Property, Plant and Equipment: IAS 16

JOIN KHALID AZIZ

FRESH CLASSES OF ICMAP STAGE 1,2,3,4 ICAP MODULE B & D PIPFA 0322-3385752 KARACHI, PAKISTAN

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

Property, Plant and Equipment

Related standards IAS 16 Current GAAP comparisons IFRS financial statement examples Looking ahead End-of-chapter practice

Related Standards
IAS 17 Leases IAS 20 Accounting for government grants and disclosure of government assistance IAS 23 Borrowing costs IAS 36 Impairment of assets IAS 40 Investment property IFRS 2 Share-based payment IFRS 5 Non-current assets held for sale and discontinued operations
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IAS 16 - Overview
Objective and scope Recognition Measurement at recognition Measurement after recognition (CM, RM) Derecognition Disclosure
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IAS 16 - Objective and Scope

IAS 16 objective: standards for the recognition and derecognition of PP&E assets, measurement at and after acquisition, and disclosures Scoped out: assets held for sale, agricultural biological assets, nonrenewable natural resource rights and reserves Includes investment property under construction and when ready, if cost model applied

IAS 16 - Objective and Scope

Property, plant and equipment (IAS 16.6): 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
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IAS 16 - Recognition
Costs are recognized as PP&E only if: 1. probable that future economic benefits associated with the item will flow to the entity, and 2. the cost can be measured reliably.

Applies to costs at acquisition and after acquisition.

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IAS 16 - Recognition
The government requires HTY Ltd. to affix new pollution reduction equipment to existing equipment. Is this a PP&E costor an expense? Apply general principle:
1. 2.

Future economic benefits Reliable measure

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IAS 16 - Recognition
Meets the future economic benefits criterion if costs are incurred to obtain the economic benefits or to increase the economic benefits from other assets Cost of pollution reduction equipment = PP&E asset cost Same criteria apply to major repairs and overhauls
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IAS 16 - Recognition
Works in combination with a components approach Recognize major components as separate PP&E assets and depreciate separately When major overhaul or replacement takes place, remove old components remaining undepreciated cost Recognize new component as PP&E asset Gain/loss to income statement

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IAS 16 - Measurement at Recognition

Need to know: 1. What elements of cost are included 2. How to measure cost

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IAS 16 - Measurement at Recognition

Cost elements to include: 1. Purchase price net of discounts, rebates, and add non-recoverable taxes, duties 2. Costs to get in place and ready to use as management intended 3. Costs of obligation to decommission asset and restore site as a result of acquiring the asset
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IAS 16 - Measurement at Recognition

Cost elements to exclude: 1. Costs after asset in place and ready for use as management intended 2. Costs to open a new facility, introduce a product, move to new location 3. General and administrative overhead type costs

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IAS 16 - Measurement at Recognition

If self constructed: 1. Apply same principles 2. Charge abnormal costs to P or L 3. Interest costs during construction: IAS 23 4. Government assistance: IAS 20

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IAS 16 - Measurement at Recognition

Situation-equipment: $100 cost, 7% sales tax, 5% GST $10 to transport to plant, $5 storage cost (plant not ready) $3 labour, $2 materials to calibrate machine. $4 recovered from trial run production Used at 50% of capacity: costs = $50, sales = $55 $11 to consultant for services related to choice of machine and calibration $1 interest cost during one month storage
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IAS 16 - Measurement at Recognition

Equipment cost: Invoice and tax: 100 + 7 = $107 Transportation 10 Calibration: 3 + 2 4 = 1 Professional fees 11 $129
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IAS 16 - Measurement at Recognition

How to measure cost? Cost is defined (IAS 16.6) as: Cash or cash equivalents paid or the FV of other consideration given to acquire asset when acquired or constructed Other IFRS such as IFRS 2: Share-based payment may have other specific requirements

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IAS 16 - Measurement at Recognition

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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IAS 16 - Measurement at Recognition

Commercial substance exists if: 1. Cash flows (amount, timing, risk) of new asset differ from those of old asset(s) transferred; or 2. After-tax cash flows of part of business taking on new asset (entity specific value) have changed; and 3. Difference in 1 or 2 is significant
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JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

IAS 16 - Measurement after Recognition

Choice of two models: 1. Cost model 2. Revaluation model Separate decision for each class of PP&E assets. Examples of a class: land, office equipment, machinery, buildings
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IAS 16 - Measurement after Recognition

Cost Model (CM): PP&E are carried after acquisition at cost, less accumulated depreciation and accumulated Impairment losses
Revaluation Model (RM): PP&E are carried after acquisition at fair value at date of revaluation, less any accumulated depreciation 24and impairment losses after revaluation

IAS 16 - Measurement after Recognition: Cost Model (CM)

Depreciation: Each major component may have a different depreciation policy Depreciable amount: carrying amount less residual value Residual value defined: - estimate of net amount entity would receive now from assets disposal, if asset was as old and in same condition as expected at end of its 25 useful life

IAS 16 - Measurement after Recognition: Cost Model (CM)

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
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IAS 16 - Measurement after Recognition: Cost Model (CM)

Depreciation (continued): Useful life consider capacity, wear and tear, technology changes, changes in product demand, contractual or legal limits Choose method based on pattern that assets economic benefits are expected to be received: SL, DB, or activity-based If change in pattern, change method prospectively (change in estimate)
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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

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

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

RM accounting - what happens if an increase in assets carrying amount?

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

RM accounting - what happens if a decrease in assets carrying amount?

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

Debits and credits to Revaluation Surplus are reported in OCI
Choice of entries to revalue assets and accumulated depreciation: Proportionately, or Eliminate existing accumulated 31 depreciation

IAS 16 - Measurement after Recognition: Revaluation Model (RM)

Situation:
On January 1, Year 1, ABC Co. acquires a building at a cost of $1,000. The building is expected to have a 25-year life and no residual value. The asset is accounted for under the revaluation model and revaluations are carried out every three years. On December 31, Year 3, the fair value of the building is appraised at $900. Prepare the entries required on December 31, Year 3

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

New depreciation rate is needed as of January 1, Year 4:

$900 carrying amount = $41 per year 25 3 years
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IAS 16 - Measurement after Recognition: Revaluation Model (RM)

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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IAS 16 - Measurement after Recognition

Note - Revaluation Model is not widely used. KPMG : The Application of IFRS: Choices in Practice International Financial Reporting Standards, December 2006
http://www.kpmg.co.uk/pubs/304574_ifrg.pdf

: see page 16 of 44
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IAS 16 - Derecognition
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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IAS 16 - Disclosure
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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IAS 16 - Disclosure
If RM used: Date of revaluation Independent valuation? Methods, techniques used Assumptions made in determining FV Amounts if CM had been used Details of changes in Revaluation Surplus
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Looking Ahead
No significant changes are expected to IAS 16 in the foreseeable future

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End-of-Chapter Practice
10-1 The following assets have been recognized as items of property, plant, and equipment. 1. Head office boardroom table and executive chairs 2. A landfill site 3. Wooden pallets in a warehouse 4. Forklift vehicles in a manufacturing plant 5. Stand-alone training facility for pilot training, including a flight simulator, classrooms equipped with desks, whiteboards and electronic instructional aids Instructions For each of the items listed: a) Identify what specific costs are likely to be included in acquisition cost. b) Explain whether any components of this asset should be given separate recognition, and why. c) Suggest what should be taken into consideration in determining each components depreciable amount and depreciation period. d) Suggest and explain what depreciation method might be most appropriate for each component separately identified.

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End-of-Chapter Practice
10-2Vedat Corporation acquires new equipment with a list price of $100 to expand its product line, paying $50 on delivery and agreeing to pay $25 in one years time and the remaining $25 in two years time. The company extends a portion of its factory wall in order to fit the new machine in place and then rearranges existing equipment into a more efficient layout. The new equipment is dropped on installation requiring repairs prior to use. At the end of the equipments useful life, Vedat Corporation is required to dismantle and dispose of it, paying a special environmental levy due to hazardous materials in its construction. Vedat is licensed to manufacture products with this equipment, and is required to pay a royalty for each unit produced.

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Instructions Discuss how the cost of the new equipment should be

End-of-Chapter Practice
10-3Teyal Limited has just finished the construction of its new head office building. About the same time, one of Teyals major suppliers, Layet Corporation, also moved into its new head office building. Layet Corporation did not construct its own building, but contracted it out in a fixed price total contract. The total expenditures were approximately the same for both buildings. Instructions a) Assume you are a co-op student in the accounting department of Teyal Limited. You are asked to write a short report on what the chief accountant needs to consider in accounting for the cost of the new building and its subsequent depreciation policy. Write the report. b) Assume you are a co-op student in the accounting department of Layet Corporation. If you were asked to write a report similar to the one required in part (a) above, identify in what respect it might differ, and why.

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End-of-Chapter Practice
10-4 Resorts Ltd. has occupied its plant facility for 15 years, about one-third of its expected useful life. Although still very functional, numerous repairs have been required in recent months. The accounts indicate the original cost of the plant building was $500. The entire inside of the plant was painted at a cost of $2; the old wooden roof was replaced with a new one at a cost of $45; and part of the plumbing system was upgraded at a cost of $25 due to a change in the manufacturing process used. The plant was closed down while the roof was replaced, but overhead and administrative costs of $10 continued to be incurred even though production was at a standstill. The original roof had been identified as a separate component of the building when it was constructed with a cost of $30 and a useful life of 20 years. No separate records were kept of the original cost of the plumbing or painting. Instructions Prepare entries to record the recent repairs.

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JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.