In this article, I would like to select important points of IAS 16 which are significantly different to VAS 03 (Vietnamese Accounting Standard no. 03) – Tangible fixed assets. Most provisions in VAS 03 are inherited from IAS 16, however there are significant differences because VAS03 was built by referring to old version of IAS 16 (revised in 1998).

Criteria for a Property, Plant and Equipment (PPE) item

According to definition in IAS 16, PPE is an item that:

(i) Are held for use in production or supply of goods and services, for rentals to others or for administrative purposes; and

(ii) Are expected to be used for more than 01 accounting period.

Compared to criteria of PPE (fixed assets) in Vietnam, Circular 45/2013 regulates on Fixed assets and depreciation additionally said that costs value of fixed asset must be at least VND 30mil or higher. This monetary criteria is fixed and does not take into account nature of each business or inflation matter.

You therefore can see that, under IAS 16, it leaves room for accounting practitioner to use judgment to determine value of PPE base on nature of the business and company-specific patterns of PPE management. It seems to provide more relevant information for FS reader.

Initial costs

An item of PPE that qualified for recognition as an asset shall be measured initially at costs.

Subsequent costs

Under VAS 03, it does not provide guidance on how to account for subsequent costs relating replacement, overhaul expenses of a PPE subsequent to its initial recognition. However, under IAS 16, it is clearly guided as following.

(i) Replacement expenses

Parts of some PPE may require replacement at regular intervals. For example, a furnace may require relining after a specific number of using hours; or aircraft interiors may require replacement several times during useful life of the airframe. [IAS 16.13] said that when there is such replacement, an entity shall recognize in carrying amount of the PPE the cost of replacing part if recognition criteria are met. Carrying amount of the replaced part will be derecognized (removed) from the PPE.

(ii) Overhaul expenses

As a condition of continuing to operate a PPE, overhaul examination may be performed periodically regardless of whether parts of the item are replaced or not. [IAS 16.14] said that when each inspection is performed, its costs are recognized in carrying amount of the PPE as a replacement if recognition criteria are met. Any remaining amount of the previous inspection should be derecognized. In case costs of the prior inspection are not readily determined, the entity can estimate by referring to cost of a future similar inspection.

Adversely, in accounting regulation (Cir 200/2014) overhaul examination is expended in Profit/losses accounts rather than capitalizing in carrying amount of PPE.

Elements of costs

Point (c) is an innovation compared to the old version of IAS 16 (revised in 1998). In the old version, the standard only mentioned about costs of dismantling and site restoration due to installation of the PPE. Obligation on dismantling as a consequent of having used the item during a period of time is not regulated.

While in Vietnamese accounting regime (Cir 200/2014), dismantling expenses are expended in P/L accounts directly. It is not included in costs of PPE at the initial recognition.

Recognition of costs in the carrying amount of PPE ceases when the item is in location and condition necessary for it to be capable of operating in the manner intended by Management. Therefore, costs incurred in using or redeploying an item are not included in carrying amount of the item. For examples, following costs are not included in carrying amount of PPE at initial recognition:

- Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity.

- Initial operating losses

- Costs of relocating or re-organizing part or all of an entity’s operation.

Depreciation

[IAS 16.43] said that each part of a PPE with a cost that is significant in relation to total costs of the PPE shall be depreciated separately.

Remainder of the PPE shall then be grouped and depreciated separately. However [IAS 16.57] also allows that the company can select to depreciate separately parts of a PPE that do not have a cost that is significant in relation to total costs of the item.

[IAS 16.55] Depreciation of an asset begins when it is available for use in the manner as intended by management (other than when it is actually used) and ceases at the earlier date that the asset is classified as held for sale under IFRS 5 and the date that the asset is derecognized.

Under VASs, because there is no similar standard to IFRS 5, therefore depreciation of an asset is ended when it is derecognized (disposed).

Periodic review of accounting estimates

Residual value, useful life and depreciation method of an asset should be reviewed at least at each year-end and if expectations differ from previous estimates, the change should be accounted for as changes in accounting estimate in accordance with IAS 8 – Accounting policies, changes in accounting estimates and Errors.

De-recognition of PPE

The carrying amount of an item of PPE shall be de-recognized when:

- On disposal; or

- When no future economic benefits are expected from its use or disposal.

Accounting models for PPE after initial recognition will be addressed in the 2nd article of IAS 16.

(to be continued)

References

­IAS 16 Property, Plant and Equipment