Ias 16 property plant and equipment lecture notes slides

Ias 16 property plant and equipment lecture notes slides Ias 16 property plant and equipment lecture notes slides Ias 16 property plant and equipment lecture notes slides Ias 16 property plant and equipment lecture notes slides

IAS 16: Property, Plant and Equipment

ACCA F7/FR Lectures

Updated: July 2025

Introduction to IAS 16

Context

IAS 16 Property, Plant and Equipment governs the accounting for tangibleassets used in business operations, such as land, buildings, machinery, andequipment, ensuring transparencyandreliability in financial reporting

Equivalent to VAS 3 Tangible Fixed Assetsin Vietnam

Focus: Recognition, measurement, depreciation, derecognition, andpresentation of PPE

Objective: Provide stakeholders with clear information on asset valuesand usage

Critical for ACCA F7/FR, with key differences from VAS 3

emphasized

Held for use , not for sale (distinguishes from inventory).

Useful life > 1 year (distinguishes from short-term assets).

Examples: Factories, machinery, vehicles, office equipment

Exam Tip: Always justify PPE classification based on purpose anduseful life

PPE vs Investment Property

Core Components of IAS 16

Five Key Areas

1 Recognition Criteria: Conditions for recording PPE

2 Initial Measurement: Determining cost at acquisition

3 Subsequent Measurement: Valuing PPE post-recognition

4 Derecognition: Accounting for disposals or retirements

5 Presentation: Disclosing PPE in financial statements

Objective: Ensure accurate, comparable, and transparent financialreporting

Exam Tip: Structure answers around these five areas for

scenario-based questions

Recognition Criteria for PPE

IAS 16 Article 7

PPE is recognized if:

1 It is probablethat future economic benefits will flow to the entity

2 Thecostof the asset can be measured reliably

Example: A production machine with verifiable purchase and

Initial Measurement of PPE

Costs Excluded from PPE

Non-Capitalizable Costs

Costs incurredafterthe asset is ready for use areexpensed, not capitalized.Examples:

Staff training for operating the asset.

Routine maintenance or repairs.

Operating losses during initial use.

Exception: Major upgrades (e.g., enhancing capacity) meeting

recognition criteria are capitalized

Exam Tip: Clearly distinguish pre-use (capitalizable) vs post-use(expensed) costs

Example: Initial Cost Calculation

Training ($2,000) is expensed as a post-use operating cost

Journal: DR PPE $86,000, CR Cash/Payables $86,000

Exam Tip: List included/excluded costs with justifications in answers

Dismantling and Restoration Costs

Example: Restoration Costs

Journal (30.9.X4): DR PPE $20.4M, CR Provision $20.4M

Exam Tip: Show time value of money calculations clearly

Borrowing Costs (IAS 23)

IAS 23 Overview

Borrowing costs directly attributable to acquiring or constructing a

qualifying asset (requiring >1 year to prepare) arecapitalizedas part ofPPE cost

Qualifying assets: Factories, power plants, large machinery

General loans: Use weighted average borrowing rate

Example: Interest on a loan for factory construction

Exam Tip: Reference IAS 23 and show rate/time apportionment incalculations

Example: Borrowing Costs

Journal: DR PPE $549,333, CR Cash/Interest Payable $549,333.Exam Tip: Detail rate calculation and time-weighted interest

Subsequent Measurement Models

IAS 16 Options

After initial recognition, PPE is measured using:

1 Cost Model: Cost less accumulated depreciation and impairmentlosses

2 Revaluation Model: Fair value less subsequent depreciation and

impairment

VAS 3 restricts to cost model; IAS 16 allows flexibility

Choice applies consistently to an entire class of PPE

Exam Tip: Compare models and discuss implications in scenarios

Depreciable amount reviewed annually; changes per IAS 8.

Practical Scenario: Depreciation begins after machine installation andtesting

Exam Tip: Specify method, useful life, and residual value in answers

Cost Model

Definition

PPE is carried at costless accumulated depreciationand impairmentlosses

Aligns with VAS 3; simple and widely used

Example: Machine with $1M cost, 50-year life, no residual value.Depreciation: $20,000/year; carrying amount after 3 years: $940,000.Journal: DR Depreciation Expense $20,000, CR Accumulated

Depreciation $20,000

Revaluation Model

IAS 16 Article 31

PPE is carried at fair value at revaluation date, less subsequent

depreciation and impairment losses

Fair value: Market-based, reliably measurable (e.g., appraisals)

Frequency: When fair value differs materially from carrying amount.Practical Scenario: Annual revaluation for volatile property markets.Exam Tip: Discuss fair value source and revaluation frequency

Revaluation: Accounting Treatment

IAS 16 Articles 3142

First Revaluation:

Increase : Credit to Revaluation Surplus (OCI).

Decrease : Charge to profit or loss (PL).

Subsequent Revaluations:

Increase after decrease: Reverse prior PL loss, then OCI.

Decrease after increase: Reverse prior OCI surplus, then PL.

Exam Tip: Provide journal entries and explain surplus/loss allocation

Example: Revaluation and Depreciation

Scenario

Asset purchased 1.1.X0: Cost $1M, useful life 50 years, straight-line, noresidual value Revalued to $1.2M on 31.12.X1 Revalued to $0.9M on31.12.X3

Cost Model (31.12.X2): Depreciation $20,000; carrying amount

Revaluation Surplus Handling

IAS 16 Article 41

Revaluation surplus may be:

Transferred toretained earningsupon derecognition (e.g., disposal).Gradually transferred based on depreciation difference (revalued vs.original)

Example: Annual transfer of $5,000 ($25,000 $20,000) from surplus

Derecognition of PPE

IAS 16

PPE is derecognized on disposal(e.g., sale, scrapping) or whenno futureeconomic benefits are expected

Disposal date: When buyer obtains control (per IFRS 15)

Gain/loss = Proceeds Carrying amount Disposal costs

Gains not classified as revenue

Practical Scenario: Selling obsolete machinery for scrap value

Exam Tip: Calculate gain/loss and show journal entries

DR Acc Depreciation $50,000, CR Disposal $50,000.

DR Disposal $1.2M, CR PPE Cost $1.2M.

DR Cash $1.3M, CR Disposal $1.3M (net gain $150,000 to PL).

Exam Tip: Show all journals and explain gain recognition in PL

IAS 16 vs VAS 3, Impairment, and Exam Tips

IAS 16 vs VAS 3

Measurement: IAS 16 allows cost and revaluation models; VAS 3

restricts to cost model

Revaluation Surplus: IAS 16 permits OCI recognition; VAS 3 does

not

Borrowing Costs: IAS 16 references IAS 23 for capitalization; VAS 3

stricter

Component Accounting: IAS 16 emphasizes separate depreciation;

VAS 3 less detailed

Show detailed calculations (e.g., initial cost, revaluation,

derecognition) with journal entries

Compare IAS 16 vs VAS 3for measurement and flexibility

Reference IAS 23(borrowing costs), IAS 36 (impairment),IFRS 15(disposal), IFRS 16(sale and leaseback)

Practice scenarios for cost, revaluation, and disposal calculations

IAS 16: Property, Plant and Equipment Updated: July 2025 26 / 26