(although the IASB now plans no further work on this project until the Post-
implementation Review of IFRS 11 is undertaken).7 Nevertheless, the IASB has continued
to allow early application of the September 2014 amendment as it did not wish to prohibit
the application of better financial reporting. [IFRS 10.BC190O].8 This issue is discussed further
in Chapter 7 at 3.3.2, Chapter 11 at 7.6.5.C and in Chapter 12 at 8.2.3.
(b) Vendor retains control
If the asset is not jointly controlled in the subsequent arrangement, the vendor might
retain control over the asset. The vendor will recognise revenue or it will be a financing
arrangement. If it is the former, then the issue is the period and pattern over which
revenue is recognised.
If the vendor retains control, then it will not meet the requirements in IFRS 15 for
treating the transaction as a sale, i.e. recognising revenue on entering into the
arrangement. IFRS 15 requires that revenue (and a gain or loss on disposal of a non-
current asset not in the ordinary course of business) be recognised upon satisfaction of
performance obligation by transferring control (see Chapter 28 at 8).
The arrangement could be akin to a lease, especially if the disposal is for a period of
time. However, arrangements are only within the scope of IFRS 16 if they relate to a
specified asset. Generally, a portion of a larger asset that is not physically distinct is not
considered to be a specified asset. The related detailed requirements of IFRS 16 are
discussed in Chapter 24 at 3.1.2.
If it is not a lease and the vendor continues to control the asset, the arrangement might
be best characterised as a performance obligation for services to be spread over the
Property, plant and equipment 1343
term of the arrangement. That is, the initial receipt would be a liability and recognised
in profit and loss over time.
Alternatively, it could be a financing-type arrangement, in which case the proceeds would
be classified as a financial liability. In effect, the vendor is trading a share of any revenue to
which it is entitled in exchange for funding by the purchaser of one or more activities
relating to the asset. The purchaser receives a return that is comparable to a lender’s rate of
return out of the proceeds of production. This could be by receiving a disproportionate
share of output until it has recovered its costs (the financing it has provided) as well as the
agreed rate of return for the funding. These arrangements are found in the extractive sector,
e.g. carried interests and farm-outs (Chapter 39 at 6). In the development stage of a project,
the asset in question will be classified as PP&E or as an intangible asset under IAS 38. Under
a carried interest arrangement the carried party transfers a portion of the risks and rewards
of a property, in exchange for a funding commitment from the carrying party.
(c) Partial
disposal
In some circumstances it is argued that the rights transferred by the vendor are such that
it neither controls nor jointly controls the whole of the original asset and the question
arises as to whether there is a part disposal of the asset. The arrangement cannot be
accounted for as a joint operation as there is no joint control. Classification as a joint
operation would allow a part disposal of an item of PP&E. It is noted that a party that
participates in a joint operation but does not have joint control records its interests in
the same way as a participant in a joint operation, accounting for its own assets and
liabilities. [IFRS 11.23]. This is unaffected by the fact that the asset in question may be an
interest in an undivided asset; it will still classify its interest in the asset as an item of
PP&E. In those sectors where these arrangements are common and where an entity will
be simultaneously vendor and acquirer in different arrangements, it is argued that the
transactions should be treated symmetrically, i.e. as a part disposal of the undivided
asset and an acquisition of an interest in PP&E. However, this interpretation depends
entirely on the vendor ceding control of part of its rights and applying IAS 16 principles
to obtain symmetry of accounting between acquisitions and disposals.
8
IAS 16 DISCLOSURE REQUIREMENTS
The main disclosure requirements of IAS 16 are set out below, but it should be noted
that the related disclosure requirements in other standards such as IFRS 13, IAS 1 –
Presentation of Financial Statements – and IAS 36 may also be relevant. See
Chapters 14, 3 and 20, respectively.
8.1 General
disclosures
For each class of PP&E the following should be disclosed in the financial statements:
(a) the measurement bases used for determining the gross carrying amount (e.g. cost or
revaluation). [IAS 16.73(a)]. When more than one basis has been used, the gross carrying
amount for that basis in each category may have to be disclosed (however the standard
requires that if revaluation is adopted the entire class of PP&E must be revalued);
(b) the depreciation methods used. Selection of the depreciation method adopted is a
matter of judgement and its disclosure provides information that allows users of
1344 Chapter 18
financial statements to review the policies selected by management and enables
them to compare with other entities. For similar reasons, it is necessary to disclose
depreciation (in item (e)(vii) below), whether recognised in profit or loss or as a
part of the cost of other assets, during a period; and accumulated depreciation at
the end of the period (in item (d) below); [IAS 16.73(b), 75]
(c) the useful lives or the depreciation rates used. Selection of the useful lives or
depreciation rates used is a matter of judgement and its disclosure provides
information that allows users of financial statements to review the policies selected
by management and enables them to compare with other entities; [IAS 16.73(c), 75]
(d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; [IAS 16.73(d)]
and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) disposals, and assets classified as held for sale or included in a disposal group
held for sale in accordance with IFRS 5;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations and from impairment
losses recognised or reversed directly in other comprehensive income under
IAS 36;
(v) impairment losses recognised in profit or loss during the period under IAS 36;
(vi) impairment losses reversed in profit or loss during the period under IAS 36;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation
currency, including the translation of a foreign operation into the
presentation currency of the reporting entity; and
(ix) other
changes.
[IAS 16.73(e)].
Extract 18.9 below illustrates an accounting policy on PP&E together with the
&nb
sp; movement and reconciliation note (a comparative is provided in the financial
statements but is not reproduced here).
Extract 18.9: Volkswagen Aktiengesellschaft (2017)
Notes to the Consolidated Financial Statements [extract]
Accounting policies [extract]
PROPERTY, PLANT AND EQUIPMENT [extract]
Property, plant and equipment is carried at cost less depreciation and – where necessary – write-downs for
impairment. Investment grants are generally deducted from cost. Cost is determined on the basis of the direct and
indirect costs that are directly attributable. Special tools are reported under other equipment, operating and office
equipment. Property, plant and equipment is depreciated using the straight-line method over its estimated useful life.
The useful lives of items of property, plant and equipment are reviewed on a regular basis and adjusted if required.
Depreciation is based mainly on the following useful lives:
Property, plant and equipment 1345
Useful life
Buildings
20 to 50 years
Site improvements
10 to 20 years
Technical equipment and machinery
6 to 12 years
Other equipment, operating and office equipment, including special tools
3 to 15 years
Balance sheet disclosures [extract]
13.
Property, plant and equipment [extract]
CHANGES IN PROPERTY, PLANT AND EQUIPMENT IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2017
[extract]
Land, land
rights and
buildings,
Other
including
Technical
equipment,
Payments on
buildings on
equipment operating and
account and
third-party
and
office
assets under
€ million
land
machinery
equipment
construction Total
Cost
Balance at Jan. 1, 2017
33,534
43,353
64,595
7,008
148,490
Foreign exchange differences
–440
–824
–1,056
–152
–2,473
Changes in consolidated Group
–303
–71
–117
–11
–501
Additions
630 1,355 5,056 5,474
12,516
Transfers
1,063 2,509 1,829 –5,411 –11
Disposals 149
873
1,399
31
2,452
Balance at Dec. 31, 2017
34,335 45,450 68,909
6,876
155,569
Depreciation and impairment
Balance at Jan. 1, 2017
13,887
30,531
49,999
39
94,456
Foreign
exchange
differences
–153 –560 –790
–5
–1,508
Changes in consolidated Group
–117
–62
–80
–
–259
Additions to cumulative
depreciation
1,058 3,211 5,152
–
9,421
Additions to cumulative
impairment losses
3
–9
254
55
303
Transfers 14
–16
–1
0
–3
Disposals 71
807
1,183
7
2,068
Reversal of impairment losses
0
2
0
13
15
Balance at Dec. 31, 2017
14,621
32,286
53,352
69
100,327
Carrying amount at
Dec. 31, 2017
19,714
13,164
15,557
6,807
55,243
of which assets leased under
finance leases
Carrying amount at Dec. 31, 2017
286
6
46
–
339
Options to purchase buildings and plant leased under the terms of finance leases exist in most cases, and are also
expected to be exercised.
1346 Chapter 18
IAS 16 also requires the disclosure of the following information, which is useful to gain
a fuller understanding of the entire position of the entity’s holdings of and its
commitments to purchase property plant and equipment:
(a) the existence and amounts of restrictions on title, and PP&E pledged as security
for liabilities;
(b) the amount of expenditures recognised in the carrying amount of an item of PP&E
in the course of construction;
(c) the amount of contractual commitments for the acquisition of PP&E; and
(d) if it is not disclosed separately in the statement of comprehensive income, the
amount of compensation from third parties for items of PP&E that were impaired,
lost or given up that is included in profit or loss. [IAS 16.74].
In addition there is a reminder in the standard that, in accordance with IAS 8, the nature
and effect of any change in an accounting estimate (e.g. depreciation methods, useful
lives, residual values, and the estimated cost of dismantling, removing or restoring items
of PP&E) that has an effect on the current period or is expected to have an effect in
future periods must be disclosed. [IAS 16.76].
8.2
Additional disclosures for revalued assets
In addition to the disclosures required by IFRS 13, the disclosure requirements in IAS 16
if the revaluation method is adopted are:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) for each revalued class of PP&E, the carrying amount that would have been
recognised had the assets been carried under the cost model; and
(d) the revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders. [IAS 16.77].
In particular the requirement under (c) is quite onerous for entities, as it entails their
keeping asset register information in some detail in order to meet it.
In May 2014, the Interpretations Committee received a request to clarify whether an
entity is required to reflect the capitalisation of borrowing costs to meet the disclosure
requirement of IAS 16 for assets stated at revalued amounts and for which borrowing
costs are not capitalised. Since the capitalisation of borrowing costs for such assets is
not required (see Chapter 21 at 3.2), the determination of the amount of borrowing costs
that would have been capitalised under a cost model – solely to meet a disclosure
requirement – might be considered burdensome.
The Interpretations Committee noted that the requirements in paragraph 77(e) of IAS 16
(i.e. item (c) above) are clear. This paragraph requires an entity to disclose the amount
at which assets stated at revalued amounts wo
uld have been stated had those assets
been carried under the cost model. The amount to be disclosed includes borrowing
costs capitalised in accordance with IAS 23 (see Chapter 21).9
Property, plant and equipment 1347
IFRS 13 has a number of disclosure requirements for assets measured at fair value. Some of
the significant disclosures under IFRS 13 which would apply to revalued PP&E are: [IFRS 13.93]
• if the highest and best use differs from its current use, an entity must disclose that fact
and why the asset is being used in a manner different from its highest and best use;
• the fair value measurement’s categorisation within the fair value measurement
hierarchy (i.e. Level 1, 2 or 3);
• if categorised within Level 2 or 3 of the fair value hierarchy (which most revalued
PP&E is likely to be):
(i)
a description of the valuation technique(s) used in the fair value measurement;
(ii) the inputs used in the fair value measurement;
(iii) if there has been a change in the valuation technique (e.g. changing from a
market approach to an income approach or use of an additional technique):
• the change; and
• the reason(s) for making it;
• quantitative information about the significant unobservable inputs used in the fair
value measurement for those categorised within Level 3 of the fair value
measurement hierarchy;
• if categorised within Level 3 of the fair value measurement hierarchy, a description
of the valuation processes used by the entity (including, for example, how an entity
decides its valuation policies and procedures and analyses changes in fair value
measurements from period to period).
In addition to these requirements, an entity must also provide the disclosures depending
on whether the fair value measurement is recurring or non-recurring. Revalued PP&E are
considered recurring fair value measurements and are subject to additional disclosure
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 265