property plant and equipment

Property plant and equipment (PPE) are tangible assets that an entity holds for its own use or for rental to others, and that the entity expects to use during more than one period.     IAS 16 refers to tangible non-current assets as property, plant and equipment (PPE) and recognises that they possess a physical substance, are held for use in the production of goods or delivery of services or for an administrative purpose, and are expected to be used for more than one accounting period. In practice this definition causes few problems. PPE includes freehold and leasehold land, buildings and plant and machinery. The objective of IAS 16 is to prescribe in relation to PPE the accounting treatment for:

The recognition of assets;

The determination of their carrying amounts; and

The depreciation charges and any losses relating to them

 The cost of PPE can be measured reliably in the case of an acquired asset by the cost of the market transaction (purchase price). The directly attributable costs of bringing the asset to the location and the condition for use will include incidental costs of acquisition, such as import duties, site preparation and professional fees such as architects’ fees. The inclusion of these costs should cease once substantially all activities necessary to get the asset ready for use are completed, even if the asset has not yet been brought into use. Costs that would be excluded include: cost of opening new facility, administration and general overhead costs and cost of introducing new products. Where, as a result of the acquisition of an item of PPE, an obligation arises to dismantle it at the end of its useful life and/or to restore the site, then that obligation must be recorded as a liability at the same time the asset is recognised (e.g. decommissioning costs associated with nuclear power stations). In the case of a self-constructed asset, the cost of the acquired materials, labour and other costs must be recognised.

Depreciation

IAS 16 requires that each part of an item of PP&E with a cost that is significant in relation to

the total cost of the item be depreciated separately . Significant parts of an item of PP&E

that have the same useful lives and depreciation methods may be grouped in determining

depreciation.An entity allocates the depreciable amount of an asset (or each significant part, as applicable)on a systematic basis over its useful life. The depreciation method used should reflect thepattern in which the asset’s future economic benefits are expected to be consumed by the entity . The residual value and the useful life of an asset must be reviewed at least at each financial year end and any changes from previous estimates are accounted for prospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the depreciation method applied to an asset 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 must be changed to reflect the changed pattern. Such a change is also to be accounted for as a change in accounting estimate (but if the method is changed for a reason other than a change in the consumption pattern, this would still be considered a change in accounting policy, which requires retroactive application).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 International Accounting Standard 16 , Property, Plant and Equipment 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.