The term Property, Plant and equipment describes the category of tangible assets acquired by an entity to be used as a mean to obtain future economic profit. This category generally includes items such as buildings, machinery, furniture, land and vehicles. Items of property, plant and equipment are presented in the financial statement on the balance sheet as non-current asset, and since they are hardly converted into cash they can easily be distinguished from current-assets. Additionally, the amount needed to acquire non-current assets and the amount obtained from the deposition of non-current assets are counted on the income statement as gains or losses and on the statement of cash flow as investing outflows or inflows. During the accounting process for items of property, plant and equipment several issues and questions arise, including how to determine an asset useful life, which depreciation method to apply and impairment can be accounted for. Among these issues the most relevant is deciding at which amount an asset should be valuated (PKF, 2017).
PPE items are initially measured at cost. Cost is the amount of cash or cash equivalent paid to acquire the item ownership, including all costs deriving from making the item capable of operating, such as import duties, purchase taxes, cost of transportation and installation, and costs of dismantling and removing the item. Subsequently to the initial recognition the entity should choose the accounting policy to be applied (Retallack, 2016). The international accounting standard 16 has the objective to establish the accounting treatment for property, plant and equipment so that the user of the financial statement can identify information about the entity’s investment in its PPE and the changes in such investment. IAS 16 offers two different measurement methods. Non-current assets can be either valuated at their historical cost, which is the original cost of purchase less accumulated depreciation and impairment losses, or thorough the revaluation method, where the asset value is revaluated based on its fair value less accumulated depreciation and impairment losses. All measured assets will be recognised in the financial statement and provide the most useful information to its users (Europa, 2009). The qualitative characteristics that enhance the usefulness of financial information are comparability, verifiability, timeliness and understandability. Information should be comparable with similar information for other period in order to identify and understand similarities and differences among items. Information should also be verifiable to assure a faithful economic representation and timeless in order to be available to decision makers in time to influence their decisions. Additionally, all information should be classified and presented clearly and concisely to make the financial report understandable and accurate (Deloitte, 2017a).
Both the historical cost method and the revaluation method provide several advantages and disadvantages, and each entity has its reasons to choose either one based on its necessities and interests.
In one hand, the historical cost, defined as the aggregate price paid by the entity to obtain ownership and use of the asset including cost of allocation and installation, represent the foundation of the conventional accounting model, which is meant to be applied in situations where prices are either stable or subject to slight and slow changes. Since owners and creditors are mainly concerned about how their investment in the corporation has been used and what result they have achieved, the net worth of the corporation becomes an irrelevant measure as it provides the results of the corporation’s operations (Nur Barizah & Julia, 2007).