IFRS Conversion Considerations: PP&E

Organizations that are considering a conversion to the International Financial Reporting Standards (IFRS) from U.S. Generally Accepted Accounting Policies (U.S. GAAP) should note that property, plant and equipment (PP&E) is accounted for in a similar manner with a few notable exceptions. This article is the part of a series covering considerations for organizations contemplating a conversion from U.S. GAAP to IFRS.

Both standards require that PP&E be capitalized and then depreciated over the future period of economic benefit and that depreciation is required to be recognized on a systematic basis. Both standards require that asset retirement obligations be recorded when legal requirements exist. Both also require that borrowing costs be capitalized during the construction of assets. General, administrative, maintenance and startup costs are not permitted to be capitalized under either standard. Assets held for sale are also treated similarly under both standards, requiring separate presentation on the balance sheet at the carrying value and a pause on depreciation being incurred.

The most common issue organizations face when converting their PP&E to IFRS is the requirement for componentized breakout of future depreciation. In connection with IFRS 1, First-Time Adoption of International Financial Reporting Standards, entities are permitted to consider the carrying value at the conversion date as the fair value of PP&E to simplify the initial transition. Under this expedient, the carrying value is permitted to become the deemed cost under IFRS and would then be subsequently depreciated over its estimated useful life at that measurement date. The deemed cost exemption is intended for use on an item-by-item basis. Alternatively, a company may also elect to not use the available expedient and use the initial recorded value of an item of PP&E and recalculate the depreciation as if it had always been under the IFRS requirements. Under either election, subsequent depreciation would be based on the depreciable lives of the asset’s components in accordance with International Accounting Standard 16, Property, Plant and Equipment. U.S. GAAP permits entities to elect depreciation based either on the individual components or a weighted average of the components’ lives. If the organization is currently depreciating under the weighted average method, it could become a time-consuming process to determine the component-level depreciation.

Impairments to the valuation of PP&E can be reversed under IFRS if the facts and circumstances at a measurement date indicate that reasons for the asset impairment no longer exist. IFRS PP&E can then be carried at any amount up to the original cost less the depreciation that would otherwise have occurred to that point. Under U.S. GAAP, these costs cannot be reversed and the reserves in place are only removed on an individual-item basis when the product is either sold or abandoned. Impairment may also occur more frequently under IFRS, as the carrying value is compared against a determined recoverable amount rather than future cash flows under U.S. GAAP.

IFRS organizations are also permitted to record their PP&E valuation at the historical cost model, as required under U.S. GAAP or a revaluation model. The historical cost model is followed by most organizations, which record the valuation of PP&E as the initial cost less depreciation, based on the pattern of the asset’s economic benefit and impairment incurred to date. Under the revaluation model, PP&E is recorded at fair value less any subsequent accumulated depreciation and subsequent impairment losses. Increases to the carrying value should be recorded against a reversal of any previous loss recorded, with the remainder recorded as other comprehensive income as a revaluation surplus.  If the carrying value results in a decreased valuation, it should be immediately recognized as a loss to the extent it surpasses that individual asset’s previously recorded other comprehensive income surplus. Most entities do not utilize this election, since it can be costly to implement tracking of the fair market valuation at regular measurement dates. In addition, if elected, the policy must be applied to all assets within that class of PP&E.

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