Property, Plant & Equipment

Chapter 13
Prepared by
Kent Wilson
Objectives
1. Discuss the nature of property, plant and equipment

2. Outline the recognition criteria for initial recognition of
property, plant and equipment

3. Explain how to measure property, plant and equipment
on initial recognition

4. Explain the alternative ways in which property, plant
and equipment can be measured subsequent to initial
recognition
Objectives
5. Explain the cost model of measurement and understand
the nature and calculation of depreciation

6. Explain the revaluation model of measurement

7. Account for derecognition

8. Outline the disclosure requirements of AASB 116.
The Nature of Property, Plant &
Equipment
AASB 116 defines property, plant & equipment as:
Tangible items
Assets with a specific use within the entity
They are expected to be used during more than one period
Excludes assets held for sale

Normally divided into classes:
Land
Buildings,
Machinery,
Motor vehicles

Initial Recognition of Property,
Plant & Equipment
Cost of an item is recognised as an asset if:
It is probable that economic benefits will flow to
the entity and
The cost can be reliably measured

Where future economic benefits are not expected to
flow to the entity, costs incurred should be expensed

Significant parts (with different useful lives) are
required to be separately accounted for
Aircraft
Initial Measurement of
Property, Plant & Equipment
Initially measured at cost which includes:
Purchase Price
Directly attributable costs
Initial estimate of the costs of dismantling and
removing the item or restoring the location site

Measurement Subsequent to Initial
Recognition
AASB 116 allows a choice of two possible
measurement models:
Cost model
Revaluation model

The choice of model is an accounting policy decision

The policy that is chosen must be applied to a whole
class of assets

May change policy, but only if results in more relevant
or reliable information
The Cost Model
AASB 116 requires that assets are carried at cost less
any accumulated:
Depreciation
Impairment losses

Repair and maintenance costs are expensed as
incurred, not capitalised

Capitalisation requires increased probable future
economic benefit (at time of expenditure)
Depreciation
AASB 116 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

Residual value the estimated value that an entity would currently
obtain from disposal if the asset were at the end of its useful life

Useful life the period over which an asset is expected to be
available for use by an entity
Depreciation
Depreciation is a process of allocation designed to reflect
the fall in the value of the asset in a pattern consistent with
the consumption of economic benefits by the entity

AASB 116 does not specify how this allocation process
should be undertaken

Various depreciation methods are used in practice:
Straight line method
Diminishing-balance method
Units-of-production method

The Revaluation Model
As an alternative to the cost model AASB 116 allows the
revaluation model to be used for classes of assets

Measurement basis is fair value (FV)

Frequency of revaluations is not specified, but must be performed
with sufficient regularity such that the carrying amount of assets is
not materially different from their FV

Revaluation performed on a class basis

Accounting performed on an asset-by-asset basis

Applying the Revaluation
Model: Revaluation Increases
AASB 116 para 39 outlines principles:
An increase is recognised in comprehensive income
The gain is transferred to equity (revaluation surplus)

Refer Illustrative Examples 13.6 13.7

Applying the Revaluation
Model: Revaluation Decreases
AASB 116 para 40 outlines principles:

A revaluation decrease
Recognition in P & L (Loss)

A revaluation decrease following a previous increase
Elimination of revaluation surplus
Recognition in P & L
Reversal of DTL

Refer Illustrative Examples 13.8

The Revaluation Model:
Transfers from Asset Revaluation
Surplus (ARS)
Transfers may be made from the Asset Revaluation
Surplus in the following circumstances:
When a revalued asset is derecognised the balance in the ARS
may be transferred to retained earnings
When a revalued asset is being depreciated the ARS may be
progressively transferred to retained earnings over the useful
life of the asset

Bonus share issues may be made from the ARS



Choosing Between the Cost
Model & the Revaluation Model
Revaluation model provides more relevant information

However, there is a cost disincentive of adopting the
revaluation model

Cost model harmonises with US GAAP

Differing impacts on profit & loss


Derecognition
AASB 116 para 67 identifies two occasions
where derecognition should occur:
On disposal
Where no future economic benefits are expected

When items are sold a gain or loss is recognised,
and included in the profit or loss for the period

Disclosure
AASB 116 para 73 - 79 outline
requirements:
Information on a class-by-class-basis
Measurement bases
Any restrictions on title
Selection of depreciation methods
Revaluation information