Which of the following items are included in property, plant, and equipment?

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This activity contains 12 questions.

Which of the following items qualifies as property, plant and equipment?

The "carrying amount" of an item of property, plant and equipment generally refers to:

A company pays £40,000 to replace a major component of a factory machine. The faulty component that is replaced is sold for £2,000. The carrying amount of the machine just before this replacement occurs is £450,000, of which £10,000 relates to the faulty component that is being replaced. The revised carrying amount of the machine after the replacement occurs and the profit or loss on disposal of the faulty component are:

Which of the following would not be included in the cost of an item of property, plant and equipment?

On 31 December 2014, a company acquires land for £500,000. The land is revalued at £530,000 on 31 December 2015 and £460,000 on 31 December 2016.
The company prepares financial statements to 31 December each year and uses the revaluation model in relation to land.
The correct accounting treatment of each revaluation in the statement of comprehensive income is as follows:

Depreciation is defined as the fall in value of an asset during an accounting period. True or False?

On 1 January 2015, a company which prepares financial statements to 31 December each year buys an item of equipment for £20,000. Useful life is estimated to be six years and residual value is expected to be approximately £1,500.
The company uses the diminishing balance method of depreciation at a rate of 35% per annum.
To the nearest pound, the depreciation of this item for the year to 31 December 2016 would be:

Borrowing costs that are directly attributable to the acquisition of a qualifying asset must be capitalised as part of the cost of that asset. True or False?

A company has the following general borrowings outstanding throughout the whole of an accounting year:6.5% Bank loan of £400,0008% Bank loan of £800,000If a qualifying asset costing £50,000 is funded out of these general borrowings, the capitalisation rate that should be used is:

If investment property is measured using the fair value model, a gain arising from a change in the fair value of an investment property must be:

If a company adopts the revaluation method in relation to an item of property, plant and equipment, it is no longer necessary to charge depreciation in relation to that item. True or False?

On 1 January 2015, a company which prepares financial statements to 31 December acquires an item of equipment and receives a government grant of 20% of the item's cost. The item cost £30,000 and has an expected useful life of seven years with a residual value of approximately £4,000.
The item is depreciated on the diminishing balance basis at a rate of 25% per annum.
The amount of the grant that should be recognised as income in the year to 31 December 2016 is:

Answer choices in this exercise appear in a different order each time the page is loaded.

The objective of IAS 16 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 impairment losses to be recognised in relation to them.

Scope

IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting treatments, for example:

• assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
• biological assets related to agricultural activity accounted for under IAS 41 Agriculture
  
• exploration and evaluation assets recognised in accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources
• mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

The standard does apply to property, plant, and equipment used to develop or maintain the last three categories of assets. [IAS 16.3]

The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS 40 Investment Property. [IAS 16.5]

The standard does apply to bearer plants but it does not apply to the produce on bearer plants. [IAS 16.3]

Recognition

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

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

This recognition principle is applied to all 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.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) 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 must be depreciated separately. [IAS 16.43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require 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 are satisfied. 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. [IAS 16.14]

Initial measurement

An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price 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 and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]

Proceeds from selling items 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 are not deducted from the cost of the item of property, plant and equipment but recognised in profit or loss. [IAS 16.20A]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), 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. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement subsequent to initial recognition

IAS 16 permits two accounting models:

• Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
• 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 should 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. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should 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 previously recognised as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]

Depreciation (cost and revaluation models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]

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. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]

Recoverability of the carrying amount

IAS 16 Property, Plant and Equipment requires impairment 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 impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position 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 should be recognised in profit and loss. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A]

Disclosure

Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose: [IAS 16.73]

• 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 end of the period, showing:
  • additions
  • disposals
  • acquisitions through business combinations
  • revaluation increases or decreases
  • impairment losses
  • reversals of impairment losses
  • depreciation
  • net foreign exchange differences on translation
  • other movements

Additional disclosures

The following disclosures are also required: [IAS 16.74]

• restrictions on title and items pledged as security for liabilities
• expenditures to construct property, plant, and equipment during the period
• contractual commitments to acquire property, plant, and equipment
• compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.

IAS 16 also encourages, but does not require, a number of additional disclosures. [IAS 16.79]

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]

• the effective date of the revaluation
• whether an independent valuer was involved
• for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model
• the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.

Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value Measurement.

Which of the following items in the property, plant, and equipment?

What is included in the property, plant, and equipment note?

Which of the following items in the property, plant, and equipment section of the statement of financial position are not depreciated?

What is not included in the cost of an item of property, plant, and equipment?