International Accounting Standard 16
Property, Plant and Equipment
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 16 Property, Plant and Equipment, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 16 Property, Plant and Equipment replaced IAS 16 Accounting for Property, Plant and Equipment (issued in March 1982). IAS 16 that was issued in March 1982 also replaced some parts in IAS 4 Depreciation Accounting that was approved in November 1975.
In December 2003 the IASB issued a revised IAS 16 as part of its initial agenda of technical
projects. The revised standard also replaced the guidance in three Interpretations (SIC-6 Costs of Modifying Existing Software, SIC-14 Property, Plant and Equipment—Compensation for the Impairment or Loss of Items and SIC-23 Property, Plant and Equipment—Major Inspection or Overhaul Costs).
Other IFRSs have made minor consequential amendments to IAS 16. They include IFRS 13
Fair Value Measurement (issued May 2011), Annual Improvements to IFRSs 2009-2011 Cycle (issued May 2012) and Annual Improvements to IFRSs 2010-2012 Cycle (issued December 2013).
CONTENTS
INTRODUCTION
INTERNATIONAL ACCOUNTING STANDARD 16
PROPERTY, PLANT AND EQUIPMENT
OBJECTIVE
SCOPE
DEFINITIONS
RECOGNITION
Initial costs
Subsequent costs
MEASUREMENT AT RECOGNITION
Elements of cost
Measurement of cost
MEASUREMENT AFTER RECOGNITION
Cost model
Revaluation model
Depreciation
Depreciable amount and depreciation period
Depreciation method
Impairment
Compensation for impairment
DERECOGNITION
DISCLOSURE
TRANSITIONAL PROVISIONS
EFFECTIVE DATE
WITHDRAWAL OF OTHER PRONOUNCEMENTS
APPENDIX
Amendments to other pronouncements
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IAS 16 ISSUED IN DECEMBER 2003
BASIS FOR CONCLUSIONS
International Accounting Standard 16 Property, Plant and Equipment (IAS 16) is set out in paragraphs 1-83 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 16 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Introduction
International Accounting Standard 16 Property, Plant and Equipment (IAS 16)
replaces IAS 16 Property, Plant and Equipment (revised in 1998), and should be applied for annual periods beginning on or after 1 January 2005. Earlier
application is encouraged. The Standard also replaces the following
Interpretations:
SIC-6 Costs of Modifying Existing Software
SIC-14 Property, Plant and Equipment—Compensation for the Impairment or Loss
of Items
SIC-23 Property, Plant and Equipment—Major Inspection or Overhaul Costs.
Reasons for revising IAS 16
The International Accounting Standards Board developed this revised IAS 16 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 16 the Board's main objective was a limited revision to provide additional guidance and clarification on selected matters. The Board did not reconsider the fundamental approach to the accounting for property, plant and equipment contained in IAS 16.
The main changes from the previous version of IAS 16 are described below.
Scope
This Standard clarifies that an entity is required to apply the principles of this
Standard to items of property, plant and equipment used to develop or maintain (a) biological assets and (b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
Recognition: subsequent costs
An entity evaluates under the general recognition principle all property, plant
and equipment costs at the time they are incurred. Those costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service an item. The previous version of IAS 16 contained two recognition principles. An entity applied the second recognition principle to subsequent costs.
Measurement at recognition: asset dismantlement,
removal and restoration costs
The cost of an item of property, plant and equipment includes the costs of its
dismantlement, removal or restoration, the obligation for which an entity incurs as a consequence of installing the item. Its cost also includes the costs of its dismantlement, removal or restoration, the obligation for which an entity incurs as a consequence of using the item during a particular period for purposes other than to produce inventories during that period. The previous version of IAS 16 included within its scope only the costs incurred as a consequence of installing the item.
Measurement at recognition: asset exchange
transactions
An entity is required to measure an item of property, plant and equipment
acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets, at fair value unless the exchange transaction lacks commercial substance. Under the previous version of IAS 16, an entity measured such an acquired asset at fair value unless the exchanged assets were similar.
Measurement after recognition: revaluation model
If fair value can be measured reliably, an entity may carry all items of property,
plant and equipment of a class at a revalued amount, which is the fair value of the items at the date of the revaluation less any subsequent accumulated depreciation and accumulated impairment losses. Under the previous version of IAS 16, use of revalued amounts did not depend on whether fair values were reliably measurable.
Depreciation: unit of measure
An entity is required to determine the depreciation charge separately for each
significant part of an item of property, plant and equipment. The previous version of IAS 16 did not as clearly set out this requirement.
Depreciation: depreciable amount
An entity is required to measure the residual value of an item of property, plant
and equipment as the amount it estimates it would receive currently for the asset if the asset were already of the age and in the condition expected at the end of its useful life. The previous version of IAS 16 did not specify whether the residual value was to be this amount or the amount, inclusive of the effects of inflation, that an entity expected to receive in the future on the asset's actual retirement date.
Depreciation: depreciation period
An entity is required to begin depreciating an item of property, plant and
equipment when it is available for use and to continue depreciating it until it is derecognised, even if during that period the item is idle. The previous version of
IAS 16 did not specify when depreciation of an item began and specified that an entity should cease depreciating an item that it had retired from active use and was holding for disposal.
Derecognition: derecognition date
An entity is required to derecognise the carrying amount of an item of property,
plant and equipment that it disposes of on the date the criteria for the sale of goods in IAS 18 Revenue would be met. The previous version of IAS 16 did not
require an entity to use those criteria to determine the date on which it derecognised the carrying amount of a disposed-of item of property, plant and equipment.
An entity is required to derecognise the carrying amount of a part of an item of property, plant and equipment if that part has been replaced and the entity has included the cost of the replacement in the carrying amount of the item. The previous version of IAS 16 did not extend its derecognition principle to such parts; rather, its recognition principle for subsequent expenditures effectively precluded the cost of a replacement from being included in the carrying amount of the item.
Derecognition: gain classification
An entity cannot classify as revenue a gain it realises on the disposal of an item
of property, plant and equipment. The previous version of IAS 16 did not contain this provision.
International Accounting Standard 16
Property, Plant and Equipment
Objective
Scope
The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity's investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them.
This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment.
This Standard does not apply to:
property, plant and equipment classified as held for sale in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
biological assets related to agricultural activity (see IAS 41 Agriculture);
the recognition and measurement of exploration and evaluation assets
(see IFRS 6 Exploration for and Evaluation of Mineral Resources); or
mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)-(d).
Other Standards may require recognition of an item of property, plant and
equipment based on an approach different from that in this Standard. For example, IAS 17 Leases requires an entity to evaluate its recognition of an
item of leased property, plant and equipment on the basis of the transfer of risks and rewards. However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are prescribed by this Standard.
An entity using the cost model for investment property in accordance with
IAS 40 Investment Property shall use the cost model in this Standard.
Definitions
The following terms are used in this Standard with the meanings
specified:
Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment.
Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value.
Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life.
Entity-specific value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its disposal
at the end of its useful life or expects to incur when settling a liability.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. (See IFRS 13 Fair Value Measurement.)
An impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount.
Property, plant and equipment are tangible items that:
are held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes; and
are expected to be used during more than one period.
Recoverable amount is the higher of an asset's fair value less costs to sell
and its value in use.
The residual value of an asset is the estimated amount that an entity
would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
Useful life is:
the period over which an asset is expected to be available for use by
an entity; or
the number of production or similar units expected to be obtained
from the asset by an entity.
Recognition
The cost of an item of property, plant and equipment shall be recognised
as an asset if, and only if:
it is probable that future economic benefits associated with the
item will flow to the entity; and
the cost of the item can be measured reliably.
Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this IFRS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory.
This Standard does not prescribe the unit of measure for recognition, ie what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity's specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value.
An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.
Initial 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. For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset because without them the entity is unable to manufacture and sell chemicals. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with IAS 36 Impairment of Assets.
Subsequent costs
Under the recognition principle in paragraph 7, 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. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the 'repairs and maintenance' of the item of property, plant and equipment.
Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle in
paragraph 7, 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 if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 67-72).
A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) 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 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. 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.
Measurement at recognition
An item of property, plant and equipment that qualifies for recognition
as an asset shall be measured at its cost.
Elements of cost
The cost of an item of property, plant and equipment comprises:
its purchase price, including 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.
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:
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;
costs of site preparation;
initial delivery and handling costs;
installation and assembly costs;