Key takeaways
- A hotel that the developer operates itself is PP&E under TAS 16, while condos built for sale are inventory.
- Cost includes only expenditure that brings the asset to a ready-to-use condition. Pre-opening costs, start-up losses and training are excluded.
- The component approach changes depreciation significantly, because the structure, systems and FF&E have different useful lives.
- Accounting and tax depreciation often differ, so they must be reconciled and deferred tax must be considered.
What TAS 16 covers
Thai Accounting Standard No. 16, Property, Plant and Equipment, which is aligned with IAS 16, covers recognition, measurement, depreciation and derecognition. The standard matters to businesses with a high proportion of fixed assets, such as hotels and developers that hold assets to operate themselves.
1. Definition of PP&E
PP&E is a tangible asset that an entity holds for use in producing or supplying goods or services, for rental to others, or for administrative purposes, and that it expects to use for more than one period. For property held to earn rent, check whether it should be classified as investment property under TAS 40.
- Land, such as the site of a hotel, office or factory
- Buildings, such as the hotel building, resort and head office
- FF&E, such as furniture, kitchen sets, beds and curtains
- Machinery and equipment, such as lifts, air-conditioning systems and hotel laundry machines
- Vehicles, office equipment, POS systems and leasehold improvements
2. Differences from related standards
- Held for sale in the ordinary course of business: inventory under TAS 2
- Held for own use: PP&E under TAS 16
- Held to earn rent or for capital appreciation: investment property under TAS 40
- Non-current assets that meet the criteria for sale: held for sale under TFRS 5
Example: A business owner buys three plots of land. The first is used to build a self-operated hotel, which is PP&E. The second is bought to await appreciation, which is investment property. The third is developed into condos for sale, which is inventory. Although all three are land, different standards apply.
3. Recognition
Recognise an item as PP&E when it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.
4. Initial measurement
Cost means the expenditure necessary to bring the asset to the location and condition required for it to be ready for use as management intends.
Included in cost
- Purchase price, import duties and non-refundable taxes
- Ownership transfer costs and fees
- Transport, installation and testing
- Design, architect and engineer fees
- Site preparation costs
- Borrowing costs under TAS 23
- Present value of the estimated dismantling and restoration costs
Excluded from cost
- Recoverable input VAT, which is recorded as a tax receivable
- Advertising and promotion costs
- Staff training costs
- Operating losses during start-up
- General administrative expenses
Example: cost of a new hotel
| Item | THB million |
|---|---|
| Land, 5 rai | 100 |
| Land transfer costs | 2 |
| Design fees | 15 |
| EIA and permits | 3 |
| Construction costs | 350 |
| FF&E | 50 |
| Borrowing costs, 24 months | 30 |
| PV of dismantling costs | 5 |
| PP&E cost | 555 |
Pre-opening marketing of THB 8 million, training of THB 5 million and soft-opening losses of THB 6 million, totalling THB 19 million, are expensed.
5. Subsequent measurement
Cost Model
Carried at cost less accumulated depreciation and accumulated impairment losses.
Revaluation Model
Revalue regularly enough that the carrying amount does not differ materially from fair value. Increases are recognised in OCI; decreases are recognised in profit or loss, unless they can be offset against an existing revaluation surplus on the same asset. The entity must apply the same policy to the whole class of assets.
6. Depreciation
Annual straight-line depreciation = (cost − residual value) ÷ useful life
Land is generally not depreciated. The depreciation method must reflect the pattern of use, such as straight-line, diminishing balance or units of production.
| Asset | Example useful life range |
|---|---|
| Building structure | 30 to 50 years |
| Building systems | 15 to 25 years |
| Room FF&E | 5 to 10 years |
| Soft FF&E | 3 to 5 years |
| IT equipment | 3 to 5 years |
| Vehicles | 5 to 7 years |
| Leasehold Improvement | The shorter of the lease term and the useful life |
Component Approach
Hotel costing THB 500 million, excluding land
| Component | Cost | Life (years) | Depreciation/year |
|---|---|---|---|
| Building structure | 300 | 50 | 6.0 |
| Building systems | 80 | 20 | 4.0 |
| Interior fit-out | 70 | 10 | 7.0 |
| Room FF&E | 50 | 7 | 7.1 |
| Total | 500 | — | 24.1 |
If depreciated as a single block over 50 years, depreciation would be only THB 10 million a year, overstating profit by about THB 14.1 million a year.
7. Costs after recognition
May be capitalised
- Major overhauls that meet the recognition criteria
- Replacement of a significant component, with derecognition of the NBV of the old one
- Renovation that upgrades the asset
- Major periodic inspections that meet the criteria
Expensed in the period
- Routine repair and maintenance
- General painting and replacing light bulbs
- Routine servicing and the regular annual lift inspection
A 5-year-old hotel invests THB 30 million in refurbishment. If the work is painting and minor repairs, it is expensed. But if all 100 rooms' FF&E and the entire air-conditioning system are replaced, the NBV of the old items must be derecognised and the new assets recognised.
8. Impairment under TAS 36
At every reporting date, the entity must assess indicators such as a fall in market value, changes in law, higher interest rates or performance below expectations. When there is an indicator, compare the NBV with the recoverable amount, which is the higher of fair value less costs of disposal and value in use.
The sample hotel has an NBV of THB 400 million, fair value less costs of disposal of THB 280 million and value in use of THB 320 million. The recoverable amount is therefore THB 320 million, and an impairment loss of THB 80 million is recognised.
9. Derecognition
When an asset is sold or retired, it must be derecognised, and a gain or loss is recognised based on the net proceeds received compared with its NBV. For example, a car costing THB 2 million with accumulated depreciation of THB 1.5 million has an NBV of THB 0.5 million. If it is sold for net proceeds of THB 0.7 million, the gain is THB 0.2 million.
10. Complete example: a sample hotel
Construction stage, years 0 to 2
| Item | Year 0 | Year 1 | Year 2 |
|---|---|---|---|
| Land | 100 | — | — |
| Design fees go into CIP | 15 | — | — |
| Construction costs | — | 200 | 200 |
| Borrowing Cost | — | 15 | 15 |
| FF&E | — | — | 50 |
At the start of year 3, PP&E comprises land of THB 100 million, buildings of THB 445 million and FF&E of THB 50 million.
Operations, years 3 to 7
| Component | Cost | Life | Depreciation/year |
|---|---|---|---|
| Structure | 280 | 50 | 5.6 |
| Systems | 90 | 20 | 4.5 |
| Interior fit-out | 75 | 10 | 7.5 |
| FF&E | 50 | 7 | 7.1 |
| Total | 495 | — | 24.7 |
Renovation in year 8
Invest THB 50 million to replace all the FF&E. The NBV of the old FF&E after 5 years of depreciation is 50 − (50 ÷ 7 × 5) = THB 14.3 million. This must be written off as a loss, and the new FF&E of THB 50 million is then recognised.
Impairment test in year 15
Assume there is no additional investment to replace the fit-out and FF&E. At the start of year 15, the NBV of the land, structure and systems is 100 + 212.8 + 36.0 = THB 348.8 million. If the recoverable amount is THB 308.8 million, an impairment loss of THB 40 million must be recognised.
Disposal at the end of year 30
Assume the impairment is allocated to the building and systems in proportion, and the systems are fully depreciated. The NBV at the date of sale is approximately THB 100 million for land plus about THB 103 million remaining for the structure, totalling about THB 203 million. If the hotel is sold for THB 350 million, the gain on disposal is about THB 147 million.
11. Effects on the financial statements
- Statement of financial position: PP&E is a major non-current asset, shown at net carrying amount, with the movements disclosed in the notes.
- Income statement: Depreciation is the main expense, and repair and maintenance is an ordinary expense. Gains or losses on disposal and impairment should be shown clearly.
- Cash flow statement: Purchases and sales of PP&E fall under investing activities. Depreciation is a non-cash item.
12. Tax issues in Thailand
Accounting and tax depreciation are often not the same. For accounting, useful lives and the component approach are used, whereas for tax there are maximum rates under the Royal Decree on Deductions for Wear and Tear and Depreciation, for example no more than 5% a year for permanent buildings and no more than 100% for temporary buildings. Passenger cars have a ceiling on the deductible cost, under criteria that should be checked before applying. Any resulting differences must be considered for deferred tax under TAS 12.
13. Common mistakes
- Recording CAPEX as an expense because it cannot be distinguished from repairs
- Not using the component approach
- Forgetting to assess impairment indicators
- Not derecognising the NBV of the old item when it is replaced with a new one
- Recording advertising or training costs as asset cost
- Depreciating land without a reason under the standard
- Not recording a provision for dismantling costs when there is an obligation
- Including recoverable input VAT in cost
14. Related KPIs
- Asset Turnover = Revenue ÷ Total Assets
- Fixed Asset Turnover = Revenue ÷ Net PP&E
- Capex Intensity = Capex ÷ Revenue
- Depreciation ÷ Revenue
- PP&E ÷ Total Assets
- Average Age of Asset = Accumulated Depreciation ÷ Annual Depreciation
Industry ranges should be benchmarked against hotel groups with a similar ownership model and market positioning.
15. Disclosure
Disclose the measurement basis, the depreciation method and useful lives, the reconciliation of cost and accumulated depreciation, assets pledged as security, commitments, impairment losses and reversals, and revaluation surplus information when the revaluation model is used.
16. Comparison with TAS 2 and TAS 40
- TAS 2: applies to condominiums and houses held for sale. No depreciation is charged; revenue and COGS are recognised, and the lower of cost and NRV applies.
- TAS 16: applies to hotels the developer operates itself. Depreciation is charged, the revaluation model may be elected, and impairment is tested under TAS 36.
- TAS 40: applies to rental buildings or land held for capital appreciation. Choose either the cost model or the fair value model.
17. Checklist for CFOs
- A complete asset register recording cost, age, residual value and location
- Apply the component approach to large assets
- Set a clear depreciation policy and capex policy
- Assess indicators of impairment at every reporting date
- Reconcile the PP&E movement regularly
- Physically verify assets at least once a year
- Take out insurance appropriate to the value that needs to be covered
- Calculate deferred tax on temporary differences correctly
Conclusion
TAS 16 is the framework for recognising and measuring the core assets of asset-intensive businesses. Misclassification, neglecting the component approach or failing to assess impairment affects the financial statements, tax and investment decisions. Executives who put the system in place before construction begins can plan renovation and long-term tax burdens more accurately.