AASB 116 (Property, Plant and Equipment)

Compiled Accounting Standard AASB 116 Property, Plant and Equipment This compiled Standard applies to annual reporting periods beginning on or after 1 July 2007. Early application is permitted. It incorporates relevant amendments made up to and including 30 April 2007. Prepared on 11 July 2007 by the staff of the Australian Accounting Standards Board. AASB 116-compiled 2 COPYRIGHT Obtaining Copies of Accounting Standards The most recently compiled versions of Standards, original Standards and amending Standards (see Compilation Details) are available on the AASB website: www.aasb.com.au. Printed copies of original Standards and amending Standards are available for purchase by contacting: The Customer Service Officer Australian Accounting Standards Board Level 7 600 Bourke Street Melbourne Victoria AUSTRALIA Postal address: PO Box 204 Collins Street West Victoria 8007 AUSTRALIA Phone: (03) 9617 7637 Fax: (03) 9617 7608 E-mail: publications@aasb.com.au Website: www.aasb.com.au Other Enquiries Phone: (03) 9617 7600 Fax: (03) 9617 7608 E-mail: standard@aasb.com.au COPYRIGHT © 2007 Commonwealth of Australia This compiled AASB Standard contains International Accounting Standards Committee Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non- commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The Director of Finance and Administration, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007. All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Australia should be addressed to the International Accounting Standards Committee Foundation at www.iasb.org. AASB 116-compiled 3 CONTENTS CONTENTS COMPILATION DETAILS COMPARISON WITH INTERNATIONAL PRONOUNCEMENTS ACCOUNTING STANDARD AASB 116 PROPERTY, PLANT AND EQUIPMENT Paragraphs Objective 1 Application Aus1.1 – Aus1.7 Scope 2 – 5 Definitions 6 – Aus6.1 Recognition 7 – 10 Initial Costs 11 Subsequent Costs 12 – 14 Measurement at Recognition 15 – Aus15.3 Elements of Cost 16 – 22 Measurement of Cost 23 – 28 Measurement after Recognition 29 Cost Model 30 Revaluation Model 31 – 42 Depreciation 43 – 49 Depreciable Amount and Depreciation Period 50 – 59 Depreciation Method 60 – 62 Impairment 63 Compensation for Impairment 65 – 66 Derecognition 67 – 72 Disclosure 73 – 79 BASIS FOR CONCLUSIONS ON IAS 16 (available on the AASB website) AASB 116-compiled 4 CONTENTS Australian Accounting Standard AASB 116 Property, Plant and Equipment (as amended) is set out in paragraphs 1 – 79. All the paragraphs have equal authority. Terms defined in this Standard are in italics the first time they appear in the Standard. AASB 116 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation and Application of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies. AASB 116-compiled 5 COMPILATION DETAILS COMPILATION DETAILS Accounting Standard AASB 116 Property, Plant and Equipment as amended This compiled Standard applies to annual reporting periods beginning on or after 1 July 2007. It takes into account amendments up to and including 30 April 2007 and was prepared on 11 July 2007 by the staff of the Australian Accounting Standards Board (AASB). This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB 116 (July 2004) as amended by other Accounting Standards, which are listed in the Table below. Table of Standards Standard Date made Application date (annual reporting periods … on or after …) Application, saving or transitional provisions AASB 116 15 Jul 2004 (beginning) 1 Jan 2005 AASB 2004-1 9 Dec 2004 (beginning) 1 Jan 2005 – AASB 2007-4 30 Apr 2007 (beginning) 1 Jul 2007 see (a) below (a) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2007. Table of Amendments to Standard Paragraph affected How affected By … [paragraph] 3 amended AASB 2004-1 [7] 24 amended AASB 2007-4 [50] 28 added AASB 2007-4 [49] 35 amended AASB 2007-4 [50] Table of Amendments to Australian Guidance Paragraph affected How affected By … [paragraph] G1-G11 deleted AASB, Apr 2006 * AASB 116-compiled 6 COMPILATION DETAILS * The AASB decided at its meeting on 6 April 2006 to delete all of the Australian Guidance accompanying, but not part of, AASB 116. The decision has immediate effect. AASB 116-compiled 7 COMPARISON COMPARISON WITH INTERNATIONAL PRONOUNCEMENTS AASB 116 and IAS 16 AASB 116 as amended is equivalent to IAS 16 Property, Plant and Equipment as issued and amended by the IASB. Paragraphs that have been added to this Standard (and do not appear in the text of the equivalent IASB standard) are identified with the prefix “Aus”, followed by the number of the relevant IASB paragraph and decimal numbering. Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability. Compliance with IAS 16 For-profit entities that comply with AASB 116 as amended will simultaneously be in compliance with IAS 16 as amended. Not-for-profit entities using the added “Aus” paragraphs in the Standard that specifically apply to not-for-profit entities may not be simultaneously complying with IAS 16. Whether a not-for-profit entity will be in compliance with IAS 16 will depend on whether the “Aus” paragraphs provide additional guidance for not-for-profit entities or contain requirements that are inconsistent with the corresponding IASB Standard and will be applied by the not-for-profit entity. AASB 116 and IPSAS 17 International Public Sector Accounting Standards (IPSASs) are issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants. IPSAS 17 Property, Plant and Equipment (December 2001) is drawn primarily from the 1998 version of IAS 16. The main differences between IPSAS 17 and AASB 116 (July 2004) were listed in the original AASB 116. AASB 116-compiled 8 STANDARD ACCOUNTING STANDARD AASB 116 The Australian Accounting Standards Board made Accounting Standard AASB 116 Property, Plant and Equipment under section 334 of the Corporations Act 2001 on 15 July 2004. This compiled version of AASB 116 applies to annual reporting periods beginning on or after 1 July 2007. It incorporates relevant amendments contained in other AASB Standards made by the AASB and other decisions of the AASB up to and including 30 April 2007 (see Compilation Details). ACCOUNTING STANDARD AASB 116 PROPERTY, PLANT AND EQUIPMENT Objective 1. The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial report can discern information about an entity’s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them. Application Aus1.1 This Standard applies to: (a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity; (b) general purpose financial reports of each other reporting entity; and (c) financial reports that are, or are held out to be, general purpose financial reports. AASB 116-compiled 9 STANDARD Aus1.2 This Standard applies to annual reporting periods beginning on or after 1 January 2005. [Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.] Aus1.3 This Standard shall not be applied to annual reporting periods beginning before 1 January 2005. Aus1.4 The requirements specified in this Standard apply to the financial report where information resulting from their application is material in accordance with AASB 1031 Materiality. Aus1.5 When applicable, this Standard supersedes: (a) AASB 1015 Acquisitions of Assets as notified in the Commonwealth of Australia Gazette No S 527, 5 November 1999; (b) AASB 1021 Depreciation as notified in the Commonwealth of Australia Gazette No S 341, 29 August 1997; (c) AASB 1041 Revaluation of Non-Current Assets as notified in the Commonwealth of Australia Gazette No S 294, 19 July 2001; (d) AAS 4 Depreciation as issued in August 1997; and (e) AAS 21 Acquisitions of Assets as issued in November 1999. Aus1.6 AASB 1015, AASB 1021, AASB 1041, AAS 4 and AAS 21 remain applicable until superseded by this Standard. Aus1.7 Notice of this Standard was published in the Commonwealth of Australia Gazette No S 294, 22 July 2004. Scope 2. This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment. AASB 116-compiled 10 STANDARD 3. This Standard does not apply to: (a) property, plant and equipment classified as held for sale in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations; (b) biological assets related to agricultural activity (see AASB 141 Agriculture); (c) the recognition and measurement of exploration and evaluation assets (see AASB 6 Exploration for and Evaluation of Mineral Resources); or (d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)-(d). 4. Other Australian Accounting Standards may require recognition of an item of property, plant and equipment based on an approach different from that in this Standard. For example, AASB 117 Leases requires an entity to evaluate its recognition of an item of leased property, plant and equipment on the basis of the transfer of risks and rewards. However, in such cases other aspects of the accounting treatment for these assets, including depreciation, are prescribed by this Standard. 5. An entity shall apply this Standard to property that is being constructed or developed for future use as investment property but does not yet satisfy the definition of ‘investment property’ in AASB 140 Investment Property. Once the construction or development is complete, the property becomes investment property and the entity is required to apply AASB 140. AASB 140 also applies to investment property that is being redeveloped for continued future use as investment property. An entity using the cost model for investment property in accordance with AASB 140 shall use the cost model in this Standard. Definitions 6. The following terms are used in this Standard with the meanings specified. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. AASB 116-compiled 11 STANDARD Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other Australian Accounting Standards, for example, AASB 2 Share-based Payment. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. Recoverable amount is the higher of an asset’s net selling price and its value in use. The residual value of an asset is 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 is: (a) the period over which an asset is expected to be available for use by an entity; or AASB 116-compiled 12 STANDARD (b) the number of production or similar units expected to be obtained from the asset by an entity. Aus6.1 The following term is also used in this Standard with the meaning specified. A not-for-profit entity is an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent and each of the entities that it controls. Recognition 7. The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably. 8. 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 qualify as 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 accounted for as property, plant and equipment. 9. This Standard does not prescribe the unit of measure for recognition, that is, what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, and to apply the criteria to the aggregate value. 10. An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. Initial Costs 11. Items of property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and AASB 116-compiled 13 STANDARD equipment, although not directly increasing the future economic benefits of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had it not been acquired. For example, a chemical manufacturer may install new chemical handling processes to comply with environmental requirements for the production and storage of dangerous chemicals; related plant enhancements are recognised as an asset because, without them, the entity is unable to manufacture and sell chemicals. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with AASB 136 Impairment of Assets. Subsequent Costs 12. Under the recognition principle in paragraph 7, an entity does not recognise in the carrying amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item. Rather, these costs are recognised in profit or loss as incurred. Costs of day-to- day servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The purpose of these expenditures is often described as for the ‘repairs and maintenance’ of the item of property, plant and equipment. 13. Parts of some items of property, plant and equipment may require replacement at regular intervals. For example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such as seats and galleys may require replacement several times during the life of the airframe. Items of property, plant and equipment may also be acquired to make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make a non-recurring replacement. Under the recognition principle in paragraph 7, an entity recognises in 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 recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 67-72). 14. A condition of continuing to operate an item of property, plant and equipment (e.g. an aircraft) 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 inspection AASB 116-compiled 14 STANDARD (as distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the previous 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. Measurement at Recognition 15. An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. Aus15.1 Notwithstanding paragraph 15, in respect of not-for-profit entities, where an asset is acquired at no cost, or for a nominal cost, the cost is its fair value as at the date of acquisition. Aus15.2 In respect of not-for-profit entities, an item of property, plant and equipment may be gifted or contributed to the entity. For example, land may be contributed to a local government by a developer at no or nominal consideration to enable the local government to develop parks, roads and paths in the development. An asset may also be acquired for no or nominal consideration through the exercise of powers of sequestration. Und