IAS 16 - Property, Plant & Equipment

IAS 16 - Property, plant and equipment
Executive summary
IFRS permits periodic revaluation of an entire class of fixed assets to fair value.
US GAAP does not allow revaluation.
IFRS requires depreciation of components of an asset when the components have

different periods of benefit. Component depreciation is permissible using US GAAP
but is not a common practice.
Property, plant, and equipment

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Page 2
Definition
US GAAP
IFRS
PP&E includes long-term tangible assets

acquired for use in operations and not for
resale.

Similar
Page 3
Acquisition
General
US GAAP
IFRS
PP&E should be recorded based on the fair

value given up or the value received,
whichever is more clearly evident.
Similar
Costs include purchase price and related taxes,

directly attributable costs and
estimated retirement obligation costs.
Similar
Costs that are not directly attributable

should be expensed as a period cost.
Similar

Page 4
Acquisition
General
IFRS
US GAAP
Voluntary investments in safety or

environmental equipment are capitalized.
Voluntary investments in safety or

environmental equipment are expensed,
unless they extend the economic life of the
related asset or a constructive obligation
exists to improve the assets safety or
environmental standards.

Page 5
Acquisition
General
Example 1:
Clean Company wants to be viewed as the most environmentally friendly company in its
industry. As a result, the company installs equipment on its smoke stacks to reduce
emissions. The equipment costs $30,000 and has a three-year life.
How would this equipment be accounted for

using US GAAP and IFRS?

Page 6
Acquisition
General
Example 1 solution:
Using US GAAP, this equipment would be capitalized and depreciated over its three-year life.
Using IFRS, the $30,000 cost of this voluntary investment in environmental equipment might be
expensed in year one, unless it extends the economic life of the smoke stacks or this expenditure
fulfills a constructive obligation.

Page 7
Valuation at acquisition
Exchange of non-monetary assets
US GAAP
IFRS
Valuation should be based on fair value given

up or fair value received, whichever is more
clearly evident.
Similar
If the transaction has commercial substance,

any related gain or loss should be recognized
in income.
Similar
If the exchange lacks commercial substance,

losses should be recognized immediately and
gains should be deferred if no cash is received
as part of the exchange.
Similar

Page 8
US GAAP
If the exchange lacks commercial
substance and some cash is received, a
portion of the gain can be recognized:
The formula for recognizing gain is:

(cash received/(fair value of assets received
plus cash received)) x total gain.
When cash represents 25% or more of the

exchanged value, the transaction should be
accounted for as a monetary exchange.
IFRS
IAS 16, paragraph 24, states unless (a)
the exchange lacks commercial substance
or (b) the fair value of neither the asset
received nor the asset given up is reliably
measurable, then the value of the
acquired item is measured at fair value. If
the exchange lacks commercial substance
or the fair value of neither asset is reliably
measurable, then the cost is measured as
the cost of the asset given up. In this case,
this would result in gains being deferred
using IFRS.

Page 9
Example 4:
A company exchanges two used printing presses with a total net book value of $24,000
($40,000 cost less accumulated depreciation of $16,000) for a new printing press with a
fair value of $24,000 and $3,000 in cash. The fair value of the two used printing presses
is $27,000. The transaction is deemed to lack commercial substance.
What gain or loss would be recognized using US GAAP

and IFRS? Show corresponding journal entries.

Page 10
Example 4 solution:
The portion of the gain to be recognized using US GAAP would be computed as follows:
cash received of $3,000/(fair value of assets of $24,000 + cash received of $3,000) x total the
gain of $3,000 = recognized gain of $333.
New printing press
Cash
Accumulated depreciation
Old printing presses
Gain on disposal
$ 21,333
3,000
16,000
$ 40,000
333
The cost of the new printing press is the $24,000 fair value reduced by the unrecognized
gain of $2,667.

Page 11
Example 4 solution (continued):
Using IFRS, no gain would be recognized since the transaction lacks commercial substance.
The entry would be as follows:
New printing press
Cash
Old printing presses
$ 21,000
3,000
16,000
$ 40,000
If there is a computed loss on the exchange, recognize the amount of the loss immediately.

Page 12
Purchases paid for using company stock
US GAAP
IFRS
If the companys stock is actively traded, the

value of the stock should be used to determine
the value of the asset received in the
exchange.
If a company cannot determine the market
value of its stock, it should determine the fair
value of the asset received in the exchange.

Similarly, the fair value of the

asset given up is used to
measure the cost of the asset
received unless the fair value of
the asset received is more
clearly evident. (IAS 16.24)
Page 13
Periodic valuation
Carrying value
US GAAP
Revaluation of
fixed assets is
not allowed.
IFRS
A company can choose to account for PP&E and natural resources
at fair value using the revaluation method:
Cost or fair value must be applied to an entire class of PP&E.

Different classes can have different policies.
Fair value is the amount at which an asset could be exchanged in an
arms length transaction between knowledgeable and willing parties.
A professional appraiser may be used to establish fair value.
Revaluations must be performed periodically to ensure the carrying value
of that asset class is not materially different than its fair value.

Page 14
Periodic valuation
Carrying value
US GAAP
Revaluation of
fixed assets is
not allowed.
IFRS
Accounting for revaluation:
Increases in value should be credited through OCI to a revaluation

surplus account in equity, unless it reverses a loss that was previously
expensed, in which case that portion may be credited to income.
Decreases in value should be expensed unless it reverses a previous
revaluation surplus account relating to the same asset. That portion can
be debited through OCI to the revaluation surplus account in equity.
If the revalued basis of an asset exceeds the cost basis, there will be an
increase in annual depreciation. To the extent there is an increase in
depreciation expense, per IAS 16.4-1, an entity may reverse the portion of
reserve surplus related to this increase by debiting revaluation surplus
and crediting retained earnings. Alternatively, this transfer may be
computed upon disposal.
Page 15
Periodic valuation
Carrying value
US GAAP
Revaluation of
fixed assets is
not allowed.
IFRS
Accounting for revaluation (continued):
When an asset is disposed of, any remaining related revaluation surplus

account in equity may be transferred to retained earnings. The
revaluation surplus can never be credited to income.
If an asset is revalued, an entity may account for the accumulated
depreciation at the date of revaluation in two ways:
Depreciation elimination method: The accumulated depreciation can
be eliminated against the asset itself.
Proportionate restatement method: The accumulated depreciation
can be restated proportionately with the change in the gross carrying
value of the asset so that the carrying value of the asset after
revaluation equals its revalued amount.
Page 16
Periodic valuation
Carrying value
US GAAP
Revaluation of fixed assets is not
allowed.
IFRS
In 2006, Ernst & Young LLP provided an overview

of 65 selected large, multinational companies
reporting using IFRS. Only one company used
the revaluation option for any of its PP&E.
In a recent study, Hans B. Christensen and Valeri
Nikolaev of the University of Chicago Booth
School of Business looked at the valuation
choices made by 1,539 German and UK
companies in the first year of preparing IFRS
financial statements. They found that only 3% of
the companies chose to use fair value accounting
for at least one class of assets.

Page 17
Periodic valuation
Carrying value
Example 5:
A company that reports using IFRS acquired weight-lifting equipment on January 1, 2010, at a
cost of $10,000. This is the companys only equipment. The company uses fair value for its
equipment using IAS 16. On December 31, 2011, the net book value is $8,000
(cost of $10,000 less accumulated depreciation of $2,000),
while the fair value is determined to be $8,800.
What journal entries would be required to record the

revaluations in 2011?

Page 18
Periodic valuation
Carrying value
Example 5 solution:
Equipment
(To eliminate accumulated depreciation.)
$ 2,000
$ 2,000
Equipment
Revaluation surplus equipment (OCI)
(To write equipment up to fair value.)
$ 800
$ 800

Page 19
Periodic valuation
Carrying value
Example 6:
A company that reports using IFRS acquired an excavator on January 1, 2010, at a cost of
$10,000. This excavator represents the companys only piece of equipment. The company uses
fair value for its equipment using IAS 16. This excavator is being depreciated on a straight-line
basis over its 10-year useful life. There is no residual value at the end of the 10-year period. In
both 2010 and 2011, depreciation would be $1,000. On December 31, 2011, the fair value is
determined to be $8,800. On December 31, 2013, the fair
value is determined to be $5,000. The companys accounting
policy is to reverse a portion of revaluation surplus related to
the increased depreciation expense.
Determine what accounts would be impacted if

this activity is recorded for 2010 through 2013.

Page 20
Periodic valuation
Carrying value
Example 6 solution:
Date
January 1, 2010
Cost
$10,000
Depreciation
expense
Accumulated
depreciation
Revaluation
surplus (OCI)
Net
$10,000
Retained
earnings
Expense
December 31, 2010
10,000
1,000
(1,000)
9,000
December 31, 2011
10,000
1,000
(2,000)
8,000
Revalue
(1,200)
2,000
800
(800)
8,800
8,800
December 31, 2012
8,800
1,100
(1,100)
7,700
(700)
(100)
December 31, 2013
8,800
1,100
(2,200)
6,600
(600)
(200)
2,200
(1,600)
600
1,000
$ 5,000
$ 1,000
Revalue
(3,800)
$ 5,000

(200)
Page 21
Periodic valuation
Carrying value

2010:
Equipment
Cash
(To record purchase of equipment.)
Depreciation expense
(To record depreciation.)
2011:
$ 10,000
$ 10,000
$ 1,000
$ 1,000
2012:
$ 1,100

$ 100
Retained earnings
$ 100
(To reverse portion of reserve surplus
related to increased depreciation expense. Note that this
journal entry is optional.)
$ 1,000
$ 2,000
Equipment
(To record revaluation.)
$ 1,000
$ 1,200
800

$ 1,100
Page 22
Periodic valuation
Carrying value

2013:
$ 1,100
$ 1,100
Revaluation surplus equipment (OCI) $ 100

Retained earnings
$ 100
(To reverse portion of reserve surplus related to increased
depreciation expense. Note that this journal entry is optional.)
$ 2,200
600
Loss
1,000
Equipment
(To record devaluation of equipment.)
$ 3,800

Page 23
Cost allocation issues

Depreciation
US GAAP
IFRS
Definition: the systematic and rational manner of allocating

the cost of a tangible asset to expense over the assets
expected life.
Similar
Useful life: the expected service period of the asset, which

could be shorter than its physical life.
Similar
Depreciable base: if the cost basis is used, then the

depreciable base is the cost of the asset less the estimated
salvage value.
Similar, but IFRS requires each significant

component of an asset to be identified and
its depreciable base to be determined.
Depreciation method: attempt to match the cost of an asset

to the period benefited from the use of the asset. Typical
methods are the straight-line method, the units-ofproduction method and various accelerated methods.
Similar

Page 24

Depreciation
IFRS
US GAAP
Depreciable base: component

depreciation is allowed, but is rarely done
because it complicates the accounting.
Depreciable base: IAS 16.43 states,

each part of an item of property, plant and
equipment with a cost that is significant in
relation to the total cost of the item shall
be depreciated separately.

Page 25

Depreciation
Example 10:
A company acquires a truck at a cost of $60,000. The service life is expected to be four years.
Based on reliable historical data, the company believes the truck can be sold at the end of four
years for $10,000. Additionally, the tires must be replaced every two years. The transmission
must be replaced every three years. On the initial date of acquisition, the tires have a cost of
$4,000 and the transmission has a cost of $6,000.
What is the depreciable base and service life using

US GAAP and IFRS? Assume the company chooses
not to use component depreciation using US GAAP.

Page 26

Depreciation
Example 10 solution:
Depreciable base
Truck
Tires
Transmission
Service life
4 years
2 years
3 years
US GAAP
$ 50,000
$ 50,000

IFRS
$ 40,000
4,000
6,000
$ 50,000
Page 27

Depreciation
Example 11:
Use the same facts as the previous example. Assume straight-line depreciation and compute the
depreciation expense in year one using US GAAP and IFRS. Assume that all of the salvage
value is assigned to the truck itself and none to the tires or transmission.

Page 28

Depreciation
Truck
Truck
Tires
Transmission
Service life
4 years
US GAAP
US GAAP
depreciable depreciation
base
expense
$ 50,000$ 12,500
Service life
4 years
2 years
3 years
$ 50,000
IFRS
IFRS
depreciable depreciation
base
expense
$ 40,000$ 10,000
4,0002,000
6,0002,000
$ 14,000
Page 29
Disposition
Sale
US GAAP
The revaluation method is not allowed.
IFRS
If the revaluation method is used, the
accounting for a sale may be slightly
different, as follows:
If the revaluation resulted in a write-down of

the asset, then the gain or loss on the sale
is calculated based on the sales proceeds
less the net adjusted asset value.
If the revaluation resulted in a write-up of
the asset, then the revaluation surplus
account can be reversed to retained
earnings.
There are no significant differences if the cost method is used.

Page 30
Disposition
Sale
Example 12:
A company acquired its only building on January 1, 2010, at a cost of $4 million. The building has
a 20-year life and is being depreciated on a straight-line basis. On December 31, 2011, the net
book value of the building was $3.6 million. The company revalued the building when the fair
value of the building was $3.78 million on December 31, 2011. On December 31, 2013, the
company sold the building for $3.6 million.
The companys accounting policy is to reverse a portion
of the surplus account related to increased depreciation
expense.
Determine what accounts would be impacted and,

in table format, show the activity for the years 2010
through 2013.
Show the journal entry to record the sale.

Page 31
Disposition
Sale
Date
Cost
Accumulated
depreciation
Net
Surplus
account in
equity - OCI
January 1, 2010
December 31, 2010
December 31, 2011
December 31, 2011
$ 4,000,000
4,000,000
4,000,000
(220,000)
$ 3,780,000
$ (200,000)
(400,000)
400,000
$
$ 4,000,000
3,800,000
3,600,000
180,000
$ 3,780,000
December 31, 2012

December 31, 2013
3,780,000
3,780,000
$ 3,780,000
(210,000)*
(420,000)
$ (420,000)
3,570,000
3,360,000
$ 3,360,000
10,000
10,000
$ (160,000)
$(3,780,000)
$
420,000
$
3,360,000
$
160,000
$
Sale
Income
Retained
earnings
$ (180,000)
$ (10,000)
(10,000)
$ (20,000)
$(240,000)
$ (240,000)
(160,000)
$ (180,000)
* Calculated as $3,780,000 NBV divided by remaining 18-year life.

Page 32
Disposition
Sale

The entry to record the sale would be as follows:
Cash
$ 3,600,000
Accumulated depreciation 420,000
Revaluation surplus (OCI) 160,000
Building cost
3,780,000
Gain on sale
240,000
Retained earnings
160,000
Note: if the asset hadnt been revalued, the NBV of the building would have been $3.2 million (cost of $4.0 million
less $200,000 depreciation x 4 years). If the building was sold for $3.6 million, the gain would have been $400,000.
Since the building was revalued, the depreciation expense over the four years was $820,000 ($200,000 in 2010
and 2011 and $210,000 in 2012 and 2013). Reserve surplus was reduced by $20,000 during this period with the
credit applied directly to retained earnings. Reserve surplus can never be credited to income. Therefore, after
reversing the remaining reserve surplus of $160,000 to retained earnings, the resulting gain is $240,000.

Page 33
Disclosures
US GAAP
IFRS
The measurement basis used for each class of

PP&E.
Similar
The balance of each class of PP&E as of the balance

sheet date.
Similar
A description of the depreciation method, the useful

lives of PP&E, the amount of accumulated
depreciation and depreciation expense during the
period.
Similar
The amount of impairment losses recognized in

income during the year.
Similar

Page 34

IAS 16 - Property, Plant &amp; Equipment

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IAS 16 - Property, plant and equipment

IFRS requires depreciation of components of an asset when the components have

Property, plant, and equipment

PP&E includes long-term tangible assets

Property, plant, and equipment

PP&E should be recorded based on the fair

Costs include purchase price and related taxes,

Costs that are not directly attributable

Property, plant, and equipment

Voluntary investments in safety or

Voluntary investments in safety or

Property, plant, and equipment

How would this equipment be accounted for

Property, plant, and equipment

Property, plant, and equipment

Valuation should be based on fair value given

If the transaction has commercial substance,

If the exchange lacks commercial substance,

Property, plant, and equipment

The formula for recognizing gain is:

When cash represents 25% or more of the

Property, plant, and equipment

What gain or loss would be recognized using US GAAP

Property, plant, and equipment

Property, plant, and equipment

Property, plant, and equipment

Purchases paid for using company stock

If the companys stock is actively traded, the

Property, plant, and equipment

Similarly, the fair value of the

Cost or fair value must be applied to an entire class of PP&E.

Property, plant, and equipment

Increases in value should be credited through OCI to a revaluation

Academic Resource Center

When an asset is disposed of, any remaining related revaluation surplus

Academic Resource Center

In 2006, Ernst & Young LLP provided an overview

Property, plant, and equipment

What journal entries would be required to record the

Property, plant, and equipment

Property, plant, and equipment

Determine what accounts would be impacted if

Property, plant, and equipment

December 31, 2010

December 31, 2011

December 31, 2012

December 31, 2013

Property, plant, and equipment

Example 6 solution (continued):

Revaluation surplus equipment (OCI)

Property, plant, and equipment

Example 6 solution (continued):

Revaluation surplus equipment (OCI) $ 100

Property, plant, and equipment

Cost allocation issues

Definition: the systematic and rational manner of allocating

Useful life: the expected service period of the asset, which

Depreciable base: if the cost basis is used, then the

Similar, but IFRS requires each significant

Depreciation method: attempt to match the cost of an asset

Property, plant, and equipment

Cost allocation issues

Depreciable base: component

IAS 16 - Property, Plant & Equipment

IAS 16 - Property, Plant & Equipment