IAS 16

The Conceptual Framework for Financial Reporting (IASB, 2010) defines an asset as ‘a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity’

– Assets are classified in the statement of financial position as either

– Non-current assets – assets intended for continuing use in the business (eg business premises and office equipment)

– Current assets – assets which are constantly changing their form (eg cash to inventory and back to cash again)

Non-current assets – Non-current assets that are intended for continuing use in the business are classified as

– Tangible non-current assets – non-monetary assets with physical substance such as property, plant and equipment

– Intangible non-current assets – identifiable non-monetary assets without physical substance (more the week after next)

Tangible non-current assets Borrowing costs (IAS23) Property, plant & equipment (IAS 16) Investment property (IAS 40) Government grants (IAS 20) IAS16

- The nature of PPE IAS 16 defines property, plant & equipment (PP&E) as: •with a specific use within the entity: IAS 16, specifically excludes assets held for sale, biological assets, and mineral rights/reserves e.g. Assets held for sale for potential premium is included as investment property •that are expected to be used during more than one period (i.e. they are non-current in nature)

•On the basis of the materiality concept, some entities write off low value items to expenses in the year of purchase (e.g. office equipment that cost £250 or less)

•Materiality states that all items that are reasonably likely to impact investors’ decision IAS16 - The nature of PPE An item of PPE should be recognized as an asset if:

- It is probable that future economic benefits associated with the asset will flow to the entity Where future economic benefits are not expected to flow to the entity, costs incurred should be expensed. - The cost of the item can be measured reliably IAS16 - The nature of PPE Component parts (with different useful lives) are required to be separately accounted for. e.g. An aircraft – the engine, frame and fittings of an aircraft are likely to have different useful lives.

IAS16 - The recognition of PP&E An item of PPE that satisfies the recognition criteria should be recognized initially at its cost. The cost comprises: - Purchase price; - Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by the entity; - Initial estimates of dismantling, removing and site restoration if the entity has an obligation that it incurs on acquisition of the asset.

IAS16 - Measurement subsquent to recognition After initial recognition of an item of PPE the asset should be measured using either the cost model or the revaluation model

• COST MODEL: requires an asset – after initial recognition - to be carried at cost less accumulated depreciation and impairment losses

• REVALUATION MODEL: requires an asset – after initial recognition – to be measured at its fair value less subsequent depreciation and impairment losses

Fair Value: the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s-length transaction

IAS16 - Depreciation IAS 16 includes the following definitions:

•Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life (match concept)

•Depreciable amount: the cost of an asset less its residual value (or other appropriate amounts substituted for cost – e.g. fair value)

•Useful life: the period over which an asset is expected to be used by an entity/ the number of production (or similar) units expected to be obtained by the entity •Residual value: the estimated value of the asset at the end of its useful life to the entity

IAS16 - Depreciation

•Depreciation is an allocation process designed to reflect the fall in the value of the asset in a pattern consistent with the consumption of economic benefits by the entity. •IAS 16 does not specify how this allocation process should be undertaken. •Various depreciation methods are used in practice.

Common methods include: -Straight line method -Diminishing balance method -Units of production method IAS16 - Depreciation

•The useful life of an asset is affected by: - expected usage - physical wear and tear - technical or commercial obsolescence (e.g. computers have a relatively short useful life) - legal or similar limits on use (e.g. expiry date of licences)

•The residual value is an estimate of what the entity would currently (at the time of the estimate) obtain from disposal.IAS16 - The cost model

•IAS 16 requires that assets are carried at cost less any accumulated •depreciation •impairment losses

•Repair and maintenance costs are expensed as incurred, not capitalised- e.g. replacement of car tyres

•Capitalisation requires (at time of expenditure) increased probable future economic benefit-e.g. replacement of car engine IAS16

- Measurement subsquent to recognition

•Accounting policy choice of this decision based primarily on relevance of information.

•The policy that is chosen must be applied to a whole class of assets The classes of PP&E are e.g. land, machinery, motor vehicles and office equipment, ect..

•May change policy, but only if results in more relevant/ reliable information IAS16 - The revaluation model As an alternative to the cost model IAS 16 allows the revaluation model to be used for classes of assets.

•Measurement basis is fair value (FV)

•Frequency of revaluations is not specified, but must be performed with sufficient regularity such that the carrying amount of assets is not materially different from their FV

•Revaluation performed on a class basis •Accounting is performed on an asset-by-asset basis IAS16 - The revaluation model When as asset is revalued (revaluation model)

• Any increase in its carrying amount should be credited to a revaluation reserve in equity. -The revaluation reserve may be released to retained earnings

- When the asset is disposed, the surplus can be transferred to retained earnings;

-The difference between the depreciation charged on the revalued amount and that based on cost can be transferred from the revaluation reserve to retained earnings

• Any reduction in value arising from a revaluation should first be debited to any revaluation surplus in equity and then charged off to the income statement