TANGIBLE NON-CURRENT ASSETS: CALCULATION, DISCUSSION AND ACCOUNTING TREATMENT IN ACCORDANCE WITH IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5 AND IFRS 16

Introduction

Tangible non-current assets represent a significant portion of many entities’ financial positions. These assets include property, plant, equipment, investment properties, and right-of-use assets arising from leases. The complexity of accounting for these assets under International Financial Reporting Standards (IFRS) requires a thorough understanding of multiple standards, including IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5, and IFRS 16.

Under IFRS, seven standards specifically relate to tangible fixed assets: IAS 16 Property, Plant and Equipment, IAS 23 Borrowing Costs, IAS 20 Accounting for Government Grants, IAS 36 Impairment of Assets, IAS 40 Investment Property, and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. IFRS 16 Leases also plays a critical role in the recognition of right-of-use assets .

This comprehensive guide provides a practical, standards-based approach to understanding the calculation, discussion, and accounting treatment of tangible non-current assets, drawing on authoritative IFRS guidance and real-world examples.

The Pain Points: Why Tangible Non-Current Assets Pose Accounting Challenges

Classification and Boundary Issues

The Problem: Distinguishing between investment property, owner-occupied property, and property held for sale in the ordinary course of business requires careful judgment. The intended use of a property determines the applicable accounting standard. Properties might have different uses to different holders, and the intended use may change over time. For example, a hotel with significant services provided may not qualify as investment property under IAS 40, even if it generates rental income .

The Solution: Apply the specific definitions in each standard consistently. For IAS 40, the crucial question is whether the property is held to earn rentals or for capital appreciation. Property held for sale in the ordinary course of business falls under the inventory standard (IAS 2), not IAS 40 .

Determining the Elements of Cost

The Problem: Identifying which costs form part of the initial cost of a tangible asset and which should be expensed requires significant judgment. Costs such as staff training, administrative overheads, and certain reorganizational expenses often pose challenges.

The Solution: IAS 16 provides clear guidance on the elements of cost. The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes after deducting trade discounts and rebates, plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management .

Practical Example: Determining Cost Components

Consider an economic entity purchasing a plant with the following costs:

Price negotiated with the supplier: N80,000

Transport, mounting and packing expenses: N2,000

Costs for arranging the production section: N1,000

Costs for partially reorganizing the activity due to the new plant: N900

Architect’s fee: N800

Staff training costs: N1,500

Under IAS 16, the plant’s initial cost would be N83,800 (80,000 + 2,000 + 1,000 + 800). The reorganizational costs (N900) and staff training costs (N1,500) should be expensed as incurred because they are not directly attributable to bringing the asset to its working condition .

Borrowing Costs Capitalisation Challenges

The Problem: Determining when to start, suspend, and cease capitalising borrowing costs, and which assets qualify, creates significant complexities. The phrase “substantial period of time” is not defined, requiring management judgment .

The Solution: Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised. A qualifying asset is any asset that necessarily takes a substantial period of time to get ready for its intended use or sale, such as manufacturing plants, real estate developments, infrastructure projects, and self-constructed intangible assets .

Capitalisation commences when the entity first incurs expenditure on the qualifying asset, incurs borrowing costs, and undertakes activities to prepare the asset. Capitalisation is suspended during extended periods when no active development is being undertaken, and ceases when substantially all the activities required to prepare the asset are complete .

Lease Accounting Complexity

The Problem: Under IFRS 16, lessees must now recognise a right-of-use asset and a lease liability for almost all leases, ending the previous distinction between operating and finance leases for lessees. This represents a significant change for many entities .

The Solution: The right-of-use asset is depreciated, normally on a straight-line basis, over the lease term. Interest on the lease liability is recognised to maintain a constant rate on the outstanding liability. The depreciation and interest on the lease liability are both recognised in the profit and loss account. Because the finance cost element maintains a constant rate on the outstanding liability, accounting profit and loss charges will be accelerated compared with operating leases under pre-IFRS 16 accounting—the finance cost will be higher in the earlier years of a lease because the liability amount is higher in those years .

Overview of Key Standards

IAS 16 Property, Plant and Equipment

Purpose: IAS 16 prescribes the accounting treatment for property, plant and equipment, including recognition, measurement, depreciation, and derecognition.

Key Requirements:

An item of property, plant and equipment shall be recognised as an asset when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably .

Items such as spare parts, stand-by equipment, and servicing equipment are recognised when they meet the definition of property, plant and equipment .

The cost of an item includes purchase price, directly attributable costs, and the initial estimate of dismantling and removal costs .

IAS 20 Accounting for Government Grants

Purpose: IAS 20 prescribes the accounting for government grants and the disclosure of government assistance.

Key Requirements:

• Government grants are not gifts; they are earned through compliance with stated conditions, such as creating jobs, investing in research, or acquiring specific assets .

• Grants are recognised only when there is reasonable assurance that the entity will comply with the conditions and the grant will be received .

• Two presentation methods are permitted for capital grants: deduction from the asset’s cost, or recognition as deferred income .

IAS 23 Borrowing Costs

Purpose: IAS 23 prescribes the accounting treatment for borrowing costs.

Key Requirements:

Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised as part of the asset’s cost .

All other borrowing costs are expensed in the period in which they are incurred .

Capitalisation of borrowing costs on qualifying assets is not optional .

IAS 40 Investment Property

Purpose: IAS 40 prescribes the accounting treatment for investment property—property held to earn rentals or for capital appreciation.

Key Requirements:

Investment property is initially measured at cost .

After initial recognition, entities may choose between the cost model or the fair value model, applied consistently to all investment property .

Under the fair value model, investment property is not depreciated, and changes in fair value are recognised in profit or loss .

IFRS 5 Non-current Assets Held for Sale

Purpose: IFRS 5 prescribes the accounting for assets held for sale and the presentation of discontinued operations.

Key Requirements:

A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use .

The asset must be available for immediate sale in its present condition and its sale must be highly probable .

Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell, and depreciation ceases .

IFRS 16 Leases

Purpose: IFRS 16 establishes principles for the recognition, measurement, presentation, and disclosure of leases.

Key Requirements:

A lessee recognises a right-of-use asset and a lease liability at the commencement of a lease .

The right-of-use asset is depreciated over the lease term, and interest on the lease liability is recognised to maintain a constant rate on the outstanding liability .

All leases with a term of more than 12 months are recognised on the balance sheet, unless the underlying asset is of low value .

Initial Recognition and Measurement

IAS 16: Recognising Property, Plant and Equipment

An item of property, plant and equipment is recognised as an asset when it is probable that future economic benefits will flow to the entity and the cost of the item can be measured reliably . The unit of measure—what constitutes an individual item of PP&E—is not prescribed, requiring judgment in applying the recognition criteria to specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools, and dies, and apply the criteria to the aggregate value .

Items may be acquired for safety or environmental reasons. Even if not directly increasing future economic benefits of any particular existing item, such assets qualify for recognition because they enable the entity to derive future economic benefits from related assets . For example, a chemical manufacturer installing new chemical handling processes to comply with environmental requirements recognises the related plant enhancements as an asset because without them the entity cannot manufacture and sell chemicals .

Cost Elements Under IAS 16

The cost of an item of property, plant and equipment comprises:

Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates .

Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management .

The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located .

Cost of Self-Constructed Assets

When an entity constructs an asset for its own use, the cost is determined using the same principles as for purchased assets. Only costs directly attributable to the production should be included.

Example: During a financial year, a company self-constructs a building with the following expenses:

Raw materials: N60,000

Supplies: N5,000

Manual labour: N12,600

Indirect expenses (maintenance and operating plants): N4,000

Interest on loan contracted for building: N1,000 (capitalised under IAS 23)

Salaries for administrative staff: N3,000

The building’s production cost is N82,600 (60,000 + 5,000 + 12,600 + 4,000 + 1,000). The administrative staff salaries are not included in the production cost .

Initial Measurement Under IAS 23 Borrowing Costs

Under IFRS, borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets must be capitalised. This represents a key difference from some national standards, where capitalisation may be permitted but not mandatory .

For specific borrowings directly associated with the acquisition of qualifying assets, capitalisation is based on the actual interest incurred on those borrowings. For general borrowings used for qualifying assets, a weighted-average borrowing rate is applied to the expenditures incurred. The weighted-average rate is based on the borrowing costs of all general borrowings outstanding during the period, excluding specific borrowings .

Exchange Transactions

A tangible asset may be purchased through an exchange with another asset. The cost is assessed according to its fair value or the accounting value of the asset assigned. Fair value is used only if the exchange transaction is not commercial. An exchange transaction is commercial if the value, frequency, or risk of cash flows from the asset received differs from those of the transferred asset, or if the using value of the affected part of the entity’s activities is modified as a result .

Government Grants (IAS 20)

Types of Grants

Government grants can be classified into two main types:

Capital-related grants linked to the purchase or construction of long-term assets, such as a factory building or equipment .

Revenue-related grants linked to operating expenses, such as training subsidies .

Recognition Criteria

Grants are recognised only when there is reasonable assurance that:

The entity will comply with the conditions attached to the grant, and

The grant will be received .

Grants are recognised in profit or loss on a systematic basis over the period in which the entity recognises the costs for which the grants are designed to compensate . If expenses have been incurred in a prior period, the grant is recognised immediately when it becomes receivable .

Presentation of Capital Grants

Two presentation methods are permitted :

Method 1: Deduct from the Asset’s Cost
The grant is deducted from the cost of the asset, and the net amount is depreciated. This results in lower depreciation expense each year and no separate income line for the grant.

Method 2: Deferred Income
The grant is recognised as a liability (deferred income) when receivable. The liability is reduced by recognising income systematically over the asset’s useful life. The asset is recorded at full cost and depreciated fully.

Example:
Harbour Tech Ltd purchased equipment on 1 January 20X5 at a cost of $1,000,000. The government provided a conditional capital grant of $200,000. The equipment has a useful life of five years with no residual value, using straight-line depreciation.

Method 1 (Deduct from Asset Cost):

Asset cost net of grant: $1,000,000 – $200,000 = $800,000

Annual depreciation: $800,000 ÷ 5 = $160,000

Method 2 (Deferred Income):

Asset cost: $1,000,000

Annual depreciation: $1,000,000 ÷ 5 = $200,000

Annual grant income: $200,000 ÷ 5 = $40,000

Repayment of Grants

When a grant becomes repayable, it is treated as a change in accounting estimate in accordance with IAS 8. If the grant was deducted from the asset’s cost, the carrying amount must be adjusted to what it would have been without the grant. If the grant was treated as deferred income, the liability must be repaid, and previously recognised income must be reversed .

Subsequent Measurement

Two Measurement Models Under IAS 16

Cost Model: The asset is carried at its cost less accumulated depreciation and any accumulated impairment losses.

Revaluation Model: The asset is carried at its revalued amount, which is its fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. Revaluations must be made with sufficient regularity to ensure the carrying amount does not differ materially from fair value at the end of the reporting period.

The revaluation model is permitted under IFRS, unlike some national standards that only permit the cost model. However, in practice, the revaluation model is rarely adopted .

Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of an asset less its residual value.

Key Principles:

The depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

The residual value and useful life of an asset are reviewed at least at each financial year-end.

The depreciation method is reviewed at least at each financial year-end.

Key Differences from Other Standards

Under IFRS, the revaluation model is permitted in addition to the cost model. The straight-line method is generally considered appropriate for buildings and fixtures where economic benefits are consumed evenly, and the use of the declining balance method must be justified as more reasonable .

Accounting for Leases Under IFRS 16

Recognition of Right-of-Use Assets

Under IFRS 16, a lessee recognises a right-of-use asset and a lease liability at the commencement of a lease . This single lessee accounting model requires all but exempt lease agreements to be recognised on the balance sheet .

The right-of-use asset represents the lessee’s right to use the underlying asset for the lease term. The lease liability represents the lessee’s obligation to make lease payments. Both are measured at the present value of the lease payments .

Measurement of Right-of-Use Assets

The right-of-use asset is initially measured at the amount of the lease liability plus any initial direct costs incurred by the lessee and any payments made to the lessor before or at the commencement date .

Subsequent Measurement of Right-of-Use Assets

The right-of-use asset is depreciated, normally on a straight-line basis, over the lease term. Interest on the lease liability is recognised to maintain a constant rate on the outstanding lease liability. Depreciation and interest are both recognised in profit or loss .

Because of the requirement to recognise the finance cost element as an amount which maintains a constant rate on the outstanding liability, accounting profit and loss charges will be accelerated compared with operating leases under pre-IFRS 16 accounting. The finance cost will be higher in the earlier years of a lease because the amount of the liability is also higher in those years .

Impact on Tax

The legislation in Schedule 14 to Finance Act 2019 requires transitional adjustments resulting from the adoption of an accounting standard introducing right-of-use assets to be spread over several years, smoothing the tax effect of the change .

Investment Property (IAS 40)

Definition of Investment Property

Investment property is property (land and/or a building) held to earn rental income and/or for capital appreciation. This includes property that is owned or leased (right-of-use asset) .

Included in Investment Property:

• Property under development for future use as investment property.

• Property that is or will be leased out to others under an operating lease (even if currently vacant).

• Land whose future use is undetermined.

Excluded from Investment Property:

• Owner-occupied property used in production or supply of goods or services (IAS 16 applies).

• Property held for sale in the ordinary course of business (IAS 2 applies).

• Property leased out to others under a finance lease (IFRS 16 applies) .

Initial Measurement

Investment property is initially measured at cost, and the IAS 16 principles for attributing cost to property, plant and equipment apply equally to owner-occupied and investment property .

Subsequent Measurement

After initial recognition, entities may choose between the cost model or the fair value model, applied consistently to all investment property .

Cost Model: Equivalent to the cost model in IAS 16—the asset is depreciated over its useful life and subject to impairment testing.

Fair Value Model: Investment property is not depreciated, and changes in fair value are recognised in profit or loss. This differs from the revaluation model in IAS 16, under which the asset is depreciated and revaluation increases or decreases are recognised in other comprehensive income .

Critical Judgments

The distinction between investment and owner-occupied property may involve complex judgments, especially when the company provides services such as hotels, retail areas, or airports. Services provided must be a “relatively insignificant component of the arrangement as a whole” for the definition of investment property to be met .

Assets Held for Sale (IFRS 5)

Classification Criteria

A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use .

For this to be the case, the asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets, and its sale must be highly probable .

For the sale to be highly probable:

The appropriate level of management must be committed to a plan to sell.

An active programme to locate a buyer must have been initiated.

The asset must be actively marketed at a reasonable price.

The sale should be expected to qualify for recognition within one year.

Actions required to complete the plan should indicate that significant changes are unlikely .

Measurement of Assets Held for Sale

Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell . Depreciation on such assets ceases .

Presentation

Non-current assets held for sale are presented separately in the statement of financial position, and the results of discontinued operations are presented separately in the statement of comprehensive income .

How Qeeva Advisory Helps with Tangible Non-Current Asset Accounting

At Qeeva Advisory, we understand that accounting for tangible non-current assets under IFRS can be complex and challenging. Our team of experienced professionals helps Nigerian and multinational organisations implement robust accounting policies and ensure compliance with applicable standards.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you implement IFRS-compliant accounting policies for tangible non-current assets, ensuring correct classification, measurement, and disclosure.

Tax Strategies and Planning – We help you understand the tax implications of tangible asset accounting, including depreciation, capital allowances, and capital gains.

Regulatory Compliance – We ensure your financial statements meet all regulatory requirements and disclosure obligations under IFRS.

Bookkeeping Services – Accurate asset registers and depreciation schedules are essential for compliance. Our bookkeeping services ensure your tangible asset records are accurate and up to date.

Risk Management – We help you identify and manage risks associated with tangible asset accounting, including impairment risks, classification errors, and disclosure deficiencies.

Frequently Asked Questions

Q: What is a tangible non-current asset under IFRS?
A: A tangible non-current asset is a physical asset that is held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and is expected to be used during more than one period.

Q: What costs are included in the initial cost of a tangible asset?
A: The initial cost includes purchase price (after trade discounts and rebates), directly attributable costs such as transport and installation, and the initial estimate of dismantling and removal costs.

Q: What is the difference between the cost model and the revaluation model?
A: Under the cost model, assets are carried at cost less accumulated depreciation and impairment losses. Under the revaluation model, assets are carried at revalued amount (fair value) less subsequent depreciation and impairment losses.

Q: How are government grants for assets accounted for?
A: Capital grants may be presented either by deducting the grant from the asset’s cost and depreciating the net amount, or by recognising the grant as deferred income and amortising it over the asset’s useful life.

Q: When must borrowing costs be capitalised?
A: Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset must be capitalised when expenditure on the asset is incurred, borrowing costs are incurred, and activities to prepare the asset are in progress.

Q: What is investment property under IAS 40?
A: Investment property is land and/or a building held to earn rental income or for capital appreciation, not for use in production, for sale in the ordinary course of business, or leased under a finance lease.

Q: When is an asset classified as held for sale?
A: An asset is classified as held for sale when its carrying amount will be recovered principally through sale rather than continuing use, and it is available for immediate sale with a highly probable sale expected within one year.

The Bottom Line

Accounting for tangible non-current assets under IFRS requires a comprehensive understanding of multiple standards, each with specific recognition, measurement, and disclosure requirements.

Key Takeaways:

Understand the Scope of Each Standard: Ensure correct classification as property, plant and equipment (IAS 16), investment property (IAS 40), or inventory. For assets held for sale, IFRS 5 applies .

Measure Cost Correctly: Include all directly attributable costs such as purchase price, transport, installation, and professional fees. Capitalise borrowing costs for qualifying assets (IAS 23) and account for government grants appropriately (IAS 20) .

Apply Subsequent Measurement Consistently: Choose between the cost model and the revaluation model for PP&E, and the cost model or fair value model for investment property. Apply the chosen model consistently to all assets in the same class .

Recognise Right-of-Use Assets: Under IFRS 16, recognise a right-of-use asset and lease liability for all leases with a term of more than 12 months. Depreciate the right-of-use asset and recognise interest on the lease liability .

Classify Assets Held for Sale When Criteria Met: Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell, and depreciation ceases .

Disclose Appropriately: Provide detailed disclosures including accounting policies, measurement bases, depreciation methods, useful lives, and reconciliations of carrying amounts.

Your job is to be prepared. Understand the principles and requirements of IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5, and IFRS 16. Apply the correct accounting treatments. Maintain proper asset registers. Seek professional guidance.

With the right approach and the right partner, you can turn tangible non-current asset accounting from a compliance exercise into a strategic advantage for accurate financial reporting.

Suggested Reading from Our Blog

IFRS vs. Nigerian GAAP: Key Differences Every Business Should Know – Understand the critical differences between IFRS and Nigerian GAAP, including asset accounting treatments, depreciation methods, and disclosure requirements.

Understanding Depreciation: Methods, Calculations, and Financial Statement Impact – Explore the various depreciation methods allowed under IAS 16, including straight-line, reducing balance, and units of production, with practical examples.

Investment Property vs. Owner-Occupied Property: Key Distinctions Under IAS 40 – Learn how to distinguish between investment property and owner-occupied property for proper classification, measurement, and accounting under IAS 40.

Lease Accounting Under IFRS 16: What Nigerian Businesses Must Know – Understand the new lease accounting requirements, right-of-use asset recognition, and the impact on financial statements under IFRS 16.

Tax Implications of Tangible Asset Disposals in Nigeria – Explore the capital gains tax and other tax considerations when disposing of tangible non-current assets in Nigeria.

Regulatory Compliance In Nigeria – Comprehensive overview of financial reporting and regulatory compliance requirements for Nigerian businesses.

Tax Strategies and Planning – Structure your business and asset acquisitions to optimize your tax position while ensuring IFRS compliance.

Reference Links / Sources

IFRS Foundation – IAS 16 Property, Plant and Equipment – Official text of IAS 16 including recognition, measurement, depreciation, and disclosure requirements

IFRS Foundation – IFRS 5 Non-current Assets Held for Sale – Official text of IFRS 5 including classification criteria and measurement requirements

PQ Magazine – Accounting for grants clarified – Practical examples of capital and revenue grant accounting under IAS 20, including repayment scenarios

Moore Global – IAS 23 Borrowing Costs – Comprehensive guide to IAS 23 principles, definitions, and capitalisation rules

RSM Global – IAS 23 borrowing costs – Key definitions, capitalisation triggers, and disclosure requirements

KPMG – Investment property: IFRS Standards vs US GAAP – Detailed explanation of IAS 40 scope, measurement models, and key judgments

GOV.UK – BLM17005 Lease accounting under IFRS 16 – Explanation of single lessee accounting model, right-of-use asset recognition, and depreciation

GOV.UK – BLM52005 Right-of-use assets: spreading rules – Practical guidance on lessee accounting under IFRS 16 and FRS 102

UHY Tokyo – IFRS tangible fixed asset standards – Overview of IAS 16, IAS 23, and IAS 20 principles, and key differences from other standards

University of Oradea – IAS 16 application examples – Practical examples of cost component allocation for tangible assets and self-constructed assets

CITN – IAS 40 and IAS 16 Pathfinder – Nigerian exam guidance on differentiating investment property and owner-occupied properties

IFRS Teaching Session Handout – Teaching examples on identifying items of PPE under IAS 16

FAR Online – IFRS 5 Non-current Assets Held for Sale – Detailed text of IFRS 5 including scope exclusions and measurement requirements

Moore Global – IAS 20 Accounting for Government Grants – Complete guide to IAS 20 scope, recognition criteria, presentation methods, and disclosures

Let’s Talk About Your Tangible Non-Current Asset Accounting Needs

Implementing and maintaining IFRS-compliant accounting for tangible non-current assets can be complex. At Qeeva Advisory, we understand the challenges faced by Nigerian and multinational organisations in correctly applying IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5, and IFRS 16.

Whether you need help with asset classification, cost allocation, or financial statement presentation, we are here to support you.

📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799

📧 Email: info@qeeva.com

📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria

Contact us today to schedule a consultation. Let us help you navigate tangible non-current asset accounting with confidence.

Your journey to IFRS-compliant asset accounting starts with a conversation. Let’s talk.