Username:
Password:
Forgot Password?

AASB 116 - Property, Plant and Equipment

Print this Article Print this Article
Email this Article

Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

 
List of Q&As relating to AASB 116: 
Accounting for building demolition costs 
Installation costs 
Asset Revaluations - Not-for-Profit Entities 
Club facilities on leased land 
Land Under Roads 
Obligations to “Make Good” 
Not-for-Profit Definition 
 
 
Accounting for building demolition costs 
as reported in ANT07/2008 
 
Q: Entity F is preparing its financial statements for the year ended 30 September 2007. F is in the process of demolishing one of its buildings that was previously owner-occupied. The original intention was to construct a new building on the same site; however, entity F is now considering selling the site after the demolition is completed. How should the building demolition costs be accounted for? 
 
A: The accounting treatment will depend on the reason for the building demolition.  
 
If the building is being demolished for the purpose of replacing it with a new building, then the cost of demolition of the existing building should be capitalised as part of the cost of the new asset, subject to impairment review tests to ensure the asset value is not overstated. In this scenario, the cost of the demolition of the existing building is a cost of site preparation, which is directly attributable to the new asset being constructed (para 17 of AASB 116 ‘Property, Plant and Equipment’).  
 
If the building is being demolished to clear the site for a possible future sale, then the cost of demolition has been incurred to avoid the eventual purchaser bearing the cost. Capitalisation of the cost of demolition could only be justified if the expenditure enhances the future economic benefits of the land (AASB 116 paragraph 7); for example, by releasing the site potential of the underlying land. As above, any capitalisation is subject to impairment review tests to ensure the asset value is not overstated. If not capitalised, such expenditure is a cost of disposal and should be expensed.  
 
If the entity were to make a decision to sell the land prior to the demolition, the asset would need to be classified as “held for sale” in accordance with AASB 5 ‘Non current assets held for sale and Discontinued Operations’ and measured at the lower of its carrying amount or fair value less costs to sell. The demolition costs would be an example of “costs to sell” in this calculation if clearing the land is a necessary part of preparing the site for sale. 
 
 
Installation costs 
as reported in ANT24/2007 
 
Q: I note from para 17 of AASB 116 that installation costs can be capitalised into the cost of an asset. If we move a piece of plant and reinstall it in another part of the factory, can we capitalise those costs? 
 
A: Unfortunately not. Para 20 deals with relocating an asset and states that "costs incurred in using or redeploying an item are not included in the carrying amount of that item". 
 
 
Asset Revaluations - Not-for-Profit Entities 
as reported in ANT06/2007 
 
Q: I work for a Not-For-Profit (NFP) organisation. Over the financial years ending 30 June 2007, 2008 and 2009, the Department of Local Government has issued a direction to Local Governments to revalue certain classes of assets in each of those years and then to apply the Revaluation Model for measurement of property, plant and equipment subsequently. We have found a practical issue that we need to resolve in regard to AASB 116. 
 
My query relates to the treatment of the Revaluation Reserve by NFP's in terms of paragraphs 39 to 41 of AASB 116, in particular what happens on derecognition of an asset if the entity wishes to use para 41 and transfer the realised revaluation surplus to retained earnings when Aus paras 39.1, 40.1 and 40.2 have been followed and the revaluations are being done by class, rather than asset by asset.  
 
This example illustrates the issue: 
 
Click here for the table. 
 
An NFP holds the following assets, all of the same class at the end of year 1. They are revalued at that time for the very first time (i.e. the assets have always been recorded at cost less depreciation). The NFP undertakes to review the carrying values each year and unless any significant movements occur, they agree to do formal valuations every 3 years. The following table lists the carrying values before and after revaluation: 
 
An amount of $5,000 is transferred to the revaluation reserve at the end of year 1 and the carrying amounts of the assets are adjusted accordingly. 
 
At the end of year 2, Asset #3 is disposed of for $32,000. In terms of a strict reading of paragraph 41 of AASB 116, $7,000 should be transferred from the revaluation reserve to retained earnings. Accordingly, this would leave the revaluation reserve with a debit balance of $2,000. Is this correct?  
 
 
A: I suspect the situation you are referring to arises as a result of the AASB squeezing some extra not-for-profit paragraphs into the text of IAS 16. The requirements of IPSAS 17 are similar (http://www.ifac.org/Members/DownLoads/2006_A21_IPSAS_17.pdf), but the wording is a little different.  
 
Para 52 states:  
 
"Some or all of the revaluation surplus included in net assets may be transferred directly to accumulated surpluses or deficits when the surplus is realized. The surplus may be realized, in part or in whole, on the retirement or disposal of some or all of the assets within the class of property, plant and equipment to which the surplus relates. However, some of the surplus may be realized as the assets are used by the entity; in such a case, the amount of the surplus realized is the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets' original cost. The transfer from revaluation surplus to accumulated surpluses or deficits is not made through the statement of financial performance." 
 
This wording would enable a reader to conclude that not all of the surplus on the asset disposed of can be transferred, as, on a class basis, not all of it has been realised because of the offset of the decrement within the class.  
 
However, the IPSAS 17 wording is not reflected in AASB 116 and the standard contains an anomaly that can only be rectified by the AASB. In the meantime, not for profits should not take up the option provided in para 41 as: 
 
1. It would be inappropriate to ever have a debit balance in the ARR as this would indicate an impairment problem 
2. Para 41 refers to individual assets so is not really applicable to not for profits on a class basis 
3. Para 41 is optional, does not really apply to not for profits and therefore should only be used with caution. 
 
The AASB is aware of this anomaly and are in the process of putting together a paper on public sector issues that are being raised. Once the paper is done, the Board will decide what it should do, for example, issue guidance or make changes to the text of the standards. 
 
 
Club facilities on leased land 
as reported in ANT01/2007  
 
Q: My client is a not-for-profit club which has its club facilities on land leased from a government body. The lease is renewed every 10 years. The club has been on this site for over 50 years and we have no indication that the land-owner would evict the club and repossess the land, but because we cannot get any written assurance from the land-owner that they will renew the lease, we are concerned that AASBs 116 and 117 require us to depreciate all the club facilities over the remainder of the lease. 
 
A: There are many arrangements like this in the not-for-profit sector and each must be examined on its own merits. 
 
As you say, AASB 117 para 27 states that "if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term" depreciation should be calculated in accordance with AASB 116. AASB 116 para 56 lists some factors to be "considered" in determining the useful life of the asset, such as "legal or similar limits on the use of the asset, such as the expiry dates of related leases". "Lease term", however, is defined as "the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with our without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option." 
 
Based on the current pattern of behaviour by the lessor and lessee to date the substance of this transaction would appear to give the lessee an option to lease the asset for longer than just the current 10 year period to the next renewal. It would also appear reasonably certain the lessee would exercise this option if necessary and therefore a longer term (reflecting the nature of the asset) is likely to be more appropriate for depreciation purposes than the 10-year lease term.  
 
However if the club were to receive an indication from the land-owner that it wishes to repossess the site at the end of the next lease term then at that point the issue of impairment should be considered and the facilities written off over the remaining life of the lease.  
 
 
Land Under Roads 
as reported in AASB Action Alert (from 13-14 December 2006 Meeting) 
 
The Board noted that in respect of not-for-profit entities AASB 116 Property, Plant and Equipment requires land under roads acquired at no cost some time ago to be recognised if, and only if, its fair value as at the date of acquisition can be measured reliably. The Board noted that such a criterion would often not be met and, where that is the case, decided that such land under roads should not be required to be measured at current fair value. 
 
Infrastructure, Cultural, Community and Heritage Assets 
As reported in AASB Action Alert (from 13-14 December 2006 Meeting) 
 
The Board clarified that its decision to develop Guidance relating to the reliable measurement, revaluation and depreciation of heritage assets is not intended to amend the principles in AASB 116. In particular, the Board clarified that the Guidance should not imply that an entity's asset maintenance program justifies non-depreciation. Instead, the Guidance will note that, depending on curatorial and preservation policies, some heritage assets may have unlimited useful lives and therefore would not be depreciated. The Board will consider at a future meeting the implications of the Guidance potentially giving rise to a change in an accounting policy, a change in an estimate or a correction of an error. 
 
 
Obligations to “Make Good” 
as reported in ANT01/2006 
 
Q: The new AASB 116 “Property Plant and Equipment” now requires that the cost of an item include an estimate of the costs of dismantling and removing the item and restoring the site. Where can I find guidance on calculating this cost?  
 
A: These costs must be recognised and measured if there should be a provision in accordance with the requirements of AASB 137 “Provisions, Contingent Assets and Contingent Liabilities” and with UIG Interpretation 1 “Changes in Existing Decommissioning, Restoration and Similar Liabilities” 
 
AASB 137 requires the liability to be measured both initially and subsequently as the present value of the amount required to settle obligation at balance date. UIG Interpretation 1 then requires changes to be added or deducted from the cost of the related asset, with the resulting depreciable amount being depreciated over its useful life. Any unwinding of the discount goes to profit and loss as it occurs.  
 
AASB 1 contains in paragraph 25E transitional provisions relating to the initial recognition of these liabilities on first time adoption of AIFRS, with additional guidance in paragraphs IG 13 and 201-203 of the implementation guidance. 
 
 
Depreciation of revalued Property, Plant and Equipment 
as reported in ANT24/2004 
 
Q: Paragraph 43 of AASB 116 states that “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.” Does that mean that items of property, plant and equipment that have been revalued to fair value and are no longer carried at cost do not need to be depreciated for 2005? 
 
A: The depreciation of revalued property, plant and equipment should remain unchanged for 2005. The relevant paragraph of AASB 116 for depreciation is paragraph 50, which states that "The depreciable amount of an asset shall be allocated on a systematic basis over its useful life". The paragraph 6 definition of “depreciable amount” refers to the cost of an asset or other amount substituted for cost less its residual value. 
 
 
Not-for-Profit Definition 
 
Q: I am looking for a definition of the term "not-for-profit", used in the standards. Can you help? 
 
A: The definition is located in each standard that uses it, but which applies to both for-profit and not-for-profit entities - see AASBs 102, 116, 136.