CHAPTER 1: MFRS 116 PROPERTY, PLANT AND EQUIPMENT
(MFRS 116 MASB)
IAS 16 (MFRS116), Property, Plant and Equipment overview
IFRS 16
There are essentially four key areas when accounting for property, plant and equipment
that you must ensure that you are familiar with:
● initial recognition
● depreciation
● revaluation
● de-recognition (disposals).
Initial recognition
The basic principle of IAS 16 is that items of property, plant and equipment that qualify
for recognition should initially be measured at cost.
One of the easiest ways to remember this is that you should capitalise all costs to
bring an asset to its present location and condition for its intended use.
Commonly used examples of cost include:
● purchase price of an asset (less any trade discount) 100,000 – 10,000
● directly attributable costs such as:
• cost of site preparation 5,000
• initial delivery and handling costs 1,000
• installation and testing costs 2,000
• professional fees 1,000 9,000
● the initial estimate of dismantling and removing the asset and restoring the site
on which it is located, to its original condition (ie to the extent that it is
recognised as a provision per IAS 37 (MFRS 137), Provisions, Contingent
Assets and Liabilities)
● borrowing costs in accordance with IAS 23 (MFRS 123), Borrowing Costs.
EXAMPLE 1
On 1 March 20X0 Yucca Co acquired a machine from Plant Co under the following
terms:
$
List price of machine 82,000 /
Import duty 1,500 /
Delivery fees 2,050 /
Electrical installation costs 9,500 /
Pre-production testing 4,900 /
Purchase of a five-year maintenance contract with Plant 7,000 x
Cost of Machine 99,950
In addition to the above information Yucca Co was granted a trade discount of 10% on
the initial list price of the asset and a settlement discount of 5% if payment for the
machine was received within one month of purchase. Yucca Co paid for the plant on
25 March 20X0.
How should the above information be accounted for in the financial statements? (See
'Related links' for the solution to Example 1.)
Answer:
Price Cost of Machine (after discount) = RM82,000 – (10% x RM82,000)
= RM73,800*
Total cost of Machine = RM73,800 + RM1,500 + RM2,050 + 9,500 + RM4,900
= RM91,750
Journal Entries:
Dr. Property, Plant & Equipment (PPE) RM91,750
Cr. Account Payable – Plant Co. RM91,750
Entitled for 5% Discount Received on early full settlement:
Discount received: 5% X RM73,800* = RM3,690
Journal Entries:
Dr. Account Payable-Plant Co. RM91,750
Cr. Bank / Cash RM88,060
Cr. Discount Received RM3,690
Financial Statement:
SOPL (Extracted) for the year ended 31 March 20x0
(+): Revenue:
Discount Received RM3,690
(-): Expenses:
Maintenance (RM7,000 / 5 years) 1,400
SOFP (Extracted) as at 31 March 20x0
Non-current Assets:
Plant, Property & Equipment (cost) RM91,750
EXAMPLE 2
Construction of Ham Co’s new store began on 1 April 20X1. The following costs were
incurred on the construction:
$000
Freehold land 4,500 /L
Architect fees 620 /B
Site preparation 1,650 /L
Materials 7,800 /B
Direct labour costs 11,200 /B
Legal fees 2,400 /B
General overheads 940 X
$000
Interest Capitalized
(RM25,000,000 X 8% p.a. X 9/12m (1.4.x1- 1,500 /
1.1.x2)
Cost of new store (Building) 29,670
The store was completed on 1 January 20X2 and brought into use following its grand
opening on the 1 April 20X2. Ham Co issued a $25m unsecured loan on 1 April 20X1 to
aid construction of the new store (which meets the definition of a qualifying asset per
IAS 23/MFRS 123). The loan carried an interest rate of 8% per annum and is repayable
on 1 April 20X4.
Required
Calculate the amount to be included as property, plant and equipment in respect of the
new store and state what impact the above information would have on the statement of
profit or loss (if any) for the year ended 31 March X2.
(See 'Related links' for the solution to Example 2.)
Statement of Profit or Loss (SOPL)
Expense:
General expenses 940,000
Interest on Borrowings (3/12m X RM25,000,000 x 8%) 500,000
Subsequent costs
Once an item of PPE has been recognised and capitalised in the financial statements, a
company may incur further costs on that asset in the future. IAS 16 requires that
subsequent costs should be capitalised if:
● it is probable that future economic benefits associated with the extra costs will
flow to the entity
● the cost of the item can be reliably measured.
All other subsequent costs should be recognized as an expense in the income
statement (SOPL) in the period that they are incurred.
EXAMPLE 3
On 1 March 20x2 Yucca Co purchased an upgrade package from Plant Co at a cost of
(2)$18,000 for the machine it originally purchased in 20X0 (Example 1). The upgrade
took a total of two days where new components were added to the machine. Yucca
agreed to purchase the package as the new components (1) would lead to a reduction
in production time per unit of 15%. This will enable Yucca to increase production without
the need to purchase a new machine.
Should the additional expenditure (subsequent cost) be capitalized or expensed? (See
'Related links' for the solution to Example 3.)
Upgrade package of RM18,000 to the machine should be capitalized due to its fulfills
the requirement for subsequent cost:
● it is probable that future economic benefits associated with the extra costs will
flow to the entity
● the cost of the item can be reliably measured.
Depreciation
Depreciation is defined in IAS 16 as being the systematic allocation of the depreciable
amount of an asset over its useful life. In other words, depreciation applies the accruals
concept to the capitalized cost of a non-current asset and matches this cost to the
period that it relates to.
Depreciation methods
There are many methods of depreciating a non-current asset with the most common
being:
● Straight line
• x% on cost, or
• Cost – residual value divided by estimated useful life
Cost – Scrap value
Estimated useful life
● Reducing balance
• % on carrying amount
● X% X (Cost – Accumulated depreciation)
● Unit of production
EXAMPLE 4
An item of plant was purchased on 1 April 20X0 for $200,000 and is being depreciated
at 25% on a reducing balance basis.
Prepare the extracts of the financial statements (extract SCI & extract SFP) for the year
ended 31 March 20X2. (See 'Related links' for the solution to Example 4.)
ANSWER:
* Date of purchased, *Accounting year end
*Depreciable amount: **Prov. For Depr
1 April 20x0 - 31 March 20x1 = 25% (RM200,000) = RM50,000 RM50,000
(cost)
1 April 20x1 – 31 March 20x2 = 25% (RM200k-RM50k) =RM37,500 RM87,500
(cost – Accum. Depn)
1) Statement of Comprehensive Income (Extracted) for the year ended 31 March …
20x1 20x2
*Depreciation RM50,000 RM37,500
2) Statement of Financial Position (Extracted) as at 31 March…
PPE 20x1 20x2
Plant (Cost) RM200,000 RM200,000
(-) **Provision for depreciation (RM50,000) (RM87,500)
Carrying value (NBV) RM150,000 RM112,500
Useful life and residual value
IAS 16 (MFRS 116) requires that these estimates be reviewed at the end of each
reporting period. If either changes significantly, the change should be accounted for
over the useful life remaining.
EXAMPLE 5
A machine was purchased on 1 April 20X0 for $120,000. It was estimated that the asset
had a residual value of $20,000 and a useful life of 10 years at this date.
On 1 April 20X2 (two years later) the residual value was reassessed as being only
$15,000 and the useful life remaining was considered to be only five years.
How should the asset be accounted for (CV) in the years ending 31 March
20X1/20X2/20X3? (See 'Related links' for the solution to Example 5.)
ANSWER:
(1) Depreciation per annum (SLM) = Cost PPE – Scrap value / estimated useful life
= (RM120,000 – RM20,000) / 10 years
= RM10,000
(1) 1 April 20x0 – 31 March 20x1 Depreciation = RM10,000
(2) 1 April 20x1 – 31 March 20x2 Accumulated depreciation = RM10,000 x 2 years
= RM20,000
Carrying value (NBV) = Cost – Accumulated depreciation
Carrying value of machine as at 31 March 20x2= RM120,000–RM20,000 = RM100,000
(3) 1 April 20x2 – 31 March 20x3 Depreciation = (RM100,000 – RM15,000) / 5 years
= RM17,000
(31 March 20x3) = Carrying value =RM100,000 - RM17,000 = RM83,000
Component depreciation
If an asset comprises two or more major components with different useful lives, then
each component should be accounted for separately for depreciation purposes and
depreciated over its own useful life.
EXAMPLE 6
A company purchased a property with an overall cost of $100 million on 1 April 20X1.
The property elements are made up as follows:
$000 Estimated life
Land and buildings
(Land element $20,000,000) 65,000 50 years
Fixtures and fittings 24,000 10 years
Lifts 11,000 20 years
100,000
Calculate the annual depreciation charge for the property for the year ended 31 March
20X2. (See 'Related links' for the solution to Example 6.)
ANSWER:
Land Buildings Fixtures & Fittings Lifts
RM’000 RM’000 RM’000 RM’000
Costs 20,000 45,000 24,000 11,000
E.U.L Nil 50 years 10 years 20 years
Depreciation Nil 900 / year 2,400 / year 550 / year
Revaluations
This is an important topic in the exam and features regularly in Question 2, so you
should ensure that you are familiar with all aspects of revaluations.
IAS 16 rules
IAS 16 permits the choice of two possible treatments in respect of property, plant and
equipment:
● The cost model (carry an asset at cost less accumulated
depreciation/impairments).
● The revaluation model (carry an asset at its fair value at the revaluation date
less subsequent accumulated depreciation impairment).
If the revaluation policy is adopted this should be applied to all assets in the entire
category, i.e if you revalue a building, you must revalue all land and buildings in that
class of asset. Revaluations must also be carried out with sufficient regularity so that the
carrying amount does not differ materially from that which would be determined using
fair value at the reporting date.
Accounting for a revaluation
There are a series of accounting adjustments that must be undertaken when revaluing a
non-current asset. These adjustments are indicated below.
The initial revaluation
You may find it useful in the exam to first determine if there is a gain (Surplus) or loss
(Deficit) on the revaluation with a simple calculation to compare:
Carrying amount (CV) of non-current asset at revaluation date
X
(COST – ACCUMULATED DEPRECIATION)
Valuation of non-current asset (Fair value / market value) X
Difference = gain (surplus) or loss (deficit) on revaluation X
Revaluation gains
A gain on revaluation is always recognised in equity (Asset Revalutiation Reserve
(ARR) - SoCiE, under a revaluation reserve (unless the gain reverse’s revaluation
losses on the same asset that were previously recognised in the income statement – in
this instance the gain is to be shown in the income statement).
The revaluation gain is known as an unrealised gain which later becomes realised when
the asset is disposed of (derecognised).
Double entry:
(1) Dr Non-current asset cost (difference between valuation and original
cost/valuation)
● Dr Accumulated depreciation (with any historical cost accumulated
depreciation)
● Cr Revaluation reserve (gain on revaluation)
(2) Dr. NCA (carrying value)
Cr. ARR
EXAMPLE 7
A company purchased a building on 1 April 20X1 for $100,000. The asset had a useful
life at that date of 40 years. On 1 April 20X3 the company revalued the building to its
current fair value of $120,000.
What is the double entry to record the revaluation? (See 'Related links' for the solution
to Example 7.)
ANSWER:
1.4.20x1 Purchased building RM100,000
E.U.L 40 years
Depreciation: RM100,000 / 40 years
Depreciation/annum RM2,500
Accumulated depreciation:
1.4.20x1 – 31.3.20x2
1.4.20x2 – 31.3.20x3
(2 years x RM2,500) : RM5,000
31.3.20x3 CV? = RM100,000 – RM5,000
= RM95,000 (NBV)
1.4.20x3 Revaluation RM120,000 (FV)
Revaluation gain / loss = RM95,000 (CV) – RM120,000 (FV)
Gain (surplus) on revaluation: = RM25,000
(1) Cost Model:
Dr. Building (RM100,000 – RM120,00) RM20,000
Dr. Accumulated depreciation RM5,000
Cr. ARR (gain on revaluation) RM25,000
(2) Revaluation Model:
Dr. Building RM25,000
Cr. ARR (gain on revaluation) RM25,000
Revaluation losses
A revaluation loss should be charged against any related revaluation surplus to the
extent that the decrease does not exceed the amount held in the revaluation surplus in
respect of the same asset. Any additional loss must be charged as an expense in the
statement of profit or loss.
1st time revaluation loss no ARR balance:
Dr. SOPL (amount of Loss)(expenses) xx
Cr. PPE (Asset) xx
1st time revaluation loss with ARR balance:
Dr. ARR (up to amount of loss) xx
Cr. PPE xx
Double entry:
● Dr Revaluation reserve (to maximum of original gain) (ARR)
● Dr Income statement (any residual loss) (SCI)
● Cr Non-current asset (loss on revaluation)
EXAMPLE 8
The carrying amount of Zen Co’s property at the end of the year amounted to $108,000.
On this date the property was revalued and was deemed to have a fair value of
$95,000. The balance on the revaluation surplus relating to the original gain of the
property was $10,000. What is the double entry to record the revaluation?
ANSWER:
a) CV Property = RM108,000
FV Property = RM95,000
Difference (Loss) = (RM13,000)
ARR Balance = RM10,000
Recording revaluation loss:
Dr. ARR RM10,000
Dr. SOPL RM3,000
CR. Property RM13,000
b)
Dr. SOPL (Expenses - Revaluation loss) RM13,000
Cr. Property RM13,000
Depreciation
The asset must continue to be depreciated following the revaluation. However, now that
the asset has been revalued the depreciable amount has changed. In simple terms the
revalued amount should be depreciated over the assets remaining useful life.
Reserves transfer (ARR)
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. As a result of this,
IAS 16 permits a transfer to be made of an amount equal to the excess depreciation
from the revaluation reserve to retained earnings.
Double entry:
● Dr Revaluation reserve
● Cr Retained earnings
Be careful, in the exam a reserves transfer is only required if the examiner indicates that
it is company policy to make a transfer to realised profits in respect of excess
depreciation on revalued assets. If this is not the case then a reserves transfer is not
necessary.
This movement in reserves should also be disclosed in the statement of changes in
equity.
EXAMPLE 9
A company revalued its property on 1 April 20X1 to $20m ($8m for the land). The
property originally cost $10m ($2m for the land) 10 years ago. The original useful life of
40 years is unchanged. The company’s policy is to make a transfer to realised profits in
respect of excess depreciation.
How will the property be accounted for in the year ended 31 March 20X2? (See 'Related
links' for the solution to Example 9.)
ANSWER:
LAND (RM’000) BUILDING (RM’000) TOTAL (RM’000)
COST: 2,000 8,000 (NBV = 6,000) 10,000
REVALUE: 8,000 12,000 20,000
GAIN/LOSS (ARR) 6,000 6,000 12,000
Depreciation (Building) = RM8,000,000 / 40 years
= RM200,000 per annum
Depreciation (Building after 10 years) =RM200,000 x 10 years
= RM2,000,000
Building (NBV) =RM8,000,000 – RM2,000,000
CV (NBV) = RM6,000,000
Revaluation = RM12,000,000
Gain on revaluation = RM6,000,000
Reserves (ARR) transfer:
Dr. ARR RM12,000,000
CR. Retained earnings RM12,000,000
Land (RM’000) Buildings (RM’000) Total (RM’000)
Cost 2,000 8,000 10,000
FV 8,000 12,000 20,000
Gain/(loss) 6,000 4,000 10,000
Depreciation (HC) NIL 8,000/40 year
200 per annum
Depreciation (RV) (1.4.x1-31.3.x2) 12,000 / (40 years – 10 years)
400 per annum
RESERVES TRANSFER:
Dr. ARR ($400,000 - $200,000) RM200,000
Cr. Retained earning RM200,000
Exam focus
In the exam make sure you pay attention to the date that the revaluation takes place. If
the revaluation takes place at the start of the year then the revaluation should be
accounted for immediately and depreciation should be charged in accordance with the
rule above.
If however the revaluation takes place at the year-end then the asset would be
depreciated for a full 12 months first based on the original depreciation of that asset.
This will enable the carrying amount of the asset to be known at the revaluation date, at
which point the revaluation can be accounted for.
A further situation may arise if the examiner states that the revaluation takes place mid-
way through the year. If this were to happen the carrying amount would need to be
found at the date of revaluation, and therefore the asset would be depreciated based on
the original depreciation for the period up until revaluation, then the revaluation will take
place and be accounted for. Once the asset has been revalued you will need to
consider the last period of depreciation. This will be found based upon the revaluation
rules (depreciate the revalued amount over remaining useful life). This will be the most
complicated situation and you must ensure that your working is clearly structured for
this; i.e. depreciate for first period based on old depreciation, revalue, then depreciate
last period based on new depreciation rule for revalued assets.
EXAMPLE 10
A company purchased a building on 1 April 20X1 for $100,000 at which point it was
considered to have a useful life of 40 years. At the year end 31 March 20X6 the
company decided to revalue the building to its current value of $98,000.
How will the building be accounted for in the year ended 31 March 20X6? (See
'Related links' for the solution to Example 10.)
ANSWER:
Cost of building = RM100,000
E.U.L = 40 years
Date of purchased (Building) = 1 April 20x1
1.4.20x1 – 31.3.20x2
1.4.20x2 – 31.3.20x3
1.4.20x3 – 31.3.20x4
1.4.20x4 – 31.3.20x5
1.4.20x5 – 31.3.20x6
Accumulated Depreciation = 5 years X (RM100,000 / 40 years)
= 5 years x (RM2,500)
= RM12,500
CV (Building) (NBV) = RM100,000 – RM12,500
= RM87,500
Date of revaluation = 31 March 20x6
FV of Building (MV) = RM98,000
Revaluation gain/loss = RM10,500
Journal entries:
Dr. Building (FV) RM98,000
Cr. ARR RM10,500
Cr. Building (HC) RM87,500
SOPL (Extracted) for the year ended 31.3.20x6
Expenses:
Depreciation RM2,800
SOFP (Extracted) as at 31.3.20x6
Non-Current Asset
PPE (Buiding) RM98,000 - depr(2800)=nbv(95200).
Equity;
ARR (gain on revaluation) RM10,500
EXAMPLE 11
At 1 April 20X1 HD Co carried its office block in its financial statements at its original
cost of $2 million less depreciation of $400,000 (based on its original life of 50 years).
HD Co decided to revalue the office block on 1 October 20X1 to its current value of
$2.2m. The useful life remaining was reassessed at the time of valuation and is
considered to be 40 years at this date. It is the company’s policy to charge depreciation
proportionally.
How will the office block be accounted for in the year ended 31 March 20X2? (See
'Related links' for the solution to Example 11.)
1.4.20X1 (BUILDING BLOCK)
CV = (RM2,000,000 – RM400,000) – (RM2,000,00/ 50 years X 6/12m)
= 2,000,000 – 400,000 – 20,000
= RM1,580,000 (NBV) @ 1 October 20X1
--------------------------------------------------------------------------------------------
1.10.20X1; Revaluation @ FV (MV) = RM2,200,000
Gain on Revaluation = RM620,000
1.10.20x1 – 31.3.20x2 = (6 months)
Depreciation = (RM2,200,000 / 40 years) X 6/12m
= RM27,500
Journal entries:
Revaluation gain/loss = 10,500
Journal entries:
Dr. Building (FV) RM98,000
Cr. ARR RM10,500
Cr. Building (HC) RM87,500
SOPL (Extracted) for the year ended 31.3.20x6
Expenses:
Depreciation RM2,500
SOFP (Extracted) as at 31.3.20x6
Non-Current Asset
PPE (Buiding) RM98,000
Equity;
ARR (gain on revaluation) RM10,500
Dr.
Cr.
SOPL
SOFP
ANSWER:
Derecognition (Disposal)
Property, plant and equipment should be de-recognised when it is (1) no longer
expected to generate future economic benefit or (2) when it is disposed of.
When property, plant and equipment is to be de-recognised, a gain or loss on disposal
is to be calculated. This can be found by comparing the difference between:
Carrying amount (cost – acc. depreciation) X
Disposal proceeds (Cash receipts) X
Profit or (loss) on disposal X
Tip: When the disposal proceeds are greater than the carrying amount there is a profit
on disposal and when the disposal proceeds are less than the carrying amount there is
a loss on disposal.
EXAMPLE 12
An asset that originally cost $16,000 and had accumulated depreciation on it of $8,000
was disposed of during the year for $5,000 cash.
How should the disposal be accounted for in the financial statements? (See 'Related
links' for the solution to Example 12.)
ANSWER
Carrying Value (RM16,000 – RM8,000) = RM8,000
Cash Proceeds = RM5,000
Loss on disposal = RM3,000
Journal entries:
Dr. Cash RM5,000
Dr. SCI (Loss on disposal) RM3,000
Cr. PPE RM8,000
Dr. Cash RM5,000
Dr. SCI (Loss on disposal) RM3,000
Dr. Accumulated Depreciation RM8,000
Cr. PPE RM16,000
Disposal of previously revalued assets
When an asset is disposed of that has previously been revalued, a profit or loss on
disposal is to be calculated (as above). Any remaining surplus on the revaluation
reserve is now considered to be a ‘realised’ gain and therefore should be transferred to
retained earnings as:
● Dr Revaluation reserve
● Cr Retained earnings
In summary, it can be seen that accounting for property, plant and equipment is an
important topic that features regularly in the Financial Reporting exam. With most of
what is examinable feeding though from the Financial Accounting exam, this should be
a comfortable topic that you can tackle well in the exam.
Bobbie-Anne Retallack is a content specialist at Kaplan Publishing
Additional Exercises:
(1) Self-constructed Assets
1. A storage company constructed a small building to store its unused vehicles and
other moveable assets. The costs incurred in constructing the building include the
following:
RM
Contractors’ costs 300,000
Direct materials & labour 50,000
Technical overheads 12,000
General administrative overheads 8,000
Interest costs in financing the construction 3,000
The company purchased RM50,000 of materials for the construction; however due to
technical inaccuracies in estimating the necessary amount of material for the
construction, only RM48,000 of materials were used. In addition, during the
construction, several of the foreign labour involved were affected with an infectious
disease. The disease had disrupted the construction and cost the company a further
RM15,000.
Determine the cost of the building to be capitalized.
