IAS 16 Generation Assets for Power and Utilities : Dubai Audit Review

IFRS requires that ‘components’ be depreciated as per IAS 16 Property Plant and Equipment. Each component of an item of property or plant is depreciated individually. You can group together important parts of assets that have similar usage patterns and useful lives. Utility entities may find this a problem as many assets have components that have a shorter life span than the asset itself.

Identifying The Components Of An Asset

Many components of generation assets may be complex, with many having different useful lives. It is important to identify the most significant components of these assets. This can be a complicated process, especially when transitioning to IFRS. The detailed record-keeping required for componentization may not have been necessary to conform to national generally accepted accounting principles. This is especially true for older power plants. Some regulators may require asset records that are detailed, which could be helpful for IFRS component identification.

If the required information is not available in the accounting records, an entity may look at its operating data. You can identify some components by looking at the power station’s routine shutdown and overhaul schedules, as well as the replacement and maintenance procedures. You should also consider components that are more susceptible to technological obsolescence or corrosion than the rest of the asset.

First-time IFRS users can take advantage of an exemption under IFRS 1. First-time adoption of International Financial Reporting Standards. This exemption allows entities the ability to use a value that is not depreciated in accordance with IAS 16 and IAS 23 Borrowing costs as deemed cost upon transition to IFRS. The exemption can be applied to any asset or group of assets.

IFRS 14 Regulatory Deferral Accounts, which was published in January 2014, is an interim standard for rate-regulated activities. IFRS 14 allows first-time adopters of IFRS to continue to recognize amounts related to rate regulation according to their GAAP accounting policies prior to the adoption of IFRS.

However, IFRS 14 demands that the rate regulation effect be presented separately from all other items in order to improve comparability with entities who already use IFRS (and thus do not recognize such amounts). A company that has IFRS financial statements does not qualify to use the new guidance.


Each component should be depreciated at its maximum recoverable value over its useful life. This may vary among components. On replacement, the remaining carrying amount of the component should be depreciated and the cost for the replacement part capitalized.

Capitalizing the costs of major maintenance/overhaul is a component of the plant it provides future economic benefits. When incurred, turnaround/overhaul expenses that are not related to the replacement of components or installation of new assets should also be expensed.

Turnaround/overhaul costs should not be accrued over the period between the turnarounds/overhauls, because there is no legal or constructive obligation to perform the turnaround/overhaul; the entity could choose to cease operations at the plant and hence avoid the turnaround/overhaul costs.

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Borrowing Fees

A borrower’s cost may be included in the cost of an item property, plant, or equipment. IAS 23 (revised), requires that such borrowing costs be capitalized if the asset takes a significant amount of time to prepare for its intended use.

The standard provides examples of borrowing costs such as interest expense calculated using an effective interest method (described under IFRS 9 Financial Instruments); finance charges for finance leases that are recognized in accordance with IFRS 16 Leases; and foreign currency borrowings which are regarded to be adjustments to interest costs.

While construction or acquisition is underway, borrowing costs must be capitalized. These costs include specific borrowings for the purpose of building the asset and general borrowings that could have been avoided if it had not been spent on the qualifying asset. Calculating the general borrowing costs resulting from an asset’s construction should take into account the entity’s average weighted cost of general borrowings.

Utilities may use operating cash flow to finance capital expenditures during periods when general financing is not available. The full amount of the qualifying asset is subject to the borrowing rate. Even if cash flows from operations are sufficient to finance capital expenditures, this is true. IAS 23 (revised), does not address the imputed or actual cost of capital.

A utility may contract for a power station on a turnkey basis. The utility will make progress payments throughout the construction of the power plant. An entity’s prepayments to a third party in order to acquire a qualifying asset are capitalized according to IAS 23 (revised), on the same basis that the borrowing costs for an asset constructed by it.

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