| INTERNATIONAL ACCOUNTING STANDARD 16 PROPERTY, PLANT AND EQUIPMENT | |
| OBJECTIVE | 1 |
| SCOPE | 2 |
| DEFINITIONS | 6 |
| RECOGNITION | 7 |
| Initial costs | 11 |
| Subsequent costs | 12 |
| MEASUREMENT AT RECOGNITION | 15 |
| Elements of cost | 16 |
| Measurement of cost | 23 |
| MEASUREMENT AFTER RECOGNITION | 29 |
| Cost model | 30 |
| Revaluation model | 31 |
| Depreciation | 43 |
| Impairment | 63 |
| Compensation for impairment | 65 |
| DERECOGNITION | 67 |
| DISCLOSURE | 73 |
| TRANSITIONAL PROVISIONS | 80 |
| EFFECTIVE DATE | 81 |
| WITHDRAWAL OF OTHER PRONOUNCEMENTS | 82 |
| APPENDIX | |
| Amendments to other pronouncements | |
| APPROVAL BY THE BOARD OF IAS 16 ISSUED IN DECEMBER 2003 | |
| APPROVAL BY THE BOARD OF AMENDMENTS TO IAS 16: | |
| Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) issued in May 2014 | |
| Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) issued in June 2014 | |
| Property, Plant and Equipment— Proceeds before Intended Use (Amendments to IAS 16) issued in May 2020 | |
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
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| BASIS FOR CONCLUSIONS | |
| DISSENTING OPINIONS | |
International Accounting Standard 16 Property, Plant and Equipment (IAS 16) is set out in paragraphs 1–83 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 16 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
1 | The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users [Refer:Conceptual Framework paragraphs 1.2-1.10 and 2.36] of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. 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 recognised in relation to them. |
2 | This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment. [Refer:
IFRS 16 paragraphs B43 and B44 (costs incurred by lessee in design or construction of underlying asset) IFRS 16 Basis for Conclusions paragraph BC139(b) (in-substance purchase)] |
3 | This Standard does not apply to:
However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)–(d). |
4 | [Deleted] |
5 | An entity using the cost model for investment property in accordance with IAS 40 Investment Property shall use the cost model [Refer:paragraph 30] in this Standard for owned investment property. [Refer:IAS 40 paragraph 56(c)]
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6 | The following terms are used in this Standard with the meanings specified: A bearer plant is a living plant that:
(Paragraphs 5A–5B of IAS 41 elaborate on this definition of a bearer plant.) Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. [Refer:paragraph 28 (re government grants)] Cost [Refer:paragraphs 7–28] 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, eg IFRS 2 Share‑based Payment. Depreciable amount [Refer:paragraph 50] is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation [Refer:paragraphs 43–49] is the systematic allocation of the depreciable amount of an asset over its useful life. Entity‑specific value [Refer:paragraph 25] 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 [Refer:paragraph 63] is the amount by which the carrying amount of an asset exceeds its recoverable amount. Property, plant and equipment are tangible items that:E1
Recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. [Refer:IAS 36]
The residual value [Refer:paragraphs 51–54] 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 [Refer:paragraphs 50, 51 and 55–59] is:
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| E1 | [IFRIC® Update, November 2014, Agenda Decision, ‘IAS 16 Property, Plant and Equipment and IAS 2 Inventories—Accounting for core inventories’ The Interpretations Committee received a request to clarify the accounting for ‘core inventories’. The submitter defined core inventories as a minimum amount of material that:
The issue is whether core inventories should be accounted for under IAS 16 or IAS 2. The Interpretations Committee discussed the issue at its March 2014 meeting and tentatively decided to develop an Interpretation. The Interpretations Committee further directed the staff to define the scope of what is considered to be core inventories and to analyse the applicability of the concept to a range of industries. At its July 2014 meeting the Interpretations Committee discussed the feedback received from informal consultations with IASB members, the proposed scope of core inventories and the staff analysis of the applicability of the issue to a range of industries. The Interpretations Committee observed that what might constitute core inventories, and how they are accounted for, can vary between industries. The Interpretations Committee noted that significant judgement might be needed in determining the appropriate accounting. Disclosure about such judgements might therefore be needed in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements. The Interpretations Committee noted that it did not have clear evidence that the differences in accounting were caused by differences in how IAS 2 and IAS 16 were being applied. In the absence of such evidence, the Interpretations Committee decided to remove this item from its agenda.] |
7 | The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
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8 | Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this IFRS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. |
9 | This Standard does not prescribe the unit of measure for recognition, ie what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria [Refer:paragraph 7] to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value. |
10 | An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. The cost of an item of property, plant and equipment may include costs incurred relating to leases of assets that are used to construct, add to, replace part of or service an item of property, plant and equipment, such as depreciation of right‑of‑use assets [Refer:IFRS 16 paragraphs 30(a) and 31]. |
11 | Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition [Refer:paragraph 7] as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset because without them the entity is unable to manufacture and sell chemicals. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with IAS 36 Impairment of Assets. |
12 | Under the recognition principle in paragraph 7, an entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day‑to‑day servicing of the item. Rather, these costs are recognised in profit or loss as incurred. Costs of day‑to‑day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment. |
13 | Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a nonrecurring replacement. Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 67–72). |
14 | A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria [Refer:paragraph 7] are satisfied. 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. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. |
15 | An item of property, plant and equipment that qualifies for recognition [Refer:paragraph 7] as an asset shall be measured at its cost. [Refer:paragraphs 16–28] |
16 | The cost of an item of property, plant and equipment comprises:
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| E2 | [IFRIC® Update, March 2016, Agenda Decision, ‘IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets—Variable payments for asset purchases’ The Interpretations Committee received a request to address the accounting for variable payments to be made for the purchase of an item of property, plant and equipment or an intangible asset that is not part of a business combination. The Interpretations Committee observed significant diversity in practice in accounting for these variable payments. It discussed the accounting, both at the date of purchasing the asset and thereafter, for variable payments that depend on the purchaser’s future activity as well as those that do not depend on such future activity. The Interpretations Committee was unable to reach a consensus on whether an entity (the purchaser) recognises a liability at the date of purchasing the asset for variable payments that depend on its future activity or, instead, recognises such a liability only when the related activity occurs. The Interpretations Committee was also unable to reach a consensus on how the purchaser measures a liability for such variable payments. In deliberating the accounting for variable payments that depend on the purchaser’s future activity, the Interpretations Committee considered the proposed definition of a liability in the May 2015 Exposure Draft The Conceptual Framework for Financial Reporting as well as the deliberations of the Board on its project on leases. The Interpretations Committee observed that, during the Board’s deliberations on its project on leases, the Board did not conclude on whether variable payments linked to future performance or use of the underlying asset meet the definition of a liability at commencement of a lease or, instead, meet that definition only at the time that the related performance or use occurs. In addition, the Interpretations Committee noted that there are questions about the accounting for variable payments subsequent to the purchase of the asset. Accordingly, the Interpretations Committee concluded that the Board should address the accounting for variable payments comprehensively. The Interpretations Committee determined that this issue is too broad for it to address within the confines of existing IFRS Standards. Consequently, the Interpretations Committee decided not to add this issue to its agenda.] |
17 | Examples of directly attributable costs are:
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18 | An entity applies IAS 2 Inventories to the costs of obligations for dismantling, removing and restoring the site on which an item is located that are incurred during a particular period as a consequence of having used the item to produce inventories during that period. The obligations for costs accounted for in accordance with IAS 2 or IAS 16 are recognised and measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. |
19 | Examples of costs that are not costs of an item of property, plant and equipment are:
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20 | Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment:
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20A | Items may be produced while bringing an item of property, plant and equipment to the location and condition necessary for it to be capable of operating in the manner intended by management (such as samples produced when testing whether the asset is functioning properly). An entity recognises the proceeds from selling any such items, and the cost of those items, in profit or loss in accordance with applicable Standards. The entity measures the cost of those items applying the measurement requirements of IAS 2. |
21 | Some operations occur in connection with the construction or development of an item of property, plant and equipment, but are not necessary to bring the item to the location and condition necessary for it to be capable of operating in the manner intended by management. These incidental operations may occur before or during the construction or development activities. For example, income may be earned through using a building site as a car park until construction starts. Because incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense. |
22 | The cost of a self‑constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (see IAS 2). Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self‑constructing an asset is not included in the cost of the asset. IAS 23 Borrowing Costs establishes criteria for the recognition of interest as a component of the carrying amount of a self‑constructed item of property, plant and equipment. |
22A | Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by management. Consequently, references to ‘construction’ in this Standard should be read as covering activities that are necessary to cultivate the bearer plants before they are in the location and condition necessary to be capable of operating in the manner intended by management. |
23 | The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23. |
24 | One or more items of property, plant and equipment may be acquired in exchange for a non‑monetary asset or assets, or a combination of monetary and non‑monetary assets. The following discussion refers simply to an exchange of one non‑monetary asset for another, but it also applies to all exchanges described in the preceding sentence. The cost of such an item of property, plant and equipment is measured at fair value unless (a) the exchange transaction lacks commercial substance [Refer:paragraph 25] or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. |
25 | An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
For the purpose of determining whether an exchange transaction has commercial substance, the entity‑specific value of the portion of the entity’s operations affected by the transaction shall reflect post‑tax cash flows. The result of these analyses may be clear without an entity having to perform detailed calculations. |
26 | The fair value [Refer:IFRS 13] of an asset is reliably measurable if (a) the variability in the range of reasonable fair value measurements is not significant for that asset or (b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value. If an entity is able to measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. |
27 | [Deleted] |
28 | The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. [Refer:IAS 20 paragraph 24]
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29 | An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class [Refer:paragraph 37] of property, plant and equipment. |
29A | Some entities operate, either internally or externally, an investment fund that provides investors with benefits determined by units in the fund. Similarly, some entities issue groups of insurance contracts with direct participation features and hold the underlying items. Some such funds or underlying items include owner-occupied property. The entity applies IAS 16 to owner-occupied properties that are included in such a fund or are underlying items. Despite paragraph 29, the entity may elect to measure such properties using the fair value model in accordance with IAS 40. For the purposes of this election, insurance contracts include investment contracts with discretionary participation features. (See IFRS 17 Insurance Contracts for terms used in this paragraph that are defined in that Standard). |
29B | An entity shall treat owner-occupied property measured using the investment property fair value model applying paragraph 29A as a separate class of property, plant and equipment.
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30 | After recognition [Refer:paragraph 7] as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation [Refer:paragraphs 6 (definition of depreciation) and 43–62] and any accumulated impairment losses [Refer:paragraph 63]. |
31 | After recognition [Refer:paragraph 7] as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation [Refer:paragraphs 43–62] and subsequent accumulated impairment losses. [Refer:paragraph 63] Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. |
32–33 | [Deleted] |
34 | The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years. |
35 | When an item of property, plant and equipment is revalued, [Refer:paragraph 31] the carrying amount of that asset is adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following ways:
The amount of the adjustment of accumulated depreciation forms part of the increase or decrease in carrying amount that is accounted for in accordance with paragraphs 39 and 40. |
36 | If an item of property, plant and equipment is revalued, [Refer:paragraph 31] the entire class [Refer:paragraph 37] of property, plant and equipment to which that asset belongs shall be revalued. |
37 | A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations. The following are examples of separate classes:
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38 | The items within a class [Refer:paragraph 37] of property, plant and equipment are revalued [Refer:paragraph 31] simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are kept up to date. |
39 | If an asset’s carrying amount is increased as a result of a revaluation, [Refer:paragraph 31] the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
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40 | If an asset’s carrying amount is decreased as a result of a revaluation, [Refer:paragraph 31] the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. |
41 | The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss. |
42 | The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in accordance with IAS 12 Income Taxes. |
43 | Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. |
44 | An entity allocates the amount initially recognised [Refer:paragraph 7] in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. For example, it may be appropriate to depreciate separately the airframe and engines of an aircraft. Similarly, if an entity acquires property, plant and equipment subject to an operating lease in which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms. |
45 | A significant part of an item of property, plant and equipment may have a useful life and a depreciation method [Refer:paragraphs 60–62] that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge. |
46 | To the extent that an entity depreciates separately some parts of an item of property, plant and equipment, it also depreciates separately the remainder of the item. The remainder consists of the parts of the item that are individually not significant. If an entity has varying expectations for these parts, approximation techniques may be necessary to depreciate the remainder in a manner that faithfully represents the consumption pattern and/or useful life of its parts. |
47 | An entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item. |
48 | The depreciation charge for each period shall be recognised in profit or loss unless it is included in the carrying amount of another asset. |
49 | The depreciation charge for a period is usually recognised in profit or loss. However, sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets. In this case, the depreciation charge constitutes part of the cost of the other asset and is included in its carrying amount. For example, the depreciation of manufacturing plant and equipment is included in the costs of conversion of inventories (see IAS 2 [Refer:IAS 2 paragraphs 12–14]). Similarly, depreciation of property, plant and equipment used for development activities may be included in the cost of an intangible asset recognised in accordance with IAS 38 Intangible Assets. [Refer:IAS 38 paragraphs 65–67] |
50 | The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. |
51 | The residual value and the useful life of an asset shall be reviewed at least at each financial year‑end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate [Refer:IAS 8 paragraphs 36–40] in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. |
52 | Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset’s residual value does not exceed its carrying amount. Repair and maintenance of an asset do not negate the need to depreciate it. |
53 | The depreciable amount of an asset is determined after deducting its residual value. In practice, the residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable amount. |
54 | The residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount. |
55 | Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 [Refer:IFRS 5 paragraphs 6–14] and the date that the asset is derecognised. [Refer:paragraphs 67–70] Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. |
56 | The future economic benefits embodied in an asset are consumed by an entity principally through its use. However, other factors, such as technical or commercial obsolescence and wear and tear while an asset remains idle, often result in the diminution of the economic benefits that might have been obtained from the asset. Consequently, all the following factors are considered in determining the useful life of an asset:
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| E3 | [IFRIC® Update, November 2019, Agenda Decision, ‘IFRS 16 Leases and IAS 16 Property, Plant and Equipment—Lease Term and Useful Life of Leasehold Improvements’ The Committee received a request about cancellable or renewable leases. The cancellable lease described in the request is one that does not specify a particular contractual term but continues indefinitely until either party to the contract gives notice to terminate. The contract includes a notice period of, for example, less than 12 months and the contract does not oblige either party to make a payment on termination. The renewable lease described in the request is one that specifies an initial period, and renews indefinitely at the end of the initial period unless terminated by either of the parties to the contract. The request asked two questions:
... Useful life of non-removable leasehold improvements Paragraph 50 of IAS 16 requires an item of property, plant and equipment (asset) to be depreciated over its useful life. IAS 16 defines the useful life of an asset as (emphasis added) ‘the period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity’. Paragraphs 56 and 57 of IAS 16 provide further requirements on the useful life of an asset. In particular, paragraph 56(d) specifies that in determining the useful life of an asset, an entity considers any ‘legal or similar limits on the use of the asset, such as the expiry dates of related leases’. Paragraph 57 specifies that the useful life of an asset ‘is defined in terms of the asset’s expected utility to the entity’, and ‘may be shorter than its economic life’. An entity applies paragraphs 56–57 of IAS 16 in determining the useful life of non-removable leasehold improvements. If the lease term of the related lease is shorter than the economic life of those leasehold improvements, the entity considers whether it expects to use the leasehold improvements beyond that lease term. If the entity does not expect to use the leasehold improvements beyond the lease term of the related lease then, applying paragraph 57 of IAS 16, it concludes that the useful life of the non-removable leasehold improvements is the same as the lease term. The Committee observed that, applying paragraphs 56–57 of IAS 16, an entity might often reach this conclusion for leasehold improvements that the entity will use and benefit from only for as long as it uses the underlying asset in the lease. ... The Committee concluded that the principles and requirements in IFRS 16 provide an adequate basis for an entity to determine the lease term of cancellable and renewable leases. The Committee also concluded that the principles and requirements in IAS 16 and IFRS 16 provide an adequate basis for an entity to determine the useful life of any non-removable leasehold improvements relating to such a lease. Consequently, the Committee decided not to add the matter to its standard-setting agenda.] |
57 | The useful life of an asset is defined in terms of the asset’s expected utility to the entity. The asset management policy of the entity may involve the disposal of assets after a specified time or after consumption of a specified proportion of the future economic benefits embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of judgement based on the experience of the entity with similar assets. |
58 | Land and buildings are separable assets and are accounted for separately, even when they are acquired together. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated. Buildings have a limited useful life and therefore are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the depreciable amount of the building. |
59 | If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring those costs. In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that reflects the benefits to be derived from it. |
| E4 | [IFRIC® Update, November 2004, Agenda Decision, ‘IAS 16 Property, Plant and Equipment and IAS 17 Leases: Depreciation of assets leased under operating leases’ The Agenda Committee considered whether interest methods of depreciation were permissible under IFRSs. Use of such methods would permit an entity to depreciate an asset that is not a receivable in much the same way as if it were a receivable, with the result that the depreciated amount of the asset reflects the present value of future net cash flow expected from it. The Committee recommended that this topic should not be added to the IFRIC’s agenda. The IFRIC noted that, while deliberating certain issues related to service concessions, it had considered whether it would be appropriate to use an interest method of depreciation. In that discussion, it concluded that using an interest method of depreciation was not appropriate. The IFRIC concluded that there was nothing unique about assets leased under operating leases in service concessions that would cause it to reach a different conclusion about the use of interest methods of depreciation. It noted that the Basis for Conclusions in the future Interpretations on service concessions would include a discussion of its conclusions on interest methods of depreciation. [Now see IFRIC 12 paragraphs BC64 and BC65]] |
60 | The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. [Link to: paragraph 62A for the clarification that the use of revenue-based method of depreciation is not appropriate]
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61 | The depreciation method applied to an asset shall be reviewed at least at each financial year‑end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8. [Refer:IAS 8 paragraphs 36–40] |
62 | A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight‑line method, the diminishing balance method and the units of production method. Straight‑line depreciation results in a constant charge over the useful life if the asset’s residual value does not change. The diminishing balance method results in a decreasing charge over the useful life. The units of production method results in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits. |
62A | A depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. The revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset. For example, revenue is affected by other inputs and processes, selling activities and changes in sales volumes and prices. The price component of revenue may be affected by inflation, which has no bearing upon the way in which an asset is consumed. |
63 | To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36 Impairment of Assets. That Standard explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises, or reverses the recognition of, an impairment loss. |
64 | [Deleted] |
65 | Compensation from third parties for items of property, plant and equipment that were impaired, [Refer:paragraph 63] lost or given up shall be included in profit or loss when the compensation becomes receivable. |
66 | Impairments [Refer:paragraph 63] or losses of items of property, plant and equipment, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and are accounted for separately as follows:
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67 | The carrying amount of an item of property, plant and equipment shall be derecognised:
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68 | The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback [Refer:IFRS 16 paragraphs 98–103]). Gains shall not be classified as revenue. |
68A | However, an entity that, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of such assets shall be recognised as revenue in accordance with IFRS 15 Revenue from Contracts with Customers. IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories. |
69 | The disposal of an item of property, plant and equipment may occur in a variety of ways (eg by sale, by entering into a finance lease [Refer:IFRS 16 Appendix A (definition of a finance lease)] or by donation). The date of disposal of an item of property, plant and equipment is the date the recipient obtains control of that item in accordance with the requirements for determining when a performance obligation is satisfied in IFRS 15. [Refer:IFRS 15 paragraph 31] IFRS 16 applies to disposal by a sale and leaseback. [Refer:IFRS 16 paragraphs 98–103] |
70 | If, under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed. |
71 | The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. |
72 | The amount of consideration to be included in the gain or loss arising from the derecognition of an item of property, plant and equipment is determined in accordance with the requirements for determining the transaction price in paragraphs 47–72 of IFRS 15. Subsequent changes to the estimated amount of the consideration included in the gain or loss shall be accounted for in accordance with the requirements for changes in the transaction price in IFRS 15. [Refer:IFRS 15 paragraphs 87–90] |
| Disclosure of property, plant and equipment [text block] Disclosure | Text block | 800500, 822100 |
73 | The financial statements shall disclose, for each class [Refer:paragraph 37] of property, plant and equipment:
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74 | The financial statements shall also disclose:
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74A | If not presented separately in the statement of comprehensive income, the financial statements shall also disclose:
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75 | Selection of the depreciation method [Refer:paragraphs 60–62] and estimation of the useful life of assets are matters of judgement. Therefore, disclosure of the methods adopted and the estimated useful lives [Refer:paragraphs 56–59] or depreciation rates provides users of financial statements with information that allows them to review the policies selected by management and enables comparisons to be made with other entities. For similar reasons, it is necessary to disclose:
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76 | In accordance with IAS 8 an entity discloses the nature and effect of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in subsequent periods. For property, plant and equipment, such disclosure may arise from changes in estimates with respect to:
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77 | If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed in addition to the disclosures required by IFRS 13 [Refer:IFRS 13 paragraphs 91–99]:
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| E5 | [IFRIC® Update, May 2014, Agenda Decision, ‘IAS 16 Property, Plant and Equipment—disclosure of carrying amounts under the cost model’ The Interpretations Committee received a request for clarification about IAS 16. The submission relates to whether an entity is required to reflect the capitalisation of borrowing costs to meet the disclosure requirement in paragraph 77(e) of IAS 16 for assets stated at revalued amounts for which borrowing costs are not capitalised in accordance with paragraph 4(a) of IAS 23 Borrowing Costs. The submitter asserted that the capitalisation of borrowing costs for these assets to meet disclosure requirements is burdensome and suggested that it should not be a requirement of IAS 16 to capitalise these costs. The Interpretations Committee noted that the requirements in paragraph 77(e) of IAS 16 are clear. This paragraph requires an entity to disclose the amount at which assets stated at revalued amounts would have been stated at had those assets been carried under the cost model. The amount to be disclosed includes borrowing costs capitalised in accordance with IAS 23. The Interpretations Committee determined that, in the light of the existing IFRS requirements, neither an Interpretation nor an amendment to a Standard was necessary and consequently decided not to add this issue to its agenda.] |
78 | In accordance with IAS 36 an entity discloses information on impaired property, plant and equipment in addition to the information required by paragraph 73(e)(iv)–(vi). |
79 | Users of financial statements may also find the following information relevant to their needs:
Therefore, entities are encouraged to disclose these amounts. |
| E6 | [IFRIC® Update, May 2009, Agenda Decision, ‘IAS 16 Property, Plant and Equipment—Disclosure of idle assets and construction in progress’ The IFRIC received a request for more guidance on the extent of required disclosures relating to property, plant and equipment temporarily idle or assets under construction when additional construction has been postponed. In accordance with paragraph 74(b) of IAS 16, an entity is required to disclose the amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction. Paragraph 79(a) encourages an entity to disclose the amount of property, plant and equipment that is temporarily idle. The IFRIC also noted that paragraph 112(c) of IAS 1 requires an entity to provide in the notes information that is not presented elsewhere in the financial statements that is relevant to their understanding. The IFRIC noted that disclosure regarding idle assets might be particularly relevant in the current economic environment. Consequently, the IFRIC expected that entities would provide information in addition to that specifically required by IAS 16 whenever idle assets or postponed construction projects become significant. Given the requirements of IAS 16 and IAS 1, the IFRIC did not expect significant diversity in practice and decided not to add this issue to its agenda. However, the IFRIC recommended that the Board should undertake a review of all disclosures encouraged (but not required) by IFRSs with the objective of either confirming that they are required or eliminating them.] |
80 | The requirements of paragraphs 24–26 regarding the initial measurement of an item of property, plant and equipment acquired in an exchange of assets transaction shall be applied prospectively only to future transactions. |
80A | Paragraph 35 was amended by Annual Improvements to IFRSs 2010–2012 Cycle. An entity shall apply that amendment to all revaluations recognised in annual periods beginning on or after the date of initial application of that amendment and in the immediately preceding annual period. An entity may also present adjusted comparative information for any earlier periods presented, but it is not required to do so. If an entity presents unadjusted comparative information for any earlier periods, it shall clearly identify the information that has not been adjusted, state that it has been presented on a different basis and explain that basis. [Refer:Basis for Conclusions paragraph BC36A]
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80B | In the reporting period when Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) is first applied an entity need not disclose the quantitative information required by paragraph 28(f) of IAS 8 for the current period. However, an entity shall present the quantitative information required by paragraph 28(f) of IAS 8 for each prior period presented. |
80C | An entity may elect to measure an item of bearer plants at its fair value at the beginning of the earliest period presented in the financial statements for the reporting period in which the entity first applies Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) and use that fair value as its deemed cost at that date. Any difference between the previous carrying amount and fair value shall be recognised in opening retained earnings at the beginning of the earliest period presented. |
80D | Property, Plant and Equipment—Proceeds before Intended Use, issued in May 2020, amended paragraphs 17 and 74 and added paragraphs 20A and 74A. An entity shall apply those amendments retrospectively, but only to items of property, plant and equipment that are brought to the location and condition necessary for them to be capable of operating in the manner intended by management on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments. The entity shall recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of that earliest period presented. |
81 | An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact. |
81A | An entity shall apply the amendments in paragraph 3 for annual periods beginning on or after 1 January 2006. If an entity applies IFRS 6 for an earlier period, those amendments shall be applied for that earlier period. |
81B | IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 39, 40 and 73(e)(iv). An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period. |
81C | IFRS 3 Business Combinations (as revised in 2008) amended paragraph 44. An entity shall apply that amendment for annual periods beginning on or after 1 July 2009. If an entity applies IFRS 3 (revised 2008) for an earlier period, the amendment shall also be applied for that earlier period. |
81D | Paragraphs 6 and 69 were amended and paragraph 68A was added by Improvements to IFRSs issued in May 2008. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact and at the same time apply the related amendments to IAS 7 Statement of Cash Flows. |
81E | Paragraph 5 was amended by Improvements to IFRSs issued in May 2008. An entity shall apply that amendment prospectively for annual periods beginning on or after 1 January 2009. Earlier application is permitted if an entity also applies the amendments to paragraphs 8, 9, 22, 48, 53, 53A, 53B, 54, 57 and 85B of IAS 40 at the same time. If an entity applies the amendment for an earlier period it shall disclose that fact. |
81F | IFRS 13, issued in May 2011, amended the definition of fair value and the definition of recoverable amount in paragraph 6, amended paragraphs 26, 35 and 77 and deleted paragraphs 32 and 33. An entity shall apply those amendments when it applies IFRS 13. |
81G | Annual Improvements 2009–2011 Cycle, issued in May 2012, amended paragraph 8. An entity shall apply that amendment retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors for annual periods beginning on or after 1 January 2013. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact. |
81H | Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended paragraph 35 and added paragraph 80A. An entity shall apply that amendment for annual periods beginning on or after 1 July 2014. Earlier application is permitted. If an entity applies that amendment for an earlier period it shall disclose that fact. |
81I | Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38), issued in May 2014, amended paragraph 56 and added paragraph 62A. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2016. Earlier application is permitted. If an entity applies those amendments for an earlier period it shall disclose that fact. |
81J | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 68A, 69 and 72. An entity shall apply those amendments when it applies IFRS 15. [Refer:IFRS 15 paragraphs 87–90] |
81K | Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), issued in June 2014, amended paragraphs 3, 6 and 37 and added paragraphs 22A and 80B–80C. An entity shall apply those amendments for annual periods beginning on or after 1 January 2016. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. An entity shall apply those amendments retrospectively, in accordance with IAS 8, except as specified in paragraph 80C. |
81L | IFRS 16, issued in January 2016, deleted paragraphs 4 and 27 and amended paragraphs 5, 10, 44 and 68–69. An entity shall apply those amendments when it applies IFRS 16. |
81M | IFRS 17, issued in May 2017, added paragraphs 29A and 29B. An entity shall apply those amendments when it applies IFRS 17. |
81N | Property, Plant and Equipment—Proceeds before Intended Use, issued in May 2020, amended paragraphs 17 and 74, and added paragraphs 20A, 74A and 80D. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2022. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. |
82 | This Standard supersedes IAS 16 Property, Plant and Equipment (revised in 1998). |
83 | This Standard supersedes the following Interpretations:
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The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.
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The amendments contained in this appendix when this Standard was issued in 2003 have been incorporated into the relevant pronouncements published in this volume.
International Accounting Standard 16 Property, Plant and Equipment (as revised in 2003) was approved for issue by the fourteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice-Chairman |
| Mary E Barth | |
| Hans-Georg Bruns | |
| Anthony T Cope | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| Harry K Schmid | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada |
Clarification of Acceptable Methods of Depreciation and Amortisation was approved for issue by fifteen of the sixteen members of the International Accounting Standards Board. Ms Tokar dissented. Her dissenting opinion is set out after the Basis for Conclusions.
| Hans Hoogervorst | Chairman |
| Ian Mackintosh | Vice-Chairman |
| Stephen Cooper | |
| Philippe Danjou | |
| Martin Edelmann | |
| Jan Engström | |
| Patrick Finnegan | |
| Amaro Luiz de Oliveira Gomes | |
| Gary Kabureck | |
| Suzanne Lloyd | |
| Patricia McConnell | |
| Takatsugu Ochi | |
| Darrel Scott | |
| Chungwoo Suh | |
| Mary Tokar | |
| Wei-Guo Zhang |
Agriculture: Bearer Plants was approved for issue by fourteen of the sixteen members of the International Accounting Standards Board. Mr Finnegan and Ms McConnell voted against its publication. Their dissenting opinions are set out after the Basis for Conclusions.
| Hans Hoogervorst | Chairman |
| Ian Mackintosh | Vice-Chairman |
| Stephen Cooper | |
| Philippe Danjou | |
| Martin Edelmann | |
| Jan Engström | |
| Patrick Finnegan | |
| Amaro Luiz de Oliveira Gomes | |
| Gary Kabureck | |
| Suzanne Lloyd | |
| Patricia McConnell | |
| Takatsugu Ochi | |
| Darrel Scott | |
| Chungwoo Suh | |
| Mary Tokar | |
| Wei-Guo Zhang |
Property, Plant and Equipment—Proceeds before Intended Use, which amended IAS 16, was approved for issue by all 14 members of the International Accounting Standards Board.
| Hans Hoogervorst | Chairman |
| Suzanne Lloyd | Vice-Chair |
| Nick Anderson | |
| Tadeu Cendon | |
| Martin Edelmann | |
| Françoise Flores | |
| Gary Kabureck | |
| Jianqiao Lu | |
| Darrel Scott | |
| Thomas Scott | |
| Chungwoo Suh | |
| Rika Suzuki | |
| Ann Tarca | |
| Mary Tokar |