IAS 16 does not apply to

Leasing (IAS 17)

Investment Properties (IAS 40)

assets classified as held for sale

exploration and evaluation assets

biological assets related to agricultural activity




Property Plant and Equipments are only recognized if;

it is probable that the future economic benefits associated with the asset will flow to the entity, and the cost of asset can be measureable reliably.

An item of property, plant and equipment should initially be recorded at cost + All Capital Expenditures

CAPital Expenditures includes

• original purchase price
• costs of site preparation,
• delivery, handling and installation,
• related professional fees for architects and engineers,
• estimated cost of dismantling and removing the asset and restoring the site

IAS 16 permits two accounting models:

1. The asset is carried at cost less accumulated depreciation and impairment.
2. 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.

For all depreciable assets:

The depreciable amount

• cost
• Less Scrap Value

should be allocated on a basis of useful life.

The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity. The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8.

Depreciation should be charged to the income statement. Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle.

Question 1

ABC & Co., is installing a new plant at its production facility. It has incurred these costs:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Interest charges paid to supplier for deferred credit Rs. 20,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Operating losses before commercial production Rs. 40,000.

Find out the costs to be capitalized as per IAS-16?

Solution

-         Cost to be capitalized include:

-         Cost of the plant Rs. 250,000.

-         Initial delivery and handling cost Rs. 20,000.

-         Cost of site preparation Rs. 60,000.

-         Consultants used to advice on the acquisition Rs. 70,000.

-         Estimated dismantling cost to be incurred after 7 years Rs. 30,000.

-         Total Cost = (250,000 + 20,000 + 60,000 + 70,000 + 30,000) = 430,000.

Question 2

ABC & Co., has an item of plant with an initial cost of Rs. 100,000. At the date of revaluation accumulated depreciation amounted to Rs. 55,000. The fair value of asset, by reference to transactions in similar assets, is assessed to be Rs. 65,000.

Find out the entries to be passed?

Question 3

ABC & Co., has acquired a heavy road transporter at a cost of Rs. 100,000 (with no breakdown of component parts). The estimated useful life is 10 years. At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is perfectly road worthy and is expected to last for the next four years. The cost of the new power train is Rs. 45,000.

Can the cost of new power train can be recognized as the asset, and if so, what treatment should be used?