F1 5.04 IAS 16 Property, Plant and Equipment part 1

In this session we shall begin looking at the requirements of IAS 16 Property, Plant and Equipment. We shall consider the definition of property, plant and equipment, how it is recognised and initially valued. We shall also look at how subsequent expenditure on items of property, plant and equipment should be treated.

Property, plant and equipment

Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to other or for administrative purposes and are expected to be used during more than one period.


Triton Ltd has purchased the following:

  • A laptop computer costing £2,000 that will be used for business purposes and is expected to last for three years
  • Safety equipment costing £500 that is used in the business’ production process. The equipment lasts a few months before it is replaced

Both the laptop and safety equipment are used for business purposes but their expected lives are significantly different. The laptop will last for three years whilst the safety equipment will only last for a few months. The company should only treat the laptop as an item of property, plant and equipment. The cost of the safety equipment will be treated as an expense.

Types of property, plant and equipment: Examples

Recognition of property, plant and equipment

IAS 16 tells us that “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.”


A company has recently acquired the following items which will be used profitably in its operations.

  • A spray painting booth purchased and installed at a cost of £8,000
  • A paint sprayer made by a member of staff in his spare time using parts cannibalized from old and unused paint sprayers

The cost of the spray painting booth can be measured reliably and it will provide the company with future economic benefits. It will therefore be recorded as property, plant and equipment by the company.

With respect to the cost of the materials and labour used in making the paint sprayer these have not been measured and because of the circumstances of its manufacture it would prove difficult to calculate its cost reliably. As such it should not be recognised as an item of property, plant and equipment.

Measurement at recognition

When a company first records an item of property, plant and equipment it will value the item at its cost.

A company was given some old office furniture by a friend of the company’s director. The furniture has an estimated market value of £200.
How will the value of the company’s property, plant and equipment be affected by this furniture?
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As the company was given the furniture it has no cost and will therefore make no difference to the value of the company’s property, plant and equipment.

Cost consists of the following elements:
  • Purchase price, import duties and non-refundable purchase taxes, after deducting trade discounts and rebates
  • Any costs directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; e.g.
    • Costs of any employees who construct the item
    • Costs of site preparation
    • Initial delivery and handling costs
    • Installation and assembly costs
    • Costs of testing
    • Profession fees
  • The initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located if there is an obligation to do so
Costs that should not be included
  • Day-to-day running or servicing costs, such as repairs or maintenance
  • Costs of opening a new facility
  • Costs of introducing a new product or service (including advertising and promotional costs)
  • Costs of conducting business in a new location or with a new class of customer (including costs of staff training)
  • Administration and other general overhead costs

Illustration 1

Pandion Ltd has purchased a piece of land for use as a quarry. The following amounts have been, or will be, incurred:

  • Cost of the land £4,800,000
  • Stamp duty land tax incurred on the purchase of land £214,500
  • Professional fees re the purchase and the planning application £85,000
  • Costs dismantling and removing the existing buildings on the site £50,000
  • Costs the launch party £15,000
  • Present value of the estimated costs of improving the site once its useful life has passed £620,000 (this was agreed in order to obtain planning consent for the site)

The cost to be treated as Property, Plant and Equipment would be as follows:

Illustration 2

Harmonia plc has purchased a machine and in doing so, has incurred the following costs:

  • The list price of the machine was £585,000 but a trade discount of £30,000 was negotiated and agreed
  • Costs of reinforcing the factory floor to carry the machine £7,000
  • Delivery and installation costs £12,500
  • Costs of insuring the machine for a year £3,800
  • Cost of a servicing plan £6,200
  • Testing costs £2,600

The cost to be treated as Property, Plant and Equipment would be as follows:

A VAT registered company has purchased a machine from overseas. The amount paid to the supplier for the machine was as follows:
Purchase price: £4,400
Negotiated discount: £400
1 year maintenance contract: £800
Delivery costs: £260
When the item arrived in the UK the company paid import duties of £1,100 and input VAT of £960.
Electrical work costing £70 was required before the machine could be used and £120 was spent testing that the machine was operating as expected.
What is the cost of the machine?
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The machine’s cost is £5,550, calculated as the purchase price less the discount, plus the delivery costs, import duty, electrical work and testing costs.

The input VAT will be excluded as this can be reclaimed by the VAT registered company and the maintenance contract will also be excluded as this is a running cost of the machine.

Subsequent expenditure on property, plant and equipment

Businesses will often incur costs on its existing items of property, plant and equipment. As mentioned previously, running and servicing costs should be treated as expenses but if the costs incurred improve the item beyond their normal condition then the cost should be capitalised (i.e. added to the cost of the property, plant and equipment).

For example, if a company built an extension to a factory the associated cost would be added to the company’s property as it is improving the property.

Another example would be a company that replaces a diesel engine in a delivery van with an electrical powerplant that reduces running costs. Again, the asset has been improved so the cost would be capitalised. If however, the old engine has been replaced with a similar diesel engine the asset would not have been improved beyond its normal condition and would the cost would have been treated as an expense.


Jason plc is considering whether the following costs should be capitalised and treated as property, plant and equipment or if they should be treated as expenses.

  1. New parts costing £25,000 have been fitted to a machine that is operating at a level that would be expected for its age and condition. These new parts are expected to increase the machine’s productive capacity from 1,500 to 2,400 units per hour
  2. Windows costing £12,500 at the company’s factory have been replaced with windows of a similar specification

The cost of the new parts for the machine will be capitalised as they increase the standard production capacity of the machine. The costs of the replacement windows however, would be treated as an expense as they simply maintain the factory in its normal condition.

A company has spent £520,000 on new parts for its production line equipment. The production line originally produced 820 units per hour but over time this had reduced to 740 units per hour. Following the installation of the new parts production levels have increased to 900 units per hour.
Should the cost of the new parts be treated as an expense or as property, plant and equipment?
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The costs incurred have resulted in the production line performing beyond its original capacity. They should therefore be treated as improvements to the asset and be added to the company’s property, plant and equipment.