IAS 16 - PPE
Scope: IAS 16 applies to all property, plant, and equipment (PP&E), which are
tangible assets that are used in the production or supply of goods and services,
for rental purposes, or for administrative purposes. Examples of PP&E include
buildings, machinery, vehicles, furniture, and computer equipment.
Recognition: PP&E should be recognized as an asset when it is probable that
future economic benefits associated with the asset will flow to the entity, and
the cost of the asset can be measured reliably. The cost of an item of PP&E
includes its purchase price, direct costs (such as delivery and installation), and
any costs necessary to bring the asset into working condition for its intended
use.
Measurement: PP&E should be initially measured at cost. Subsequently, the
asset can be measured using either the cost model or the revaluation model.
Under the cost model, the asset is carried at its cost less accumulated
depreciation and any accumulated impairment losses. Under the revaluation
model, the asset is carried at a revalued amount, which is its fair value at the
date of revaluation less any subsequent accumulated depreciation and
impairment losses.
Depreciation: Depreciation is the systematic allocation of the cost of an asset
over its useful life. The useful life of an asset is the period over which the asset
is expected to be used by the entity, or the number of units of production or
similar measures that are expected to be obtained from the asset. The
depreciation method used should reflect the pattern of consumption of
economic benefits of the asset. Examples of depreciation methods include the
straight-line method, the diminishing balance method, and the units of
production method.
Impairment: An asset is impaired when its carrying amount exceeds its
recoverable amount, which is the higher of its fair value less costs to sell and its
value in use. The impairment loss is recognized as an expense in the statement
, of profit or loss and other comprehensive income (OCI) and reduces the
carrying amount of the asset.
Disclosures: The entity must disclose the following information related to
PP&E: the measurement basis used (cost model or revaluation model), the
useful lives or depreciation rates used, the gross carrying amount and
accumulated depreciation of the assets, the amount of any impairment losses
recognised, and the net carrying amount of the assets. In addition, the entity
should disclose any restrictions on the title of its PP&E, and any items of PP&E
that are pledged as security for liabilities.
Subsequent Expenditure: Expenditure on a PP&E after its initial recognition can
either be capitalized or expensed. Capitalization is appropriate when the
expenditure will enhance the future economic benefits of the asset beyond its
originally assessed standard of performance. Examples of such expenditures
include replacing or upgrading parts of machinery, adding an extension to a
building, or upgrading computer software.
For example, a company purchased a delivery truck for R200,000 and
recognized it as an asset. After one year of use, the company found that the
truck's engine was no longer working properly and needed to be replaced at a
cost of R50,000. Since the engine replacement will enhance the future
economic benefits of the truck, the R50,000 expenditure can be capitalized and
added to the cost of the asset.
Componentization: A company should separate the cost of significant
components of an item of PP&E and depreciate each component separately if
the component has a different useful life than the rest of the asset. This is
known as componentization.
For example, a company buys a factory building for R5 million. The building has
a roof that needs to be replaced every 10 years, which costs R500,000. The
building itself has a useful life of 30 years. In this case, the company should
separate the cost of the roof (R500,000) and depreciate it over 10 years, while
the cost of the building (R4.5 million) should be depreciated over its useful life
of 30 years.
