IAS 16

PROPERTY, PLANT AND

EQUIPMENT

REVISION
Prepared by BIANCA NEL CA (SA)

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'BIG PICTURE'
IAS 12
1. R&M
Initial Recognition:
2. Spare parts & servicing
equipment
CF Def + RC + IAS 16 3. Safety & environmental
Def =  cost
Subsequent
Recognition:
4. Major inspections
5. Replacement components 1. Cost Model
2. Revaluation Model

DISLOSURE
DEPRECIATION:
MEASUREMENT? 1. Straight line
@ COST 2. Diminishing balance
3. Units of production Derecognition

WHAT INCL/EXCL? Impairment

IAS 36

1.Self-constructed assets
2.Deferred settlement & Government Grants
3.Exchange of PPE items

IFRIC 1

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REVISION 1.
2.
R&M = Expense P/L
Spare parts & servicing equipment = norm: inventory & expense as used
=> Can qualify for PPE if expected to be used in more than 1 period
3. Safety & environmental cost = if Recognition criteria met = capatilise
Initial Recognition: 4. Major inspections
1) Capitalise cost of inspection cost (recogn. = met & depr)
2) Remaining CA of prev inspection = derecognise
CF Def + RC + IAS 16 3) On initial recognition: part of cost = allocate to inspection cost & depr
Def =  over expected period to next inspection
NB. Cost not identified when asset was purchased?
Subsequent
Recognition:
5. Replacement components 1. Cost Model
1) Capitalise cost of replaced component (Recogn criteria = met)
2. Revaluation Model

DISLOSURE
2) Replaced component depreciate over remaining useful life
3) Derecognise remaining CA of replaced component
NB. If CA of replaced component cannot be determined?

1.Purchase price (incl. import duties&non-refundable purchase

taxes) after trade discounts/rebates DEPRECIATION:
MEASUREMENT? 2.Costs directly attributable: bringing asset to location&condition= 1. Straight line
@ COST capable -operate as management intended
2. Diminishing balance
3.IFRIC 1: dismantling & removing costs
3. Units of production Derecognition

EXCLUDED:
1. costs of opening new facility
2. costs of introducing new product/service (including Impairment
costs of advertising and promotional activities)
WHAT INCL/EXCL? IAS 36
3. costs of conducting business in new location or with a
new class of customer (including costs of staff
training) Reassessment:
4. administration and other general overhead costs Cost Model:
• Dr/Cr asset
1.Self-constructed assets = same principles as recognition • Account & disclose as change in
2.Deferred settlement (cash price) estimate
3.Government Grants = CA of PPE may be reduced (grant) • Test impairment
4.Exchange of PPE items: COST = FV unless: Revaluation Model:
transaction lacks commercial substance OR FV of neither assets reliable measured INITIAL ASSESSMENT: Increases in provision=set off against R/S
= part of cost = remaining balance => P/L
NB! IAS 37 = legal/constructive obligation Decrease in provision=credit OCI and
Costs incurred in period = PPE used as inventory increase R/S equity
IFRIC 1 => capitalise as inventory *If deficit previously written to P/L = 1st
recover from P/L
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REVISION 1.
2.
R&M = Expense P/L
Spare parts & servicing equipment = norm: inventory & expense as used
=> Can qualify for PPE if expected to be used in more than 1 period IAS 12
3. Safety & environmental cost = if Recognition criteria met = capatilise
Initial Recognition: 4. Major inspections
1) Capitalise cost of inspection cost (recogn. = met & depr)
2) Remaining CA of prev inspection = derecognise
CF Def + RC + IAS 16 3) On initial recognition: part of cost = allocate to inspection cost & depr
Def =  over expected period to next inspection
NB. Cost not identified when asset was purchased?
Subsequent
Recognition:
5. Replacement components 1. Cost Model
1) Capitalise cost of replaced component (Recogn criteria = met)
2. Revaluation Model

DISLOSURE
2) Replaced component depreciate over remaining useful life
3) Derecognise remaining CA of replaced component
NB. If CA of replaced component cannot be determined?

1.Purchase price (incl. import duties&non-refundable purchase

taxes) after trade discounts/rebates DEPRECIATION:
MEASUREMENT? 2.Costs directly attributable: bringing asset to location&condition=
1. Straight line
@ COST capable -operate as management intended
3.IFRIC 1: dismantling & removing costs
2. Diminishing balance
3. Units of production Derecognition:
* Residual Value Disposal or No FEB
EXCLUDED: * Start/Stop
1. costs of opening new facility
2. costs of introducing new product/service (including Impairment
costs of advertising and promotional activities) IAS 36
WHAT INCL/EXCL? 3. costs of conducting business in new location or with a
new class of customer (including costs of staff
training) Reassessment:
4. administration and other general overhead costs Cost Model:
• Dr/Cr asset
1.Self-constructed assets = same principles as recognition • Account & disclose as change in
2.Deferred settlement (cash price) estimate
3.Government Grants = CA of PPE may be reduced (grant) • Test impairment
4.Exchange of PPE items: COST = FV unless: Revaluation Model:
transaction lacks commercial substance OR FV of neither assets reliable measured INITIAL ASSESSMENT: Increases in provision=set off against R/S
= part of cost = remaining balance => P/L
NB! IAS 37 = legal/constructive obligation Decrease in provision=credit OCI and
Costs incurred in period = PPE used as inventory increase R/S equity
IFRIC 1 => capitalise as inventory *If deficit previously written to P/L = 1st
recover from P/L
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REVISION
IAS 12

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED (DAY) (MONTH) (YEAR)
DEFERRED TAX:
NB! separate column for each class of asset CA = R300K
PROPERTY, PLANT & EQUIPMENT NOTE use @ 28%
RES VALUE = R250K
LAND BUILDINGS MACHINERY VEHICLE TOTAL sale @ 28% x 80%
COST = R200K
Carrying amount at the beginning of the year
recoupment @ 28%
Cost TAX BASE = R140K
Accumulated depreciation

Additions
1. Identify the information provided
Depreciation This is a template:
2. Manner ofOnly
recovery
include what is
Revaluation
3. Include Diagramapplicable
Impairment
Derecognition
CA of depreciable PPE:
• Residual value = recovered through
SALE
Carrying amount at the beginning of the year
• Depreciable Amount = recovered
Carrying amount/cost
through USE
Accumulated depreciation

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FAQ:
For purposes of IAS 16, in terms of the RECOGNITION CRITERIA, do we need to APPLY the NEW conceptual frameworks definition of do we
look at IAS 16.7?
Should you need to discuss a theory question, my recommendation, follow the following steps:
1. Apply the definition in terms of the NEW Conceptual Framework
2. Apply the recognition criteria of the NEW Conceptual Framework
 Conclude: YES, this is an ASSET as per the CF
3. Apply the definition in terms of IAS 16.6 of PPE
4. Apply the recognition criteria of IAS 16.7 of PPE
 Conclude: YES, this is an ASSET as per IAS 16

EXTRACT FROM THE CONCEPTUAL FRAMEWORK NOTES: EXTRACT FROM IAS 16.6-7:

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NB! Example 1 – Dismantling and removing costs IFRIC 1

A Ltd acquired an office building. R

Cost of construction at 1 July 20.12 1 090 000
Expected dismantling and removal costs at end of useful life of asset 120 000
Applicable discount rate after tax (28%) 6,48%
Useful life of office building 24 years

If it is assumed that the building is erected on rented premises and that the rental
agreement requires dismantling of the building at the end of its life, the cost of the asset on
1 July 20.12 will be the following:
R
Cost of construction 1 090 000
Expected dismantling and removal costs discounted to present value
FV = R120 000; n = 24; i = 6,48/0,72 = 9; PV = ?* 15 169
Cost of office building 1 105 169

Journal entries for dismantling and removal costs Dr Cr

Year 1 R R
Office building (SFP) 15 169
Provision for dismantling and removal costs (SFP) 15 169
Finance cost (P/L) (15 169 x 9%) 1 365
Provision for dismantling and removal costs (SFP) 1 365
Year 2
Finance cost (P/L) [(15 169 + 1 365) x 9%] 1 488
Provision for dismantling and removal costs (SFP) 1 488
Year 3 to 23
Entries similar to Year 2 for Years 3 to 23
Year 24
Finance cost (P/L) (110 092 x 9%) 9 908
Provision for dismantling and removal costs (SFP) 9 908
Provision for dismantling and removal costs (SFP) 120 000
Bank (SFP) (110 092 + 9 908) 120 000

Amortisation table Capital/

Balance
interest
R R
Year 1 1 365 16 534
Year 2 1 488 18 022
Year 24 9 908 120 000

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NB! Example 2 – Changes in dismantling costs (Descriptive Accounting) IFRIC 1

H Ltd erected an asset during 20.12 and completed it on 31 December 20.12. The asset must
be dismantled after 20 years.

On 31 December 20.12, the company estimated the dismantling cost at an amount of

R150 000. Assume a fair discount rate of 5% before tax.

The following amounts related to dismantling costs are therefore included in the cost of the
asset in initial recognition:
FV = 150 000; PMT = nil; i = 5% (note 1); n = 20 years
Therefore, PV = 56 533

The dismantling costs are reassessed on 1 January 20.15 and are estimated at R250 000
The provision for dismantling costs will change as follows:
Balance of the provision for dismantling costs (before change in estimate) R62 328

Balance after reassessment of dismantling cost in the future:

FV = 250 000; PMT = nil; i = 5%; n = 18 years (remaining)
Therefore, PV = 103 880

An upward adjustment of R41 552 (R103 880 – R62 328) must be made to the provision.

If the company accounts for the asset in terms of the cost model, the adjustment will be
treated as follows:
Dr Cr
R R
Asset (cost) (SFP) 41 552
Provision for dismantling costs (SFP) 41 552

IFRIC 1.5(c) determines that where the carrying amount increases, as above, the entity
should assess whether there is an indication of impairment of the asset.

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COMPREHENSIVE EXAMPLE

Example 1

ABC Ltd is a listed company with a 30 June 20.17 year end.

An extract from property, plant and equipment account for the year ended 30 June 20.17,
presents the following information below:

Description Cost Purchase date Accumulated Residual

depreciation Value *
as at 1 July
20.16
Property A: Land A R200 000 1 November 20.14
Property A: Building R1 200 000 1 November 20.14 R83 333 R200 000
A
Property B: Land B R300 000 1 January 20.15
Property B: Building R1 300 000 1 January 20.15 R90 000 R100 000
B
Aircraft R970 000 1 June 20.16 Rnil

*It may be assumed that the residual values and useful lives expected of the buildings on
hand will not change during their useful lives.

Additional information
1. Aircraft: On acquisition date of the aircraft an amount of R25 000 was paid (in cash) to the
South African Revenue Service in respect of customs and excise duties. Upon initial
recognition of the aircraft, the following significant components of the aircraft were
identified:
• 30% of the cost of the aircraft is attributable to the engine of the aircraft. The
estimated useful life of the engine is determined to be 25 000 flight hours.
• It is estimated that the useful life of the remainder of the aircraft, is 5 years.
• On 1 June 20.16 the aircraft was available for use as intended by management. During
20.16 and 20.17 financial years the aircraft undertook 500 and 4600 flight hours
respectively.

2. The first revaluation of land held by the company was performed on 30 June 20.17. The
company has a policy to transfer the revaluation surplus directly to retained earning when
the asset is derecognised. The fair values on 30 June 20.17 were determined by the market
approach in accordance with IFRS 13. The market values were the following:

Market – based Entity – specific According to IFRS 13 fair value is

a market-based measurement,
Land A - - not an entity-specific
measurement. Therefore, the
Land B 1 200 000 1 220 000 market-based fair values were
used for the revaluations of the
land and buildings.

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The South African Revenue Service (SARS) allows a deduction for Building B according to
section 13quin of the Income Tax Act, calculated at 5% per annum of the cost of the
building, which is not apportioned for part of a year. Building A does not qualify for a
section 13quin of the Income Tax Act deduction.

3. Accounting policy:
- Land: accounted for in terms of the Revaluation model and is not depreciable.
- Buildings are accounted for using the cost model and are depreciated on a straight-line
over their useful life.
[You should be able to calculate this with the information provided.]

4. At 1 January 20.17 a fire broke out on the second floor of Building A and caused severe
damage to the building. In fact, the second floor of the building had to be evacuated and
the repairs at a cost of R200 000 took two months to complete, resulting in the second
floor of Building A being occupied once again only on 1 March 20.17. The insurance
company paid out R195 000 for the damages incurred after applying the averaging clause
to the claim. Repairs and maintenance of ABC Ltd normally amounts to R75 000 per annum.

5. On 30 April 20.17, the board of directors of ABC Ltd suddenly sold property A for
R1 220 000.

6. Building A is an office block, while Building B is a manufacturing building. Note that ABC
Ltd has several other properties that would enable the company to continue business as
usual, even if they dispose of both Fixed Properties A and B. However, the information in
the question only relates to the properties mentioned in the question.

7. Assume that both the taxable income and profit before tax, before taking any of the above
information into account, amounted to R800 000 for the year ended
30 June 20.17. All other matters were therefore taken into account when calculating the
amounts for taxable income and profit before tax.

8. The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%.

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REQUIRED

(a) Calculate the profit before tax of ABC Ltd for the year ended 30 June 20.17, using the
above-mentioned information.

(b) Provide the following notes to the financial statements for the year ended
30 June 20.17:
1. Profit before tax
2. Property, plant and equipment. (Disclosure requirements of IAS 16.73(d)-(e) are
required A total column is not required.)

(c) Calculate the deferred tax (ONLY for the Properties) for the year ended 30 June 20.17

Please note:
• Comparative figures are not required.
• Assume all amounts to be material.
• Ignore any Value-Added Taxation (VAT) implications.
• Your answer must comply with International Financial Reporting Standards (IFRS).
(Unisa adapted FAC 4863/103/2018 & FAC 3702 2014 EXAM)

Suggested Solution

a) CALCULATION OF PROFIT BEFORE TAX

Profit before tax (given) 800,000
Adjustments:
Depreciation for 20.11 (295,891)
- Aircraft (194,224)
- Building A (41,667)
- Building B (60,000)
Loss on sale of fixed property (55,000)
Insurance policy payout 195,000
Repairs to building A (200,000)
Revised profit before tax 444,109

b) (1) ABC Ltd

Notes for the year ended 30 June 20.11

Expenses
Depreciation on property, plant and equipment (IAS 16.75) 295,891
Loss on sale of property, plant and equipment (IAS 1.98) [C2A] 55,000
Separately disclosable item:
Repairs related to fire damage (IAS 1.97) 200,000
Income
Compensation from insurer (IAS 16.74(d)) 195,000

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Property, plant & equipment

b) (2) Land Buildings Aircraft
R R R
Carrying amount at beginning of year 500,000 2,326,667 977,422
Gross carrying amount or cost
(200 000 + 300 000); (1 200 000 +1 300 000); 500,000 2,500,000 995,000
(970 000 + 25 000)
Accumulated depreciation (83 333 + 90 000) - (173,333) (17,578)
Movements 700,000 (1,176,667) (194,224)
Revaluation 900,000
Depreciation for the year (101,667) (194,224)
Disposal of fixed property (200,000) (1,075,000)
Additions
Carrying amount at end of year 1,200,000 1,150,000 783,198
Gross carrying amount or cost 1,200,000 1,300,000 995,000
Accumulated depreciation and impairment loss - (150,000) (211,802)

Engine:
995 000 x 30% =298 500 / 25 000 x 500 = 5 970
995 000 x 30% =298 500 / 25 000 x 4 600 = 54 924
Remainder:
995 000 x 70% =696 500/60 x 1 = 11 608
995 000 x 70% =696 500/60 x 12 = 139 300

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c) Deferred tax calculation

Carrying amount Temporary Deferred tax

Date Description Tax base difference at asset/(liability)
80% (28%)
Total Revaluation Cost
LAND A
1/11/20.14 Cost 200 000 - 200 000 200 000 - -
30/4/20.17 Carrying amount 200 000 - 200 000 200 000 - -
BUILDING A (OFFICE BUILDING) Does
not qualify for Section 13quin deductions. The depreciation on the cost of the building is a non-deductible item in the Income tax calculation.

01/11/20.14 Cost 1,200,000 - 1,200,000 Exempt

30/06/20.15 Depreciation (33,333) - (33,333) Exempt
30/06/20.15 Carrying amount 1,166,667 - 1,166,667 Exempt
30/6/20.16 Depreciation (50,000) - (50,000) Exempt
30/6/20.16 Carrying amount 1,116,667 - 1,116,667 Exempt
30/4/20.17 Depreciation (41,667) - (41,667) Exempt
30/4/20.17 Carrying amount 1,075,000 - 1,075,000 Exempt

1 Tax base = Nil = nothing deductible for tax purposes

2 Dep: [1 200 000 - 200 000]/20 x 8/12 33,333.33
3 Dep: [1 200 000 - 200 000]/20 x 12/12 50,000.00
4 Dep: [1 200 000 - 200 000]/20 x 10/12 41,666.67

Carrying amount Temporary Deferred tax

Date Description Tax base difference at asset/(liability)
80% (28%)
Total Revaluation Cost

LAND B
01/01/20.15 Cost 300,000 - 300,000 300,000 - -
1/7/20.16 Revaluation 900,000 900,000 - - 720,000 (201,600)
(900 000 x 80%)
30/6/20.17 Carrying amount 1,200,000 900,000 300,000 300,000 480 000 (201,600)
BUILDING B (MANUFACTURING BUILDING)
01/11/20.14 Cost 1,300,000 1,300,000 -
30/06/20.15 Depreciation (30,000) (65,000) 35,000 (9,800)
30/06/20.15 Carrying amount 1,270,000 1,235,000 35,000 (9,800)
30/6/20.16 Depreciation (60,000) (65,000) 5,000 (1,400)
30/6/20.16 Carrying amount 1,210,000 1,170,000 40,000 (11,200)
30/4/20.17 Depreciation (60,000) (65,000) (5,000) 1,400
30/4/20.17 Carrying amount 1,150,000 1,105,000 45,000 (12,600)

1 S13quin = 1 300 000 x 5% 65,000

2 Dep: [1 300 000 - 100 000]/20 x 6/12 30,000
3 Dep: [1 300 000 - 100 000]/20 60,000
4 Dep: [1 300 000 - 100 000]/20 60,000

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