Updated: 30 November 2004

IAS 16 Property, Plant and Equipment

Valuer’s guide to the revised accounting standard published December 2003

What’s it about? Treatment of assets in accounts.

Recognition of Relates to “non-current” ie capital assets. Asset is recognised

assets; only if future economic benefits will flow to entity and cost can
be reliably measured.

Measurement of Carrying amount can be either:

carrying amount Initial cost (purchase price plus directly attributable costs)
(balance sheet or
figure); Revalued amount, based on fair value.
Assets acquired by exchange, or part exchange for non-
monetary assets, must be carried at fair value.
Notes on revaluation are provided below.

Depreciation; Depreciation charge is carried in profit & loss account. Should

reflect pattern at which the asset’s future economic benefits are
expected to be consumed by the entity

Notes on depreciation are provided on Page 3 of this guide.

Exclusions: Investment property, biological assets, mineral assets. Leased

assets are excluded, but not all elements of a property subject
to a lease may be classified as a leased asset under IAS 17,
and may be therefore still fall under this standard.

Land and buildings held for sale or development, which are

classified as inventory and accounted for under IAS 2. Surplus
assets are accounted for under IFRS 5.

Notes on
revaluation
Basis of value The fair value of land and buildings is usually determined from
(IAS 16 provisions) market-based evidence by appraisal that is normally undertaken
by professionally qualified valuers.

The fair value of items of plant and equipment is usually their

market value determined by appraisal

If there is no market-based evidence of fair value because of

the specialized nature of the item of property, plant and
equipment and the item is rarely sold, except as part of a
continuing business, an entity may need to estimate fair value
using an income or a depreciated replacement cost approach,
(drc).

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Implications for Previously IAS 16 stated that the fair value of land and buildings
Valuers was normally market value, and that fair value of plant and
equipment was market value or, if specialised, drc.

New standard does not define bases but instead describes

process. It no longer implies that fair value and market value
are synonymous and permits either a depreciated replacement
cost or a profit’s test approach to be used for both property and
plant where market evidence is not available.

No reasons were given for this change. However, since 1998

there has been ongoing debate as to the appropriate basis
used to determine the fair value of owner occupied property
following removal of references to Market Value for Existing
Use from IAS16. Indeed, the debate continues as the IASB is
undertaking a fundamental review of how assets and liabilities
should be “measured” in financial statements. This review is
not expected to be complete before 2007. IAS 16 is thus
expected to be either replaced or revised within two or three
years.

The new IAS requires disclosure of the method used to derive

fair value, and in particular, the extent to which this has been
derived using market based evidence. The alternative
approaches of either an income (profits test) or depreciated
replacement cost should only be used where there is no reliable
market based evidence. When preparing valuations under IAS,
valuers can expect to be asked to provide much more
justification for the approach adopted than has previously been
the case.

The RICS Red Book requires members undertaking valuations

under International Accounting Standards to follow IVA1,
Valuations for Financial Statements, in the International
Valuation Standards. In November 2004 IVSC updated IVA 1,
which covers valuations under IAS 16. This is available on the
IVSC web site www.ivsc.org and will be part of the revised IVS
2005 book that will be pub lished in January 2005.

Consequential changes have also been made to the Red Book,

including supplementary guidance to assist members in
implementing IVA 1. These will be released to subscribers as
part of Amendment 5, due in late December 2004.

Transitional If an entity is currently carrying property assets at their revalued

arrangements amount under FRS 15 in the UK Accounting Standards, when
adopting the international standards for the first time it may treat
a revaluation on the date of transition as the initial cost. This is
subject to the proviso that the revaluation figure is “broadly
comparable” to fair value. RICS considers that any of the
revaluation bases specified in FRS 15 meet this criterion.

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Frequency No prescriptive period. General statement that frequency

depends on changes in fair value. Some items may be volatile
and require annual revaluation In other cases P, P&E may only
need revaluing every 3 to 5 years.

Impact of changed Revaluation increases go to equity, except to the extent that

valuation they reverse a previous loss in P&L, in which case the amount
of gain required to reverse loss goes to P&L. Revaluation
reductions go to P&L, unless there is an existing “revaluation
surplus” in equity, in which case reduction can be o ffset against
this to the extent of the credit balance available.

Notes on
Depreciation
Componentisation 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.

For example, significant different buildings on a site may have

to be depreciated separately, as may significant parts of a
building that can be readily identified, eg fitting out works or
services may be depreciated separately from the building shell.

Frequency Depreciation must be reviewed at least annually

Method The depreciable amount of an asset shall be allocated on a

systematic basis over its useful life. The depreciation method
used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.

Land & Buildings Land normally has indefinite economic life and is not
depreciated. Land and buildings therefore have to be
depreciated separately. An increase in the value of the land on
which a building stands does not affect the determination of the
depreciable amount of the building.

Implications for There are few practical differences to determining the

Valuers depreciable amount under IAS 16 and under the UK standards,
FRS 11 and 15, which is described in Red Book UK Appendix
1.4.

It is important to note that, unlike a revaluation of the carrying

amount, valuations for depreciation do not necessarily reflect
market based evidence, and therefore may not be simply an
apportionment or allocation of the revalued amount. The
assessment of the residual value will depend on the useful life
of the asset to the entity, which is determined by the entity, and
is specific to the entity.

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When asked to provide valuations for depreciation, the valuer
will need to discuss the componentisation of any major assets
with the entity, and whether the entity considers that the useful
life for each component is less than its the economic life.

The residual value under IAS 16 reflects the intentions of the

entity and may be required to be assessed for components that
are incapable of being separately brought or sold in their
current setting. From a valuation perspective it therefore may
appear to be an artificial exercise, bearing little relationship to
market principles. However, if asked to assess the residual
value of an asset or its components, the valuer must bear in
mind that the objective is simply to arrive at the depreciable
amount, and in turn this is used to reflect a reasonable annual
charge for the consumption of the asset. The valuer’s task is to
identify and adopt rational approach and it made clear that the
residual valuations provided are hypothetical allocations purely
for use in assessing the appropriate depreciation charge in the
accounts.

In November 2004 IVSC updated IVA 1, Valuations for

Financial Statements, which includes guidance on depreciation
under IAS 16. This is available on the IVSC web site
www.ivsc.org and will be part of the revised IVS 2005 book that
will be published in January 2005.

Updated: 30 November 2004

This summary is intended to provide an interim guide for RICS members to those parts of the International
Accounting Standard that could affect the work of property valuers. RICS accepts no responsibility for errors
or omissions in this summary, or for loss arising from any person acting or refraining from action as a result
of information in this document. Copies of the International Accounting Standards may be obtained from
IASB Publications Department, 30 Cannon Street, LONDON EC4A 2DY

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