17.11.

2020

IAS 16 Property, Plant and Equipment

Non-current assets:

1) Property, plant and equipment

2) Intangible assets
3) Investment property, other assets

Live circle of every asset:

1) Acquisition
2) Use within business
3) Disposal

PPE:

Are tangible assets

 Held by an entity for more than one accounting period

 For use in the production or supply of goods and services
 For rental to others
 Or for administrative purposes

Recognition:

An item of PPE should be recognized as an asset when:

1) It is probable that future economic benefits associated with the asset will
flow to the entity
2) The cost of the asset can be measured reliably

Ways of entering the assets into the entity:

1. Purchase
2. Gift-given
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 3. Contribution in Share-capital
4. Exchange
5. Surplus (as a result of stocktaking)
6. Creating (Capital expenditure)

Measurement:

An item of PPE should initially be measured at its cost

 Purchase price (capital costs)

 Subsequent expenditure
 Delivery costs
 Legal fees
 Installation costs
 Borrowing costs (in according with IAS 23)
 Dismantling costs – the PV of these costs should be capitalized, with an
equivalent liability set up

Includes: all costs involved in bringing the asset into working condition

Excludes:

 Repairs
 Renewals
 Repainting
 Administration
 General overheads
 Training costs
 Wastage

Example:

If an oil rig was built in the sea.

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If the asset cost $10 million to construct, and would cost $4 million to remove in
20 years. Interest rates were 5%

Answer: $10 million + $4 million/(1+5%)^20

Subsequent costs (последующие расходы) on the non-current asset can only be

recorded as part of the cost (or capitalised),

 It enhances the economic benefits provided by the asset (this could be

extending the asset’s life, an expansion or increasing the productivity of the
asset)
 It relates to an overhaul or required major inspection of the asset – the costs
associated with this should be capitalized and depreciated over the time until
the next overhaul or safety inspection
 It is replacing a component of a complex asset. The replaced component will
be derecognized. A complex asset is an asset made up of a number of
components, which each depreciate at different rates, e.g. an aircraft would
comprise body

Borrowing costs (IAS 23):

 Borrowing costs must be capitalized

As part of the cost of an asset is a qualifying asset (one which ‘necessary takes a
substantial period of time to get ready for its intended use or sale’)

IAS 23 states that capitalization of borrowing costs should commence when all of
the following conditions are met:

 Expenditure for the asset if being incurred

 Borrowing costs are being incurred
 Activities that are necessary to prepare the asset its intended sale are in
progress

The rate of interest to be taken:

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Where funds are borrowed specifically to acquire a qualifying asset, borrowing
costs which may be capitalized are those actually incurred, less any investment
income on the temporary investment of the borrowings during the capitalization
period

Evaluation of non-current assets

In accounting – acquisition cost

In the statement of financial position – the carrying amount (booking value)

The carrying amount (booking value) = to the acquisition cost of the non-current
asset less accumulated depreciation on the asset to date

Use within business – depreciation

The systematic allocation of the depreciable amount of an asset over its useful life

 In simple terms, depreciation spreads the cost of the asset over the period in
which it will be used
 Depreciation matches the cost of using a non-current asset to the revenues
generated by that asset over its useful life
 The depreciation method applied to an asset should reflect the pattern in
which the assets future economic benefits are expected to be consumed
 The estimated useful life of items of PPE must be regularly reviewed and
may be changed if the method no longer matches the usage of the asset

The purpose of depreciation is:

 Not only to show the asset at its current value in the statement of financial
position
 Nor it is intended to provide a fund for the replacement of the asset
 It is simply a method of allocating the cost of the asset over the periods
estimated to benefit from its use (the useful life)
 Depreciation of an asset begins when it is available for use

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According to IAS 16, the estimated useful life of items of PPE must be:

 Regularly reviewed
 And may be changed if the method no longer matches the usage of the asset

This is achieved by recording a depreciation charge each year, the effect of which
is twofold (‘the dual effect’):

1) Reduce the statement of financial position value of the non-current asset by

accumulated depreciation to reflect the wearing out
2) And record the depreciation charge as an expense in the statement of profit
or loss to the revenue generated by the non-current asset

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

Depreciation of an asset begins when it is available for use

Depreciation is continued even if the asset is idle

An estimate of the value of an asset at the end of its useful life

Depreciable amount is the cost of an asset less its residual value

Review:

1) Useful life
2) And residual value

Should be:

- Reviewed at the end of each reporting period

- And revised if expectations are significantly different from previous
estimates

Methods of calculating depreciation (PPA):

Straight-line method – results in the same charge every year and is used wherever
the pattern of usage of an asset is consistent throughout its life
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Reducing balance method – results in a constantly reducing depreciation charge
throughout the life of the asset

Machine hours method

Which method is used to calculate depreciation, the accounting remains the same

Straight-line method:

Useful life: the estimated number of years during which the business will use the
asset

Depreciation rate – is the annual percentage of transferring the assets of the cost of
finished products

Depreciation amount = Depreciable amount * Depreciation rate

Depreciation rate = 1/Useful life*100%

Reducing balance method:

Depreciation amount = Carrying amount * Depreciation rate

This is used to reflect the expectation that the asset will be used less and less

If an asset is classed as a complex asset, it may be thought of as having separate

components within a single asset

An engine within an aircraft will need replacing before the body of the aircraft
needs replacing

Each separate part of the asset should be depreciated over its useful life

Inspection and overhaul costs are generally expensed as they are incurred

They are, however, capitalized as a non-current asset to the exent that they satisfy
the IAS 16 rules for separate components

Where this is the case they are then depreciated over their useful lives, until the
next inspection or overhaul is due

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IAS 16 allows a choice of accounting treatment for PPE:

1) The cost model

2) The revaluation model

The cost model: PPE should be valued at cost less accumulated depreciation

The revalueation model:

PPE nay be carried at a relevant amount less any subsequent accumulated

depreciation

If the revaluation alternative is adopted, two conditions must be omplied with:

1) Revaluations must be subsequently be made with ufficient regularity to

ensure that the carrying amount does not differ materially from the fair value
at each reporting date
2) When an item of PPE is revalued, the entire class of assets to which the item
belongs must be revalued

Revaluation gains are recorded:

1) As a component of other comprehensive income either within the statement

of profit or loss and other comprehensive income
2) Or in a separate statement

This gain is then carried in a revaluation surplus within equity

Results:

- Revalutation surplus
- Revaluation loss

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Revaluation surplus = revaluated amount – Carrying amount

For a non-depreciated asset:

Dr Non-current asset revaluation surplus

Cr Revaluation surplus

For a depreciated asset:

Dr Accumulated depreciation

Dr Non-current asset-cost

Cr Revaluation surplus depreciation to date revaluation gain

IAS 16 says that ‘the carrying amount of an item of PPE shall be derecognized:

- On disposal
- Or when no future economic benefits are expected from its use or disposal

When a tangible non-current asset is disposed of there are a number of adjustments

required to remove the asset and associated accumulated depreciation from the
statement of financial position and to record a profit or loss on the disposal

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Disposal:

1. Selling
2. Gift-given
3. Contribution in share-capital
4. Exchange
5. Shortfall (as a result of stocktaking)

Proceeds > CA at disposal date = Profit

Proceeds < CA at disposal date = Loss

Proceeds = CA at disposal date = Neither

This is a three-step process:

1. Remove the original cost of the non-current asset from the noncurrent asset
account
2. Remove accumulated depreciation on the non-current asset from the
accumulated depreciation account
3. Recoginze proceeds

The profit or loss on disposal of a revaluated non-current asset should be calculate

as the difference between the net sale proceeds and the carrying amount

There are two steps to disposing of a revaluated asset:

(1) It should be accounted for in the statement of profit or loss of the period
(2) Any balance on the revaluation surplus relating to this asset should now be
transferred to retained earnings

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 IAS 40 Investment property

Investment property:

Land or

A building

Held to earn rentals or for capital appreciation or both

Rather than for use by the entity or for sale in the ordinary course of business

Owner-occupied property is excluded from the definition of investment property

These could be spare properties:

Rented out to third parties, or specifically bought in order to profit from a gain in
value

There could be a situation where a building can be accounted for in different ways

If an entoty occupies a premises but rents out certain floors to other companies,
then the part occupied will be classed as PPE per IAS 16, with the floors rented out
classed as investment property

An item of investment property should be reconized as an asset when

1) It is probable that future economic benefits associated with the asset will
flow to the entity
2) The cost of the asset can be measured reliably

IAS 40 gives a choice for subsequent measurement between the flollwong^

1) The cost model

2) Fair value model

Cost model is the same as IAS 16

Under the fair value model:

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 - The asset is revalued to fair value at the end of each year the gain or loss is
shown directly in the statement of profit or loss
- No depreciation is charged on the asset

If an asset is transferred from PPE to investment property:

1) The fair value model for investment property is used:

The asset must first be revalued per IAS 16 (creating a revaluation surplus in
equity) and then transferred into investment property at fair value

2) The cost model is used:

The asset is transferred into investment properties at the current carrying amount
and continues to be depreciated

The other way around:

1) Fair value – revalue the property first per IAS 40 and then transfer at fair
value
2) Cost model – the asset is transferred and continues to be depreciated

IAS 36 Impairment of assets

IAS 36 applies to all assets other than:

- Inventories (IAS 2)
- Construction contracts (IAS 11)
- Deferred tax assets (IAS 12)
- Assets arising from employee benefits (IAS 19 is ecluded from FR)
- Financial assets included in the scope of IFRS 9
- Investment property measured at fair value (IAS 40)
- Non-current assets classified as held for sale (IFRS 5)

An asset is impaired if:

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Its recoverable amount is below

The value currently shown on the statement of financial position – the asset’s
current carrying amount

Recoverable amount is taken as the higher of:

1) Fair value less costs to sell (net realizable value)

2) Value in use

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