NZ IAS 16Property, Plant and

Equipment(PP&E)

The nature of PP&ENZ IAS 16 defines property, plant & equipment

(PP&E) as:Tangible itemsWith a specific use within the entity That are expected to be used during more than one

period (i.e. they are non-current in nature) (para 6)

NZ IAS 16 specifically excludes:Assets held for sale (as per NZ IFRS 5)Biological assets (as per NZ IAS 41)Mineral rights/reserves (as per NZ IFRS 6) (para 3)

2

3

Initial recognition of PP&E Cost is recognised if:

It is probable that future economic benefits associated with the

item will flow to the entity, and The cost of the item can be measured reliably (para 7)

Major spare parts and servicing equipment are PP&E, except if

small when they can be expensed through inventory (para 8) Small items can be aggregated (para 9) Where future economic benefits are not expected to flow to the

entity, costs incurred should be expensed. Component parts (with different useful lives) are required to be

separately accounted for. e.g. an aircraft – the engine, frame

and fittings are likely to have different useful lives.

4

Initial measurementInitial measurement is at cost (para 15)Note that if an asset is acquired at no cost or nominal cost,

the cost is its fair value as at the date of acquisition (para NZ15.1)

‘At cost’ covers (para 16): Purchase price, including…(see (a))Directly attributable costs, necessary to bring the asset

to the location and condition for operation (examples para 17)

Estimate to dismantle/remove/restore (e.g. oil platform)See para 19 for examples of costs that are not capitalised

5

Measurement after recognition After initial recognition (at cost) the entity can

choose to use one of two measurement models: Cost (para 30) Revaluation (para 31)

This is an accounting policy decision and must apply to an entire class of PP&E (para 29)

Examples of classes are in para 37 May change policy, but only for more

relevant/reliable information

6

1 - Cost ModelAsset is carried at cost less any accumulated

depreciation and any accumulated impairment losses (para 30)

Repairs and maintenance costs are expensed as incurred, not capitalised (para 12)

Capitalisation requires (at time of expenditure) increased probable future economic benefit (para 7)

e.g. replacement of car tyres

e.g. replacement of a car engine

DepreciationNZ IAS 16 includes the following definitions:

Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life

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

Residual value: the estimated value of the asset at the end of its useful life to the entity

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

7

8

Note…Depreciation is specifically described as an allocation process –

not as a change in the value of an asset

‘Useful life’ is affected by expected usage, physical wear and tear, technical or commercial obsolescence, legal or similar limits on use

Residual value estimates what the entity would currently (at the time of the estimate) obtain from disposal (sale less costs of sale) if already of the age and condition expected at the end of its useful life (para 6)

Why deduct residual value from cost?Precision: to reflect the item’s net costEconomics: to stop depreciation if asset is expected to increase more

than diminish.

9

Depreciation choiceIAS 16 does not specify any depreciation method

(but some are mentioned in para 62)The depreciation method chosen should be the

one that most closely reflects the pattern in which the asset’s future economic benefits are expected to be consumed (para 60)

A depreciation method applied to an asset should be reviewed annually. If there is a significant change in the pattern of consumption, the method should be changed – accounted for as a change in accounting estimate under NZ IAS 8 (para 61)

Methods

Commonly used depreciation methods include:

Straight-line method – asset used evenly throughout its life

Diminishing balance method – more benefits received in earlier years of the life of asset

Units of production method – based on expected use or output of asset

10

11

2 - Revaluation ModelIn this alternative to the cost model:

Measurement basis is fair value at date of valuation less any subsequent accumulated depreciation or impairment losses (para 31)

Fair value – the amount an asset would be sold for in an orderly transaction between market participants at the measurement date (para 6)

Revaluation frequency varies dependent on material changes in value – could be annual or as infrequent as 3 – 5 years (para 34)

Revaluation must be by class to avoid selective revaluation (para 36)Hence all assets within a class must be able to be measured at fair

value for a revaluation model to be adopted for that class

Although the whole class must be revalued, accounting is on an asset-by-asset basis

ExampleA Ltd has decided to change from the cost model to the

revaluation model to account for plant.At 30 June 2012 A Ltd owned the following:

Cost Accum dep’n

Carrying value

Fair value

Increment/(decrement)

Plant A 200,000 100,000 100,000 150,000 50,000

Plant B 140,000 40,000 100,000 80,000 (20,000)

TOTAL 340,000 140,000 200,000 230,000 30,000

• A revaluation increment will be recorded for Plant A and a revaluation decrement will be recorded for Plant B.

Revaluation incrementsIncreases (increments) are recognised in other comprehensive income

and accumulated in equity under the heading of revaluation surplus

(para 39)

The revaluation of Plant A would be recorded as follows:

Dr Accum. depreciation 100,000 *

Cr Plant 50,000 **

Cr Asset revaluation surplus 50,000 ***

Revaluation of Plant A

On derecognition of the asset (e.g. disposal) this amount is transferred

to retained earnings. Transfers are not through the Income statement

(profit/loss) (para 41) 13

* Removal of existing accumulated depreciation

* Removal of existing accumulated depreciation

** Cost- Fair value(200,000 – 150,000) = 50,000

** Cost- Fair value(200,000 – 150,000) = 50,000

*** Amount of increment*** Amount of increment

Revaluation decrementsDecrements are recognised in the Income Statement as

a loss (para 40).

The revaluation of Plant B would be recorded as follows:Dr Accum. depreciation 40,000*Dr Loss on revaluation of plant 20,000**

Cr Plant 60,000*** Revaluation of Plant B

14

*Removal of existing accumulated depreciation

*Removal of existing accumulated depreciation

***Cost- Fair value

(140,000 – 80,000) = 60,000

***Cost- Fair value

(140,000 – 80,000) = 60,000**Amount of decrement**Amount of decrement

Reversing prior increments…A decrement reversing a previous increment will be

recognised in other comprehensive income to the extent of any

credit balance existing in the revaluation surplus, so reducing

the accumulation in the surplus (para 40)In relation to Plant B, assume that a gross revaluation

increment of $10,000 had been made in an earlier year.The revaluation of Plant B would be recorded as follows:

Dr Accum. depreciation 40,000

Dr Asset revaluation surplus 10,000

Dr Loss on revaluation of plant 10,000

Cr Plant 60,000

Revaluation of Plant B 15

Reversing prior decrements…An increment reversing a prior decrement is recognised in

the profit or loss to the extent of the previous decrement

increment (para 39)In relation to Plant A, assume that a gross revaluation

decrement of $15,000 had been made in an earlier year.The revaluation of Plant A would be recorded as follows:

Dr Accum depreciation 100,000Cr Plant 50,000Cr Gain on revaluation of plant 15,000Cr Asset revaluation surplus 35,000

Revaluation of Plant A

16

17

Which model to choose…

There is a cost disincentive to adopt the revaluation model because there is more involved

However, the revaluation model provides increased relevance & reliability

Currently the cost model harmonises with existing US GAAP but in the IASB/FASB current projects this will change

18

DerecognitionDerecognition occurs:

On disposal (sale)When no future economic benefits expected (from

use or sale) (para 67)Gain or loss arising from derecognition is recorded in

profit or loss (para 68) Gains shall not be classified as revenue unless sale

was part of ordinary business activities (paras 68 & 68A)

Reflected through cash flow from investing activities

ExampleA Ltd acquired a machine on 1 July 2010 for $50,000Useful life = 4 years; Residual value = $10,000Annual depreciation is $10,000 p.a.On 1 July 2012 the machine was sold for $45,000The journal entry to account for the sale are:

Dr Cash 45,000Dr Accum. depreciation 20,000

Cr Machine 50,000Cr Gain on sale 15,000

Sale of machine

The gain on sale is $15,000 ($45,000- $30,000)19

20

DisclosureRequired disclosures are described in NZ IAS

16 paras 73–79: For each class the following are stated:

measurement bases, depreciation methods, useful lives or depreciation rates used,Gross carrying amount and accumulated

depreciation (aggregated with accumulated impairment losses) at beginning and end of period, and

A reconciliation of the carrying amount at the beginning and end of the period (para 73)

21

Disclosure if revalued…If revalued, the following needs disclosure:

date of revaluation, whether an independent valuer was used Carrying amount under the cost model for each

revalued class of property, plant and equipmentRevaluation surplus indicating any change (para 77)

22

Additional disclosures…The existence and amounts of restrictions on

title and PP&E pledged as security for liabilitiesExpenditures recognised in the carrying amount

of item of PP&E in the course of its constructionContractual commitments for the acquisition of

PP&ECompensation from third parties for items of

PP&E impaired, lost or given up (if not already disclosed in the Income Statement) (para 74)

Investment propertyAccounting for investment property is covered in a

separate standard – NZ IAS 40This is property held (owned or under a finance lease) for

the purpose of earning rentals or for capital appreciation or both (para 5)

After initial recognition at cost, investment property is measured at fair value (para 33) (unless fair value is not reliably determinable on a continuing basis - para 53)

Any gain or loss on change in fair value is recognised in profit or loss for the period in which is arises (para 35)

Where investment property is at cost, the cost model under NZ IAS 16 is applied (NZ IAS 16 para 5)

23