Assets

IAS 16 · Property, plant and equipment

Capitalise, depreciate, and revalue through the revaluation surplus.

Draft: not yet reviewed by a teacher

Why it exists

A building, a machine or a van serves the business for many years. The standard decides which costs become an asset and which are expensed at once, and how the asset is carried afterwards so that each year's profit bears its share of the cost.

Key rules

A tangible non-current asset is held for use in the business (not for resale) and used for more than one period.
Cost includes the purchase price, duties, delivery, installation, site preparation and testing. Staff training, maintenance and general overheads are expenses.
Capital expenditure (improving the asset or extending its life) is capitalised; revenue expenditure (repairs, maintenance) is an expense of the period.
After recognition: the cost model (cost − depreciation) or the revaluation model (fair value − later depreciation), applied to a whole class of assets.
A revaluation gain goes to the revaluation surplus through other comprehensive income, not to profit.
Each year the excess of depreciation on the revalued amount over depreciation on cost may be transferred from the revaluation surplus to retained earnings (Dr Revaluation surplus, Cr Retained earnings), not through profit. On disposal, profit or loss = proceeds − carrying amount, and the remaining surplus is transferred to retained earnings.
The non-current asset register is kept separately and checked against the general ledger and the assets that physically exist.

Examples

A bakery buys an oven: price 40,000, delivery 1,200, installation 800, training for the bakers 500, a 2-year maintenance contract 1,800.

Cost of the oven: 40,000 + 1,200 + 800 = 42,000
Expensed: 500 + 1,800 = 2,300 (next year's maintenance is a prepayment)

What goes into cost

A building: cost 500,000, accumulated depreciation 100,000, carrying amount 400,000; valued at 560,000.

Dr Buildings (cost) 60,000
Dr Accumulated depreciation 100,000
Cr Revaluation surplus 160,000

Check: 560,000 − 400,000 = 160,000. With 40 years left, the new charge is 560,000 / 40 = 14,000 a year.

An upward revaluation

How it works

On revaluation, accumulated depreciation is cleared and the asset account is brought to the new value; the difference is the gain, credited to Revaluation surplus. Depreciation is then based on the revalued amount over the remaining life.

The notes reconcile each class: cost (or valuation) and accumulated depreciation at the start, additions, disposals, revaluation, the year's depreciation and the closing balance.

Traps

Taught in the course

Key rules

A tangible non-current asset is held for use in the business (not for resale) and used for more than one period.

Cost includes the purchase price, duties, delivery, installation, site preparation and testing. Staff training, maintenance and general overheads are expenses.

Capital expenditure (improving the asset or extending its life) is capitalised; revenue expenditure (repairs, maintenance) is an expense of the period.

After recognition: the cost model (cost − depreciation) or the revaluation model (fair value − later depreciation), applied to a whole class of assets.

A revaluation gain goes to the revaluation surplus through other comprehensive income, not to profit.

Each year the excess of depreciation on the revalued amount over depreciation on cost may be transferred from the revaluation surplus to retained earnings (Dr Revaluation surplus, Cr Retained earnings), not through profit. On disposal, profit or loss = proceeds − carrying amount, and the remaining surplus is transferred to retained earnings.

The non-current asset register is kept separately and checked against the general ledger and the assets that physically exist.