IAS 16-PPE

Question 1

What are the objectives of IAS 16?

Answer 1

Objective:
* Ensure financial statement users understand an entity’s investment in property, plant, and equipment.

• Clarify changes in such investments through recognition, carrying amount determination, depreciation, and impairment loss accounting.

Question 2

What is the scope of IAS 16?

Answer 2

Scope:

• Applies to property, plant, and equipment accounting, except when overridden by another standard.
• Excludes assets held for sale, certain biological assets, exploration and evaluation assets, and mineral rights and reserves.
• Applies to PPE used to develop or maintain excluded assets.

Question 3

What is the carrying amount?

Answer 3

Recognized asset value after deducting depreciation and impairment.

Question 4

What is the cost?

Answer 4

Cash paid or fair value of consideration for asset acquisition.

Question 5

Depreciable Amount

Answer 5

Asset cost minus residual value.

Question 6

Depreciation:

Answer 6

Systematic allocation of asset’s depreciable amount over its useful life.

Question 7

What is fair value

Answer 7

Price received to sell asset or paid to transfer liability in an orderly transaction.

Question 8

What is impairment loss?

Answer 8

Excess of asset carrying amount over its recoverable amount.

Question 9

What is a bearer plant?

Answer 9

• Living plant used in agricultural production.
• Expected to produce over multiple periods.
• Unlikely to be sold as agricultural produce itself.

Question 10

When can PPE be recognised?

Answer 10

* Future economic benefits are probable.
* The cost can be reliably measured.

• Spare parts, stand-by equipment, and servicing equipment are recognized if they meet the definition of PPE; otherwise, they are classified as inventory.
• No specific unit of measure is prescribed, so judgment is needed based on entity-specific circumstances.
• All costs related to PPE, including initial acquisition, construction, additions, replacements, and servicing, are evaluated for recognition.

Question 11

How are subsequent costs treated?

Answer 11

• Day-to-day servicing costs are expensed as incurred.
• Costs of parts replacement or major inspections are capitalized if they meet recognition criteria.

Question 12

Measurement at Recognition

Answer 12

• PPE is measured at cost, including purchase price, direct attributable costs, and initial estimate of dismantling and removal costs.
• Costs not included are those related to opening new facilities, introducing new products, conducting business in new locations, and general overheads.

Question 13

Measurement after recognition:

Answer 13

• Choose either the cost model or the revaluation model for accounting policy.
• Under the cost model, PPE is carried at cost less accumulated depreciation and impairment losses.
• Under the revaluation model, PPE is carried at a revalued amount, being fair value less subsequent accumulated depreciation and impairment losses.

Question 14

Revaluation:

Answer 14

• Revaluations should be made with sufficient regularity to ensure carrying amount doesn’t differ materially from fair value.
• Increases in carrying amount due to revaluation are recognized in other comprehensive income, while decreases are recognized in profit or loss.
• Revaluation surplus can be transferred to retained earnings upon derecognition of the asset, either in full or as the asset is used by the entity.
• Tax effects resulting from revaluation are recognized and disclosed according to IAS 12 Income Taxes.

Question 15

Depreciation

Answer 15

• The initial amount recognized for a PPE item is allocated to its significant parts and each part is depreciated separately.
• Depreciation starts when the asset is available for use and stops when it’s classified as held for sale or derecognized, but not necessarily when it becomes idle.
• The depreciation method used should reflect the pattern of the asset’s future economic benefits consumption and is reviewed annually.

Question 16

Derecognition:

Answer 16

• derecognized when disposed of or when no future economic benefits are expected from their use or disposal.
• Gains or losses from derecognition are included in profit or loss, except when IFRS 16 Leases requires otherwise in a sale and leaseback scenario.
• Assets held for rental that are routinely sold in the ordinary course of business are transferred to inventories at their carrying amount upon cessation of rental, with proceeds recognized as revenue under IFRS 15 Revenue from Contracts with Customers.
• the date of disposal being when the recipient obtains control of the item.
• If a replacement part’s cost is recognized in the carrying amount of an asset, the carrying amount of the replaced part is derecognized regardless of whether it was separately depreciated.
• The gain or loss from derecognition is the difference between the net disposal proceeds, if any, and the carrying amount of the item.
• Consideration included in the gain or loss from derecognition follows the requirements for determining the transaction price in paragraphs 47–72 of IFRS 15, with subsequent changes in estimated consideration adjusted accordingly.

Question 17

Disclosure

Answer 17

**- Disclosure requirements for each class of property, plant, and equipment include:
**
- Measurement bases used for determining the gross carrying amount
- Depreciation methods employed
- Useful lives or depreciation rates utilized
- Gross carrying amount and accumulated depreciation (including impairment losses) at the beginning and end of the period
- Reconciliation of the carrying amount at the beginning and end of the period, detailing additions, disposals, acquisitions through business combinations, revaluations, impairment losses, depreciation, exchange differences, and other changes.

**- Additional disclosures encompass:
**
- Restrictions on title and property pledged as security
- Expenditures recognized in the carrying amount during construction
- Contractual commitments for property acquisition
- Compensation from third parties for impaired, lost, or given-up property included in profit or loss
- Proceeds and costs related to items produced not part of ordinary activities in the statement of comprehensive income

• Disclosure of depreciation methods and estimated useful lives or rates allows users to review management policies and make comparisons.
• Changes in accounting estimates, such as residual values, dismantling costs, useful lives, and depreciation methods, require disclosure.
• For revalued assets, disclosure includes the effective date of revaluation, involvement of an independent valuer, carrying amount under the cost model, revaluation surplus, and any restrictions on distribution of surplus.
• Information on impaired property, plant, and equipment beyond standard requirements is disclosed as per IAS 36.
• Additional information users may find relevant includes temporarily idle assets, fully depreciated assets still in use, retired assets not classified as held for sale, and material differences between fair value and carrying amount when the cost model is used.