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Summary IAS 16
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IAS 16Summary
Defined terms
A bearer plant is a living plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than one period; and
c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and
accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid, or the fair value of the other consideration given to acquire an
asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements of other IFRSs, e.g. IFRS 2 Share-based Payment.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an
asset and from its disposal at the end of its useful life or expects to incur when settling a liability.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
Property, plant and equipment are tangible items that:
a) are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
b) are expected to be used during more than one period.
Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.
The residual value of an asset is the estimated amount that an entity 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 is:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by an entity.
, Recognition
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
a. it is probable that future economic benefits associated with the item will flow to the entity; and
b. the cost of the item can be measured reliably.
Par 8- Spare parts
E.g. spare part bought that is essential for a machine- recognise as PPE. Start depreciation when it is available for
use (e.g. when it takes a large installation process, probably would not be immediately depreciated)
Usually look at part of PPE definition that states “used for more than one period” when determining if it is PPE
When spare parts are used to repair PPE- classified as inventory, and expensed when used
If e.g. standby machine only to support one other machine = PPE and will be depreciated from the day that it is
ready for use as determined by management (even if it is not actually used)
Par 11- Initial costs
Safety and environmental reasons
Items acquired for safety or environmental reasons- recognise as PPE if it is essential, as it indirectly helps to create
future economic benefits, e.g. because of applicable laws
However, entity has to do a test of impairment to see if asset is overstated
E.g. Carrying amount = R 120 000; Safety equipment= R 6 000; Recoverable Amount = R 125 000: There would have
to be a R 1000 impairment loss, as the safety equipment does not actually present direct future economic benefits
Subsequent costs
Par 12
Do not include costs of day-to-day servicing- expensed under “repairs and maintenance”
Replacement and inspection
Replacement of items- carrying amount of item that is replaced, must be derecognised- (regardless of the fact If
replaced part had been depreciated)
If a cost price and time of replacement (every x years) of the parts that needs to be replaced are given, use the time
between replacements as the useful life of the parts
If cost price was not identified at initial recognition- use useful life of asset as useful life of replaced component, and
the cost of the replacement as the deemed cost of the component at initial recognition
Par 14- major inspection (without it PPE item cannot operate) is treated like a replacement
Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is
derecognised- this occurs regardless of whether the cost of the previous inspection was identified in the transaction
in which the item was acquired or constructed.
When no previous inspection- cost price split into components, one of which is the inspection
Inspection depreciated as a separate component- if depreciation is correct over expected useful life, there will be no
carrying amount to exclude
Thus, credit PPE with carrying amount, debit loss
If inspection amount of previous years was not capitalised and depreciated- take cost actually incurred for this
expectation (do not take TVM into account), and calculate what carrying amount would have been, and derecognise
it using the estimates that you were using for other components “the rest”- deemed carrying amount
In PPE note: Treated as normal acquiring and selling of asset (inspection under additions, derecognition under
disposals @ carrying amount)
Disclosure
For calculation purposes (not in note)- each component of an asset depreciated differently
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