IAS 16 revised 2003 Property, Plant and Equipment

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IAS 16 (revised 2003) Property, Plant and
Equipment
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Objective

• To prescribe the accounting treatment for PPE
• Principal issues
• timing of recognition of assets
• determination of carrying amount
• depreciation charges to be recognised

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Scope

• The Standard applies to all PPE, except where
  another IAS requires or permits a different
  treatment
• Does not apply to biological assets related to
  agricultural activity or mineral rights and
  reserves. Does apply to PPE used to develop and
  maintain these assets

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Definition

• Property, plant and equipment (PPE) 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
• are expected to be used during more than one
  period

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Recognition

• An item of PPE should be recognised as an asset
  when
• it is probable that future economic benefits
  associated with asset will flow to the
  enterprise and
• cost of asset to the enterprise can be measured
  reliably

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Initial measurement

• PPE initially measured at cost
• Cost components
• purchase price
• import duties and purchase taxes
• directly attributable costs of bringing asset to
  working condition / use
• less trade discounts rebates

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Subsequent expenditure

• When should subsequent expenditure be
  capitalised?
• future economic benefits are probable
• in excess of the originally assessed standard of
  performance of the asset

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Subsequent measurement

• Cost model
• cost less accumulated depreciation and impairment
  losses
• Revaluation model
• Fair value at date of revaluation less subsequent
  depreciation, provided fair value can be measured
  reliably.

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Subsequent measurement

• Revaluation increase ? credit directly to equity
• unless it reverses a prior revaluation decrease
  recognised in the I/S
• Revaluation decrease ? expense in the I/S
• unless any revaluation surplus left

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Depreciation

• Depreciation charge ? expense
• unless included in another asset
• The depreciable amount should be allocated on a
  systematic basis over the assets useful life
• The residual value and useful life should be
  reviewed at least annually and adjusted if
  necessary

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Depreciation

• Depreciation methods
• straight-line method
• diminishing balance method
• sum-of-the-units
• Change in depreciation method
• change in accounting estimate

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Impairment losses

• IAS 16 (revised 1998) no longer includes the
  requirements for impairment
• Impairment of an item of PPE should be dealt
  with under IAS 36, Impairment of Assets

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Retirements and disposals

• PPE eliminated from B/S when
• disposed of
• permanently withdrawn from use and no future
  benefit expected (ie no sale)
• Gains or losses on disposal
• proceeds less carrying amount
• recognised in the income statement

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IAS 38 Intangible Assets
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Objective

• To prescribe accounting treatment for intangible
  assets not dealt with in another Standard
• Principal issues
• recognition of intangible assets
• initial measurement
• subsequent measurement

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Scope

• Applies to intangible assets except
• those covered by another IAS
• mineral rights and certain expenditure in
  extractive industry
• assets from insurance contracts
• Financial assets
• Applies to expenditure on
• advertising, training, start-up...
• research and development activities

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Definitions

• Intangible asset
• identifiable non-monetary asset
• no physical substance
• held for use or rental
• Asset
• resource controlled by enterprise as a result of
  past events
• probable future economic benefits

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Recognition

• An intangible asset should be recognised when
• it is probable that future economic benefits
  associated with asset will flow to the
  enterprise and
• cost of asset can be measured reliably

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Initial measurement

• Initially measured at cost
• Cost components where purchased
• purchase price
• import duties and purchase taxes
• directly attributable expenditure of preparing
  asset for use
• less trade discounts rebates

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Initial measurement

• Acquisition
• Government grants
• Exchange of assets
• Internally generated intangibles

• ? fair value
• ? fair value or nominal amount
• ? fair value, if dissimilar
• ? distinguish research phase (expense) from
  development phase

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Internally generated assets

• Research phase
• no intangible asset should be recognised from
  research (or the research phase of a project)
• all expenditure on research (or on the research
  phase) ? expense

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Internally generated assets

• An intangible asset should be recognised in its
  development phase if, and only if
• definition and recognition are met
• a list of other criteria are met
• technical feasibility
• probability of future economic benefits
• availability of resources...

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Internally generated assets

• Cost
• expenditure from recognition date
• no reinstatement of prior expenses
• includes
• expenditure on materials, services, fees
• direct salaries, wages, etc.
• allocation of direct overheads

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Recognition of Acquired Intangible Assets
Acquired in a business combination
No
YES
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Subsequent expenditure

• Subsequent expenditure ? expense unless
• probable future economic benefits
• in excess of the originally assessed standard of
  performance of the asset
• expenditure can be measured and attributed to the
  asset reliably

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IAS 38 Intangible Assets Measurement

• Cost model
• Cost less accumulated amortisation and/or
  impairment losses
• OR
• Revaluation model
• Fair value at date of revaluation less
  accumulated amortisation and/or impairment losses
• - Provided an active market exist

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Subsequent measurement

• Revalued amount
• fair value should be determined by reference to
  an active market
• if no active market ? no revaluation
• revaluations should be made
• with sufficient regularity
• for the entire class to which the revalued item
  belongs

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Subsequent measurement

• Revaluation increase ? credit directly to equity
• unless it reverses a prior revaluation decrease
  recognised in the I/S
• Revaluation decrease ? expense in the I/S
• unless any revaluation surplus left

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Amortisation

• Depreciable amount ? systematic allocation over
  the best estimate of the assets useful life
• Depreciation charge ? expense
• unless included in another asset

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Useful life

• What factors should be considered in determining
  the useful life of an intangible asset?

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Amortisation

• Amortisation method ? straight-line
• unless another pattern can be determined reliably
• Amortisation period and method should be reviewed
  annually and adjusted if necessary
• ? change in accounting estimates

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Retirements and disposals

• Elimination from B/S when
• disposed of
• permanently withdrawn from use and no future
  benefit expected (ie no sale)
• Gains or losses on disposal
• proceeds less carrying amount
• recognised in the income statement

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• Questions?