IAS 16 : Scope, Definition, Recognition

Question 1

Scope 1

All PP&E is within the scope of IAS 16 except as follows:

• when another standard requires or permits a different accounting treatment, for example, IAS 40 for investment properties held at fair value (but investment properties held using the cost model under IAS 40 should use the cost model in IAS 16
• PP&E classified as held for sale in accordance with IFRS 5;
• biological assets related to agricultural activity (covered by IAS 41 – Agriculture) other than bearer plants
• the recognition and measurement of exploration and evaluation assets (covered by IFRS 6 – Exploration for and Evaluation of Mineral Resources); and
• mineral rights and mineral reserves such as oil, gas, and similar ‘non-regenerative’ resources.

Answer 1

All PP&E is within the scope of IAS 16 except as follows:

• when another standard requires or permits a different accounting treatment, for example, IAS 40 for investment properties held at fair value (but investment properties held using the cost model under IAS 40 should use the cost model in IAS 16
• PP&E classified as held for sale in accordance with IFRS 5;
• biological assets related to agricultural activity (covered by IAS 41 – Agriculture) other than bearer plants
• the recognition and measurement of exploration and evaluation assets (covered by IFRS 6 – Exploration for and Evaluation of Mineral Resources); and
• mineral rights and mineral reserves such as oil, gas, and similar ‘non-regenerative’

Question 2

Scope 2

Although the standard scopes out non bearer plant biological assets and mineral rights and reserves, it includes any PP&E used in developing or maintaining such resources. [IAS 16.3].

Therefore, exploration PP&E is included in the scope of the standard, as is agricultural PP&E

Answer 2

Although the standard scopes out non bearer plant biological assets and mineral rights and reserves, it includes any PP&E used in developing or maintaining such resources. [IAS 16.3].

Therefore, exploration PP&E is included in the scope of the standard, as is agricultural PP&E

Question 3

Scope 3

Other standards may require an item of PP&E to be recognised on a basis different from that required by IAS 16. For example, under IFRS 16, lessees will recognise most leases in their statement of financial position as lease liabilities with corresponding right-ofuse assets. Consequently, accounting for right-of-use assets should be in accordance with IFRS 16

Answer 3

Other standards may require an item of PP&E to be recognised on a basis different from that required by IAS 16. For example, under IFRS 16, lessees will recognise most leases in their statement of financial position as lease liabilities with corresponding right-ofuse assets. Consequently, accounting for right-of-use assets should be in accordance with IFRS 16

Question 4

Scope 4

IFRS 16 amended paragraph 5 of IAS 16 to clarify that an entity should use the cost model in IAS 16 for its owned investment property if the entity chooses the cost model to account for its investment property under IAS 40

Answer 4

IFRS 16 amended paragraph 5 of IAS 16 to clarify that an entity should use the cost model in IAS 16 for its owned investment property if the entity chooses the cost model to account for its investment property under IAS 40

Question 5

Definitions used in IAS 16 1

Bearer plant is a living plant that:
• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales

Carrying amount :
the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses.

Answer 5

Bearer plant is a living plant that:
• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales

Carrying amount :
the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses.

Question 6

Definitions used in IAS 16 2

Cost :
the amount of cash or cash equivalents paid or the fair value of 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, e.g. IFRS 2 – Share based Payment

Answer 6

the amount of cash or cash equivalents paid or the fair value of 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, e.g. IFRS 2 – Share based Payment

Question 7

Definitions used in IAS 16 3

Depreciable amount :
the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation :
the systematic allocation of the depreciable amount of an asset over its useful life.

Entity-specific value :
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

Answer 7

Depreciable amount :
the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation :
the systematic allocation of the depreciable amount of an asset over its useful life.

Entity-specific value :
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

Question 8

Definitions used in IAS 16 4

Fair value :
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).

Answer 8

Fair value :
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).

Question 9

Definitions used in IAS 16 5

An impairment loss :
the amount by which the carrying amount of an asset exceeds its recoverable amount.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use

Answer 9

An impairment loss :
the amount by which the carrying amount of an asset exceeds its recoverable amount.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use

Question 10

Definitions used in IAS 16 6

Property, plant and equipment are 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.

Answer 10

Property, plant and equipment are 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.

Question 11

Definitions used in IAS 16 7

The residual value of an asset :
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:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity

Answer 11

The residual value of an asset :
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:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity

Question 12

Recognition - Spare parts and minor items 1

Items such as spare parts, stand-by equipment and servicing equipment are inventory unless they meet the definition of PP&E (see Definitions used in IAS 16 6 above)

Answer 12

Items such as spare parts, stand-by equipment and servicing equipment are inventory unless they meet the definition of PP&E (see Definitions used in IAS 16 6 above)

Question 13

Recognition - Aspects of recognition :
Spare parts and minor items 1

Items such as spare parts, stand-by equipment and servicing equipment are inventory unless they meet the definition of PP&E (see Definitions used in IAS 16 6 above)

Answer 13

Items such as spare parts, stand-by equipment and servicing equipment are inventory unless they meet the definition of PP&E (see Definitions used in IAS 16 6 above)

Question 14

Recognition - Aspects of recognition :
Spare parts and minor items 2

Materiality judgements are considered when deciding how an item of PP&E should be accounted for. Major spare parts, for example, qualify as PP&E, while smaller spares would be carried as inventory and as a practical matter many companies have a minimum value for capitalising assets.

Answer 14

Materiality judgements are considered when deciding how an item of PP&E should be accounted for. Major spare parts, for example, qualify as PP&E, while smaller spares would be carried as inventory and as a practical matter many companies have a minimum value for capitalising assets.

Question 15

Recognition - Aspects of recognition :
Spare parts and minor items 3

Some types of business may have a very large number of minor items of PP&E such as spare parts, tools, pallets and returnable containers, which are used in more than one accounting period. There are practical problems in recording them on an asset by-asset basis in an asset register; they are difficult to control and frequently lost. The main consequence is that it becomes very difficult to depreciate them. Generally, entities write off such immaterial assets as expenses in the period of addition

Answer 15

Some types of business may have a very large number of minor items of PP&E such as spare parts, tools, pallets and returnable containers, which are used in more than one accounting period. There are practical problems in recording them on an asset by-asset basis in an asset register; they are difficult to control and frequently lost. The main consequence is that it becomes very difficult to depreciate them. Generally, entities write off such immaterial assets as expenses in the period of addition

Question 16

Recognition - Aspects of recognition :
Spare parts and minor items 4

The standard notes that there are issues concerning what actually constitutes a single item of PP&E. The ‘unit of measurement’ for recognition is not prescribed and entities have to apply judgement in defining PP&E in their specific circumstances. The standard suggests that it may be appropriate to aggregate individually insignificant items (such as tools, moulds and dies) and to apply the standard to the aggregate amount
(presumably without having to identify the individual assets).

Answer 16

The standard notes that there are issues concerning what actually constitutes a single item of PP&E. The ‘unit of measurement’ for recognition is not prescribed and entities have to apply judgement in defining PP&E in their specific circumstances. The standard suggests that it may be appropriate to aggregate individually insignificant items (such as tools, moulds and dies) and to apply the standard to the aggregate amount
(presumably without having to identify the individual assets).

Question 17

Recognition - Aspects of recognition :
Environmental and safety equipment 1

The standard acknowledges that there may be expenditures forced upon an entity by legislation that requires it to buy ‘assets’ that do not meet the recognition criteria because the expenditure does not directly increase the future economic benefits expected to flow from the asset.

Examples would be safety or environmental protection
equipment.

Answer 17

The standard acknowledges that there may be expenditures forced upon an entity by legislation that requires it to buy ‘assets’ that do not meet the recognition criteria because the expenditure does not directly increase the future economic benefits expected to flow from the asset.

Examples would be safety or environmental protection
equipment.

Question 18

Recognition - Aspects of recognition :
Environmental and safety equipment 2

IAS 16 explains that these expenditures qualify for recognition as they allow an entity to derive future economic benefits from related assets in excess of those that would flow if such expenditure had not been made.

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 the chemicals or a plant might have to be closed down if these safety or environmental expenditures were not made.

Answer 18

IAS 16 explains that these expenditures qualify for recognition as they allow an entity to derive future economic benefits from related assets in excess of those that would flow if such expenditure had not been made.

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 the chemicals or a plant might have to be closed down if these safety or environmental expenditures were not made.

Question 19

Recognition - Aspects of recognition :
Environmental and safety equipment 3

An entity may voluntarily invest in environmental equipment even though it is not required by law to do so. The entity can capitalise those investments in environmental and safety equipment in the absence of a legal requirement as long as:

• the expenditure meets the definition of an asset; OR
• there is a constructive obligation to invest in the equipment.

Answer 19

An entity may voluntarily invest in environmental equipment even though it is not required by law to do so. The entity can capitalise those investments in environmental and safety equipment in the absence of a legal requirement as long as:

• the expenditure meets the definition of an asset; OR
• there is a constructive obligation to invest in the equipment.

Question 20

Recognition - Aspects of recognition :
Environmental and safety equipment 4

If the entity can demonstrate that the equipment is likely to increase the economic life of the related asset, the expenditure meets the definition of an asset. Otherwise, the expenditure can be capitalised when the entity can demonstrate all of the following:

• the entity can prove that a constructive obligation exists to invest in environmental and safety equipment (e.g. it is standard practice in the industry, environmental groups are likely to raise issues or employees demand certain equipment to be present);
• the expenditure is directly related to improvement of the asset’s environmental and safety standards; and
• the expenditure is not related to repairs and maintenance or forms part of period costs or operational costs.

Answer 20

If the entity can demonstrate that the equipment is likely to increase the economic life of the related asset, the expenditure meets the definition of an asset. Otherwise, the expenditure can be capitalised when the entity can demonstrate all of the following:

• the entity can prove that a constructive obligation exists to invest in environmental and safety equipment (e.g. it is standard practice in the industry, environmental groups are likely to raise issues or employees demand certain equipment to be present);
• the expenditure is directly related to improvement of the asset’s environmental and safety standards; and
• the expenditure is not related to repairs and maintenance or forms part of period costs or operational costs.

Question 21

Recognition - Aspects of recognition :
Environmental and safety equipment 5

Whenever safety and environmental assets are capitalised, the standard requires the resulting carrying amount of the asset, and any related asset, to be reviewed for impairment in accordance with IAS 36.

Answer 21

Whenever safety and environmental assets are capitalised, the standard requires the resulting carrying amount of the asset, and any related asset, to be reviewed for impairment in accordance with IAS 36.

Question 22

Recognition - Aspects of recognition :
Property economic benefits and property developments 1

The standard requires that PP&E only be recognised when it is probable that future economic benefits associated with the item will flow to the entity.

For example, in relation to property development, many jurisdictions require permissions prior to development whilst developers, including entities developing property for their own use, typically incur significant costs prior to such permissions being granted.

Answer 22

The standard requires that PP&E only be recognised when it is probable that future economic benefits associated with the item will flow to the entity.

For example, in relation to property development, many jurisdictions require permissions prior to development whilst developers, including entities developing property for their own use, typically incur significant costs prior to such permissions being granted.

Question 23

Recognition - Aspects of recognition :
Property economic benefits and property developments 2

In assessing whether such pre-permission expenditures can be capitalised – assuming they otherwise meet the criteria – a judgement must be made at the date the expenditure is incurred of whether it is sufficiently probable that the relevant permission will be granted. Such expenditure does not become part of the cost of the land; to the extent that it can be recognised it is part of the costs of a separate building.

Answer 23

In assessing whether such pre-permission expenditures can be capitalised – assuming they otherwise meet the criteria – a judgement must be made at the date the expenditure is incurred of whether it is sufficiently probable that the relevant permission will be granted. Such expenditure does not become part of the cost of the land; to the extent that it can be recognised it is part of the costs of a separate building.

Question 24

Recognition - Aspects of recognition :
Property economic benefits and property developments 3

Furthermore, if during the application and approval process of such permits it is no longer expected that necessary permits will be granted, capitalisation of pre-permission expenditure should cease, any related amounts that were previously capitalised should be written off in accordance with IAS 36 and accordingly, the carrying amount of any related item of PP&E subject to development or redevelopment (or, if appropriate, the cash generating unit where such an asset belongs) should be tested for impairment, where applicable

Answer 24

Furthermore, if during the application and approval process of such permits it is no longer expected that necessary permits will be granted, capitalisation of pre-permission expenditure should cease, any related amounts that were previously capitalised should be written off in accordance with IAS 36 and accordingly, the carrying amount of any related item of PP&E subject to development or redevelopment (or, if appropriate, the cash generating unit where such an asset belongs) should be tested for impairment, where applicable

Question 25

Recognition - Aspects of recognition :
Classification as PP&E or intangible asset 1

The restrictions in IAS 38 – Intangible Assets – in respect of capitalising certain internally-generated intangible assets focus attention on the treatment of many internal costs.

In practice, items such as computer software purchased by entities are frequently capitalised as part of a tangible asset, for example as part of an accounting or communications infrastructure. Equally, internally written software may be capitalised as part of a tangible production facility, and so on.

Answer 25

The restrictions in IAS 38 – Intangible Assets – in respect of capitalising certain internally-generated intangible assets focus attention on the treatment of many internal costs.

In practice, items such as computer software purchased by entities are frequently capitalised as part of a tangible asset, for example as part of an accounting or communications infrastructure. Equally, internally written software may be capitalised as part of a tangible production facility, and so on.

Question 26

Recognition - Aspects of recognition :
Classification as PP&E or intangible asset 2

Judgement must be exercised in deciding whether such items are to be accounted for under IAS 16 or IAS 38 and this distinction becomes increasingly important if the two standards prescribe differing treatments in any particular case.

IAS 38 states that an entity needs to exercise judgement in determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 or as an intangible asset under IAS 38

Answer 26

Judgement must be exercised in deciding whether such items are to be accounted for under IAS 16 or IAS 38 and this distinction becomes increasingly important if the two standards prescribe differing treatments in any particular case.

IAS 38 states that an entity needs to exercise judgement in determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 or as an intangible asset under IAS 38

Question 27

Recognition - Aspects of recognition :
Classification as PP&E or intangible asset 3

For example:
• computer software that is embedded in computer-controlled equipment that cannot operate without that specific software is an integral part of the related
hardware and is treated as PP&E;
• application software that is being used on a computer is generally easily replaced and is not an integral part of the related hardware, whereas the operating system
normally is integral to the computer and is included in PP&E; and
• a database that is stored on a compact disc is considered to be an intangible asset because the value of the physical medium is wholly insignificant compared to that of the data collection.

Answer 27

For example:
• computer software that is embedded in computer-controlled equipment that cannot operate without that specific software is an integral part of the related
hardware and is treated as PP&E;
• application software that is being used on a computer is generally easily replaced and is not an integral part of the related hardware, whereas the operating system
normally is integral to the computer and is included in PP&E; and
• a database that is stored on a compact disc is considered to be an intangible asset because the value of the physical medium is wholly insignificant compared to that of the data collection.

Question 28

Recognition - Aspects of recognition :
Classification as PP&E or intangible asset 4

It is worthwhile noting that as the ‘parts approach’ in IAS 16 requires an entity to account for significant parts of an asset separately, this raises ‘boundary’ problems between IAS 16 and IAS 38 when software and similar expenditure are involved.

We believe that where IAS 16 requires an entity to identify significant parts of an asset and account for them separately, the entity needs to evaluate whether any software-type intangible part is actually integral to the larger asset or whether it is really a separate asset in its own right. The intangible part is more likely to be an asset in its own right if it was developed separately or if it can be used independently of the item of PP&E.

Answer 28

It is worthwhile noting that as the ‘parts approach’ in IAS 16 requires an entity to account for significant parts of an asset separately, this raises ‘boundary’ problems between IAS 16 and IAS 38 when software and similar expenditure are involved.

We believe that where IAS 16 requires an entity to identify significant parts of an asset and account for them separately, the entity needs to evaluate whether any software-type intangible part is actually integral to the larger asset or whether it is really a separate asset in its own right. The intangible part is more likely to be an asset in its own right if it was developed separately or if it can be used independently of the item of PP&E.

Question 29

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 1

Entities may acquire items of inventory on a continuing basis, either for sale in the ordinary course of business or to be consumed in a production process or when
rendering services.

Answer 29

Entities may acquire items of inventory on a continuing basis, either for sale in the ordinary course of business or to be consumed in a production process or when
rendering services.

Question 30

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 2

This means there will always be a core stock of that item (i.e. a minimum level of inventory is maintained). This does not in itself turn that inventory into an item of PP&E, since each individual item will be consumed within a single operating cycle. However, there may be cases where it is difficult to judge whether an item is part of inventory or is an item of PP&E. This may have implications on measurement because, for example, PP&E has a revaluation option (see below) that is not available for inventory.

Answer 30

This means there will always be a core stock of that item (i.e. a minimum level of inventory is maintained). This does not in itself turn that inventory into an item of PP&E, since each individual item will be consumed within a single operating cycle. However, there may be cases where it is difficult to judge whether an item is part of inventory or is an item of PP&E. This may have implications on measurement because, for example, PP&E has a revaluation option (see below) that is not available for inventory.

Question 31

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 3

In our view, an item of inventory is accounted for as an item of PP&E if it:

• is not held for sale or consumed in a production process or during the process of rendering services;
• is necessary to operate or benefit from an asset during more than one operating cycle; and
• cannot be recouped (regain) through sale (or is significantly impaired after it has been used to operate the asset or benefit from that asset).

This applies even if the part of inventory that is an item of PP&E cannot be physically separated from the rest of inventories.

Answer 31

In our view, an item of inventory is accounted for as an item of PP&E if it:

• is not held for sale or consumed in a production process or during the process of rendering services;
• is necessary to operate or benefit from an asset during more than one operating cycle; and
• cannot be recouped (regain) through sale (or is significantly impaired after it has been used to operate the asset or benefit from that asset).

This applies even if the part of inventory that is an item of PP&E cannot be physically separated from the rest of inventories.

Question 32

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 4

Consider the following examples:

• An entity acquires the right to use an underground cave for gas storage purposes for a period of 50 years. The cave is filled with gas, but a substantial part of that gas will only be used to keep the cave under pressure in order to be able to get gas out of the cave. It is not possible to distinguish the gas that will be used to keep the cave under pressure and the rest of the gas.
• An entity operates an oil refining plant. In order for the refining process to take place, the plant must contain a certain minimum quantity of oil. This can only be taken out once the plant is abandoned and would then be polluted to such an extent that the oil’s value is significantly reduced.
• An entity sells gas and has at any one time a certain quantity of gas in its gas distribution network.

Answer 32

Consider the following examples:

• An entity acquires the right to use an underground cave for gas storage purposes for a period of 50 years. The cave is filled with gas, but a substantial part of that gas will only be used to keep the cave under pressure in order to be able to get gas out of the cave. It is not possible to distinguish the gas that will be used to keep the cave under pressure and the rest of the gas.
• An entity operates an oil refining plant. In order for the refining process to take place, the plant must contain a certain minimum quantity of oil. This can only be taken out once the plant is abandoned and would then be polluted to such an extent that the oil’s value is significantly reduced.
• An entity sells gas and has at any one time a certain quantity of gas in its gas distribution network.

Question 33

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 5

In the first example, therefore, the total volume of gas must be virtually split into (i) gas held for sale and (ii) gas held to keep the cave under pressure. The former must be accounted for under IAS 2 – Inventories. The latter must be accounted for as PP&E and depreciated over the period the cave is expected to be used.

Answer 33

In the first example, therefore, the total volume of gas must be virtually split into (i) gas held for sale and (ii) gas held to keep the cave under pressure. The former must be accounted for under IAS 2 – Inventories. The latter must be accounted for as PP&E and depreciated over the period the cave is expected to be used.

Question 34

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 6

In the second example the part of the crude (not yet processed) that is necessary to operate (in technical terms) the plant and cannot be recouped (or can be recouped but would then be significantly impaired), even when the plant is abandoned, should be considered as an item of PP&E and amortised over the life of the plant.

Answer 34

In the second example the part of the crude (not yet processed) that is necessary to operate (in technical terms) the plant and cannot be recouped (or can be recouped but would then be significantly impaired), even when the plant is abandoned, should be considered as an item of PP&E and amortised over the life of the plant.

Question 35

Recognition - Aspects of recognition :
Classification of items as inventory or PP&E when minimum levels are maintained 7

In the third example the gas in the pipeline is not necessary to operate the pipeline. It is held for sale or to be consumed in the production process or process of rendering services. Therefore this gas is accounted for as inventory.

Answer 35

In the third example the gas in the pipeline is not necessary to operate the pipeline. It is held for sale or to be consumed in the production process or process of rendering services. Therefore this gas is accounted for as inventory.

Question 36

Recognition - Aspects of recognition : Bearer plants 1

Bearer plants, defined as :

living plants that are used in the production or supply of agricultural produce, are expected to bear produce for more than one period and have a remote likelihood of being sold as a plant or harvested as agricultural produce, (except for incidental scrap sales such as for use as firewood).

Examples of bearer plants would be tea bushes and grape vines, fruit trees, oil palms

Answer 36

Bearer plants, defined as :

living plants that are used in the production or supply of agricultural produce, are expected to bear produce for more than one period and have a remote likelihood of being sold as a plant or harvested as agricultural produce, (except for incidental scrap sales such as for use as firewood).

Examples of bearer plants would be tea bushes and grape vines, fruit trees, oil palms

Question 37

Recognition - Aspects of recognition : Bearer plants 2

Bearer plants are within the scope of IAS 16 and subject to all of the requirements therein. This includes the ability to choose between the cost model and revaluation model for subsequent measurement.

Agricultural produce growing on bearer plants, e.g.
the fruit growing on a tree, remains within the scope of IAS 41

Answer 37

Bearer plants are within the scope of IAS 16 and subject to all of the requirements therein. This includes the ability to choose between the cost model and revaluation model for subsequent measurement.

Agricultural produce growing on bearer plants, e.g.
the fruit growing on a tree, remains within the scope of IAS 41

Question 38

Recognition - Aspects of recognition : Bearer plants 3

The following are not included within the definition of bearer plants:

• plants cultivated to be harvested as agricultural produce, e.g. trees grown for use as lumber;
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales, e.g. trees that are cultivated both for their fruit and their lumber; and
• annual crops such as maize and wheat.

Answer 38

The following are not included within the definition of bearer plants:

• plants cultivated to be harvested as agricultural produce, e.g. trees grown for use as lumber;
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales, e.g. trees that are cultivated both for their fruit and their lumber; and
• annual crops such as maize and wheat.

Question 39

Recognition - Aspects of recognition : Bearer plants 4

Bearer plants are accounted for in the same way as self-constructed items of PP&E before they are brought to the location and condition necessary to be capable of operating in the manner intended by management.

Consequently, references to ‘construction’ in IAS 16, with respect to bearer plants, cover the activities that are necessary to cultivate such plants before they are brought in to the location and condition necessary to be capable of operating in the manner intended by management.

Answer 39

Bearer plants are accounted for in the same way as self-constructed items of PP&E before they are brought to the location and condition necessary to be capable of operating in the manner intended by management.

Consequently, references to ‘construction’ in IAS 16, with respect to bearer plants, cover the activities that are necessary to cultivate such plants before they are brought in to the location and condition necessary to be capable of operating in the manner intended by management.

Question 40

Recognition - Aspects of recognition : Bearer plants 5

Bearer plants are subject to the requirements of IAS 16, and so entities will need to consider the correct unit of account, analyse which costs can be capitalised prior to maturity, set useful lives for depreciation purposes and consider the possibility of impairment.

Answer 40

Bearer plants are subject to the requirements of IAS 16, and so entities will need to consider the correct unit of account, analyse which costs can be capitalised prior to maturity, set useful lives for depreciation purposes and consider the possibility of impairment.

Question 41

Recognition - Accounting for parts (‘components’) of assets 1

IAS 16 has a single set of recognition criteria, which means that subsequent expenditure must also meet these criteria before it is recognised.

Parts of an asset are to be identified so that the cost of replacing a part may be recognised (i.e. capitalised as part of the asset) and the previous part derecognised. These parts are often referred to as ‘components’. ‘Parts’ are distinguished from day-today servicing but they are not otherwise identified and defined; moreover, the unit of measurement to which the standard applies (i.e. what comprises an item of PPE) is not itself defined

Answer 41

IAS 16 has a single set of recognition criteria, which means that subsequent expenditure must also meet these criteria before it is recognised.

Parts of an asset are to be identified so that the cost of replacing a part may be recognised (i.e. capitalised as part of the asset) and the previous part derecognised. These parts are often referred to as ‘components’. ‘Parts’ are distinguished from day-today servicing but they are not otherwise identified and defined; moreover, the unit of measurement to which the standard applies (i.e. what comprises an item of PP&E) is not itself defined

Question 42

Recognition - Accounting for parts (‘components’) of assets 2

IAS 16 requires ‘significant parts’ of an asset to be depreciated separately. These are parts that have a cost that is significant in relation to the total cost of the asset. An entity will have to identify the significant parts of the asset on initial recognition in order for it
to depreciate each such part of the asset properly.
[IAS 16.43, 44]. There is no requirement to identify all parts.

Answer 42

IAS 16 requires ‘significant parts’ of an asset to be depreciated separately. These are parts that have a cost that is significant in relation to the total cost of the asset. An entity will have to identify the significant parts of the asset on initial recognition in order for it
to depreciate each such part of the asset properly.
[IAS 16.43, 44]. There is no requirement to identify all parts.

Question 43

Recognition - Accounting for parts (‘components’) of assets 3

IAS 16 requires entities to derecognise an existing part when it is replaced, regardless of whether it has been depreciated separately, and allows the carrying value of the part that has been replaced to be estimated, if necessary :
‘If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed.’
As a consequence, an entity may not actually identify the parts of an asset until it incurs the replacement expenditure, as in the following example.

Answer 43

IAS 16 requires entities to derecognise an existing part when it is replaced, regardless of whether it has been depreciated separately, and allows the carrying value of the part that has been replaced to be estimated, if necessary :
‘If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed.’
As a consequence, an entity may not actually identify the parts of an asset until it incurs the replacement expenditure, as in the following example.

Question 44

Recognition - Accounting for parts (‘components’) of assets 4

Example 18.1: Recognition and derecognition of parts

An entity buys a piece of machinery with an estimated useful life of ten years for €10 million. The asset contains two identical pumps, which are assumed to have the same useful life as the machine of which they are a part. After seven years one of the pumps fails and is replaced at a cost of €200,000. The entity had not identified the pumps as separate parts and does not know the original cost. It uses the cost of the replacement part to estimate the carrying value of the original pump. With the help of the supplier, it estimates that the cost would have been approximately €170,000 and that this would have a remaining carrying value after seven year’s depreciation of €51,000. Accordingly it derecognises €51,000 and capitalises the cost of the replacement.

Answer 44

Example 18.1: Recognition and derecognition of parts

An entity buys a piece of machinery with an estimated useful life of ten years for €10 million. The asset contains two identical pumps, which are assumed to have the same useful life as the machine of which they are a part. After seven years one of the pumps fails and is replaced at a cost of €200,000. The entity had not identified the pumps as separate parts and does not know the original cost. It uses the cost of the replacement part to estimate the carrying value of the original pump. With the help of the supplier, it estimates that the cost would have been approximately €170,000 and that this would have a remaining carrying value after seven year’s depreciation of €51,000. Accordingly it derecognises €51,000 and capitalises the cost of the replacement.

Question 45

Recognition - Accounting for parts (‘components’) of assets 5

If the entity has no better information than the cost of the replacement part, it appears that it is permitted to use a depreciated replacement cost basis to calculate the amount derecognised in respect of the original asset.

Answer 45

If the entity has no better information than the cost of the replacement part, it appears that it is permitted to use a depreciated replacement cost basis to calculate the amount derecognised in respect of the original asset.

Question 46

Recognition - Initial and subsequent expenditure 1

IAS 16 makes no distinction in principle between the initial costs of acquiring an asset and any subsequent expenditure upon it. In both cases any and all expenditure has to meet the recognition rules, and be expensed in profit or loss if it does not.

Answer 46

IAS 16 makes no distinction in principle between the initial costs of acquiring an asset and any subsequent expenditure upon it. In both cases any and all expenditure has to meet the recognition rules, and be expensed in profit or loss if it does not.

Question 47

Recognition - Initial and subsequent expenditure 2

IAS 16 states:
‘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.’ [IAS 16.10].

Answer 47

IAS 16 states:
‘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.’

Question 48

Recognition - Initial and subsequent expenditure 3

The standard draws a distinction between servicing and more major expenditures. Day to-day servicing, by which is meant the repair and maintenance of PP&E that largely comprises labour costs, consumables and other minor parts, should be recognised in profit or loss as incurred. [IAS 16.12].
However, if the expenditure involves replacing a
significant part of the asset, this part should be capitalised as part of the PP&E, if the recognition criteria are met. The carrying amount of the part that has been replaced should be derecognised

Answer 48

The standard draws a distinction between servicing and more major expenditures. Dayto-day servicing, by which is meant the repair and maintenance of PP&E that largely comprises labour costs, consumables and other minor parts, should be recognised in profit or loss as incurred. [IAS 16.12].
However, if the expenditure involves replacing a
significant part of the asset, this part should be capitalised as part of the PP&E, if the recognition criteria are met. The carrying amount of the part that has been replaced should be derecognised

Question 49

Recognition - Initial and subsequent expenditure 4

Under IFRS 16 lessees are required to recognise most leases in their statement of financial position as lease liabilities with corresponding right-of-use assets.
Paragraph 10 of IAS 16 (described above) clarifies that the cost of an item of PP&E may include costs incurred relating to leases of assets that are used to construct, add to, replace part of or service an item of PP&E, such as depreciation of right-of-use assets.

Answer 49

Under IFRS 16 lessees are required to recognise most leases in their statement of financial position as lease liabilities with corresponding right-of-use assets.
Paragraph 10 of IAS 16 (described above) clarifies that the cost of an item of PP&E may include costs incurred relating to leases of assets that are used to construct, add to, replace part of or service an item of PP&E, such as depreciation of right-of-use assets.

Question 50

Recognition - Initial and subsequent expenditure :
Types of parts 1

IAS 16 identifies two particular types of parts of assets.

The first is an item that requires replacement at regular intervals during the life of the asset such as relining a furnace after a specified number of hours of use, or replacing the interiors of an aircraft (e.g. seats and galleys) several times during the life of the airframe.

Answer 50

IAS 16 identifies two particular types of parts of assets.

The first is an item that requires replacement at regular intervals during the life of the asset such as relining a furnace after a specified number of hours of use, or replacing the interiors of an aircraft (e.g. seats and galleys) several times during the life of the airframe.

Question 51

Recognition - Initial and subsequent expenditure :
Types of parts 2

The second type involves less frequently recurring replacements, such as replacing the interior walls of a building, or to make a nonrecurring replacement. The standard requires that under the recognition principle described above, an entity recognises in the carrying amount of an item of PP&E the cost of replacing part of such an item when that cost is incurred and the recognition criteria are met while derecognising the carrying amount of the parts that have been replaced

Answer 51

The second type involves less frequently recurring replacements, such as replacing the interior walls of a building, or to make a nonrecurring replacement. The standard requires that under the recognition principle described at 3 above, an entity recognises in the carrying amount of an item of PP&E the cost of replacing part of such an item when that cost is incurred and the recognition criteria are met while derecognising the carrying amount of the parts that have been replaced

Question 52

Recognition - Initial and subsequent expenditure :
Types of parts 3

IAS 16 does not state that these replacement expenditures necessarily qualify for recognition. Some of its examples, such as aircraft interiors, are clearly best treated as separate assets as they have a useful life different from that of the asset of which they
are part. With the other examples, such as interior walls, it is less clear why they meet the recognition criteria. However, replacing internal walls or similar expenditures may extend the useful life of a building while upgrading machinery may increase its capacity,
improve the quality of its output or reduce operating costs. Hence, this type of expenditure may give rise to future economic benefits.

Answer 52

IAS 16 does not state that these replacement expenditures necessarily qualify for recognition. Some of its examples, such as aircraft interiors, are clearly best treated as separate assets as they have a useful life different from that of the asset of which they are part. With the other examples, such as interior walls, it is less clear why they meet the recognition criteria. However, replacing internal walls or similar expenditures may extend the useful life of a building while upgrading machinery may increase its capacity, improve the quality of its output or reduce operating costs. Hence, this type of expenditure may give rise to future economic benefits.

Question 53

Recognition - Initial and subsequent expenditure : Major inspections 1

The standard also allows a separate part to be recognised if an entity is required to perform regular major inspections for faults, regardless of whether any physical parts of the asset are replaced.

Answer 53

The standard also allows a separate part to be recognised if an entity is required to perform regular major inspections for faults, regardless of whether any physical parts of the asset are replaced.

Question 54

Recognition - Initial and subsequent expenditure : Major inspections 2

The reason for this approach is to maintain a degree of consistency with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – which forbids an entity to make provisions if there is no obligations. Therefore an entity is prohibited by IAS 37 from making, for example, a provision to overhaul an owned aircraft engine by annually providing for a quarter of the cost for four years and then utilising the provision when the engine is overhauled in the fourth year. [IAS 37 IE Example 11A, 11B]. This had been a common practice in the airline and oil refining industries, although it had never been universally applied in either sector; some companies accounted for the expenditure when incurred, others capitalised the cost and depreciated it over the period until the next major overhaul

Answer 54

The reason for this approach is to maintain a degree of consistency with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets – which forbids an entity to make provisions if there is no obligations. Therefore an entity is prohibited by IAS 37 from making, for example, a provision to overhaul an owned aircraft engine by annually providing for a quarter of the cost for four years and then utilising the provision when the engine is overhauled in the fourth year. [IAS 37 IE Example 11A, 11B]. This had been a common practice in the airline and oil refining industries, although it had never been universally applied in either sector; some companies accounted for the expenditure when incurred, others capitalised the cost and depreciated it over the period until the next major overhaul

Question 55

Recognition - Initial and subsequent expenditure : Major inspections 3

IAS 16 applies the same recognition criteria to the cost of major inspections. Inspection costs are not provided for in advance, rather they are added to the asset’s cost if the recognition criteria are satisfied and any amount remaining from the previous inspection (as distinct from physical parts) is derecognised. This process of recognition and derecognition should take place regardless of whether the cost of the previous
inspection was identified (and considered a separate part) when the asset was originally acquired or constructed. Therefore, if the element relating to the inspection had previously been identified, it would have been depreciated between that time and the
current overhaul.

Answer 55

IAS 16 applies the same recognition criteria to the cost of major inspections. Inspection costs are not provided for in advance, rather they are added to the asset’s cost if the recognition criteria are satisfied and any amount remaining from the previous inspection (as distinct from physical parts) is derecognised. This process of recognition and derecognition should take place regardless of whether the cost of the previous inspection was identified (and considered a separate part) when the asset was originally acquired or constructed. Therefore, if the element relating to the inspection had previously been identified, it would have been depreciated between that time and the current overhaul.

Question 56

Recognition - Initial and subsequent expenditure : Major inspections 4

However, if it had not previously been identified, the recognition and derecognition rules still apply, but the standard allows the estimated cost of a future similar inspection to be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed that must be derecognised. [IAS 16.14].

This appears to allow the entity to reconstruct the carrying amount of the previous inspection (i.e. to estimate the net depreciated carrying value of the previous inspection that will be derecognised) rather than simply using a depreciated replacement cost approach.

Answer 56

However, if it had not previously been identified, the recognition and derecognition rules still apply, but the standard allows the estimated cost of a future similar inspection to be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed that must be derecognised. [IAS 16.14].

This appears to allow the entity to reconstruct the carrying amount of the previous inspection (i.e. to estimate the net depreciated carrying value of the previous inspection that will be derecognised) rather than simply using a depreciated replacement cost approach.