Recognition and Initial Measurement of Property, Plant and Equipment (PPE) as per IAS 16

 

T ngible fixed asset is a key resource for any business and generally represents a significant portion of the net worth captured on the balance sheet. These fixed assets help businesses to run its operating activities and thereby generating revenue. Apart from generating future economic benefits, amount of such tangible assets is also used in various vital ratios which are regularly analysed by the users of financial statements. IAS 16 -“Property, Plant, and Equipment” (PPE), is a basic and vital International Financial Reporting Standard (IFRS) that provides guidelines on the accounting of tangible fixed assets. IAS 16 provides the accounting principles for recognition, initial and subsequent measurement, presentation, derecognition and disclosure for the PPE in the financial statements.

In essence, IAS 16 provides in depth guidance on the topics like when to recognise PPE in the financial statements, how to measure asset initially i.e. measurement basis (viz. cost), which expenses incurred will form part of the cost of an asset (for e.g. borrowing costs, dismantling and restoration expenses, directly attributable costs etc.), how to measure assets on subsequent reporting date, i.e. measurement basis (cost or revaluation model), how to determine the asset’s useful life, depreciation methods, impairment of assets etc., where to present such assets in financial statements, when to derecognise and which disclosures are required in the financial statements.

For students pursuing a Diploma in IFRS, having in depth knowledge on IAS 16 is fundamental. This standard forms the backbone for accounting of tangible asset in the financial reporting and helps in better analysing the financial statements of any entity. It is vital for ensuring accurate and reliable financial reporting, which in turn enhances the credibility of an entity’s financial statements.

Considering the fact that the topic is vast, in this blog, we will discuss about recognition and initial measurement principle of PPE as per IAS 16.

 

Definition of PPE:

 – Ind AS 16 defines property, plant and equipment as:

*Land or building or part of land or building held for rental or for capital appreciation or for both will be classified as investment property under Ind AS 40.

 

Bearer plants also are considered as PPE as per IAS 16. Bear plants are the plants which bear produce and plant itself will not be harvested as produce. For. e.g. mango trees bear mangoes for more than one year and tree itself will not be harvested as produce and thus mango tree can be classified as PPE.

 

Recognition Principle

To recognise Property, Plant & Equipment, all the below conditions must be satisfied:

Recognise PPE – Generally this coincides with physical delivery

Initial Measurement of Property, Plant and Equipment

All PPE shall be measured initially at ‘COST’.

Which expenses will form part of costs will depend on the mode of its acquisition i.e.

1. Separate acquisition,
2. Internally generated
3. In exchange of another non-monetary asset
4. In business combination
5. Government grant (covered separately in IAS 20)
6. Leases (covered separately in IFRS 16)

Following is the summary of expenses that will form part of the cost of PPE based on its mode of acquisition.

01.

External acquisition

1. Purchase price
2. Import duties and non-refundable taxes
3. All directly attributable expenditure (viz. transportation, site preparation, installation, transit insurance etc.)
4. Borrowing costs (as per Ind AS 23)
5. Dismantling and restoration costs

Deductions from costs:

1. Discounts and rebates
2. Imputed cost of interest in case of deferred credit arrangement

 

02

 Self-constructed

1. Direct material + non-refundable taxes
2. Direct labour (ignore abnormal losses)
3. Direct Overheads (ignore indirect overheads)
4. All directly attributable expenditure
5. Borrowing costs (as per Ind AS 23)
6. Dismantling and restoration costs

Deductions from costs:

1. Discounts rebates
2. Imputed cost of interest in case of deferred credit arrangement

Examples of costs that are not directly attributable: training costs, costs of opening a new facility, costs of conducting business from new territory, administration and general overheads.

 

 03

Business combination

COST = Acquisition date Fair Value

Recognition is possible since:

1. “Probability” criteria is assumed to be satisfied and
2. “Reliable measurement of cost” criteria is satisfied if fair value can be measured reliably.

• Identifiable IA, even if not recognised in the books of acquiree, are recognised separately from goodwill.
• If not identifiable, amount is subsumed in goodwill.

 

 04

Asset exchange

* Transaction shall not lack commercial substance

COST = Fair Value (of an asset which is more reliably measurable),

Sequence to determine cost:

1. Fair value of an outgoing asset (if FV of both the assets are measurable with equal reliability)
2. Fair value of an incoming asset (if fair value of outgoing asset cannot be measured reliably)
3. Carrying value of an outgoing asset (if fair value of both the assets is not measurable reliably or transaction lacks commercial substance)

At FinPro Consulting, we focus on providing training, GAAP conversion services, and other consulting support for financial reporting under IFRS, Ind AS, and US GAAP. We are also a Registered Learning Partner (RLP) with ACCA, UK, and have successfully conducted over 30 retail training sessions for the Online DipIFR course.