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AASB 116 - Property, Plant and Equipment

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

 
IFRIC Rejections and Guidance  
  1. May 2007 - Sale of assets held for rental 
  2. November 2006 - whether the revaluation model in IAS 16 is available for investment property under construction 
  3. March 2006 - Leases of Land that do not transfer Title to the Lessee 
  4. December 2005 - Capitalised Software  
  5. November 2004 - Depreciation of Assets Leased under operating leases 
  6. May 2004 - Depreciation of fixed assets
 
1. May 2007 - Sale of assets held for rental 
 
Issue:  
 
The IFRIC was asked to provide guidance on the accounting for sales of assets held for rental. Some entities sell assets after renting them out to third parties. In such circumstances, it appears that the asset is manufactured or acquired with a dual intention, to rent it out and to sell it. The issue is whether the sale of such an asset should be presented gross (revenue and costs of sales) or net (gain or loss) in the income statement.  
 
IFRIC Decision: 
 
The IFRIC noted that IAS 16 paragraph 68 states that gains arising from derecognition of an item of property, plant and equipment shall not be classified as revenue. Also, when the asset is classified as held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 5 paragraph 24 refers to the derecognition requirements of paragraphs 67-72 of IAS 16, thereby confirming that gains should not be classified as revenue. However, some believed that, in some limited circumstances, reporting gross revenue in the income statement would be consistent with the Framework paragraph 72, with IAS 18 Revenue, IAS 2 Inventories, and IAS 40 Investment Properties and with the prohibition on offsets in IAS 1 Presentation of Financial Statements.  
 
For this reason, the IFRIC decided to draw the issue to the attention of the Board and not to take the item on to its own agenda.  
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2. November 2006 - whether the revaluation model in IAS 16 is available for investment property under construction 
 
Issue:  
 
Whether to take on a project to consider whether the revaluation model in IAS 16 is available for investment property under construction. 
 
IFRIC Decision: 
 
The IFRIC noted that since IAS 40 was written, the use of fair values in accounting has become more widespread. At the same time, valuation techniques have become more robust. The IFRIC therefore considered that the requirement that investment property under construction be accounted for under IAS 16 might no longer be necessary, and agreed to ask the Board whether it would consider amending IAS 40 to state that investment property under construction should be accounted for under that standard. 
 
As reported in the October 2006 IASB Update, the Board agreed that, as part of its Annual Improvements project, it would propose amending IAS 16 and IAS 40 to state that investment property under construction should be accounted for under IAS 40. Since the issue was being resolved by the Board, the IFRIC decided not to take the issue onto its agenda. 
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3. November 2006 - whether the revaluation model in IAS 16 is available for investment property under construction 
 
Issue:  
 
The IFRIC considered whether long leases of land would represent a situation when a lease of land would not normally be classified as an operating lease even though title does not transfer to the lessee.  
 
IAS 17 states at paragraph 14 that a characteristic of land is that it normally has an indefinite economic life. If title is not expected to pass to the lessee by the end of the lease term, then the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease will be an operating lease. Even when the land has an indefinite economic life, paragraph 15 states that ‘the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term……’ [emphasis added].  
 
IFRIC Decision:  
 
The IFRIC noted that leases of land with an indefinite economic life, under which title is not expected to pass to the lessee by the end of the lease term, were classified as operating leases before an amendment to IAS 17 was made in respect of IAS 40 Investment Properties. Specifically, IAS 17 was amended to state that in leases of land that do not transfer title, lessees normally do not receive substantially all the risks and rewards incidental to ownership.  
 
Some have understood the introduction of the word ‘normally’ as implying that a long lease of land in which title would not transfer to the lessee would henceforth be treated as a finance lease, since the time value of money would reduce the residual value to a negligible amount.  
 
The IFRIC noted that, as summarised in paragraph BC 8, the Board considered but rejected that approach in relation to the classification of leases of land and buildings, because ‘it would conflict with the criteria for lease classification in the Standard, which are based on the extent to which the risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee’. The Board also made clear that it had not made any fundamental changes to the Standard.  
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4. December 2005 - Capitalised Software 
 
Issue:  
 
AASB 138 'Intangible Assets' states that in determining whether an asset that incorporates both intangible and tangible elements should be treated under AASB 116 'Property, Plant and Equipment' or as an intangible asset, an entity uses judgement to assess which element is more signifcant.  
 
It also explains that the operating system of a computer is treated as property, plant and equipment because the computer cannot operate without it, whereas computer software that is not an integral part of the related hardware is treated as intangible asset. 
 
Are there any additional guidance on the classification of computer software as tangible or intangible assets? 
 
IFRIC Decision:  
 
Application software normally would be classified as intangible assets. However, as stated in paragraph 4 of AASB 138, judgment is required in distinguishing property, plant and equipment and intangible assets.  
 
The AASB decided not to add this issue to the UIG's agenda as the principle is clearly stated in paragraph 4 of AASB 138. 
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5. November 2004 - Depreciation of Assets Leased under operating leases 
 
Issue:  
 
Whether interest methods of depreciation were permissible under IFRSs. Use of such methods would permit an entity to depreciate an asset that is not a receivable in much the same way as if it were a receivable, with the result that the depreciated amount of the asset reflects the present value of future net cash flow expected from it. 
 
IFRIC Decision:  
 
Using an interest method of depreciation was not appropriate. There was nothing unique about assets leased under operating leases in service concessions that would cause it to reach a different conclusion about the use of interest methods of depreciation. The Basis for Conclusions in the future Interpretations on service concessions would include a discussion of its conclusions on interest methods of depreciation. 
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6. May 2004 - Depreciation of fixed assets 
 
Issue: 
 
The Committee considered a potential issue as to whether the production method of depreciation could be used under IAS 16 "Property, Plant and Equipment" if an asset is not consumed (worn down) directly in relation to the level of use. For example, if a road with a greater capacity than current demands is built, should depreciation in the initial period be lower than in later periods, if usage is expected to increase over the life of the asset?  
 
IFRIC Decision: 
 
The IFRIC agreed that this was foremost a conceptual area, and decided not to add it to the IFRIC agenda. However, the IFRIC recommended that this topic be considered by the Board as part of the Concepts project. 
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