IAS-16 PROPERTY, PLANT AND EQUIPMENT

IAS-16 PROPERTY, PLANT AND EQUIPMENT

Introduction:-

IAS-16 Property, Plant and Equipment were issued in December 2003 and are applicable to annual periods beginning on or after 1 January 2005.

IAS-16 prescribes the accounting treatment for property, plant and equipment, unless

another standard requires or permits a different accounting treatment. For example,

IFRS-5 Non-current assets Held for Sale and Discontinued Operations applies to

Property, plant and equipment classified as held for sale.

DEFINITION:-

                                    IAS-16 defines the property, plant and equipment as tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purpose and expected to be used during more than one accounting period.

Measurement of property, plant and equipment:-

                                                                                              IAS 16 requires that property plant and equipment should initially be measured at cost.

§  The cost of purchase, any trade discount plus any import duties and non refundable sales tax.

§  Any cost charging on bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

OBJECTIVE:-

                        The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognized in relation to them.

The principal issues associated with accounting for PP&E are:-

• Recognition of the assets when they are acquired

• Determination of the carrying amounts of these assets in subsequent periods

• Determination of depreciation charges and any impairment losses to be recognized

in relation to these assets.

SCOPE:-

                        IAS-16 addresses accounting for property, plant, and equipment, except in cases when another Standard requires or permits a different accounting treatment. It would not apply, for Instance, to livestock or other assets that are accounted for in accordance with IAS-41 Agriculture or to PP&E classified as held for sale in accordance with IFRS-5 Non-current Assets Held for Sale and Discontinued Operations. With respect to property being constructed or developed for future use as investment property, IAS-16 applies until the point where construction is complete and the asset satisfies the definition of an “investment property”; at that point, IAS-40 Investment Property takes effect.

Depreciation:-

                                                IAS-16 defines the depreciation as the depreciable amount is the cost of an asset, cost less residual value or other amount. The depreciation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. A method can be used to allocate the depreciate amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method. Straight-line depreciation results in a constant charge over the useful life if the asset's residual value does not change.

When an item of property, plant, and equipment is revalued, any accumulated depreciation at the date of the revaluation is treated in one of two ways:-

A) Restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to determine its depreciated replacement cost; or

B) Eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings.