The aims and objectives of IAS 16 are to describe the accounting treatment of property, plant and equipment. The users of financial statement get and collect the information of investment in property, plant and equipment and also the changes in investment. The main problems and issues in recording the property, plant and equipment are the asset's recognition, amounts determination, impairment losses and depreciation charges.
The Standard IAS 16 is applied in accounting treatment of property, plant and equipment. This standard is not applicable to the property, plant and equipment available for the sale e.g. the amount of biological assets related to agricultural activities, the measurement and recognition of asset's evaluation and exploration and also to the mineral reserves and resources such as natural gas and oil.
The terms used in IAS 16 are as under:
The carrying amount is the amount of an asset after subtracting accumulated impairment losses and accumulated depreciation.
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Cost is the amount of cash or equal to the cash paid or other consideration's fair value to purchase an asset at the time of its purchase and sale.
Depreciable amount is the net and remaining amount of as asset after subtracting the accumulated depreciation or residual value
Depreciation is gradual reduction or loss of an asset over a specified period of time. It is calculated as cost minus residual value divided by estimated useful life.
Fair value is the amount for which an asset is exchanged between the willing parties involves in the dealing or transaction.
Entity specific value is the value of cash flows gains from the continuous use of the asset and its useful life.
Impairment loss is the value that comes from the amount of assets becomes greater than its recoverable amount.
The property, plant and equipment are tangible Assets that:
They may be used in the supply and production of the commodities may be given on rent to others or may be used for administrative purposes. It may be used more than one period.
The recoverable amount is the greater than fair value subtracts to and value in use of an asset. The residual value is amount which may be gained from its disposal. The expected useful life is the time period in which the asset is fully used during the operation the company.
The property, plant and equipment shall be considered as an asset if fulfills the conditions that
it gives the economic benefits to the entity and
Its cost may be measured reliably.
The spare parts and the servicing equipments are considered and treated like the nominal account in the profit and loss account as inventory and get consumes.
If the spare parts are used as the items of the property, plant and equipment then they can be considered as an asset.
The standard 16 does not define the recognition measure unit which may constitutes the items of property, plant and equipment so for the application of criteria of recognition to the entity specific conditions the judgment is needed. It can be suitable and appropriate to the moulds, dies and tools apply to the aggregate value criteria.
Under the recognition principles the entity evaluates the costs of the property, plant and equipment at the time they are incurred. These costs also contain the initial cost incurred to purchase and constructions of property, plant and equipment.
The property, plant and equipment items may be purchased for the environmental, security and safety purposes, whether the purchase of these property, plant and equipment may not increasing the future economic benefits but it can be necessary for a company to get the economic benefits from its assets. The property, plant and equipment items which capable the company to get the future economic benefits from are qualified for the recognition.
In the light of recognition principle, the company does not identify the carrying amount of property, plant and equipment items. These costs are identified in the profit or loss account as they incurred. The day to day servicing costs are basically the cost of workers and may be considered the small portion. The aims of such expenses prescribe the repair and maintenance of the property, plant and equipment items.
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The items of property, plant and equipment may needs the replacement at the regular intervals of times e.g. the equipments needs the lubricants after the usage of specified number of hours, an airlines need to change its seats several times in its life. The property, plant and equipment items is purchased for the less frequently replacement recurring cost, like replacing the internal structure of equipment. In the light of recognition principle, a company identifies the carrying amounts of item when their costs are incurred if they are meeting the criteria of recognition. The amounts of such parts which are replaced is derecognized according to the recognition provision of the standard 16.
The continuation for operation of property, plant and equipments perform the regular major inspection for the faults except the item's parts are replaced, after this inspection the cost are identified the items of property, plant and equipment as carrying amount if they are satisfying the criteria of recognition.
Measurement at recognition:
The item of property, plant and equipment should be measuring at its cost while qualifying for the recognition acting like an asset.
Element of the cost:
The cost of the item of property, plant and equipment are consisting on:
Its acquiring price having import duties and taxes of non refundable latterly subtracting the trade discounts and rebates.
The costs directly contribute in bringing asset to its conditions and locations at the method recognize by the company's management.
The initial costs of taking into pieces and item removing item and site on its location, the rules that a company incurs when the item is purchased and used during a particular time interval for the aim except producing the inventories during the period specified.
The directly attributed costs are as follows:
The employee benefits costs come from the acquisition of the items of property, plant and equipment.
The site establishing costs
The handle and delivery cost
The assembly and installation costs
Costs to check the assets is working properly and deducting net proceeds from the sale item to bringing the asset to its location and condition.
The costs examples that are excluded from the item of property, plant and equipment are as under:
New facility opening costs
Introduction of new commodities costs
Conduction of business in new area or with new customers costs
Overhead and administration costs
The costs excluded from the carrying amount of property, plant and equipment.
The cost will be incurred if item is being used in the operation on the method use by the management.
Initially operated losses
Relocating and reorganizing costs by the company
Measurement of Cost
The cost of an item of the property, plant and equipment will be equal to cash at the date of recognition, and then the interest will be difference between total payments and cash equivalent.
The items of property, plant and equipment may be purchased and exchangeable for monetary and non-monetary assets. The items will be measurable at fair value except the transaction has no business material, asset sold and purchase which is reliable measure. The purchase of item is measured if the company derecognizes the asset sold.
The exchange transaction has business materials if;
The arrangements of the cash paid on asset purchased are different from the arrangements from the cash received from the asset sold.
To determine whether the transaction has business material, the company specific value of portion of the company's operation affected by transaction will be shown the post tax of cash flows.
If the cost of an item of property, plant and equipment under the contract of the finance lease is being held by the lessee then the cost can be identified in next Standard. The amount of an item of property, plant and equipment may be decreased and declined by the government subsidies.
If the company is capable to identify the fair value of asset sold and purchased. Then fair value of asset sold is avail for the measurement of value of asset purchased except the fair value of asset purchased are more clear and comprehensive.
Measurement after recognition
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The accounting policy of the entity should be cost model or revaluation model; it is applicable to the all items of property, plant and equipment.
The item of property, plant and equipment will be recorded at cost less the accumulated depreciation or any impairment losses after the recognition of asset.
The fair value of an item of property, plant and equipment may be measurable and recorded at revalued amount after the recognition of asset. Its fair value at revaluation date subtracted accumulated impairment losses and accumulated depreciation. The revaluations process will be completed carefully and regularly to confirm the carrying amount is not different from book value.
The land and building fair values should be identified from market based evidence by assessment undertaken by an auditors or a chartered accountant.
If no provision of market based evidence is available then the company may require determining the fair value by using income or depreciated replacement cost approach.
The revaluation's frequency is depending upon the changes made in fair value of the items of property, plant and equipment. The further revaluation will be needed if the fair value is different from the carrying amount.
At the time that an item of property, plant and equipment is being revalued at the revaluation date, then the accumulated depreciation is treated in one of ways.
The carrying amount converted into revaluation amount after revaluation, so it redefines proportionately with the change in gross carrying amount of asset. This method is used when the revaluation process is applying an index to measure its depreciated replacement cost.
The adjusted amount from eliminated of accumulated depreciation made the part of increase or decrease in carrying amount, the eliminated amount against gross carrying amount then the net amount of restated to the revalued amount of assets is measured and method is applicable to building.
The whole amount of property, plant and equipment will be revalued as the result of revaluation of an item of property, plant and equipment.
The assets having the same nature in company's operations is categories in a separate group plant, plant assets and equipment. The separate groups will be land, Building, machines, ship and aircraft.
The simultaneous revaluation o f property, plant and equipment avoid the chances of selective revaluation, the amount from the costs and value of different date reports in the financial statements. The revaluation process is completed in short period of time on the rolling basis.
The increase in the carrying amount of an asset is recognized as income in revaluation surplus account. The income will be reported in profit and loss account.
The decrease in the carrying amount of an asset is recognized as expense in the revaluation surplus account. This item is also reported in the profit and loss account.
After the recognition the revaluation surplus of an item of property, plant and equipment is closed in retain earning containing total amount the retired asset. The transferred amount will be difference between depreciation from the revaluation of asset and it original cost. After the revaluation, surplus is closed in retained earnings through the profit and loss account.
The taxes imposing on income from revaluation of an item of property, plant and equipment will be according to income tax mention is IAS 12.
The items cost of property, plant and equipment will gradually decreased over its estimated useful life.
The entity item of property, plant and equipment is initially recorded at its cost, then after each year at the end depreciation expense will be charged. The cost of items will gradually decline and reaches to its scrap value over its estimated useful life. On other hand the accumulated depreciation account will be created for the recoupment of cost of items to be purchased in the future.
Entity can depreciate the item parts that have no cost linked with total cost.
The depreciation expense will be closed and credited in the profit and loss account on other side accumulated depreciation account will be created on the credit side of balance sheet.
Depreciable Amount and Depreciation Period
Depreciable amount is cost less residual value of the asset. It useful life and depreciable amount is analyzed at the end of each year. An entity may change the depreciation methods on its choice. The depreciation is recorded even if the residual value is not greater or more than its cost. The depreciation is calculated by subtracting the residual value from original cost divided by estimated useful life. To determine useful life of asset then the following factors should be considered.
Expected useful life and its ability to produce the outcomes
The expectation about the physically wear and tear is depend on factors of operation.
Due to changes in production improvements the technical and commercial obsolescence will occurs. There will be some legal limits on assets use like expiration date.
After the expiration of the useful life which is the expected ability or capacity of asset to produce for entity then it may be disposed of when it becomes useless. The asset's economic life will be greater than its useful life.
The building will be depreciated in the form of wear and tear. The land cannot be depreciated; it may be depreciated if there are some mineral resources inside the land.
The depreciation method will depend upon the entity choice that how an asset is proved to be an economical in its expected period of time.
At the end of each year the depreciation method is analyzed, if the current depreciation method is considered not to be suitable for entity then depreciation method will be changed and select the best suitable one for the entity as mentioned in international accounting standard 8.
The depreciation methods may be Straight line method, units of production method, diminishing balance method and sum of the year digits method.
The straight method shows constant decrease in value of asset over estimated useful life except change in scrap value. The units of production method shows decline based on estimated on output. The diminishing balance method shows decrease based on asset's depreciable amount previous year.
The entity would like to use any of depreciation methods keeping in view that which method is suitable for company.
Impaired amount of an item of property, plant and equipment is calculated by the application of IAS 36, this standard describe how the entity analyze the impairment losses, carrying amount, recovered and reserved amount.
Compensation for Impairment
The impaired items of property, plant and equipment is compensated from third person, if there is any loss or deficit should be included in the income statement.
The impairments items are accounted for are as mentioned under:
Impairments are identified and analyzed according to IAS 36.
The items de recognition is also determined according to this standard.
Recovery from third person for the item that was impaired, destroyed is kept in income statement to calculate the profit and loss.
If the items cost are restored then replacement is determined according to this standard.
De-recognition of carrying amount of items of property, plant and equipment on its disposal or having no expectation of economic benefits from its use.
The income and loss from de recognition of an item of property, plant and equipment would be recorded in income statement.
An entity may sell the items of property, plant and equipment or it may be given on the rent to the second party.
An item of property, plant and equipment may be disposed of by selling and donation to others. The disposal date may be identified by the application of IAS 18 to analyze the sale.
For the items of property, plant and equipment the profit and loss account should be disclosed:
For identification of gross carrying amount the basis of measurement will be used.
The methods of depreciation will be used
The estimated useful life and rates of depreciation will be used.
The amount of accumulated depreciation and gross carrying amount is mentioned at the beginning and ending of the year.
Carrying amount reconciliation at beginning and ending will told the summation, sale of assets at its disposal, Collections by economic combinations, gain or loss from revaluation of items, impairment losses as recognized and reversed in income statement, the depreciation and other charges.
The profit and loss account should also be disclosed:
The security for liabilities like banned amount of property, plant and equipment.
During the procedure of construction there will be recognized amount of items.
The purchase of property, plant and equipment there will be pledge commitments amounts.
Financial statement user can search information according to their needs:
If the cost model is using, carrying amount of property, plant and equipment is different from its fair value.
There will be the carrying amount of property, plant and equipment which is used for short period of time.
So the entities are appreciated to disclose the amounts.
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