Presentations Chapter 4- Ias – 16 Property, Plant And Equipment.pdf

Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocat

HO CHI MINH UNIVERSITY OF BANKING

ACCOUNTING AND AUDITING DEPARTMENT

Ho Chi Minh City, 21° September, 2022

LIST OF MEMBER AND ASSIGN TASKS

2 Dang Phuong Thao 050608200646 _| 4.2.1 + 4.2.2 100%

3 Tran Nhu Y 050608200796 _| 4.2.3 + PPT 100%

4 Ho Thi Mong Tien 050608200163 | 4.2.4 (abc) + 1 sentence true or false 100%

6 Ha Thi Khanh Vi 050608200763 | 4.2.5 + Compose excel in English 100%

TABLE OF CONTENTS

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IAS 16 - PROPERTY, PLANT AND EQUIPMENT

4.1 Introduction of IAS 16

IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its

4.1.2 Scope

This Standard shall be applied in accounting for property, plant and equipment except when another Standard requires or permits a different accounting treatment This Standard DOES NOT apply to:

(a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non- current Assets Held for Sale and Discontinued Operations

(b) biological assets related to agricultural activity other than bearer plants (see IAS 41 Agriculture) This Standard applies to bearer plants but it does not apply to the produce

on bearer plants

(c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources)

(d) mineral rights and mineral reserves such as oil, natural gas and similar non- regenerative resources

However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b)—(d)

An entity using the cost model for investment property in accordance with IAS 40 Investment Property shall use the cost model in this Standard for owned investment property

4.1.3 Key definitions

A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;

(b) is expected to bear produce for more than one period; and

(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value

Depreciation is the systematic allocation of the depreciable amount of anasset over

its useful life

Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (See IFRS 13 Fair Value Measurement)

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others,

or for administrative purposes; and

(b) are expected to be used during more than one period

Recoverable amount is the higher of an asset’s fair value less costs to sell and its

value in use

The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity

4.2 The content of IAS 16

4.2.1 Principles for recognition of PPE

a The concept of PPE

Property, plant and equipment (PPE) are physical assets held for use in production,

provision of services, or leases for at least 12 months Thus, to distinguish PPE from other assets, we need to note 2 issues:

2 PPE isan asset for use, not for sale

© PPE must have a shelf life of at least 12 months

Example: Distinguishing PPE from Investment Property

Both are physical assets, but the difference between PPE and investment property lies in the purpose of holding the asset: While PPE is held for use, Investment Property is held only for rent or waiting for price increase If real estate is held for use, it becomes PEE, and if it is for sale in the ordinary course of business, it becomes inventory

b Principles for recognition of PPE

The cost of an item of property, plant and equipment shall be recognised as an asset

if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably

Cost = Purchase price + Taxes + Directly related costs

Example: Company ABC buys a car for the business management department with the tax-exclusive purchase price of 296.000.000 VND VAT is 10%, registration fee is 1.000.000 VND and brokerage fee is 3.000.000 VND Calculate the cost of the above asset

Answer: All of the above fees are incurred up to the time when the car is ready for use

So it will be included in the original price of the car

So the original price of the car is: 296,000,000 + 29.600.000 + 1,000,000 + 3,000,000 =

329.600.000 VND

4.2.2 Initial recognition and measurement

An item of property, plant, and equipment that qualifies to be recognized as an asset must be measured at its cost The cost of an item of property, plant and equipment comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates

(b) 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

(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item

is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period

Cost = Purchase price + Directly related costs + Restoration cost

Example: Company ABC purchased 20 HP copiers with the amount of VND

600,000,000, paid in installments within 3 years and with equal installments each year

Deferred interest rate 12%/year Determine the purchase price of 20 machines to record

on the balance sheet

Answer:

Annual installment amount: 600.000.000/3=200.000.000 VND

Amount to buy machine at current price: 200.000.000/(1+12%)+ 200.000.000 /

(1+12%)^2 + 200.000.000 /(1+12%)^3 = 480.000.000 VND

Interest payable: 600.000.000 — 480.000.000 = 120.000.000 VND

Recorgnize on the balance sheet at the time of initial recognition 1s: 430.000.000 VND

Directly related costs are usually incurred before the asset is used Note that extraneous but not useful details are not recognized in assets such as fines; Correction and repair costs due to incorrect installation are not capitalized but must be recognized as expenses in the period Expenses that are not directly attributable to bringing the asset to

a ready-for-use state are not capitalized in the asset's value For example, advertising costs, product introduction; business development costs in new locations with new clients including coaching costs; general management costs; relocation costs to restructure part

or all of the company's operations In general, these expenses are related to the general operation of the company and not directly related to that asset

Restoration costs: At the time of initial recognition, the entity should estimate all necessary costs related to dismantling, relocating and restoring the asset location produce These costs are capitalized into the present value of the asset For example, when building an oil rig, if there are regulations related to dismantling the rig after use for the purpose of protecting the environment, the owner must capitalize the above

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expenses and the value of the rig drill and accept this as part of the costs associated with bringing the asset to a ready-for-use state These expenses will be amortized over the useful life of the asset

4.2.3 Subsequent measurement

IAS 16 permits two accounting models:

CO Cost model: The asset is carried at cost less accumulated depreciation and impairment

O Revaluation model: The asset is carried at a revalued amount, being its fair value

at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably

For the revaluation model: A revaluation surplus is recognized as other

comprehensive income and accumulated in a revaluation surplus account in equity unless

a revaluation deficit has been charged to the income statement previously Revaluation deficit is recognized as an expense in the income statement unless there is a balance in the revaluation surplus account

Recognize the first year revaluation difference:

O If revaluation increases the carrying amount of the asset, Credit to other comprehensive income (interest on revaluation)

O1 If revaluation reduces the carrying amount of the asset, it shall be included in profit or loss

Recognize the revaluation difference in the following years:

Revaluation | Loss is recognized as an expense Balance in the revaluation

charging the revaluation deficit as an expense to the

Revaluation Recognized directly credited to the Revaluation surplus is Gain income statement, up to the total reported as other

amount of revaluation deficit comprehensive income and previously recognized as an expense accumulated in a revaluation

reserve

If an item of property, plant and equipment is revalued, the entireclass of property, plant and equipment to which that asset belongsshall be revalued.A class of property, plant and equipment is a grouping of assets ofa similar nature and use in an entity’s operations The following are examples of separate classes:

(g) furniture and fixtures;

(h) office equipment; and

(i) bearer plants

Before the revaluation entries are made, the asset's accumulated depreciation is

written off:

O Debit Accumulated Depreciation

O Credit fixed assets

Revaluation Gain:

O Debit to fixed assets

O Credit an Asset Revalue Surplus

Revaluation Loss:

O Debit Expense (P/L)

Example:

First year recognize: ABC Company buys a piece of land for 500.000.000 After 1 year, the land is revalued at a fair value of 550.000.000 Recognize the re-evaluated entry Next year: ABC Company determines the fair value of the land to be 450.000.000 The re-evaluated entry is as follows?

Accumulated depreciation can be recognized by two methods:

o Method 1: Use the Gross up method If the accumulated depreciation is adjusted in proportion to the post-assessed gross cost of tangible fixed assets

so that the residual value of the fixed assets after the assessment is equal to the revaluation price, the following accounts shall be recorded:

Debit 211: Adjusted difference increased to historical cost

Credit 214: Accumulated depreciation adjustment difference

Credit 412: Difference due to upward adjustment

o Method 2: Use the net method If accumulated depreciation is deducted from the gross cost of the fixed asset and the reported net value is equal to the revaluation price of the fixed asset Then the accountant recognizes: Debit 211: The difference between the assessed gross cost increased

Debit 214: Accumulated depreciation

Credit 412: Appreciation difference for increase in fixed assets

Example:

K Corporation owns buildings with a cost of 200.000.000 VND and estimated useful life

of 5 years Accordingly, depreciation of 40.000.000 VND per year is anticipated After two years, K obtains market information suggesting that a current fair value of the buildings is 300.000.000 VND and decides to write the buildings up to a fair value of 300.000.000 VND Apply the net method to reflect new fair value information, or the asset can be revalued as a new asset

Answer:

Accumulated depreciation is: 2 x 40.000.000 = 80.000.000

The residual value of buildings immediately before the revaluation is:

When revaluation reduces the carrying value of assets, the difference due to revaluation such reduction will be recognized as an expense in the income statement Accounting records get the following:

Debit 214: Accumulated depreciation

Debit 412: Appreciation gap decreases

Credit 211: Cost difference difference

4.2.4 Depreciation

a Cost allocation

IAS 16.6 and 16.50 state that depreciation is the systematic allocation of a depreciable amount of an asset over its useful life The depreciable amount is the original cost of an asset, or some other amount that replaces the cost (e.g revalued amount), less than its residual value The residual value of an asset is the estimated amount that an entity could currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset is of age and in its intended condition at the end of its useful life

Example: An entity has a machine with the historical cost of 10.000.000 VND The

machine has an estimated current residual value of 1.000.000 VND Calculate the amount

of depreciation of that machine?

Answer:

Cost: 10.000.000 VND