IAS 16 : Definitions

Definitions

Carrying amount is the amount at which an asset is recorded in the balance sheet, after deducting any accumulated depreciation and accumulated impairment losses.

Cost is the amount of cash (or cash equivalents) paid and the fair value of any other consideration, given to acquire an asset at the time of its acquisition, or construction.

Depreciable amount is the cost of an asset, or valuation, less its residual value.

Depreciation is the spreading of the depreciable amount of an asset over its useful life.

Fair value is the amount for which an asset could be exchanged between knowledgeable, independent parties.

Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

Property, plant and equipment (‘PPE’) are tangible items that:

(1) are held for use in the production, or supply, of goods or services, for rental to others, or for administrative purposes; and

(2) are expected to be used during more than one reporting period.

Recoverable amount is the higher of an asset’s fair value less costs to sell, and its value in use.

Residual value is the estimated amount that you would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age, and in the condition expected at the end of its useful life.

Useful life

(1) the period over which an asset is expected to be available for use by an undertaking; or

(2) the number of production, or similar, units expected to be obtained from the asset by an undertaking.

In the following examples, I/B refers to Income Statement and Balance Sheet.

EXAMPLE residual value 1 Your policy is to keep company vehicles for 4 years. You have just bought a new vehicle for $20.000. Today’s market price, less selling costs, of a similar vehicle that is 4 years old is $6.000, which is a reasonable estimate of the residual value of the new vehicle. The depreciable amount will be $20.000-$6.000= $14.000, and the annual depreciation charge will be $14.000 / 4 years = $3.500. At the end of the 4 years, you will sell the vehicle.
	I/B	DR	CR
Depreciation	I	3.500
Accumulated depreciation	B		3.500
Annual depreciation
Property, plant & equipment	B		20.000
Accumulated depreciation	B	14.000
Cash	B	6.000
Sale of vehicle, assuming the cash received = residual value

EXAMPLE residual value 2 You buy an air-conditioning system for your bank branch for $200.000. It is estimated to have a life of 5 years, with no residual value. You depreciate it at the rate of $40.000 per year.
	I/B	DR	CR
Depreciation	I	40.000
Accumulated depreciation	B		40.000
Annual depreciation

EXAMPLE depreciation per unit You buy a printing machine for $100.000 for a seasonal promotional publication. You estimate that it will be able to print 20.000 units over its life. No residual value is anticipated. Every time a unit is printed, depreciate the machine by $5.
	I/B	DR	CR
Depreciation	I	5
Accumulated depreciation	B		5
Unit depreciation

Property type- different accounting treatment applied to properties under IFRS depending on their current and future uses and their ownership
	Standard	Standard Name	Valuation
Owner-occupied property	IAS 16	Property, plant and equipment (see also IAS 20 Government grants)	Cost or revaluation.
Property under construction (including investment property under construction)	IAS 16	Property, plant and equipment (see also IAS 23 Borrowing costs)	Cost. (The 2007 IASB annual improvement process intends that investment property being built will be accounted for under IAS 40 - cost or fair value.)
Property acquired in an exchange of assets	IAS 16	Property, plant and equipment	Fair value or the carrying amount of the assets given up.
Investment property	IAS 40	Investment property	Cost or fair value.
Investment property being redeveloped for continuing use as investment property.	IAS 40	Investment property	Cost or fair value.
Investment property held for sale without development (unless it meets the criteria of IFRS 5 – see below).	IAS 40	Investment property	Cost or fair value.
Property held under an operating lease classified as an investment property	IAS 40	Investment property	Fair value (accounted for as a finance lease under IAS 17).
Property held under a finance lease	IAS 17	Leases. Owner-occupied IAS 16,              Investment property IAS 40.	The lower of fair value and the present value of the minimum lease payments.
Property held under an operating lease – owner -occupied	IAS 17	Leases	Leasing costs expensed.
Property lease to another party under a finance lease	IAS 17	Leases	Account receivable equal to the net investment in the lease.
Property sale and leaseback	IAS 17	Leases	As operating lease or finance lease, as appropriate
Trading properties – property (including investment property) intended for sale in the normal course of business or being built or developed for that purpose	IAS 2	Inventories   (Properties held for sale that meet the criteria of IFRS 5 should be recorded according to IFRS 5 – see below. These are generally not in the normal course of business.)	Lower of cost and net realisable value.
Property held for sale, or included in a disposal group that is held for sale.	IFRS 5	Non-current assets held for sale and discontinued operations	Lower of carrying amount and fair value less costs to sell.
Assets received in exchange for loans (taking possession of collateral)	IFRS 5 IAS 16	Non-current assets held for sale and discontinued operations Property, plant and equipment (see Property acquired in an exchange of assets above)	Lower of fair value less costs to sell and carrying amount of the loan net of impairment at the date of exchange. (see HSBC plc Annual Report 2005 page 247)
Property provided as part of a construction contract	IAS 11	Construction contracts	Stage of contract completion or cost.
Future costs of dismantling, removal and site restoration.	IAS 37	Provisions, contingent liabilities and contingent assets (see also IFRIC 1, IFRIC 5)	Present value of the expected costs, using a pre-tax discount rate.

Notes to the table on the previous page. The table above identifies the different accounting treatment applied to properties under IFRS depending on their current and future uses and their ownership. Note 1: Where an asset is revalued, increases in carrying amounts above cost are recorded as revaluation surplus, in equity.             Using fair values, all changes in fair value are recorded in the income statement. Reductions below cost are recorded in the income statement under both methods. Note 2. In the cases where the asset is subject of cost or revaluations, the carrying value will be reduced by accumulated depreciation and accumulated impairment (see IAS 36 workbook).

Workbooks are available on our website on each standard that explain each accounting treatment with examples.