PROPERTY PLANT AND EQUIPMENT EXPLAINATION

IAS16 PROPERTY PLANT AND EQUIPMENT
This standard does apply to property, plant, and equipment is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and destruction losses to be recognized in relation to them.

Recognition

Items of property, plant, & equipment ought to be recognized as assets when it is probable that the future economic benefits associated with the asset will flow to the entity, the cost of the asset can be measured reliably. This recognition principle is applied to all property, plant, & equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant & equipment & costs incurred subsequently to add to, replace part of., IAS 16 does not prescribe the unit of measure for recognition what constitutes an item of property, plant, & equipment. Note, however, that if the cost model is used (see below) each part of an item of property, plant, & equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. , IAS 16 recognizes that parts of some items of property, plant, & equipment may need replacement at regular intervals. The carrying amount of an item of property, plant, & equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits & measurement reliability) are met., Also, continued operation of an item of property, plant, & equipment (for example, an aircraft) may need regular major inspections for faults irrespective of whether parts of the item are replaced.

Initial Measurement:

An item of property, plant and equipment ought to initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its anticipated use. This would include not only its original purchase cost but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset.

If payment for an item of property, plant, and equipment is overdue, interest at a market rate must be recognized or imputed.

If an asset is acquired in exchange for another asset, the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.

·         Cost Model. The asset is carried at cost less accumulated depreciation and destruction.

·         Revaluation Model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The Revaluation Model:

Under the revaluation model, revaluations ought to be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. If an item is revalued, the whole class of assets to which that asset belongs ought to be revalued. If a revaluation leads to an increase in value, it ought to be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset historically in the past recognized as an expense, in which case it ought to be recognized as income.

 Depreciation (Cost and Revaluation Models)

The depreciable amount (cost less residual value) ought to be apportioned on a systematic basis over the asset's useful life. The residual value and the useful life of an asset ought to be reviewed at least at each financial year-end and, if expectations differ from earlier estimates. The depreciation system used ought to reflect the pattern in which the asset's economic benefits are consumed by the entity. The depreciation system ought to be reviewed at least yearly and, if the pattern of consumption of benefits has changed, the depreciation system ought to be changed prospectively. Depreciation ought to be charged to the income statement, unless it is included in the carrying amount of another asset. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle.

Recoverability of the Carrying Amount

IAS 36 requires destruction testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for destruction is included in profit or loss when the claim becomes receivable.

Derecogniton (Retirements and Disposals)

An asset ought to be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and ought to be recognized in the income statement.If an entity rents some assets and then ceases to rent them, the assets ought to be transferred to inventories at their carrying amounts as they become held on the market in the ordinary work of business.

Disclosure

For each class of property, plant, and equipment, disclose:

·         basis for measuring carrying amount

·         depreciation method(s) used

·         useful lives or depreciation rates

gross carrying amount and accumulated depreciation and impairment losses

·         reconciliation of the carrying amount at the beginning and the finish of the period