of depreciation. The main general requirements include

Depreciation
(a) Significant parts of an asset should be depreciated separately if their cost is substantial.

 Grouping is allowed for parts with the same useful life and depreciation method.

 Example: Aircraft airframe and engines.

(b) Depreciation should be recognized as an expense in profit/loss.

 If used to produce other assets, depreciation is included in the cost of those assets.

 Example: Factory machine depreciation in inventories.

(c) Review residual value and useful life annually.

Adjust the depreciable amount for changes and allocate over the asset's remaining useful life.
(d) Consider usage, wear and tear, and obsolescence for useful life.

Useful life may be shorter than the asset's full economic life.

(e) If residual value ≥ carrying amount, the depreciable amount is zero.

Depreciation charges will be zero until the residual value drops below the carrying amount.

(f) Depreciation starts when the asset is available for use and continues until derecognized or held for
sale.

Depreciation doesn’t stop if idle, though usage-based methods may give zero depreciation when not in
use.

(g) Land and buildings treated separately

Land is not depreciated, except for finite life assets like quarries or mines.
 Depreciation Method

(a) Straight-line method (b) Diminishing balance or Reducing

The asset's depreciable amount is spread Balance
evenly over its useful life, so giving a
constant depreciation charge in each IAS16 states that a The depreciation charge for an accounting
accounting period. variety of depreciation period is calculated by applying a constant
percentage to the carrying amount of the
methods may be used to
SL method = (Cost-Scrap Value)/Useful Life asset brought forward from the previous
allocate the depreciable period Reducing Carrying Amount *
amount of an item of Balance method
=
Depreciation Rate(%)
property, plant and
equipment over its useful
life.

(c) Units of Production Method

This method is typically applied to machines used in a factory.
The useful life of the asset is measured in units of production
rather than years and the depreciation charge for an accounting
period is calculated in accordance with the number of units of
production achieved in that period.
Usage Method = (Cost-Scrap Value)/ Activity (hr,unit,day )
EXAMPLE 4

On 1 January 2019, a company which prepares financial statements to 31 December each year buys a
machine at a cost of £46,300. The machine's useful life is estimated at four years with a residual
value of £6,000. The machine is expected to achieve 50,000 units of production over its useful life, as
follows:
2019 2020 2021 2022
Number of units 10,000 20,000 15,000 5,000
Calculate depreciation charges for each of these four years using:
(a) the straight-line method
(b)the diminishing balance method (at a rate of 40%)
(c) the units of production method.
Solution

(a) The machine's depreciable amount is £40,300. Allocating this evenly over the
four years gives an annual depreciation charge of £10,075.

(b)Year Carrying amount Depreciation Carrying amount

b/f at 40% c/f
£ £ £
2019 46,300 18,250 27,880
2020 27,780 11,112 16,668
2021 16,668 6,667 10,001
2022 10,001 4,001 6,000
40,300
(c) Depreciation per unit is 80.6p (£40,300 ÷ 50,000). Depreciation charges are:

Year Units of Depreciation

production at 80.6p
£ £
2019 10,000 8,060
2020 20,000 16,120
2021 15,000 12,090
2022 5,000 4,030
40,300
Disclosure Requirements
The disclosure requirements of IAS16 are very extensive (both numerical & narrative).
The main disclosures required are as follows:
a) for each class of property, plant and equipment:
i. the measurement bases used
ii. the depreciation methods used
iii. the useful lives or depreciation rates used
iv. the gross carrying amount and accumulated depreciation at the beginning and end of
the accounting period
v. a reconciliation of the carrying amount at the beginning and end of the period, showing
additions, disposals, revaluation increases and decreases, depreciation, impairment
losses and any other movements
b) the amount pledged as security for liabilities
c) the amount of any contractual commitments for the acquisition
d) for revalued property, plant and equipment,
i. the date of the revaluation
ii. whether or not an independent valuer was involved
iii. carrying amount of each class that would have been recognised if the cost model
had been used.
 disclose additional information which may be relevant to the needs of users

e) the carrying amount of temporarily idle property, plant and equipment

f) the gross carrying amount of any fully-depreciated property, plant and equipment that are still
in use

g) the fair value property, plant and equipment to which the cost model has been applied if this
is materially different from the carrying amount.
THANK
YOU
GROUP 2