IAS 16 Property, plant and equipment

 IAS 16 Property, plant and equipment

• Property, plant and equipment is initially recognised at cost. This includes its purchase price, less any trade discounts or rebates, plus any further costs directly attributable to bringing it into working condition for its intended use.

• IAS 23 Borrowing costs requires finance costs to be capitalised providing they are directly attributable to the asset being constructed. Capitalisation commences when construction expenditure is being incurred and ceases when the asset is ready for use.

• Subsequent expenditure on noncurrent assets may be capitalised if it:

– enhances the economic benefits of the asset e.g. adding an new wing to a building

– replaces part of an asset that has been separately depreciated and has been fully depreciated; e.g. furnace that requires new linings periodically

– replaces economic benefits previously consumed, e.g. a major inspection of aircraft.

• The aim of depreciation is to spread the cost of the asset over its life in the business.

• The depreciation method and useful life of an asset should be reviewed at the end of each year and revised where necessary in accordance with IAS 8. This is not a change in accounting policy.

• If an asset has parts with different lives, (e.g. a building with a flat roof), the component parts of the asset should be capitalised and depreciated separately.

Revaluation of property, plant and equipment

• Revaluation is optional.

• If one asset is revalued, all assets in that class must be revalued, i.e. no cherry-picking.

• Where an entity adopts a policy of revaluation it need not be applied to all classes of tangible non-current assets held by the entity.

• Valuations should be kept up to date to ensure that the carrying amount does not differ materially from the fair value at each reporting date.

• Revaluation gains are credited to other comprehensive income unless the gain reverses a previous revaluation loss of the same asset previously recognised in

profit or loss.

• Revaluation losses are charged to the statement of profit or loss unless the loss relates to a previous revaluation surplus, in which case it should be charged to

other comprehensive income.

Depreciation is charged on the revalued amount less residual value (if any) over the remaining useful life of the asset.

An entity may choose to make a reserves transfer for the excess depreciation arising from a revaluation. This is taken from the revaluation reserve to retained earnings annually and disclosed in the Statement of Changes in Equity.