HKAS 16 - Property, Plant and Equipment (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Objective & Scope | Prescribe accounting treatment for PPE | HKAS 16 sets rules for recognition, measurement, depreciation, and impairment of property, plant and equipment, excluding assets like biological assets (except bearer plants) and mineral rights. |
| Definitions | Key terms defined | Defines critical terms such as carrying amount, cost, depreciable amount, fair value, impairment loss, and useful life. |
| Recognition | Asset recognition criteria | An item of PPE is recognized when it is probable that future economic benefits will flow to the entity and its cost can be measured reliably. |
| Measurement at Recognition | Initial measurement at cost | PPE is initially measured at cost, which includes purchase price, directly attributable costs, and an initial estimate of dismantling and removal costs. |
| Measurement after Recognition | Cost model vs. Revaluation model | Entities can choose either the cost model (cost less depreciation and impairment) or the revaluation model (fair value less subsequent depreciation and impairment) for entire classes of PPE. |
| Depreciation | Systematic allocation of cost | Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life, with methods like straight-line, diminishing balance, or units of production. |
| Impairment & Derecognition | Impairment and disposal | PPE is tested for impairment under HKAS 36. Derecognition occurs on disposal or when no future benefits are expected, with gains/losses recognized in profit or loss. |
| Disclosure | Required financial statement disclosures | Entities must disclose measurement bases, depreciation methods, useful lives, a reconciliation of carrying amounts, and details of revaluations and impairments. |
Objective and Scope
Objective
The objective of HKAS 16 is to prescribe the accounting treatment for property, plant and equipment (PPE) so that users of financial statements can discern information about an entity's investment in its PPE and the changes in such investment.
Scope
HKAS 16 applies to accounting for PPE except when another Standard requires or permits a different accounting treatment.
Important: This Standard DOES apply to PPE used to develop or maintain the assets described in the exclusions above.
Bearer Plants
Bearer plants are living plants that are used in production or supply of agricultural produce, expected to bear produce for more than one period, and have a remote likelihood of being sold as agricultural produce (except incidental scrap sales). They are within the scope of HKAS 16.
Definitions
Key terms defined in HKAS 16 include:
| Term | Definition |
|---|---|
| Carrying amount | The amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses. |
| Cost | The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction. |
| Depreciable amount | The cost of an asset, or other amount substituted for cost, less its residual value. |
| Depreciation | The systematic allocation of the depreciable amount of an asset over its useful life. |
| Fair value | 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. |
| Impairment loss | The amount by which the carrying amount of an asset exceeds its recoverable amount. |
| Property, plant and equipment | Tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period. |
| Recoverable amount | The higher of an asset's fair value less costs of disposal and its value in use. |
| Residual value | 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 | The period over which an asset is expected to be available for use, or the number of production or similar units expected to be obtained from the asset. |
Recognition
General Recognition Principle
Initial Costs
Items of PPE may be acquired for safety or environmental reasons. These qualify for recognition as assets because they enable the entity to derive future economic benefits from related assets in excess of what could be derived without them.
Subsequent Costs
| Type of Cost | Treatment |
|---|---|
| Day-to-day servicing (repairs and maintenance) | Recognised in profit or loss as incurred. |
| Replacement of parts (regular intervals) | Recognised in carrying amount if recognition criteria met; carrying amount of replaced parts derecognised. |
| Major inspections | Cost recognised in carrying amount as replacement if recognition criteria satisfied; remaining carrying amount of previous inspection derecognised. |
Measurement at Recognition
General Rule
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
Elements of Cost
The cost of an item of PPE comprises:
- Purchase price: Including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
- Directly attributable costs: Costs to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
- Initial estimate of dismantling and removal costs: Costs of dismantling and removing the item and restoring the site, where the obligation is incurred either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Examples of Directly Attributable Costs
| Directly Attributable Costs | NOT Directly Attributable Costs |
|---|---|
| Employee benefits arising directly from construction/acquisition | Costs of opening a new facility |
| Costs of site preparation | Costs of introducing a new product/service |
| Initial delivery and handling costs | Costs of conducting business in a new location |
| Installation and assembly costs | Administration and other general overhead costs |
| Costs of testing whether asset is functioning properly | |
| Professional fees |
Deferred Payment
The cost of an item of PPE 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 capitalised per HKAS 23).
Measurement after Recognition
Accounting Policy Choice
An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.
Cost Model
After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation Model
After recognition 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 and subsequent accumulated impairment losses.
Accounting for Revaluation Increases
If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Exception: 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.
Accounting for Revaluation Decreases
If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. Exception: 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.
Depreciation
Component Depreciation
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.
Depreciable Amount and Depreciation Period
The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. The residual value and the useful life of an asset shall be reviewed at least at each financial year-end.
Commencement and Cessation of Depreciation
| Event | Treatment |
|---|---|
| Begins | When asset is available for use (in location and condition necessary for operation as intended by management). |
| Ceases | Earlier of: (a) date asset is classified as held for sale per HKFRS 5; or (b) date asset is derecognised. |
Depreciation Methods
The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. Common methods include straight-line, diminishing balance, and units of production.
Impairment and Derecognition
Impairment
To determine whether an item of PPE is impaired, an entity applies HKAS 36 Impairment of Assets. Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable.
Derecognition
The carrying amount of an item of property, plant and equipment shall be derecognised: (a) on disposal; OR (b) when no future economic benefits are expected from its use or disposal.
Gain or Loss on Derecognition
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 HKFRS 16 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
Calculation of Gain or Loss
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.
Disclosure
Required Disclosures for Each Class of PPE
The financial statements shall disclose:
- Measurement bases used for determining gross carrying amount
- Depreciation methods used
- Useful lives or depreciation rates used
- Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at beginning and end of period
- Reconciliation of carrying amount at beginning and end of period showing additions, disposals, acquisitions through business combinations, revaluations, impairment losses, depreciation, and other changes
Additional Disclosures
The financial statements shall also disclose:
- Existence and amounts of restrictions on title, and PPE pledged as security for liabilities
- Amount of expenditures recognised in carrying amount of PPE in the course of its construction
- Amount of contractual commitments for acquisition of PPE
Revaluation Disclosures
If items are stated at revalued amounts, disclose in addition to HKFRS 13 requirements: the effective date of revaluation, whether an independent valuer was involved, the carrying amount that would have been recognised under the cost model, and the revaluation surplus.
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