Accounting for Property, Plant & Equipment: AASB 116

This assignment provides an in-depth analysis of the accounting requirements for property, plant, and equipment (PPE) as outlined in AASB 116. It covers topics such as recognition, measurement, depreciation, and disclosure, with a focus on practical application through the use of real-world examples from BHP Billiton's annual report.

Accounting for
Property, Plant &
Equipment

 The following conditions are to be satisfied
for recognition of any cost spent on PPE as
asset (AASB 116, para.7)
◦ Probable future economic benefits arising from
the PPE
◦ Reliable measurement of the cost
 Includes assets which do not directly
contribute in any future economic benefits
to the controlling entity (AASB 116, para.11)
Recognition

 Carrying amount of consumable and other
PPE required for continuous servicing would
not be recognised under PPE but rather as
expenses under “Repair & Maintenance”
(AASB 116, para.12)
 For frequently replaced or inspected parts,
derecognition of replaced parts and
previous inspections must be done (AASB
116, para.13,14)
Recognition (Contd..)

 A PPE recognised as asset is to be measured
at cost (AASB 116, para.15)
 For not-for-profit entities, asset may be
acquired for free and hence the fair value is
to be considered (AASB 116, para.15.1)
 Elements of Cost (AASB 116, para.16)
◦ Purchase Price
◦ Direct costs associated with transporting and
installing the asset
◦ Site restoration (including previous item removal)
Measurement (Acquired
Assets)

 Deployment costs incurred after the equipment
is in place initially (AASB 116, para.20)
◦ Relocation Costs
◦ Initial Operating Losses
◦ Incurred costs due to machine not being deployed
despite being in deployable condition
 Construction or Development cost related to
the asset which are incurred despite not being
considered necessary for intended use (AASB
116, para.21)
Costs that are not included

 Same principles apply as to acquired assets
 Internal profits are eliminated
 Any cost on wasted inputs such as raw
material, labour would not be considered in
the asset cost
 Borrowing costs in accordance with AASB
123 is included in the asset cost
Measurement (Self-Constructed
Asset)

 Following two choices available to reporting entity
(AASB 116, para.29)
◦ Cost Model – Cost Minus Accumulated Depreciation and
accumulated Impairment losses(if any) (AASB 116, para.30)
◦ Revaluation Model – Fair Value Minus Accumulated
Depreciation and accumulated Impairment losses(if any) (AASB
116, para.31)
 Policy cannot be selectively applied and cover entire
class of PPE
Measurement (After Initial
Recognition)

 Frequency: Revaluation to be done
whenever carrying value and fair value
significantly differ. Minimum is once in 3-5
years (para.34)
 Revaluation has to be carried out in a class
of PPE simultaneously (para. 36)
 Recognition of revaluation
◦ Increase/Decrease in revaluation amount
(para.39)
 Balance sheet – Revaluation Surplus (Equity)
 Income Statement – Comprehensive income
Revaluation Method
(Details)

 Depreciation to be charged separately to all
components of PPE having significant cost (para.43)
 Depreciation charge to be recognised in P&L
(para,48)
 Depreciation method to be decided by the reporting
entity considering the pattern of economic benefits
arising from asset in future (para.60)
 Method to be reviewed annually and change
permissible only if change in pattern (para.61)
Depreciation

 Measurement Bases (Determination of
Gross Amount)
 Depreciation Method
 Depreciation rates deployed
 Period beginning and ending carrying
amount & depreciation
 Reconciliation of carrying amount
 Restrictions on Title & Amount
 Construction related expense considered
part of carrying cost
Disclosure

 Contractual commitments for acquisition of
PPE
 Disclosures regarding Revaluation
◦ Effective Date
◦ Involvement of an independent valuer
◦ Carrying amount recognised under cost method
◦ Revaluation Surplus
Disclosure (Contd..)

BHP Billiton (Annual Report
FY17)

BHP Billiton (Exerpts)

BHP Billiton (Excerpts
contd..)

 AASB (2014), AASB 116- Property, Plant And Equipment, [online]
Available at http://
www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun
14_07-14.pdf
[Accessed March 26, 2018]
 AASB (2016), AASB 116, [online] Available at http://
www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun1
0_07-09.pdf
[Accessed March 26, 2018]
 Australian Government (2004), Property, Plant & Equipment, [online]
Available at https://www.legislation.gov.au/Details/F2005B00678
[Accessed March 26, 2018]
 BHP (2017) Annual Report 2017, [online] Available at
https://www.bhp.com/-/
media/documents/investors/annual-reports/2017/bhpannualreport201
7.pdf
[Accessed March 26, 2018]
 Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney:
McGraw-Hill
References