Beyond IAS 16

Understanding the nuances of accounting standards can be complex, especially when it comes to properties, plants, and equipment (PPE). In this video, I  discuss various classifications of PPE and their accounting treatments.

From assets used directly in business operations (IAS 16) to those rented out to others (IAS 40), each category has distinct valuation methods. PPE marked for disposal within 12 months falls under IFRS 5, while those bought for resale are governed by IAS 2.

Surprisingly, even properties intended for consumption, like agricultural produce (IAS 41), have specific accounting guidelines. Join me as I discuss these classifications and their implications on financial reporting.

You can watch the video of the podcast by clicking here ( @nasirfinancial)

Transcript

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all property plant and equipment are equal but some are more equal than others in his book Properties Farm George Orwell famously remarked on the complexity of accounting for various types of properties according to him not all properties plant and equipment fall under IAS sixteen this fictitious court which I just made up mirrors a reality of frequently encounter while teaching accounting while students can crunch numbers for different IFRS's like pros, they often miss out on understanding why these standards really matter and how they work together in real life it's like being great at knowing prices but not seeing the value behind them a little bit of Oscar there the accounting treatment of any properties hinges on its intended use and purpose which directly influences its valuation in financial statements which it is you have a building but it's accounting valuation changes based on why you bought it and what you are going to do about it it's not always under IAS sixteen property plant and equipped so here we go let's explore our metaphorical property farm to illustrate this phenomenon I'm your host NASIR and let's go we have different types of properties here properties for use in our business properties for use in someone's else's business properties that once we used in our business but are no longer needed and we want to get rid of them properties that we buy with the sole intention of resale and of course the mouth watering properties that are so good that you want to take a bite out of them so let's just get the first one property plant equipment bought with the sole intention of using it in the business will be under IAS sixteen property plant equipment these are the tangible asset beautifully serving the business from tractors to factory machinery and land and building. Intangible assets such as patents and licences will be under AS 38 now here's the beautiful thing about both of these standards both gives you the choice of either a cost or re valuation basis in both cases such properties are depreciated over it's useful economic life if the revaluation model is chosen then the revaluation is undertaking regularly which doesn't mean every year more on this, perhaps some other time let's stroll further and explore a different breed all to together these are properties we do not use in our business we rent them out to other businesses which utilise them in their operations and businesses therefore, are under IAS 40 investment property these assets are carefully managed for their rental income and capital appreciation potential ias 40 allows you to choose either a cost or a fair value model if you choose the cost option it is similar to IAS 16 i.e. you depreciate the asset over its useful economic life however if you choose a fair value model then no depreciation is charged any gaining losses due to the revaluation at the end of the year are reported directly in the profit loss statement for that year which is completely different from ias 16 revaluation model where gains are reported in other comprehensive income but hold your horses cows and chickens the plot thickens a bit as we encounter a herd of one's valued PPE members we have used them in our business until now sadly they are now marked for departure we want to get rid of them within the next 12 months time these properties have fallen under the shadows of ifrs 5 these assets should be valued at the lower of fair value less cost to sell and the caring amount usually impairment losses occur when assets are classified according to ifrs 5 so let's look like it's time for these property plant equipment assets to finally ditch their non current status and make a swift move to the current assets site of the pasture after all it's all about time they stop hanging out with the long term lounge and join the here and now crew let's explore a different breed altogether properties bought with the sole intention of resale these are the nomads of the accounting world drifting between the transactions and balance sheets governed by none other than IAS 2 inventories from machinery equipments everything is included if bought with the sole intention of resale such properties will be accounted for at the lower of cost and net realisable value and finally we can now talk about the most unexpected members of the bunch properties you can eat the mouth watering properties yes you heard that right in the world of IAS 41 agriculture biological assets take centre stage here we discuss two things biological asset and agriculture produce a biological acid is a living thing like a plant or an animal while agriculture produce is what we get from it like fruit and milk biological assets should be measured at fair value less cost to sell if biological assets are held for consumption in the ordinary course of business they will be treated more like an inventory in which case they should be measured at the lower of cost and fair value less cost to sell on the other hand agriculture produce should be measured at lower cost and fair value once again just like inventory accounting so there you have it so let's sum up our discussion properties can be classified into No. 1 use it IAS sixteen let others to use it IAS 40 lose it or get rid of them in the next 12 months time IFRS five buy so that you can sell them later IAS 2 and even IAS 41 thanks for watching see you next time