IAS 16 — property, plant and equipment

Slide 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT Presented by March 8th, 2019 OVERVIEW Objective and scope Recognition Initial Measurement Subsequent Measurement Measurement after recognition (CM, RM) Der.

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IAS 16

PROPERTY, PLANT AND EQUIPMENT

Presented by :

March 8th, 2019

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 Timing of the recognition of assets

 Determination of assets carrying amounts using both the cost model and the revaluation model

 Depreciation charges and impairment losses to be recognized

 Disclosure requirements

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SCOPE OF THE STANDARD

IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting treatments.

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SCOPE OF THE STANDARD

IAS 16 applies to all PPE except

 Assets Held for Sale and Discontinued Operations (IFRS 5)

 Biological assets (IAS 41)

 Exploration and evaluation assets (IFRS 6)

 Investment Property (IAS 40)

 Mineral rights and mineral reserves such as oil, natural gas and similar

non-regenerative resources.

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Property, Plant & Equipment defines Property Plant and Equipment as tangible assets

that -

DEFINITION : PROPERTY, PLANT & EQUIPMENT

 Held for use in the production or supply of goods or services for rental to others, or

administrative purposes

 Expected to be utilized in more than one period.

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OTHER IMPORTANT DEFINITIONS

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MEASUREMENT of RECOGNITION

An item of Property, Plant & Equipment that qualifies for recognition as an asset shall be measured at its cost

Element of Cost:

 Its purchase price and duties paid

 Directly attributable costs

 Initial estimate of the cost of dismantling and removing the item and restoring the site

 Materials, labour and other inputs for sell constructed assets.

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MEASUREMENT of RECOGNITION

Items of property, plant, and equipment should be recognised as assets when it is probable that:

 It is probable that the future economic benefits associated with the asset will flow to the entity.

 The cost of the asset can be measured reliably.

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MEASUREMENT at RECOGNITION

COST NEVER TO BE CAPITALIZED

 Costs of opening the facility

 Costs of introduce new product or service

 Costs of conducting business in the new location or with new class of customer

 Administration and other general overhead costs

 Costs incurred in using or redeveloping an item

 Amounts related to certain incidental operations.

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EXAMPLE of initial measurement

DAF bought a new printing machine The cost of the machine was $80,000 The costs to delivery from supplier were

$3,000.The installation costs were $5,000 and the employees received training on how to use the machine, at a cost of

$2,000 Before using the machine to print customer’s orders, a test was undertaken and the paper and ink cost $1,000

What should be the cost of the machine in the company’s statement of financial position?

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Note:

Following elements of cost will not become the part of the cost of asset and will be charged to statement of profit or loss as expense:

- Insurance cost

- Labor training cost

- Rectification cost of an error

- Cost of initial operating losses

- Start up cost

- Relocation cost

- Cost related to opening of new facility

- Any general and administrative overheads

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Self-constructed

If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (see IAS 2)

It will be the sum of Material, Labour and Overhead cost of such asset

to statement of profit or loss as expense

weighted average of accumulated expenditures) as part of the cost of producing PPE

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The machine was completed on 1 Oct 2018 and started producing on 1 Jan,

2019 DAF issued a $50,000 unsecured loan on 1 Jan,2018 to aid construction of

the new machine (which meets the definition of a qualifying asset per IAS 23)

The loan carried an interest rate of 10% per annum and is repayable on 1 Oct

2019

Required:Calculate the amount to be included as property, plant and

equipment in respect of the new machine

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Self-constructed

Solution:

Determine: Expense can be capitalized?

How should we do with interest on the loan?

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Exchange of asset:

If non-monetary transaction, exception to FV principle if:

1. FV cannot be reliably determined, or

2. Transaction lacks commercial substance – i.e., transaction has no economic effect on the entity

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Commercial substance exists if:

 Cash flows (amount, timing, risk) of new asset differ from those of old asset(s) transferred; or

 After-tax cash flows of part of business taking on new asset (entity specific value) have changed; and

 Difference in 1 or 2 is significant

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Exchange of asset:

Company A exchanged machine A with machine B from Company B

Machine A’s carrying amount at the date of the exchange was $10,000, and its fair value was $15,000 The manner in which the exchange is

accounted for depends on whether or not the transaction had commercial substance

Therefore, the Company’s ledger entry for the transaction will be as

Dr PPE (machine B) $15,000

Cr PPE (machine A) $10,000

Cr Gain on disposal of machine $ 5,000

Dr PPE (machine B) $10,000

Cr PPE (machine A) $10,000

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SUBSEQUENT RECOGNITION

 Additional costs are incurred after the asset becomes operational is called subsequent costs.

 For example:

 Expense day-to-day servicing cost.

 Repair and maintenance, overhauling, upgradation, replacement costs.

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Depreciate cost over useful life

Cost model

Depreciate revalued amount over useful life

Revaluation

Revaluation Model

MEASUREMENT after RECOGNITION

IAS 16 permits two accounting models for measurement of the asset in periods subsequent to its recognition.

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REVALUATION MODEL

Carrying amount = Fair value – subsequent accumulated depreciation – subsequent accumulated impairment losses

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Depreciation

 Each major component may have a different depreciation policy

useful life

COST MODEL (CM)

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Depreciation (continued):

 Depreciation period begins when PP&E is in place and ready to use, continues even if not used or is retired from active use.

 Depreciation period ends when PP&E is derecognized or classified as held for sale (IFRS 5)

 Depreciate over useful life to entity.

COST MODEL (CM)

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Depreciation (continued):

 Depreciate over useful life to entity

 Choose method based on pattern that asset’s economic benefits are expected to be received: SL, DB, or activity-based

 If change in pattern, change method prospectively (change in estimate)

COST MODEL (CM)

Note

Dr Depreciation expense

Cr Accumulated depreciation

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Impairment:

Impairment apply under IAS 36

If asset impairment is recognized, it must be recorded in the general journal:

Dr Impairment Loss

Cr Accumulated Impairment Losses.

Reversal of impairments

Under the cost model, only IFRS allows reversal of impairment losses recognized in the past

Dr Accumulated Impairment Losses

Cr Gain on Revaluation.

COST MODEL (CM)

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Example

1 July, 2017 DAF purchased a new machine service for production at $200,000 It was estimated that the asset had a residual value of $40,000 and a useful life

of 8 years at this date On 1 Jan 2019 the residual value was reassessed as being $20,000 and the useful life remaining was considered to be 6 years.

How should the asset be accounted for in the years ending 31 Dec 2017/2019?

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 Apply only to assets whose FV can be reliably measured

 Revalue often enough that carrying amount is close to FV

 Depreciate revalued amount using same principles as for CM

REVALUATION MODEL (RM)

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RM accounting - what happens if an increase in asset’s carrying amount?

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 The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset

 IAS 16 permits a transfer to be made of an amount equal to the excess depreciation from the revaluation reserve to retained earnings

Dr Revaluation surplus

Cr Retained earnings

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1 April 2018 DAF purchase a new photocopy machine at a cost of $120,000 with nil residual value and 6 years useful life.

On 31 Dec 2018, the photocopy machine was revalued to $130,000

The asset is accounted for under the revaluation model and revaluation are carried out every year

Prepare the entries required on 31 Dec 2018

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RM accounting - what happens if an decrease in asset’s carrying amount?

When an asset's carrying amount is decreased as a result of a revaluation, the decrease should be recognised as an expense However, a revaluation

decrease should be charged directly against any related revaluation reserve to the extent that the decrease does not exceed the amount held in the revaluation reserve in respect of that same asset

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Dr Revaluation reserve (to maximum of original gain)

Dr Income statement (any residual loss)

Cr Non-current asset (loss on revaluation)

RM accounting - what happens if an decrease in asset’s carrying amount?

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At 31/12/2018, the carrying amount of DAF’s equipment amounted to $130,000 On this day company intends to switch to revaluation model and carries out a revaluation exercise which estimates the fair value of the equipment to be $102,000 The balance of the revaluation surplus relating to the original gain of the equipment was $10,000.

What is the double entry to record the revaluation?

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Debits and credits to Revaluation Surplus are reported in OCI

Choice of entries to revalue assets and accumulated depreciation:

 Proportionately, or

 Eliminate existing accumulated depreciation

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DAF Co purchased a equipment 1 July 2018 for $800,000 At acquisition, the useful life of equipment was 8 years Depreciation is calculated on the straight line basis

 31 Dec 2018, the equipment was revalued to $900 ,000

 31 Dec 2018 due to the slump in market, equipment was revalued at only $700,000

Banjo Co has a policy of transferring the excess depreciation on revaluation from the revaluation surplus to retained earnings

What is the double entry to record the revaluation at 31 Dec 2018 and 31 Dec 2019

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31/12/2018 Gross carying amount Method

Eliminate the accumulated depreciation:

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New depreciation rate is needed as of January 1, 2019

$900,000 carrying amount = $120,000 per year

7.5

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31/12/2019 Revaluation loss

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31/12/2019 Revaluation loss

 Gross carying amount Method

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Revaluation Surplus account?

 As asset is used, transfer difference between depreciation taken using RM and amount if CM had been used - directly to Retained Earnings, OR

 Transfer directly to Retained Earnings when asset derecognized

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 When disposed of, or when no future economic benefits to be received from use or disposal

 Remove carrying amount from statement of financial position

 Gain or loss = difference between carrying amount of asset (or part of asset if a replacement) and net proceeds on disposal

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Whether CM or RM :

 Depreciation methods used

 Depreciation rate or useful lives

 Beginning and ending balances and reconciliation of the two for gross amount and total of accumulated depreciation and impairment losses

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