1

Property, Plant & Equipment and Investment Property

2

Property, Plant & Equipment

• PP&E is initially measured at cost– This includes all directly attributable costs to acquire and

prepare the asset for its intended use.– ISA 16 states that start-up and pre-production costs are

not capitalized unless the costs are a necessary part of bringing the asset to working condition.

– Interest capitalization is similar under GAAP and IFRS since 2009.• GAAP uses weighted avg. accumulated expenditures x some

interest rate to determine (theoretical) avoidable interest.• IFRS capitalizes actual borrowing costs.

3

Asset Exchanges

• Recall that under APBO 29 exchanges of nonmonetary assets were recorded at the FV of assets exchanged unless the assets exchanged were similar and a gain was involved.– In those cases assets were recorded at cost and the gain

was buried in the CV of the newly acquired asset.

• SFAS 153 modified APBO 29 to conform to IFRS and eliminated that exclusion.– Now any gain or loss is recognized unless the exchange

transaction does not have commercial substance (defined as no material difference in future CF of the two assets.)

4

Revaluation of PP&E

• The benchmark treatment with IFRS is to report PP&E at cost, net of depreciation and any impairments.

• However, an allowed alternative is to value PP&E at fair value. – Companies can use “highest and best use” to determine

FV.

5

Revaluations of PP&E

• Once an entity begins to revalue PP&E it must continue to do so “…with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.”– If an item is revalued the entire class of PP&E to which it

belongs must be revalued as well.

• The offsetting side of the revaluation entry will be to “revaluation surplus” in other comprehensive income and accumulated in the equity section.

6

PP&E Revaluations continued

• If a revaluation is downward the revaluation equity account is first reduced and any excess goes to expense.

• If an asset was downwardly adjusted and it went to expense and subsequently it’s written up, the increase goes to income to the extent it was previously recognized as expense.– Any excess would go to revaluation equity.

• Disclosure requirements for PP&E are more stringent with IFRS than with GAAP.

7

Depreciation

GAAP• Component depreciation is

permitted but not common in practice.

IFRS• Component depreciation

required if components of an asset have different patterns of benefits.

8

Investment Property

• Property held to earn rentals or for capital appreciation are considered Investment Properties per IFRS.

• Cost or fair value can be used (FMV is the preferred method).– With FMV method changes in value are recognized on the

income statement.– With cost method FMV must be disclosed in the notes.

• For the most part if the FV method is used for some properties it is to be used for all investment property.

• There are no corresponding FV provisions in GAAP.