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IAS16 Property plant

and equipment
Definition &
Recognition
Definitions
Property, plant and equipment are tangible assets that:
– are held for use in the production or supply of goods or
services, or for administrative purposes; and
– are expected to be used during more than one period.
Recognition
The recognition of property, plant and equipment
depends on two criteria.

a) It is probable that future economic benefits


associated with the asset will flow to the entity
b) The cost of the asset to the entity can be measured
reliably
Initial measurement
Initial measurement

Once an item of property, plant and equipment


qualifies for recognition as an asset, it will initially
be measured at cost.
Components of cost
Purchase price, less any trade discount or rebate
Import duties and non-refundable purchase taxes
Directly attributable costs of bringing the asset to working
condition for its intended use, eg:
– The cost of site preparation
– Initial delivery and handling costs
– Installation costs
– Testing
– Professional fees (architects, engineers)
Initial estimate of the unavoidable cost of dismantling and
removing the asset and restoring the site on which it is located
Ex1
IAS 16 Property, Plant and Equipment requires an asset to be measured at
cost on its original recognition in the financial statements. EW used its own
staff, assisted by contractors when required, to construct a new warehouse
for its own use.
Identify whether the costs listed below should be capitalised or expensed.
Capitalise Expense
Clearance of the site prior to work commencing
Professional surveyors' fees for managing the
construction work
EW's own staff wages for time spent working on the
construction
An allocation of EW's administration costs, based on
EW staff time spent
Ex1
Answer
Capitalise Expense
Clearance of the site prior to work commencing ×
Professional surveyors' fees for managing the
×
construction work
EW's own staff wages for time spent working on the
×
construction
An allocation of EW's administration costs, based on
×
EW staff time spent

The allocation of EW's administration costs would not be included as these


costs are not directly incurred as a result of carrying out the construction. All
of the others are costs which would not have been incurred without the
related asset being built.
Ex2
Which TWO of the following items should be capitalised within
the initial carrying amount of an item of plant?
A. Cost of transporting the plant to the factory
B. Cost of installing a new power supply required to operate the
plant
C. A deduction to reflect the estimated realisable value
D. Cost of a three-year maintenance agreement
E. Cost of a three-week training course for staff to operate the
plant
Ex2
Answer A, B
The maintenance and training costs should be expensed as
incurred. The residual value should be taken into account for the
purposes of calculating depreciation, but not for the amount to be
capitalised.
Depreciation
The depreciable amount of an item of property, plant
and equipment should be allocated on a systematic basis
over its useful life.
The depreciation method used should reflect the pattern
in which the asset's economic benefits are consumed by
the entity
The depreciation charge for each period should be
recognised as an expense unless it is included in the
carrying amount of another asset.
Land and buildings are dealt with separately even
when they are acquired together because land normally
has an unlimited life and is therefore not depreciated. In
contrast buildings do have a limited life and must be
depreciated.
Question

A lorry bought for a business cost $17,000. It is


expected to last for five years and then be sold for
scrap for $2,000. Usage over the five years is
expected to be:
Year 1 200 days
Year 2 100 days
Year 3 100 days
Year 4 150 days
Year 5 40 days
Required
Work out the depreciation to be charged each year under:
a) The straight line method
b) The reducing balance method (using a rate of 35%)
c) The machine hour method
d) The sum-of-the digits method
Answer

a) Under the straight line method, depreciation for


each of the five years is:
Annual depreciation = $(17,000 - 2,000) /5= $3,000
b) Under the reducing balance method, depreciation for each of the
five years is:
Year Depreciation
1. 35% × $17,000 = $5,950
2. 35% × ($17,000 - $5,950) = 35% × $11,050 = $3,868
3. 35% × ($11,050 - $3,868) = 35% × $7,182 = $2,514
4. 35% × ($7,182 - $2,514) = 35% × $4,668 = $1,634
5. Balance to bring book value down to $2,000 $1,034
= $4,668 - $1,634 - $2,000
c) Under the machine hour method, depreciation for each of the
five years is calculated as follows.
Total usage (days) = 200 + 100 + 100 + 150 + 40 = 590 days
Depreciation per day = $(17,000 - 2,000)/590 = $25.42
Year Usage(days) Depreciation ($) (days × $25.42)
1. 200 5,084.00
2. 100 2,542.00
3. 100 2,542.00
4. 150 3,813.00
5. 40 1,016.80
14,997.80
d) The sum-of-the digits method begins by adding up the
years of expected life. In this case, 5 + 4 + 3 + 2 + 1 = 15.
The depreciable amount of $15,000 will then be allocated as
follows:
Year
1. 15,000 × 5/15 = 5,000
2. 15,000 × 4/15 = 4,000
3. 15,000 × 3/15 = 3,000
4. 15,000 × 2/15 = 2,000
5. 15,000 × 1/15 = 1,000
Depreciation 2
Review of useful life

A review of the useful life of property, plant and


equipment should be carried out at least at each
financial year end and the depreciation charge for the
current and future periods should be adjusted if
expectations have changed significantly from previous
estimates. Changes are changes in accounting estimates
and are accounted for prospectively as adjustments to
future depreciation.
Example: review of useful life

B Co acquired a non-current asset on 1 January 20X2 for


$80,000. It had no residual value and a useful life of 10
years.
On 1 January 20X5 the remaining useful life was reviewed
and revised to 4 years.
What will be the depreciation charge for 20X5?
Solution

Original cost 80,000


Depreciation 20X2 – 20X4 (80,000 *3/10) (24,000)
Carrying amount at 31 December 20X4 56,000
Remaining life 4 years
Depreciation charge years 20X5 – 20X8 (56,000/4) 14,000
Review of depreciation method

The depreciation method should also be reviewed at


least at each financial year end and, if there has been a
significant change in the expected pattern of economic
benefits from those assets, the method should be changed
to suit this changed pattern. When such a change in
depreciation method takes place the change should be
accounted for as a change in accounting estimate and the
depreciation charge for the current and future periods
should be adjusted.
折旧方法/残值等也是同样处理!
Subsequent Measurement
- Revaluation model
The standard offers two possible treatments here,
essentially a choice between keeping an asset recorded
at cost or revaluing it to fair value.
a) Cost model. Carry the asset at its cost less
depreciation and any accumulated impairment loss.
b) Revaluation model. Carry the asset at a revalued
amount, being its fair value at the date of the
revaluation less any subsequent accumulated
depreciation and subsequent accumulated
impairment losses.
Ex3
The following trial balance extract relates to a property which is owned by
Veeton as at 1 April 20X4:
Dr Cr
$000 $000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 20X4 3,600

On 1 October 20X4, following a sustained increase in property prices,


Veeton revalued its property to $10.8 million.
Ex3
What will be the depreciation charge in Veeton's statement of
profit or loss for the year ended 31 March 20X5?
A. $540,000
B. $570,000
C. $700,000
D. $800,000
Ex3
Answer C
Six months' depreciation to the date of the revaluation will be $300,000
(12,000/20 years x 6/12);
six months' depreciation from the date of revaluation to 31 March 20X5
would be $400,000 (10,800/13.5 years remaining life x 6/12).
Total depreciation is $700,000.
Revaluations – accounting entry
How should any increase in value be treated when a
revaluation takes place?
The debit will be the increase in value in the statement of
financial position, but what about the credit?
Normally IAS 16 requires the increase to be credited to a
revaluation surplus (ie part of owners' equity).
Revaluations – accounting entry

DEBIT Accumulated depreciation


DEBIT Asset value
CREDIT Revaluation surplus
XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2
(illustrating presentation in one statement)
20X2 20X1
$'000 $'000
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Profit before tax X X
Income tax expense (X) (X)
PROFIT FOR THE YEAR X X
Other comprehensive income:
Gains/(losses) on property revaluations X (X)
Investments in equity instruments (X) X
Other comprehensive income for the year, net of tax X X
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
XYZ GROUP – STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31
DECEMBER 20X2
Share Retained Revaluation Total
capital earnings surplus equity
$'000 $'000 $'000 $'000
Balance at 1 January 20X2 X X X X
Issue of share capital X – – X
Dividends – (X) – (X)
Total comprehensive income
for the year – X X X
Balance at 31 December 20X2 X X X X
EQUITY AND LIABILITIES
Equity
Share capital X X
Retained earnings X X
Other components of equity X X
Total equity X X

Non-current liabilities
Long-term borrowings X X
Deferred tax X X
Long-term provisions X X
Total non-current liabilities X X
Revaluations - frequency

The frequency of valuation depends on the


volatility of the fair values of individual items of
property, plant and equipment. The more volatile
the fair value, the more frequently revaluations
should be carried out. Where the current fair value
is very different from the carrying value then a
revaluation should be carried out.
Revaluations - scope

Most importantly, when an item of property, plant and


equipment is revalued, the whole class of assets to
which it belongs should be revalued.
All the items within a class should be revalued at the
same time, to prevent selective revaluation of certain
assets and to avoid disclosing a mixture of costs and
values from different dates in the financial statements. A
rolling basis of revaluation is allowed if the revaluations
are kept up to date and the revaluation of the whole class
is completed in a short period of time.
Ex4
Which of the following statements is correct?
Statement 1: If the revaluation model is used for property, plant
and equipment, revaluations must subsequently be made with
sufficient regularity to ensure that the carrying amount does not
differ materially from the fair value at each reporting date.
Statement 2: When an item of property, plant and equipment is
revalued, there is no requirement that the entire class of assets to
which the item belongs must be revalued.
Statement 1 Statement 2
True
False
Ex4
Answer
Statement 1 Statement 2
True ×
False ×

IAS 16 states that when the revaluation model is used, revaluations


should be made with sufficient regularity to ensure that the
carrying value of the assets remain close to fair value. IAS 16 also
states that, if one item in a class of assets is revalued, all the assets
in that class must be revalued.
Complex assets
Ex5
Tibet acquired a new office building on 1 October 20X4. Its initial carrying
amount consisted of:
$000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
.
16,000
.
The estimated lives of the building structure and air conditioning system are
25 years and 10 years respectively.
Ex5
When the air conditioning system is due for replacement, it is estimated that
the old system will be dismantled and sold for $500,000.

Depreciation is time apportioned where appropriate.

At what amount will the office building be shown in Tibet's statement


of financial position as at 31 March 20X5?
•15,625
•15,250
•15,585
•15,600
Ex5
Answer A
Six months' depreciation is required on the building structure and air
conditioning system.
$000
Land (not depreciated) 2,000
Building structure (10,000 - (10,000/25 x 6/12)) 9,800
Air conditioning system (4,000 -(3,500/10 x 6/12)) 3,825
15,625
Overhauls
An aircraft requires a planned overhaul each year at a cost of $5,000.
This is a condition of being allowed to fly.
How should the cost of the overhaul be treated in the financial
statements?
Accrued for over the year and charged to maintenance expenses
Provided for in advance and charged to maintenance expenses
Capitalised and depreciated over the period to the next overhaul
Charged to profit or loss when the expenditure takes place
(2 marks)
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