This chapter addresses the IFRS requirements for property, plant, and equipment as follows:

• Initial recognition and measurement of property, plant, and equipment.
• Measurement after initial recognition, including the cost and revaluation models.
• De-recognition.
• Impairment of property, plant, and equipment is addressed by IAS 36.
• Fair value is addressed in IFRS 13.

Initial recognition and measurement, subsequent measurement including revaluation, depreciation and impairment, de-recognition, and disclosures are addressed in IAS 16, ‘Property, plant and equipment’.

Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset form part of the cost of that asset. Qualifying assets are primarily property, plant, and equipment.

The initial estimate of the costs of decommissioning, restoration, or similar activity arising from the acquisition of an item of property, plant, and equipment, or as a consequence of having used the item during a particular period for purposes other than to produce inventories are also included in the cost of an item of property, plant, and equipment.

IFRIC 1, ‘Changes in existing decommissioning, restoration and similar liabilities’, guides accounting for changes in decommissioning and restoration provisions, including capitalization of estimated costs.

Computer software that is integral to machinery or other fixed assets is treated as property, plant, and equipment.

This would include the operating system of a computer.

Software that is not an integral part of the related hardware is treated as an intangible asset.

Scope

Property, plant, and equipment are defined as:

“… tangible items that:

• is held for use in the production or supply of goods or services, for rental to others, or administrative purposes; and
• is expected to be used during more than one period.”

Property, plant, and equipment are accounted for under IAS 16, except where another IFRS requires or permits a different accounting treatment.

The standard does not apply to:

1. biological assets related to agricultural activity other than bearer plants.
2. Recognition and measurement of exploration and evaluation assets.
3. Mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative resources.
4. Property, plant, and equipment are classified as held for sale by IFRS 5.

However, the standard does apply to property, plant, and equipment used to develop or maintain the assets listed in (a) to (c).

Assets acquired under a lease are recognized and measured based on the guidance in IFRS 16. A lessee applies the depreciation requirements in IAS 16 in depreciating the right-of-use asset.

An entity that uses the cost model for investment property under IAS 40 applies IAS 16.

Classification of mineral rights as tangible or intangible assets The term ‘mineral rights’ is not defined in IFRS Standards. In practice, it is often used to refer to both an ‘intangible’ right to explore or mine and the ‘tangible‘ underlying mineral reserve. The illustrative examples accompanying IFRS 3 list ‘use rights‘ such as drilling rights as an example of a contract-based intangible asset that should be recognized separately from goodwill in a business combination. However, it is not always possible to distinguish the intangible right from the tangible element. In accordance with IAS 38, an entity should assess which element is more significant when an asset incorporates both intangible and tangible elements. For that reason, the entity should assess whether the underlying reserve or the right to mine is more significant. If the tangible resource/reserve is the more significant element, the combined mineral rights should be classified as tangible. Factors to consider in this assessment include: whether the rights are granted for extraction of the mineral resources; whether the rights include ownership of the land on which the mineral resources are located; and whether the rights are granted for exploration only. Investment property, including property being constructed or developed for future use as investment property, is within the scope of IAS 40. When an entity chooses to apply the cost model to investment properties under IAS 40, it should use the cost model as specified in IAS 16.

Hotel properties The question is often asked as to whether hotel properties should be classified as property, plant and equipment within the scope of IAS 16 or as investment properties within the scope of IAS 40. The key determinant is whether the owner acts primarily as the hotel operator or as a landlord. If the property owner’s primary source of income from the property depends on day-to-day or week-by-week occupancy of hotel rooms and usage of restaurants and other facilities, and the property owner is providing services directly to hotel guests and diners, the hotel is likely to be property held by the entity for use in the production of services, in which case IAS 16 applies. On the other hand, if the owner’s primary source of income from the property comes from longer-term leases (months and years rather than days or weeks), the hotel is likely to be an investment property, in which case IAS 40 applies. That is the case even if the property owner provides a relatively insignificant amount of ancillary services such as cleaning. Management should make the determination based on facts and circumstances. It is not a matter of accounting policy choice. IAS 40 acknowledges that it may be difficult to determine when ancillary services are so significant that a property does not qualify as an investment property. For example, the owner of the hotel may transfer certain responsibilities to a third party under a management contract. The terms of such management contracts vary widely. At one end of the spectrum, the owner’s position may, in substance, be that of a passive investor. At the other end of the spectrum, the owner may simply have outsourced certain day-to-day functions, while retaining significant exposure to variations in the cash flows generated by the operations of the hotel. In the latter case, classification as an investment property is not appropriate. Classification as an investment property may also be acceptable if the direct involvement of the entity in the operation of the property is short-term. For example, following the acquisition of a hotel, if the entity continues to operate it while seeking a suitable third-party manager, the operation of the hotel can be seen to be incidental to the underlying objective of investment return.

Base stock of assets It is common for restaurants and similar operations to maintain a base stock inventory of items such as silverware and dishes in an unchanging amount. Additions to the stock are recognized in profit or loss. On average, the turnover of the items is likely to exceed one year. These items are tangible assets held for use in the supply of goods and services and are expected to be used for more than one period. They are therefore appropriately classified as property, plant and equipment and should not be included in current assets.

Property, plant and equipment used in research activities Property, plant and equipment used in research activities should be accounted for in the same way as other property, plant and equipment under IAS 16. IAS 38, which requires all expenditure on research to be recognized as an expense when it is incurred, does not require that expenditure on property, plant and equipment used in research activities should be recognized in profit or loss when acquired. However, the depreciation of property, plant and equipment used in research activities constitutes a research expense to which IAS 38 applies.

Gold bullion held by a central bank Central banks commonly hold significant gold reserves to support the national currency. Such reserves are not traded and the levels frequently do not change from one year to the next. The gold bullion should be classified as property, plant and equipment, and accounted for under IAS 16, using either the cost model or the revaluation model. Gold bullion meets the definition of property, plant and equipment in that it is a tangible item, held for use in the supply of services (stabilization of the exchange rates for the benefit of entities operating in the jurisdiction) and can be expected to be used during more than one period. IFRS 9 Definition of a financial instrument: gold bullion (which is also included in the implementation guidance accompanying IAS 39) states that gold bullion “… is a commodity. Although bullion is highly liquid, there is no contractual right to receive cash or another financial asset inherent in bullion”. Accordingly, gold bullion is not a financial instrument and is outside the scope of IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). In the circumstances described, the gold bullion is not held for sale; it is not in the process of production for sale, nor is it to be consumed in a production process or the rendering of services. Therefore, it does not meet the definition of inventories in IAS 2.

Bearer plants related to agricultural activity Bearer plants included within the scope of IAS 16 Although biological assets related to agricultural activity are generally excluded from the scope of IAS 16 (and accounted for in accordance with IAS 41), an exception applies for ‘bearer plants’. A bearer plant is a living plant that: is used in the production or supply of agricultural produce; is expected to bear produce for more than one period; and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. The following additional guidance on the identification of bearer plants is included in IAS 41: the following are not bearer plants (and, consequently, are within the scope of IAS 41 rather than IAS 16): plants cultivated to be harvested as agricultural produce (e.g., trees grown for use as lumber); plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (e.g., trees that are cultivated both for their fruit and their lumber); and annual crops (e.g., maize and wheat); and when bearer plants are no longer used to bear produce, they may be cut down and sold as scrap (e.g., for use as firewood). Such incidental scrap sales would not prevent a plant from satisfying the definition of a bearer plant. Bearer plants are accounted for under IAS 16 rather than IAS 41 because, once mature, they are held by an entity solely to grow produce over their productive life. Under IAS 16, entities have a choice to measure these assets subsequent to initial recognition using either a cost model or a revaluation model. The Board specifically considered the case of crops that are perennial plants because their roots remain in the ground to sprout for the next period’s crop; an example would be sugar cane if its roots are retained for a second harvest. The Board agreed that, if an entity retains the roots to bear produce for more than one period and the roots are not later sold, the roots would meet the definition of a bearer plant.

Livestock used as bearer biological assets The scope of IAS 16 extends only to bearer plants. Livestock held for breeding purposes only, with only a remote likelihood that it will ever be sold, should be accounted for under IAS 41. The Board considers that, unlike plants, livestock is not attached to land and there is usually an active market for livestock, meaning that fair value information is more likely to be readily available and easier to apply than cost measurement.

Plants with more than one potential use Plants that have more than one potential use (e.g., trees cultivated both for their lumber and their fruit) are not bearer plants and should be accounted for under IAS 41. The Basis for Conclusions on IAS 16 clarifies that bearer plants within the scope of IAS 16 are those that are solely used in the production or supply of agricultural produce. If plants are intended to be sold as agricultural produce after they have been used as bearer plants for a period of time, apart from incidental scrap sales, they are not considered to be solely used in the production or supply of agricultural produce and, consequently, should be accounted for under IAS 41, including during the period for which they are used as bearer plants.

Bearer plants that are not yet mature Bearer plants that are not yet mature should be accounted for under IAS 16 provided that it is intended that they will only be used in the production or supply of agricultural produce. The Board considers that, although such plants continue to undergo biological transformation, they should be accounted for under IAS 16 throughout their lives.

Produce growing on a bearer plant Consistent with the requirements for other biological assets, produce growing on a bearer plant should be accounted for at fair value less costs to sell under IAS 41 from the date it starts to grow (unless the presumption in IAS 41 that fair value can be measured reliably has been rebutted).

Unit of measure for bearer plants The Board considered whether guidance was required regarding the unit of measure for bearer plants (e.g., is it the individual plant or some larger aggregation, such as a field or a planting cycle?). Specific issues arise in this regard because agricultural activity is often a continuous process, meaning that older plants are continuously removed from service and replaced. If bearer plants are accounted for using a cost model, this continuous process needs to be made discrete. Without providing specific guidance, the Board noted that applying the recognition criteria in IAS 16 to bearer plants will require judgement. This would give an entity flexibility, depending on its circumstances, to decide how to aggregate individual plants for the purpose of determining a measurable unit of bearer plants.