IAS 16 and IAS 38

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Non-current assets
The basic things you
need to know
Agenda/Contents
IAS 16 - Property, plant and equipment
IAS 38 - Intangible assets
PwC's Academy July 2016

PwC Slide 2
Definitions
Property, plant &

equipment Investment property Intangible asset
Tangible assets that: Property (land or a An identifiable non-
- are held for use in the building - or part of a monetary asset without
production or supply of building - or both) held to physical substance
goods or services, for earn rentals or for capital
rental to others, or for appreciation or both,
administrative rather than for:
purposes; and - use in the production or
- are expected to be used supply of goods or
during more than one services or for
period administrative
purposes; or
- sale in the ordinary
course of business

PwC Slide 3
Land and buildings
Analysis of a building
• Assuming that an entity owns a

building that is:
- partly held for own-use (eg. a
floor is used for
administration purposes), and
- partly held for rental or
capital appreciation
the building must be analysed
between the element that is PPE,
and the element that is
investment property

PwC Slide 4
IAS 16 - Property, plant & equipment

PwC Slide 5
Scope
• IAS 16 applies in accounting for PPE except when another Standard

requires or permits a different accounting treatment
• It does not apply to:
- property, plant and equipment classified as held for sale (IFRS 5)
- biological assets related to agricultural activity (IAS 41)
- the recognition and measurement of exploration and evaluation
assets (IFRS 6)
- mineral rights or reserves such as oil and natural gas
… but does apply to PPE used to develop or maintain the assets
described above

PwC Slide 6
Definitions
Cost the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of
its acquisition or construction
Fair value Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date (IFRS13)
Carrying the amount at which an asset is recognised after deducting any

amount accumulated depreciation and accumulated impairment losses
Depreciation the systematic allocation of the depreciable amount of an asset

over its useful life
Impairment the amount by which the carrying amount of an asset exceeds its
loss recoverable amount

PwC Slide 7
Definitions (continued)
Depreciable the cost of an asset, or other amount substituted for cost, less its
amount residual value
Residual value the estimated amount that an entity would currently obtain from
disposal of the asset after deducting the estimated costs of
disposal
Useful life the period over which an asset is expected to be available for use
by an entity; or
the number of production or similar units expected to be
obtained from the asset by an entity
Recoverable the higher of an asset’s net selling price and its value in use
amount

PwC Slide 8
Recognition
• An asset is defined as:
- A resource controlled by a company
- As a result of a past event
- From which future economic benefits are expected to flow to the
entity
• The cost of an item of PPE is recognised as an asset if, and only if:
- it is probable that future economic benefits associated with the item will
flow to the entity; and
- the cost of the item can be measured reliably
• An entity does not recognise in the carrying amount of an item of PPE the
costs of the day-to-day servicing of the item
- rather, these costs are recognised in profit or loss as incurred (as ‘repairs
and maintenance’)

PwC Slide 9
Measurement at recognition
Elements of cost
• An item that qualifies for recognition as an asset shall initially be

recorded at its cost
• The cost of an item of property, plant and equipment comprises:
- its purchase price, including import duties/non-refundable
purchase taxes, after deducting discounts and rebates
- any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating
- the initial estimate of the costs of dismantling and removing the
item and restoring the site on which it is located

PwC Slide 10
Measurement at recognition
Elements of cost: quick exercise
• ‘Entity A’ purchased new plant and machinery and incurred the

following costs:
Nature of expense Capitalise?

Reinforcement of factory floor P
Freight P
Asset’s list price P
Trade discount obtained (i.e. a negative amt) P
Installation costs P
Staff training (to operate the asset) O

PwC Slide 11
Elements of cost
Examples of directly attributable costs
• Examples of directly attributable costs are:

- costs of employee benefits arising directly from the construction or
acquisition of the item of PPE
- costs of site preparation
- initial delivery and handling costs
- installation and assembly costs
- costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while
bringing the asset to that location and condition (such as samples
produced during testing)
- professional fees

PwC Slide 12
Elements of cost
Costs which may not be capitalised
• Examples of costs that are not costs of an item of PPE are:

- costs of introducing a new product or service (eg. costs of
advertising and promotional activities)
- costs of conducting business in a new location or with a new class
of customer (eg. costs of staff training)
- administration and other general overhead costs
• Costs incurred in using or redeploying an item are not included in the
carrying amount of that item

PwC Slide 13
Elements of cost
Ancillary activities
• Some operations occur in connection with the construction or

development of an item of PPE, but are not necessary to bring the
item to the location and condition necessary for it to be capable of
operating in the manner intended by management
- for example, income may be earned through using a building site
as a car park until construction starts
• Because incidental operations are not necessary, the income and
related expenses of incidental operations are recognised in profit or
loss and included in their respective classifications of income and
expense

PwC Slide 14
Elements of cost
Self-constructed assets
• The cost of a self-constructed asset is determined using the same

principles as for an acquired asset
• If an entity makes similar assets for sale in the normal course of
business, the cost of the asset is usually the same as the cost of
constructing an asset for sale (IAS 2)
• Any internal profits are eliminated in arriving at such costs.
Similarly, the cost of abnormal amounts of wasted material, labour,
or other resources incurred in self-constructing an asset is not
included in the cost of the asset

PwC Slide 15
Elements of cost
Barter agreements
• The cost of an item of PPE is the cash price equivalent at the

recognition date
• One or more items of PPE may be acquired in exchange for a non-
monetary asset or assets, or a combination of monetary and non-
monetary assets. The cost of such an item of PPE is measured at fair
value unless:
- the exchange transaction lacks commercial substance, or
- the fair value of neither the asset received nor the asset given up is
reliably measurable
• If the acquired item is not measured at fair value, its cost is measured
at the carrying amount of the asset given up

PwC Slide 16
Barter agreements
Commercial substance
• The decision as to whether or not a transaction has commercial

substance depends on the extent to which the entity’s future cash
flows are expected to change as a result of the transaction
• A transaction has commercial substance if the difference in either of
the two points below is significant relative to the fair value of the
assets exchanged:
- the risk, timing and amount of the cash flows of the asset received
differs from those of the asset given up
- the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its
useful life of the part of the entity’s operations affected by the
transaction changes as a result of the exchange

PwC Slide 17
Barter agreements
Commercial substance
• The decision as to whether or not a transaction has commercial

For example, an entity might exchange a factory that is fully
substance depends on the extent to which the entity’s future cash
operational in exchange for a greenfield site on which it
flows are expected to change as a result of the transaction
intends to construct a new factory. The cash flows from the
• A transaction
operationalhas commercial
assets substance
of the factory givenifup
theare
difference in either of
quite different
the two points below is significant
in configuration relative
from those of thetogreenfield
the fair value
site of the
assets exchanged:
- the risk, timing and amount of the cash flows of the asset received
differs from those of the asset given up
- the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its
useful life of the part of the entity’s operations affected by the
transaction changes as a result of the exchange

PwC Slide 18
Barter agreements
Transactions that lack commercial substance
• Where a transaction lacks commercial substance, no gain or loss is

recognised on the barter transaction
- the initial carrying amount of the assets acquired must equal the
carrying amount of the assets that are transferred
• For example, Entity A exchanges the following assets:
- transfer out: asset carried at €10,000 and valued at €12,000
- transfer in: cash of €4,000 and another asset valued at €7,500
• Accounting entries:
Dr Cash 4,000
Cr Non-current asset 10,000
Dr Non-current asset 6,000
PwC Slide 19
Measurement after recognition
Measurement models
• IAS 16 permits two accounting models:

- cost model
- revaluation model
• An entity must choose the cost model or the revaluation model as its
accounting policy
- accounting policy applies to an entire class of PPE
A class of property, plant and Examples may include: land and

equipment is a grouping of buildings; machinery; aircraft;
assets of a similar nature and motor vehicles; furniture and
use in an entity’s operations fixtures; and office equipment

PwC Slide 20
Cost model
• Under the cost model, an item of PPE is carried at its cost less any
accumulated:
- depreciation, and
- impairment losses

PwC Slide 21
Depreciation
• Depreciation is the systematic allocation of an asset’s cost (less

residual value, if any) over its useful life
• The deprecation charge for each period is recognised in profit or loss
unless it is included in the carrying amount of another asset
- eg. depreciation included in factory overheads absorbed in the
carrying amount of inventories
• A variety of depreciation methods can be used to allocate the
depreciable amount of an asset on a systematic basis over its useful
life. These methods include the
- straight-line method, Eg. €1,000 or 10% p.a.
- diminishing balance method, and Eg. 15% of closing BV p.a.
- the units of production method Depreciation is based
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on output levels July 2016
PwC Slide 22
Depreciation
Straight line method
• Assume computer equipment is bought at a cost of €2,000

• Useful life is 3 years, and there is a residual value of €200
€
Acquisition date 2,000
Depreciation charge in year 1 (600)
Carrying amount at end of year 1 1,400
Constant
charge
Carrying amount at end of year 2 800

PwC Slide 23
Depreciation
Diminishing balance method
• Formula for calculating depreciation rate is:
residual value
1 N
cost of asset
where N is the useful life

• In the previous example, this is worked out as
200
13  53 .58 %
2,000

PwC Slide 24
Depreciation
Diminishing balance method (continued)
• Assume computer equipment is bought at a cost of €2,000

• Useful life is 3 years, and there is a residual value of €200
€
Depreciation charge in year 1 (53.58%) (1,072)
Depreciation charge in year 2 (53.58%) Constant (497)
percentage
Depreciation charge in year 3 (53.58%) (231)

PwC Slide 25
Depreciation
Units of production method
• Assume manufacturing equipment is bought at a cost of €10,000

• Equipment’s useful life is expected to be 20,000 units of production
€
Depreciation charge in year 1 (2,000 units produced) (1,000)

PwC Slide 26
Depreciation
Choice of a method
• The depreciation method used must reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity
• The depreciation method applied to an asset must be reviewed at
least at each financial year-end
- if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the
asset, the method must be changed to reflect the changed pattern

PwC Slide 27
Depreciation
Changes in estimates
• The residual value and the useful life of an asset are estimated when
the asset is acquired
- requirement to be reviewed at least at each financial year-end
• If subsequent expectations differ from previous estimates, the
change(s) are accounted for as a change in an accounting estimate in
accordance with IAS 8
- the change is reflected prospectively, i.e. past accounting entries
are not amended

PwC Slide 28
Depreciation
When depreciation should be charged
• Depreciation of an asset begins when it is available for use

- i.e. when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management
• Depreciation is a matching of the consumption of an asset to the
charge in the income statement
- depreciation is recognised even if the fair value of the asset exceeds
its carrying amount
- repairs and maintenance of an asset do not negate the need to
depreciate an asset
• Depreciation does not cease when the asset becomes idle or is retired
from active use (unless the asset is fully depreciated)

PwC Slide 29
Depreciation
Separate components
• Each part of an item of PPE with

a cost that is significant in
relation to the total cost of the
item must be depreciated
separately
- eg. in the case of an
aeroplane, the following
components will be
depreciated at different rates,
based on their useful life:
◦ fuselage
◦ engines
◦ seating/fittings
PwC Slide 30
Depreciation
Separate components: land and buildings
• Land and buildings are separable assets and are accounted for
separately, even when they are acquired together
- with some exceptions, such as quarries, mines and sites used for
landfill, land has an unlimited useful life and therefore is not
depreciated
- buildings have a limited useful life and therefore are depreciable
assets
• An increase in the value of the land on which a building stands does
not generally affect the determination of the depreciable amount of
the building

PwC Slide 31
Impairment
• An entity applies IAS 36, Impairment of Assets to determine whether

an item of PPE is impaired,
• That standard explains how an entity reviews the carrying amount of
its assets, how it determines the recoverable amount of an asset, and
when it recognises, or reverses, the recognition of, an impairment
loss
• Compensation from third parties for items of PPE that were
impaired, lost or given up is included in profit or loss when the
compensation becomes receivable

PwC Slide 32
Revaluation model
First revaluation
Acquisition date date Subsequent dates
PPE recorded PPE carried at PPE carried at

at cost (less revalued amount revalued
subsequent amount
Revalued amount
depreciation /
= fair value at
impairment
revaluation date
losses)
less subsequent
accumulated
depreciation /
impairment losses
PwC Slide 33
Revaluation model
Example
Background information
• non-current asset purchased on 1 March 2010
• cost price analysed as follows:
€
List price 48,000
Trade discount (2,000)
Freight costs 3,000
Installation costs incurred internally 5,000
54,000
• useful life of 10 years; residual value of €9,000. Straight line method
to be applied
PwC Slide 34
Revaluation model
Example (continued)
• accounting policy is to charge a full year’s depreciation in the year of

purchase and no depreciation is the year of retirement or sale
• accounting policy to revalue equipment
- no revaluations required in 2010, 2011 and 2012
- valued at €42,000 on 31 December 2013, with no change in
estimated useful life and residual value
• revaluation surplus is transferred to retained earnings as the asset is
used
• year end is 31 December
Required
• accounting effect at 31 December 2010, 2013 and 2014

PwC Slide 35
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
Depreciation to 31 December 2010 (4,500) -
Carrying amount on 31 December 2010 49,500 -
Depreciation to 31 December 2013 (3 years) (13,500) -
Carrying amount prior to revaluation 36,000 -
Revaluation surplus 6,000 6,000
Carrying amount on 31 December 2013 42,000 6,000
Transfer to retained earnings - (1,000)

PwC Slide 36
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
Depreciation is initially calculated as
Depreciation to 31 December
depreciable amount 2013 (3 years)
(54,000 - (13,500) -
Carrying9,000)
amount / prior
usefultolife (10 years)
revaluation 36,000 -
There is no change in depreciation
Depreciation to 31 there
rate until December 2014 in
is a change (5,500) -
carrying
Transfer amount,
to retained or estimates of
earnings - (1,000)
Carrying residual
amount on value or useful2014
31 December life 36,500 5,000

PwC Slide 37
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
The revaluation surplus is the
Depreciation to 31between
difference December 2010
the fair value (4,500) -
Carrying amountand
(€42,000) on 31
theDecember
carrying2010
amount 49,500 -
Depreciation to 31(€36,000)
December 2013 (3 years) (13,500) -
The revaluation surplus is
Depreciation
recognisedto 31
inDecember 2014 reserve:
a revaluation (5,500) -
Transfer to(Dr Non-current
retained earnings asset; - (1,000)
Cr Revaluation
Carrying amount reserve)
on 31 December 2014 36,500 5,000

PwC Slide 38
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
Subsequent to the revaluation,
depreciation 2010 as
is calculated (4,500) -
Carrying amount onamount
depreciable 31 December 2010 -
(€42,000 49,500 -
€9,000)to/31
Depreciation remaining
Decemberuseful
2013 (3life (6
years) (13,500) -
years)
This represents an annual
depreciation 2014
charge of €5,500, (5,500) -
which
Transfer is €1,000
to retained greater than the
earnings - (1,000)
Carryingoriginal
amount depreciation
on 31 Decembercharge
2014 36,500 5,000

PwC Slide 39
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
The additional depreciation charge
Depreciation to 31 *December
of €1,000 2010years
6 remaining (4,500) -
Carrying amount nothing
represents on 31 December 2010the
other than 49,500 -
revaluation
Depreciation surplus,2013
to 31 December which is
(3 years) (13,500) -
credited
Carrying to the
amount priorrevaluation reserve
to revaluation 36,000 -
An entity is allowed to transfer an
Depreciation
amount to 31 December
equivalent 2014
to the increased (5,500) -
Transferdepreciation
to retained earnings
charge from the - (1,000)
revaluation
Carrying amount onreserve to retained
31 December 2014 36,500 5,000
earnings
PwC Slide 40
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
The net effect on retained earnings,
subsequent to the revaluation
surplus, is that these are decreased
by an annual 2013 charge
depreciation (3 years) (13,500) -
ofamount
Carrying €5,500prior
and to
increased by an
revaluation 36,000 -
annualsurplus
Revaluation transfer of €1,000, i.e. an 6,000 6,000
overall decrease of €4,500, which
is equivalent to the original
position

PwC Slide 41
Revaluation model
Example (continued)
Carrying Rev’n
amount reserve
Cost on 1 March 2010 54,000 -
Upon revaluation, the accumulated
depreciation is offset 2010
against the (4,500) -
gross on
Carrying amount carrying amount
31 December 2010 49,500 -
Depreciation to 31 December 2013 (3 years) (13,500) -

PwC Slide 42
Revaluation model
Example (continued)
The following accounting entries would be required upon revaluation:
Dr Non-current asset (accumulated depreciation) 18,000

Cr Non-current asset (cost) 18,000
Being the offset of accumulated depreciation against the asset’s cost
(which will now represent revalued amount)
Dr Non-current asset (cost) 6,000

Cr Revaluation reserve (in equity) 6,000
Being the revaluation surplus upon revaluation

PwC Slide 43
Revaluation model
Sources of fair value
Type of asset Fair value considerations

Land and buildings Usually determined from market-based
evidence by appraisal that is normally
undertaken by professionally qualified valuers
Plant and equipment Usually determined by appraisal

PwC Slide 44
Revaluation model
Frequency of revaluations
• Revaluations must be carried out regularly so that the carrying

amount of an asset does not differ materially from its fair value at the
end of the reporting period
• The frequency of revaluations depends upon the changes in fair
values of the items of PPE being revalued
- when the fair value of a revalued asset differs materially from its
carrying amount, a further revaluation is required

PwC Slide 45
Revaluation model
Assets subject to revaluation
• If an item of PPE is revalued, the entire class of PPE to which that

asset belongs must be revalued
- decrease of carrying amount Expense
- increase of carrying amount Equity (Revaluation surplus)
• However, on subsequent revaluations:
- the increase is recognised in profit or loss to the extent that it
reverses a revaluation decrease of the same asset previously
recognised in profit or loss
- the decrease is debited directly to equity under the heading of
revaluation surplus to the extent of any credit balance existing in
the revaluation surplus in respect of that asset

PwC Slide 46
Revaluation model
Balance in the revaluation reserve
Carrying Rev’n Retained

amount reserve earnings
before Fair (cumula- (cumula-
rev’n value tive) tive)
Purchase
100 100 - -
Revaluation 1
80 85 5 -
Revaluation 2
64 50 - (9)
Revaluation 3
30 44 5 -

PwC Slide 47
Revaluation model
Deferred tax
• Where the revaluation model is applied, deferred tax considerations

must be made
• Deferred tax is calculated at a rate which reflects the expected
manner of recovery of the asset
- the expected manner of recovery of PPE is generally through
consumption/continued use (i.e. depreciation) – deferred tax is
provided for at 35%
- the land element of property is generally not expected to be
recovered through consumption/continued use – deferred tax
therefore reflects an expected mode of recovery through sale
• Deferred tax is recognised directly in other comprehensive income

PwC Slide 48
Depreciation models
Switching between models
• The choice of a model is an accounting policy choice

• Voluntary changes in accounting policies must be carried out in
- a change in accounting policy is therefore only permitted if it
results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events
or conditions on the entity’s:
◦ financial position,
◦ financial performance, or
◦ cash flows
- a change from the cost model to the revaluation model must
however be applied prospectively
PwC Slide 49
Derecognition
• The carrying amount of an item of PPE is derecognised:

- on disposal; or
- when no future economic benefits are expected from its use or
disposal
• The gain or loss arising from derecognition is included in profit or
loss when the item is derecognised
- gains may not be classified as revenue
◦ an exception exists if, in the course of its ordinary activities, an
entity routinely sells items of PPE that it has previously held for
rental to others
• Gains or losses = net disposal proceeds - carrying amount

PwC Slide 50
Derecognition
Example
• Asset purchased in a previous period has a carrying amount of

€5,000
• Disposal proceeds are €4,000
• The gain/loss on disposal is calculated as follows:
€
Disposal proceeds 4,000
Carrying amount (5,000)
Loss on disposal (1,000)
Dr Cash 4,000
Dr Loss on disposal (income statement) 1,000
Cr Non-current asset 5,000
PwC Slide 51
Disclosure
An overview
• The financial statements must disclose, for each class of PPE:

- accounting policy (including measurement bases, depreciation
methods, and useful lives or depreciation rates)
Measurement basis (in this case at cost, with
Land and Buildings being revalued)
Depreciation rates used
Source: Simonds Farsons Cisk p.l.c. 31 January 2011

Depreciation method
PwC Slide 52
Disclosure
An overview (continued)

- the gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning
and end of the period, together with a reconciliation of the opening
to the closing balances
- depreciation and impairment charges for the year
- nature and effect of changes in accounting estimates

PwC Slide 53
Disclosure

- the gross carryingCarrying
amount andamount
the accumulated depreciation
and accumulated
and end of the period,dep’n at thewith a reconciliation of the opening
together
beginning of the
year is reconciled
to that at the end
of the year

PwC Slide 54
Disclosure

- the gross carryingDepreciation
amount and andthe accumulated depreciation
any impairment
charges
and end of the period, for the
together with a reconciliation of the opening
year also need to
be disclosed...
...as do additions to
assets in the course
of construction

PwC Slide 55
Disclosure
Other disclosures
• The financial statements must also disclose information relating to:

- existence (and amounts) of restrictions on title, and PPE pledged
as security for liabilities
- expenditures recognised in the carrying amount of an item of PPE

in the course of its construction
- contractual commitments for the acquisition of PPE
- if applicable, compensation from third parties for items of PPE
that were impaired, lost or given up that is included in profit or
loss

PwC Slide 56
Disclosure
Other disclosures (continued)
• If items of PPE are stated at revalued amounts, the following must

also be disclosed:
- effective date of the revaluation
- whether an independent valuer was involved
- methods and significant assumptions applied
- extent to which the items’ fair values were determined directly by
reference to observable prices in an active market or recent market
transactions on arm’s length terms (or other valuation techniques)
- the carrying amount (by class) that would have been recognised
had the assets been carried under the cost model
- revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders
PwC Slide 57
Disclosure
Date of revaluation
Involvement of an Basis on which valuation was

independent architect arrived at (in this case open
market prices)

Carrying amount had the asset
been carried under the cost model

PwC Slide 58
IAS 38 Intangible assets

PwC Slide 59
Intangible assets
Introduction
• An intangible asset is an identifiable non-monetary asset without

physical substance
• The 3 critical attributes of an intangible asset are:
- Identifiability
- Control
- Future economic benefits

PwC Slide 60
Intangible assets
Identifiability
• An intangible asset is identifiable when it:

- is separable, i.e. is capable of being separated or divided from the
entity and sold, transferred, licensed, rented or exchanged, either
individually or together with a related contract, asset or liability; or
- arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from
other rights and obligations

PwC Slide 61
Intangible assets
Control and future economic benefits
Control
• An entity controls an asset if it has the power to obtain the future
economic benefits flowing from the underlying resource and to
restrict the access of others to those benefits
Future economic benefits

• May include revenue from sale of products or services, cost savings or
other benefits resulting from the use of the asset by the entity

PwC Slide 62
Examples of intangible assets
• Trade marks • Plays, operas, ballets

• Trade names • Literary works and titles
• Internet domain names • Musical works
• Newspaper mastheads • Pictures and photographs
• Non-competition agreements • Video and audiovisual material
• Customer lists - valuable, and in • Licensing and royalty
some markets are frequently agreements
leased or exchanged (subject of • Operating and broadcasting
course to legislation!) rights
• Customer contracts and the
related relationships

PwC Slide 63
Assets that may not be capitalised as intangibles
• Expenditure incurred on the following may not be capitalised as

intangible assets:
- start-up activities (eg. legal and secretarial costs incurred in
establishing a legal entity, expenditure to open a new facility or
business, or launch new products)
- training activities
- advertising and promotional activities
- relocating or reorganising part or all of entity

PwC Slide 64
Similarities between Intangible assets and PPE
• There are a number of similarities between intangible assets and

PPE:
- initial recognition (at cost) The major differences, on
which we will focus in this
- two accounting policy choices:
session, are the concepts of
◦ cost model finite vs indefinite life assets,
◦ fair value model and internally generated
assets
- (in the case of intangible assets with finite lives) method of
application of the above models
- impairment considerations
- disposals
- disclosure requirements of PPE are also applicable to IP
PwC Slide 65
Intangible assets
Recognition
*Is it probable that the expected

future economic benefits no
attributable to the asset will flow
to the entity?
Do not
yes recognise as
intangible
no asset
Can the cost of the asset be
measured reliably?
yes *An entity must assess the probability of

expected future economic benefits using
reasonable and supportable assumptions that
Recognise as intangible asset if represent management’s best estimate of the set
of economic conditions that will exist over the
other criteria is also met useful life of the asset

PwC Slide 66
Recognition and measurement
Internally generated intangible assets
• Internally generated intangible assets are analysed into two phases:

Research The original and planned investigation undertaken
with the prospect of gaining new scientific or
technical knowledge and understanding
Development The application of research findings or other

knowledge to a plan or design for the production of
new or substantially improved materials, devices,
products, processes, systems or services before the
start of commercial production or use

PwC Slide 67
Research and development phase
Process of generating an
intangible asset
No intangible asset
a) Research phase
may be recognised
Intangible asset may be recognised when it

demonstrates:
• technical feasibility of the project;
• its intention to complete the developments;
b) Development phase • its ability to use or sell the intangible asset;
• how the intangible asset will generate probable
future economic benefits;
• the availability of resources to complete the
development; and
• its ability to measure the attributable
expenditure reliably
PwC Slide 68
Research and development phase: expensed costs
• Any expenditure written off during the research or development

phase cannot subsequently be capitalised if the project meets the
criteria for recognition at a later date

PwC Slide 69
Research and development phase: disclosure
• Extract from an accounting policy for intangible assets
Recognition of
development costs is
subject to meeting the
specified criteria
Source:
GO p.l.c. 31 December 2011
PwC Slide 70
Costs that may not be capitalised
• The costs relating to many internally generated intangible items

cannot be capitalised and are expensed as incurred. This includes
expenditures on internally generated:
- brands
- mastheads
- customer lists
- publishing titles
- goodwill

PwC Slide 71
Subsequent measurement
• Similar to PPE, an entity must choose as its accounting policy:

- the cost model, or
- the revaluation model
• If an intangible asset is accounted for using the revaluation model, all
the other assets in its class must also be accounted for using the same
model, unless there is no active market for those assets
• Both the cost model and the revaluation model are applied in a
consistent manner with the equivalent models in IAS 16
An important distinction must

however be made between
intangible assets with a finite life,
and those with an indefinite life
PwC Slide 72
Finite vs indefinite useful life assets
Intangible assets with a Intangible assets with an

finite useful life indefinite useful life
• Have a limited period of benefit • No foreseeable limit to the
to the entity period over which the asset is
expected to generate net cash
inflows for the entity
• Amortisation is carried out on a
• Not amortised
systematic basis over the useful
life of the intangible asset
• Considered for impairment • Tested annually for impairment

when there is an indication that and whenever there is an
the asset has been impaired indication of impairment

PwC Slide 73
Indefinite useful life assets
• Extract from an accounting policy for intangible assets
An entity must test

the IA for
impairment at least
annually or
whenever there is
an impairment
indicator
Source:
GO p.l.c. 31 December 2011

PwC Slide 74
Amortisation
Changes in estimates
• Similar to PPE, the residual value and the useful life of an asset are
estimated when the asset is acquired
- requirement to be reviewed at least at each financial year-end
• If subsequent expectations differ from previous estimates, the
change(s) are accounted for as a change in an accounting estimate in
- the change is reflected prospectively, i.e. past accounting entries
are not amended

PwC Slide 75
Retirements and disposals
• Similar to PPE, an intangible asset is derecognised:

- on disposal; or
- when no future economic benefits are expected from its use or
disposal.
• The gain or loss upon derecognition is equal to the difference
between net disposal proceeds and carrying amount of the asset
- this is recognised in profit or loss when asset is derecognised
- gains may not be classified as revenue

PwC Slide 76
Disclosures
An overview
• The financial statements must disclose, for each class of intangible

asset, and distinguishing between internally generated intangible
assets and other intangible assets:
- accounting policy, including:
◦ whether the useful lives are indefinite or finite and, if finite, the
useful lives or the amortisation rates used
◦ the amortisation methods used for intangible assets with finite
useful lives
- the gross carrying amount and any accumulated amortisation
and end of the period, together with a reconciliation from opening
to closing balances

PwC Slide 77
Intangible assets
Disclosure: accounting policy
Intangible assets
are initially
measured at cost
The value of
intangible assets
is amortised over
its useful life
Source: GO p.l.c. 31 December 2011

PwC Slide 78
Disclosures
Other disclosures
An entity must also disclose:

• the line item(s) of the income statement in which any amortisation of
intangible assets is included
• for an intangible asset assessed as having an indefinite useful life, the
carrying amount of that asset and the reasons supporting the
assessment of an indefinite useful life
- a description of the factor(s) that played a significant role in
determining that the asset has an indefinite useful life must be
provided
• a description, the carrying amount and remaining amortisation
period of any individual intangible asset that is material to the
entity’s financial statements

PwC Slide 79
Disclosures
• for intangible assets acquired by way of a government grant and

initially recognised at fair value:
- the fair value initially recognised for these assets
- their carrying amount, and
- the measurement basis (cost or revaluation model)
• the existence and carrying amounts of intangible assets whose title is
restricted and the carrying amounts of intangible assets pledged as
security for liabilities
• the amount of contractual commitments for the acquisition of
intangible assets
• the aggregate amount of research and development expenditure
recognised as an expense during the period
PwC Slide 80
Disclosures
Other disclosures: revaluation model
Similar to PPE
• If intangible assets are accounted for at revalued amounts, an entity
must disclose the following:
- by class of intangible assets:
◦ the effective date of the revaluation
◦ the carrying amount of revalued intangible assets, and
◦ the carrying amount that would have been recognised had the
revalued class of intangible assets been measured after
recognition using the cost model,
- the methods and significant assumptions applied in estimating the
assets’ fair values

PwC Slide 81
Disclosures
Other disclosures: revaluation model (continued)
- the amount of the revaluation surplus that relates to intangible

assets at the beginning and end of the period, indicating the
changes during the period and any restrictions on the distribution
of the balance to shareholders; and

PwC Slide 82
Disclosures
Voluntary disclosures
• An entity is encouraged, but not required, to disclose the following

information:
- a description of any fully amortised intangible asset that is still in
use; and
- a brief description of significant intangible assets controlled by the
entity but not recognised as assets because they did not meet the
recognition criteria in this Standard or because they were acquired
or generated before the version of IAS 38 Intangible Assets issued
in 1998 was effective

PwC Slide 83
www.pwcacademy.com.mt
This material has been prepared for general guidance on matters of interest only, and does not
constitute professional advice. You should not act upon the information contained in this
material without obtaining specific professional advice. No representation or warranty (express
or implied) is given as to the accuracy or completeness of the information contained in this
material, and, to the extent permitted by law, PricewaterhouseCoopers, its members,
employees and agents do not accept or assume any liability, responsibility or duty of care for
any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this material or for any decision based on it.
© 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Malta member firm,
and may sometimes refer to the PwC network. Each member firm of which is a separate legal
entity. Please see www.pwc.com/structure for further details.

IAS 16 and IAS 38

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IAS 16 and IAS 38

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IAS 16 - Property, plant and equipment

IAS 38 - Intangible assets

PwC's Academy July 2016

Property, plant &

PwC's Academy July 2016

• Assuming that an entity owns a

PwC's Academy July 2016

PwC's Academy July 2016

• IAS 16 applies in accounting for PPE except when another Standard

PwC's Academy July 2016

Carrying the amount at which an asset is recognised after deducting any

Depreciation the systematic allocation of the depreciable amount of an asset

PwC's Academy July 2016

PwC's Academy July 2016

PwC's Academy July 2016

• An item that qualifies for recognition as an asset shall initially be

PwC's Academy July 2016

• ‘Entity A’ purchased new plant and machinery and incurred the

Nature of expense Capitalise?

PwC's Academy July 2016

• Examples of directly attributable costs are:

PwC's Academy July 2016

• Examples of costs that are not costs of an item of PPE are:

PwC's Academy July 2016

• Some operations occur in connection with the construction or

PwC's Academy July 2016

• The cost of a self-constructed asset is determined using the same

PwC's Academy July 2016

• The cost of an item of PPE is the cash price equivalent at the

PwC's Academy July 2016

• The decision as to whether or not a transaction has commercial

PwC's Academy July 2016

• The decision as to whether or not a transaction has commercial

PwC's Academy July 2016

• Where a transaction lacks commercial substance, no gain or loss is

• IAS 16 permits two accounting models:

A class of property, plant and Examples may include: land and

PwC's Academy July 2016

PwC's Academy July 2016

• Depreciation is the systematic allocation of an asset’s cost (less

• Assume computer equipment is bought at a cost of €2,000

PwC's Academy July 2016

• Formula for calculating depreciation rate is:

where N is the useful life

PwC's Academy July 2016

• Assume computer equipment is bought at a cost of €2,000

PwC's Academy July 2016

• Assume manufacturing equipment is bought at a cost of €10,000

PwC's Academy July 2016

PwC's Academy July 2016

PwC's Academy July 2016

• Depreciation of an asset begins when it is available for use

PwC's Academy July 2016

• Each part of an item of PPE with

PwC's Academy July 2016

• An entity applies IAS 36, Impairment of Assets to determine whether

PwC's Academy July 2016

PPE recorded PPE carried at PPE carried at

• accounting policy is to charge a full year’s depreciation in the year of

PwC's Academy July 2016

PwC's Academy July 2016

PwC's Academy July 2016

PwC's Academy July 2016