IAS 16 : Intro

1. Introduction

The difference between capital expenditure (including Property, Plant and Equipment) and revenue expenditure is an important distinction in accounting.

Generally revenue expenditure is accounted for in the current period (excepting deferred expenditure) and capital expenditure is spread over a number of accounting periods that benefit from the capital expenditure.

One view of depreciation is that it represents this spreading of capital expenditure costs.

AIM
The aim of this workbook is to assist the individual in understanding Property, Plant and Equipment according to IFRS.

OBJECTIVE
Property, Plant and Equipment are the subject of IAS 16.

The objective of IAS 16 is to:
 prescribe the accounting treatment for property, plant and equipment (‘PPE’)
 inform users of financial statements on the investment in PPE and any movements in these accounts over the period.

The main issues in accounting for property, plant and equipment are:
 the recognition of the assets;
 the determination of their carrying amounts;
 the determination of the useful life;
 the depreciation charges; and
 impairment losses to be recorded.

SCOPE
IAS 16 will be applied in accounting for property, plant and equipment, except when another Standard requires, or permits, a different accounting treatment.

IAS 16 does not apply to:

(1) biological assets related to agricultural activity
(see IAS 41 Agriculture workbook); nor to

(2). property, plant and equipment classified as held for sale in accordance with IFRS 5;
(3)   investment property covered by IAS 40.

(4). the recognition and measurement of exploration and evaluation assets (see IFRS 6 workbook); or

(5) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

However, IAS 16 applies to property, plant and equipment used to develop, or maintain, the assets described in (1) to (4).

LEASES
Other Standards may require recognition based on a different approach from that in IAS 16. For example, IAS 17 Leases (see IAS 17 workbook) requires you to evaluate recognition of a leased item on the basis of the transfer of risks and rewards.

Other aspects of the accounting treatment for these assets, including depreciation, are prescribed by IAS 16.

INVESTMENT PROPERTY
An undertaking will apply IAS 16 to property that is being constructed, or developed, for future use as investment property.

(The 2007 IASB annual improvement process intends that investment property being built will be accounted for under IAS 40.)

Once the construction or development is complete, the property becomes investment property, and you are required to apply IAS 40 (see IAS 40 workbook).

IAS 40 also applies to property that is being redeveloped for continued future use as investment property. An undertaking, using the cost model for investment property under IAS 40, will use the cost model in IAS 16.