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Property Plant and Equipment

SME Par.IFRS SMEU.S. GAAP
Scope
17.1 This section applies to accounting for property, plant and equipment and investment property whose fair value cannot be measured reliably without undue cost or effort. Section 16 Investment Property applies to investment property whose fair value can be measured reliably without undue cost or effort. Unlike IFRS SMEs, except in specialized industries, such as investment companies, investments in land and buildings are accounted for as property, plant, and equipment (PP&E); there is no separate accounting method for investment property.
17.2 Property, plant and equipment are tangible assets that:
  1. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and
  2. are expected to be used during more than one period.
 The definition of PP&E is essentially the same.
17.3 Property, plant and equipment does not include:
  1. biological assets related to agricultural activity (see Section 34 Specialised Activities), or
  2. mineral rights and mineral reserves, such as oil, natural gas and similar non-regenerative resources.
 Unlike IFRS SMEs, biological assets are not a separate category of assets under U.S. GAAP. Like IFRS SMEs, however, items such as trees and vines of agricultural producers and cooperatives are subject to separate accounting guidance. That guidance may differ from IFRS SMEs, however.

Like IFRS SMEs, mineral rights and mineral reserves are subject to separate accounting guidance. That guidance may differ from IFRS SMEs, however.

See Section 34.
Recognition
17.4 An entity shall apply the recognition criteria in paragraph 2.27 in determining whether to recognise an item of property, plant or equipment. Therefore, the entity shall recognise the cost of an item of property, plant and equipment as an asset if, and only if:
  1. it is probable that future economic benefits associated with the item will flow to the entity, and
  2. the cost of the item can be measured reliably.
 Same.
17.5 Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts and stand-by equipment are property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are considered property, plant and equipment. Like IFRS SMEs, spare parts are usually carried as inventory.  Unlike IFRS SMEs, however, servicing equipment is usually carried as PP&E if it is expected to be used during more than one period and its cost meets a materiality threshold. Like IFRS SMEs, major spare parts and stand-by equipment are PP&E if an entity expects to use them during more than one period. Unlike IFRS SMEs, spare parts that can be used only in connection with an item of PP&E (e.g., expendable spare parts for the sole aircraft of an airline) usually are not considered PP&E.
17.6 Parts of some items of property, plant and equipment may require replacement at regular intervals (eg the roof of a building). An entity shall add to the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised in accordance with paragraphs 17.27–17.30. Paragraph 17.16 provides that if the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Same except that, unlike IFRS SMEs—
  • There is no requirement to account for separate components of an asset (nor is there a prohibition against doing so).
  • The composite depreciation method may be used whereby the cost of the a replacement component may be capitalized without derecognizing the replaced component.
  • Rearrangement and reinstallation costs may be handled as replacements in certain circumstances.
  • There is specific guidance on the capitalization of asbestos removal costs.
17.7 A condition of continuing to operate an item of property, plant and equipment (eg a bus) may be performing 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. Any remaining carrying amount of the cost of the previous major inspection (as distinct from physical parts) is derecognised. This is done regardless of whether the cost of the previous major inspection was identified in the transaction in which the item was acquired or constructed. 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. Like IFRS SMEs, the accounting guidance for airlines provides that airlines include inspections in airframe and aircraft engine overhauls, which may be capitalized. The accounting guidance for airlines might be analogized to by other industries if performing regular major inspections is a condition for continuing to operate an item of PP&E.
17.8 Land and buildings are separable assets, and an entity shall account for them separately, even when they are acquired together. Same except that, unlike IFRS SMEs, for land and buildings held under a capital lease that does not transfer ownership to the lessee by the end of the lease term, if the fair value of the land is less than 25 percent of the total fair value of the leased property at the inception of the lease, the lessee accounts for the land and building as a single unit.
Measurement at recognition
17.9 An entity shall measure an item of property, plant and equipment at initial recognition at its cost. Same.
 Elements of cost
17.10 The cost of an item of property, plant and equipment comprises all of the following:
  1. its purchase price, including legal and brokerage fees, import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
  2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the costs of site preparation, initial delivery and handling, installation and assembly, and testing of functionality.
  3. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs 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.
 Same except that, unlike IFRS SMEs—
  • Interest must be capitalized as part of the cost of a qualifying asset (see 17.11).
  • Asset retirement obligations that result from the production of inventories in a particular period are added to the carrying amount of the item of PP&E.
17.11 The following costs are not costs of an item of property, plant and equipment, and an entity shall recognise them as an expense when they are incurred:
  1. costs of opening a new facility.
  2. costs of introducing a new product or service (including costs of advertising and promotional activities).
  3. costs of conducting business in a new location or with a new class of customer (including costs of staff training).
  4. administration and other general overhead costs.
  5. borrowing costs (see Section 25 Borrowing Costs).
 Same except that, unlike IFRS SMEs, interest must be capitalized as part of the cost of an asset—
  • Constructed or otherwise produced for the entity’s own use.
  • Intended for sale or lease that is constructed or otherwise produced as a discrete project.
17.12 The income and related expenses of incidental operations during construction or development of an item of property, plant and equipment are recognised in profit or loss if those operations are not necessary to bring the item to its intended location and operating condition. Same.
 Measurement of cost
17.13 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the cost is the present value of all future payments. Same.
 Exchanges of assets
17.14 An item of property, plant or equipment may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. An entity shall measure the cost of the acquired asset at 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. In that case, the asset’s cost is measured at the carrying amount of the asset given up. Same.
Measurement after initial recognition
17.15 An entity shall measure all items of property, plant and equipment after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses. An entity shall recognise the costs of day-to-day servicing of an item of property, plant and equipment in profit or loss in the period in which the costs are incurred. Same.
Depreciation
17.16 If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Other assets shall be depreciated over their useful lives as a single asset. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life and therefore is not depreciated. Unlike IFRS SMEs, there is no requirement to account for separate components of an asset (nor is there a prohibition against doing so). Unlike IFRS SMEs, the composite depreciation method may be used.
17.17 The depreciation charge for each period shall be recognised in profit or loss unless another section of this IFRS requires the cost to be recognised as part of the cost of an asset. For example, the depreciation of manufacturing property, plant and equipment is included in the costs of inventories (see Section 13 Inventories). Same.
Depreciable amount and depreciation period
17.18 An entity shall allocate the depreciable amount of an asset on a systematic basis over its useful life. Same.
17.19 Factors such as a change in how an asset is used, significant unexpected wear and tear, technological advancement, and changes in market prices may indicate that the residual value or useful life of an asset has changed since the most recent annual reporting date. If such indicators are present, an entity shall review its previous estimates and, if current expectations differ, amend the residual value, depreciation method or useful life. The entity shall account for the change in residual value, depreciation method or useful life as a change in an accounting estimate in accordance with paragraphs 10.15–10.18. Same.
17.20 Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases when the asset is derecognised. Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. Same except that, unlike IFRS SMEs, PP&E may not be depreciated if it is classified as held for sale.
17.21 An entity shall consider all the following factors in determining the useful life of an asset:
  1. the expected usage of the asset. Usage is assessed by reference to the asset’s expected capacity or physical output.
  2. expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle.
  3. technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset.
  4. legal or similar limits on the use of the asset, such as the expiry dates of related leases.
 Same.
Depreciation method
17.22 An entity shall select a depreciation method that reflects the pattern in which it expects to consume the asset’s future economic benefits. The possible depreciation methods include the straight-line method, the diminishing balance method and a method based on usage such as the units of production method. Same.
17.23 If there is an indication that there has been a significant change since the last annual reporting date in the pattern by which an entity expects to consume an asset’s future economic benefits, the entity shall review its present depreciation method and, if current expectations differ, change the depreciation method to reflect the new pattern. The entity shall account for the change as a change in an accounting estimate in accordance with paragraphs 10.15–10.18. Same.
Impairment
 Recognition and measurement of impairment
17.24 At each reporting date, an entity shall apply Section 27 Impairment of Assets to determine whether an item or group of items of property, plant and equipment is impaired and, if so, how to recognise and measure the impairment loss. That section explains when and how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises or reverses an impairment loss. See Section 27.
 Compensation for impairment
17.25 An entity shall include in profit or loss compensation from third parties for items of property, plant and equipment that were impaired, lost or given up only when the compensation becomes receivable. Same.
 Property, plant and equipment held for sale
17.26 Paragraph 27.9(f) states that a plan to dispose of an asset before the previously expected date is an indicator of impairment that triggers the calculation of the asset’s recoverable amount for the purpose of determining whether the asset is impaired. Same.
Derecognition
17.27 An entity shall derecognise an item of property, plant and equipment:
  1. on disposal, or
  2. when no future economic benefits are expected from its use or disposal.
 Same.
17.28 An entity shall recognise the gain or loss on the derecognition of an item of property, plant and equipment in profit or loss when the item is derecognised (unless Section 20 Leases requires otherwise on a sale and leaseback). The entity shall not classify such gains as revenue. U.S. GAAP requires an asset classified as held for sale to be remeasured at the lower of its carrying amount or fair value less cost to sell, with any loss on remeasurement recognized at the time of such classification. When combined with differences in the impairment models (see 17.26 and Section 27), however, the result is the same.
17.29 In determining the date of disposal of an item, an entity shall apply the criteria in Section 23 Revenue for recognising revenue from the sale of goods. Section 20 applies to disposal by a sale and leaseback. The guidance of determining the date of disposal of an item of PP&E is similar to IFRS SMEs.
17.30 An entity shall determine the gain or loss arising from the derecognition of an item of property, plant and equipment as the difference between the net disposal proceeds, if any, and the carrying amount of the item. Same.
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