Financial statement analysis
PROPERTY, PLANT AND EQUIPMENT
PPE
1
Learning objectives
1.
2.
3.
4.
5.
6.
7.
8.
Objective of the lectures
Recognition of PPE
How should PPE be measured?
Depreciation
Derecognition of PPE
Impairment _ IAS 36
IAS 40 Investment properties
IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance
PPE
2
Objective of the lectures
After studying this topic you should be able to discuss the
accounting requirements of IAS 16* in relation to
 recognition / measurement
 initial measurement
 subsequent expenditure
 depreciation and
 impairment
 revaluation of non-current assets.
*:
IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance
IAS 23 Borrowing Costs
IAS 36 Impairment of Assets
IAS 40 Investment Property
PPE
3
PPE & IASs / IFRSs
 IAS 16 Property, Plant and Equipment
 IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance
 IAS 23 Borrowing Costs
 IAS 36 Impairment of Assets
 IAS 40 Investment Property
PPE
4
Assets
Asset:
 “a present economic resource
(a right that has the potential to
produce economic benefits; [CF, 4.4])
 controlled by the entity
 as a result of past events.” [CF, 4.3]
Current Asset
Non-current Asset
PPE
5
Non-current Assets
IAS 1 [IAS1:66] defines an asset as current when [the entity]:
1. it expects to realise the asset, or intends to sell or
consume it, in its normal operating cycle;
2. it holds the asset primarily for the purpose of trading;
3. it expects to realise the asset within twelve months
after the reporting period; or
4. the asset is cash or a cash equivalent (as defined in IAS
7) unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after
the reporting period.
An entity shall classify all other assets as non-current.
PPE
6
What is / are PPE?
PPE [IAS 16:6]
 are tangible items that are
 held by an enterprise for
 use in the production or supply of goods and
services*
 rental to others or
 administrative purposes AND
 expected to be used during more than one period
 acquired / purchased OR self-constructed
*:
it includes bearer biological assets (IAS 41) as well
PPE
7
What is / are PPE?
IAS 16 does not apply to:
 PPE held for sales (IFRS 5)
 exploration and evaluation assets (IFRS 6)
 mineral rights and reserves such as oil, natural gas and
other non-regenerative resources
PPE
8
Recognition of PPE
Recognition? →reporting an item within the main FSs
In IAS 16 [IAS 16:7]:
The cost of an item of property, plant and equipment shall be
recognised as an asset if, and only if:
 it is probable that future economic benefits associated with
the item will flow to the entity and
 the cost of the item can be measured reliably.
PPE
9
Recognition of PPE
What constitutes an item of PPE? [IAS 16:9]
 entity specific
 based on professional judgement
 it might be: aggregated individually insignificant items (e.g.
moulds, tools)
Spare parts and servicing equipment [IAS 16:8]
 are usually carried as inventory and recognised in P&L as
consumed BUT
 major spare parts and stand-by equipment qualify as PPE when /
if
 an entity expects to use them during more than one period
 they can be used only in connection with an item of PPE.
Very large specialised items [IAS 16:13]
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10
Safety and environmental equipment
[IAS 16:11]
Recognition of PPE
Costs are evaluated under this recognition principle
at the time they are incurred.
Costs can be
 initial costs
 subsequent costs
 add to PPE
 replace part(s) of PPE
 service PPE
PPE
11
How should PPE be measured?
Measurement
at recognition
Measurement
after recognition
An item of PPE that qualifies for recognition as an asset shall
be measured at its cost. [IAS 16:15]
BUT…. Cost is not always as straight forward to calculate as
might be assumed
PPE
12
How should PPE be measured?
 A plastic toy manufacturer buys a new shaping machine.
The purchase price of the machine is listed on the suppliers
invoice. → Should costs of delivery and installation be
added to the amount recorded as asset cost?
 A company buys a new property. The purchase price is on
the contract. → Should legal costs be included in asset
cost?
 A new head office building is under development. →
Should interest being charged on funds borrowed be
included in asset cost?
PPE
13
How should PPE be measured?
Purchased (acquired) PPE [IAS 16:16-18]
Cost Comprises:
 Purchase price:
 after deducting any trade discounts and rebates
BUT
 including import duties and non-refundable purchase taxes.
 Costs directly attributable to bringing item to the location and
condition necessary for it to be operated as intended
 Estimated costs of dismantling and removing the item and
restoring the site on which the item is located, as long as the
obligation to meet these costs is incurred when the item is
acquired. (recognised & measured in accordance with IAS 37!)
PPE
14
How should PPE be measured?
Self-constructed PPE [IAS 16:16-18]
Cost Comprises:
 Production cost
 determined using the same principles as for an acquired
asset
 purchase price of raw materials and consumables
 costs directly attributable to production
 Borrowing costs
 borrowing costs are a component of cost of an item of PPE
during period of construction (IAS 23)
PPE
15
How should PPE be measured?
Examples of directly attributable costs
CAPITALISE → SFP
[IAS 16:17]
 cost of employee benefits (arising directly from the
construction or acquisition of the item of PPE)
 cost of site preparation and clearance
 initial delivery and handling costs
 installation and assembly costs
 professional fees: legal, architect fees etc.
 cost of testing whether the asset is functioning properly
PPE
16
How should PPE be measured?
EXPENSE → SPL
Examples of costs that are NOT costs of an item
of PPE [IAS 16:19]
 cost of introducing a new product or service (e.g. advertising,
promotional activities)
 costs of opening a new facility
 cost of conducting business in a new location or with a new class of
customer (including cost of staff training)
 administrative and other general overhead costs
 costs of relocating or reorganising part or all of an entity's operations
[IAS 16:20]
 initial operating losses [IAS 16:20]
 costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is operated
at less than full capacity [IAS 16:20]
 costs / revenues of incidental operations → P&L [IAS 16:21]
 internal profits & abnormal amount
other
PPE of wasted material, labour or 17
resources [IAS 16:22]
How
should
PPE
be
measured?
Period of Production
Recognition of costs ceases when the item is in
location and condition necessary for it to be
capable of operating in the manner intended by
management. [IAS 16:20]
PPE
18
How should PPE be measured?
Lecture example (BPP, 2017, Practice & Revision Kit, p7)
Foster has built a new factory incurring the following costs:
$’000
Land
1,200
Materials
2,400
Labour
3,000
Architect’s fee
25
Surveyor’s fee
15
Site overheads
300
Apportioned administration overheads
150
Testing of fire alarms
10
Business rates for first year
12
7,112
What will be the total amount capitalised in respect of the factory?
PPE
19
How
should
PPE
be
measured?
Borrowing cost _ IAS 23
The borrowing costs must be capitalised as part of the cost
of an asset, if
 the asset is one which necessarily takes a substantial time
to get ready for its intended use or sale (ie. qualifying asset;
such as inventories, manufacturing plans, power generator facilities,
intangible assets, investment properties) and
 the borrowing costs are directly attributable to the
acquisition, construction or production of the qualifying
asset.
PPE
20
How
should
PPE
be
measured?
Borrowing cost _ IAS 23
Borrowing costs may include:
 interest expense
 finance charges in respect of leases recognised in accordance with
IFRS 16
 exchange differences arising from foreign borrowings to the extent
that they are regarded as an adjustment to interest costs
Rate of interest:
 where borrowings are made specifically to acquire a
qualifying asset; borrowing cost is equal
interest cost
less: any investment income on temporary investment of borrowing
 where funds for a project are taken from general
borrowings
PPE
weighted average cost of general borrowing is taken
21
How
should
PPE
be
measured?
Borrowing cost _ IAS 23
Commencement of capitalisation _ is the date when the
entity first meet all of the following conditions
 expenditure for the asset is being incurred
 borrowing costs are being incurred
 activities are in progress that are necessary to prepare the
asset for its intended use or sale
Cessation of capitalisation _ should cease when
substantially all the activities necessary to prepare the asset
for its intended use or sale are complete
Suspension of capitalisation _ an entity should suspend
capitalisation of borrowing costs during extended periods in
which it suspends active development of a qualifying asset
PPE
22
How
should
PPE
be
measured?
Borrowing cost _ IAS 23 _ Example
On 1 January 20X8, a company began to construct a new factory
which had an estimated useful life of 30 years. The construction
of the building cost £12 million and the fixtures and fittings cost
£6 million. The construction of the factory was completed on 30
September 20X8 and it was brought into use on 1 January 20X9.
The company borrowed £15 million on 1 January 20X8 in order
to finance this project. The loan carried interest at 10% pa. It was
repaid on 30 June 20X9.
Required:
Calculate the total amount to be included as cost in PPE in respect
of the development at 31 December 20X8.
PPE
23
How
should
PPE
be
measured?
Borrowing cost _ IAS 23 _ Example
£
PPE at 31 December 20X8
Building
12,000,000
Fixtures & fittings
6,000,000
Interest capitalised 01.01.20X8 – 30.09.20X8
15,000,000 x 10% / 12 x 9
1,125,000
Cost of PPE
19,125,000
Only 9 months’ interest can be capitalised, because IAS 23
states that capitalisation of borrowing costs must cease when
substantially all the activities necessary to prepare the asset for its
indented use or sale are complete.
PPE
24
How
should
PPE
be
measured?
Subsequent expenditure [IAS 16:12-14]
Capitalise subsequent expenditure when
 probable that future economic benefits associated with
item will flow to entity and
 cost can be measured reliably.
Examples:
 modification of an item of plant to extend its useful
economic life or increase capacity
 upgrading to achieve a subsequent improvement in
quality of output
 introduction of a new production process enabling a
reduction in previously assessed operating costs
PPE
25
How
should
PPE
be
measured?
Subsequent expenditure [IAS 16:12-14]
Part(s) of an asset is replaced
 recognise the new, replacing part(s)
+ depreciate it over its expected life AND
 derecognise old part(s)
Regular major inspections for fault
 recognise the cost of the inspection
+ depreciate it over the period to the next overhaul AND
 derecognise any remaining carrying amount of the cost of
the previous inspection
↓
CAPITAL EXPENDITURES
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26
How
should
PPE
be
measured?
Subsequent expenditure [IAS 16:12-14]
Costs of day-to-day servicing (costs of labour, consumables, cost
of small parts; routine servicing, repair and maintenance cost)
expensed in P&L as incurred.
↓
REVENUE EXPENDITURES
PPE
27
How should PPE be measured?
Subsequent expenditure _ Lecture example
A hydraulic equipment requires a planned overhaul every three years at a
cost of £12,000. This is a condition of being allowed to use the equipment.
How should the cost of the overhaul be treated in the FSs?
A.
B.
C.
D.
Accrued for over the years and charged to maintain expenses.
Capitalised and depreciated over the period to the next overhaul
Provided for in advance and charged to maintenance expenses
Charged to profit or loss when the expenditure takes place
PPE
28
How
should
PPE
be
measured?
Subsequent expenditure _ Lecture example
A hydraulic equipment requires a planned overhaul every three years at a
cost of £12,000. This is a condition of being allowed to use the equipment.
How should the cost of the overhaul be treated in the FSs?
A
Accrued for over the years and charged to maintain expenses.
B
Capitalised and depreciated over the period to the next
overhaul
C
Provided for in advance and charged to maintenance expenses
D
Charged to profit or loss when the expenditure takes place
The expenditure should be capitalised when it takes place and depreciated
over the period to the next overhaul. It should not be provided for in
advance because there is no obligation arising from a past event – the
overhaul could be avoided by ceasing to operate the equipment.
PPE
29
How should PPE be measured?
Carrying amount
Exchanges of assets [IAS 16:24]
Exchanges of items are
measured at fair value,
unless
the
exchange
transaction
lacks
commercial substance or the
fair value of neither of the
assets exchanged can be
measured reliably.
Amount at which an asset is
recognised after deducting any
accumulated depreciation and
accumulated
impairment
losses. [IAS 16:6]
PPE
30
Depreciation
Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life. It is a measure of the
“consumption” of the NCA.
Consumption includes:
 wearing out
 using up or
 other reduction in useful economic life of a NCA whether
arising from
 legal or similar limits on the use
 obsolescence through either
 changes in technology or
 demand for goods and services produced by asset
PPE
31
Depreciation
Measure of consumption = application of matching concept
Depreciation is not:
 a measure of fall in value of asset!
Depreciation charge
 usually recognised in P&L
BUT
 sometimes included in the carrying amount of another
asset
PPE
32
Depreciation
Determining depreciation charge
Significant parts (based on their cost to total cost) of an
item of PPE shall be depreciated separately.
Depreciation of an asset
 begins when it is available for use
 ceases at the earlier of the date that the asset
 is classified as held for sale (IFRS 5) and
 is derecognised
NOT ceases when the asset becomes idle or retired
from active use [IAS 16:55]
PPE
33
Depreciation
Determining depreciation charge
Need to know:
 cost/valuation of asset
 useful economic life of asset
 residual value of asset
 method of depreciation
PPE
34
Depreciation
Determining depreciation charge
Useful economic life
[IAS 16:6]
 the period over which an asset is expected to be available for
use by an entity; or
 the number of production or similar units expected to be
obtained from the asset by an entity
Useful economic life should be reviewed at the end of each
reporting period and revised if expectations are significantly
different from previous estimates. [IAS 16:51]
PPE
35
Depreciation
Determining depreciation charge
Useful economic life
If expectations differ from previous estimates, changes
accounted for as a change in accounting estimates in
accordance with IAS 8 (Accounting Policies, Changes in
Accounting Estimates and Errors). [IAS 16:51]
↓
Changes in accounting estimates (e.g. depreciation) should be
accounted for prospectively, not retrospectively. Effect of
change should be dealt with in the financial statements for
period of change and (if applicable) future periods. [IAS 8]
PPE
36
Depreciation
Determining depreciation charge
Useful economic life
Changes in Accounting Estimates _ Example
PPE
37
Depreciation
Determining depreciation charge
Useful economic life
Changes in Accounting Estimates _ Example
During 20X5 the company revised the useful economic life of
the machinery. Instead of 4 years remaining as originally
thought, now anticipate remaining useful economic life of 2
years.
Need to spread 150,000 – 30,000 = 120,000 over remaining
two years.
Apply prospective approach:
year 20X5 is: 60,000
year 20X6 is: 60,000
PPE
38
Depreciation
Determining depreciation charge
Residual value
Estimated amount an entity would currently obtain from
disposal of the asset, after deducting estimated costs of
disposal, if the asset was already of the age and in the
condition expected at the end of its useful life. [IAS 16:6]
Residual value based on prices current at SFP date.
PPE
39
Depreciation
Determining depreciation charge
Residual value _ Example
Company B buys a machine for £100,000.
Useful economic life estimated at 9 years at which time
company anticipates it might be worth £20,000.
The current selling price of a 9 year old machine in normal
condition for its age is £10,000.
Under IAS 16 residual value = ?
PPE
40
Depreciation
Determining depreciation charge
Depreciation methods
Method used shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed.
[IAS 16:60]
 straight-line method
 reducing balance method
 sum of the digits method
 units of production / machine hours method.
The method should be applied consistently from period to
period unless there is a change in the expected pattern of
consumption.
The depreciation method needsPPEto be reviewed at least at each
41
financial year-end.
Depreciation
Determining depreciation charge
Depreciation methods
A delivery van bought for a business cost £17,000. It is expected to last for five
years and then be sold for £2,000. Usage over the five years is expected to be:
Year1
200 days
Year2
100 days
Year3
100 days
Year4
150 days
Year5
40 days
Required:
Work out the depreciation to be charged each year under:
The straight line method
The reducing balance method (using a rate of 35%)
The machine hour method
The sum of the digits method
(BPP, 2016, F7 Financial Reporting, Study text, p43)
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42
Depreciation
Determining depreciation charge
Depreciation methods
Straight line method
PPE
43
Depreciation
Determining depreciation charge
Depreciation methods
Reducing balance method
Year
Depreciation
£
1
£17,000 x 35%
5,950
2
(£17,000 - £5,950) x 35% = £11,050 x 35%
3,868
3
(£11,050 - £3,868) x 35% = £7,182 x 35%
2,514
4
(£7,182 - £2,514) x 35% = £4,668 x 35%
1,634
5
Balance to bring book value down to £2,000
£4,668 - £1,634 - £2,000
PPE
1,034
44
Depreciation
Determining depreciation charge
Depreciation methods
Machine hours method
Total usage (days) = 200 + 100 + 100 + 150 + 40 = 590 days
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑑𝑎𝑦 =
Year
£17,000 − £2,000
= £𝟐𝟓. 𝟒𝟐
590
Usage (days)
Depreciation (£)
(days x £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
Note: The answer does not come to exactly £15,000 because of the rounding carried out at the
“depreciation per day” stage of the calculation.
PPE
45
Depreciation
Determining depreciation charge
Depreciation methods
Sum of the digits method
The method begins by adding up the years of expected life.
In this case: 5 + 4 + 3 + 2 + 1 = 15
Year
Depreciation
£
1
£15,000 / 15 x 5
5,000
2
£15,000 / 15 x 4
4,000
3
£15,000 / 15 x 3
3,000
4
£15,000 / 15 x 2
2,000
5
£15,000 / 15 x 1
1,000
15,000
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46
Depreciation
Determining depreciation charge
Depreciation methods
Year1
Depreciation
Straight line
Reducing balance
Machine hours
Sum of the digits
Cumulated depreciation
Straight line
Reducing balance
Machine hours
Sum of the digits
Carrying value
Straight line
Reducing balance
Machine hours
Sum of the digits
Year2
Year3
Year4
Year5
3,000
5,950
5,084
5,000
3,000
3,868
2,542
4,000
3,000
2,514
2,542
3,000
3,000
1,634
3,813
2,000
3,000
1,034
1,016
1,000
3,000
5,950
5,084
5,000
6,000
9,818
7,626
9,000
9,000
12,332
10,168
12,000
12,000
13,966
13,984
14,000
15,000
15,000
15,000
15,000
12,000
9,050
9,916
10,000
9,000
5,182
7,374
6,000
6,000
2,668
4,832
3,000
3,000
1,034
1,016
1,000
0
0
0
0
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47
Depreciation
Determining depreciation charge
Depreciation methods
Depreciation
Cumulated Deprecitation
7,000
16,000
6,000
14,000
5,000
12,000
4,000
10,000
3,000
8,000
2,000
6,000
4,000
1,000
2,000
0
Year1
Year2
Year3
Depreciation
Straight line
Machine hours
Sum of the digits
Year4
0
Year5
Year1
Reducing balance
Straight line
Year2
Reducing balance
Year3
Year4
Machine hours
Year5
Sum of the digits
Carrying value
14,000
12,000
Which method
should be used?
10,000
8,000
6,000
4,000
2,000
0
Year1
Straight line
Year2
Reducing balance
Year3
Year4
Machine hours
Year5
Sum of the digits
PPE
48
Depreciation
Does every asset have a limited economic life?
With the exception of sites used for extraction purposes or
landfill, land has an unlimited life - not depreciated. [IAS
16:58]
PPE
49
Depreciation
What if land is acquired with buildings on it?
 Land and buildings are separate components.
 Buildings have a limited life and should be depreciated [IAS
16:58]
+
 If the cost of land includes the costs of site dismantlement,
removal, restoration, that portion of the land is
depreciated. [IAS 16:59]
PPE
50
Depreciation
IAS 16 does not appear to support non-depreciation of PPE
other than land in any circumstances except where:
 depreciation charge and accumulated depreciation
are immaterial (large estimated remaining life or very
high residual value) → Where this is the case,
impairment reviews are required!
 residual value exceeds carrying value [IAS 16:52]
PPE
51
How should PPE be measured?
Measurement
at recognition
Measurement
after recognition
Cost
model
Revaluation
model
PPE
52
How should PPE be measured?
Subsequent measurement
After initial recognition, IAS 16 allows 2 different ways of
measuring property, plant and equipment:
• The cost model; items are carried at cost less any
accumulated depreciation and less any accumulated
impairment losses.
• The revaluation model; items are carried at fair value at
date of revaluation, less any subsequent accumulated
depreciation and less any subsequent accumulated
impairment losses.
(Where “fair value” is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm’s length transaction.)
PPE
53
How should PPE be measured?
Subsequent measurement _ Revaluation
If revaluation model is used it must be applied to the entire
classes of PPE e.g. land, land and buildings, machinery,
motor vehicles, office equipment (need not apply to all
classes). NO cherry-picking!
WHO?
 properties → qualified valuer
 other PPE → directors
PPE
54
How should PPE be measured?
Subsequent measurement _ Revaluation
Frequency of revaluations depends on changes in fair values
of the items being revalued:
 annual revaluation for items with significant/volatile
changes in fair value,
 every three or five years for items with insignificant
changes [IAS 16:34]
PPE
55
How should PPE be measured?
Subsequent measurement _ Revaluation
IF NBV < Fair value [IAS 16:39]
↓
Increase in the carrying amount of PPE (Dr)
If there is NO previous revaluation decrease
 recognised as an increase in revaluation reserve (Cr)
 shown in the SCI (other comprehensive income)
 ensures that unrealised revaluation gains are excluded
from profit and thus from payment as dividend
If there is previous revaluation decrease
 recognised and shown in the P&L (Cr) (to the extent
that it reverses a revaluation decrease of the same asset
previously recognised PPE
in P&L)
56
How should PPE be measured?
Subsequent measurement _ Revaluation
IF NBV > Fair value [IAS 16:40]
↓
Decrease in the carrying amount of PPE (Cr)
If there is NO previous revaluation surplus
 recognised and shown in the P&L (Dr)
If there is previous revaluation surplus
 recognised as a decrease in revaluation reserve (Dr)
 shown in the SCI (to the extent of any credit balance
existing in the revaluation reserve in respect of that PPE)
PPE
57
How should PPE be measured?
PPE
58
How should PPE be measured?
Revaluation _ Example
Fair value
A special equipment acquired on 1 January 20X1 for £15,000.
Estimated useful economic life of 15 years, no residual value.
After 5 years the asset is valued at £18,000 and it is expected
that useful economic life will be another 10 years.
What is the NBV of asset after 5 years?
 Depreciation = (cost - residual value) / economic life
 Depreciation = (15,000 - 0) / 15 = 1,000
 Five years depreciation = 5 x 1,000 = 5,000
 NBV = cost – acc. depreciation = 15,000-5,000 = 10,000
PPE
59
How should PPE be measured?
Revaluation _ Example
Comparing NBV to revaluation:
NBV = 10,000
<
revaluation = 18,000
↓
surplus = 8,000
Surplus of 8,000 is unrealised profit, recorded in
revaluation reserve (and shown as “other comprehensive
income” in the entity’s Statement of Comprehensive
Income).
PPE
60
How should PPE be measured?
Revaluation _ Example
Requires asset to be recorded at 18,000 in SFP (currently at
10,000):
Assets - Liabilities =
Capital (OI)
increase NCA
by 8,000
increase revaluation reserve
by 8,000
Dr: NCA
£8,000
Cr: Revaluation reserve
£8,000
PPE
61
How should PPE be measured?
Revaluation _ Example
NCA @ cost
Accumulated depreciation
Net Book Value
Before
Revaluation
£
15,000
(5,000)
10,000
Capital and Reserves
Revaluation reserve
-
PPE
After
Revaluation
£
18,000
18,000
8,000
62
How should PPE be measured?
Revaluation _ Example
Depreciation is now based on
 revalued amount and
 remaining economic life!
Revalued amount = 18,000; remaining life (15-5=)10 years
↓
annual depreciation charge of 1,800
PPE
63
How should PPE be measured?
Revaluation _ Example
Assets
-
Liabilities =
decrease asset
by 1,800
Capital (OI)
decrease P & L
by 1,800
Dr: Depreciation expense (P&L)
£1,800
Cr: Accumulated depreciation
£1,800
PPE
64
How should PPE be measured?
Revaluation _ Example
What about 8,000 sitting in the revaluation reserve?
 some of the surplus may be transferred as the asset is used by
the entity; the amount of the surplus transferred would be the
difference between depreciation based on the revalued carrying
amount of the asset and depreciation based on the asset’s
original cost → to maintain distributable profits (upward
revaluation caused an “excess” depreciation) OR
 the entity may transfer all of the relevant surplus at the time
of the asset’s disposal
 IAS 16 prohibits release into current P & L; transfer to
Retained profits [IAS 16:40]
PPE
65
How should PPE be measured?
Revaluation _ Example
What about 8,000 sitting in the revaluation reserve?
Calculation:
Surplus transferred over 10 years → 8,000 / 10 = 800pa
OR
Annual depreciation before revaluation
£1,000
Annual depreciation after revaluation
£1,800
Difference
£800
£800
Dr: Revaluation Reserve
Cr: Retained Earnings
£800
PPE
66
Derecognition of PPE
The carrying amount of an item of PPE needs to be
derecognised:
 on disposal (e.g. sale, finance lease, donation); or
 when no future economic benefits are expected from its
use or disposal
Gain / loss from the derecognition → P&L
BUT not revenue!
PPE
67
Derecognition of PPE
Disposal _ Example
What happens if the asset is not kept in use for remaining 10
years, but sold 2 years after revaluation?
Sale price is
£18,600.
Prior to disposal: SFP extract:
NCA at cost/revaluation
Accumulated depreciation (2 x 1,800)
NBV
18,000
(3,600)
14,400
Revaluation reserve (8,000 – (2x800))
6,400
PPE
68
Derecognition of PPE
Disposal _ Example
Questions:
1. What is the profit / loss on disposal?
2. How do we account for the disposal?
PPE
69
Derecognition of PPE
Disposal _ Example
What is the profit / loss on disposal?
Gain / loss on disposal [IAS 16]
= difference between disposal proceeds and NBV of NCA
£
NBV prior to disposal
14,400
Proceeds on disposal
18,600
Gain on disposal
4,200
PPE
70
Derecognition of PPE
Disposal _ Example
How do we account for the disposal?
Assets
– Liabilities =
decrease NCA by £14,400
increase cash by £18,600
Capital (OI)
increase in P&L
gain on disposal £4,200
+
£6,400 out of revaluation reserve transfer into retained
profits
PPE
71
IAS 16 Main Disclosure Requirements
[IAS 16:73] For








each class of PPE:
measurement basis for determining gross carrying amount
gross carrying amount and accumulated depreciation
reconciliation of carrying amount at beginning and end of the period
depreciation method
useful lives or depreciation rates used
depreciation charge for period
accumulated depreciation at end of period
nature and effect of any changes in estimates of




residual values,
useful lives,
depreciation method and
the estimated costs of dismantling, removing or restoring items of PPE
 additional information about revaluation [IAS 16:77]
PPE
72
Explain the usefulness of these disclosures to
users of FSs!
 Shows breakdown of PPE to major classes of NCAs.
 Shows which classes have been revalued.
 Accumulated depreciation gives some idea of the age of the
assets. Will they need to be replaced in the near future?
 Additions may indicate growth in capacity.
 Disposals – Forced sale? Assets becoming obsolete and will
need to be replaced?
See if you can come up with any more points!
PPE
73
How should PPE be measured?
Carrying amount
Amount at which an asset is recognised after
deducting any accumulated depreciation and
accumulated impairment losses. [IAS 16:6]
PPE
74
Impairment _ IAS 36
To determine whether an item of PPE is impaired, an entity applies
IAS 36.
IAS 36 explains:
 how an entity reviews the carrying amount of its assets
 how it determines the recoverable amount of an asset
 when it recognises / reverses the recognition of an impairment
loss
PPE
75
Impairment _ IAS 36
IAS 36 requires the entity at each reporting date to assess
whether there are indications of impairment.
If and indicator exists an impairment review must be
performed.
If no indication no further action needs to be taken.
Exception: IAS 36 requires annual impairment review for
 goodwill acquired in a business combination
 intangible asset with an indefinite useful life
 intangible asset not yet available for use
PPE
76
Impairment _ IAS 36
An asset is impaired if its recoverable amount is below the value
currently shown on the SFP.
CARRYING
VALUE
>
RECOVERABLE
AMOUNT
the greater of
fair value less: cost to sell
value in use
e.g. current market price less cost
of disposal
is determined by estimating future
CFs to be derived from the use of
the asset + its ultimate disposal,
and applying a suitable discount
rate
PPE
77
Impairment _ IAS 36
Recognition of impairment
 impairment loss → SPL
Dr: Expenses (SPL)
Cr: NCA
 exception: if the impairment reverses a previous gain taken to the
revaluation reserve
 reverse the revaluation gain → OCI
 remaining impairment → SPL
Dr: Revaluation Reserve
Dr: Expenses (SPL)
Cr: NCA
The depreciation charge on the asset should be based on its new
carrying amount, its estimated residual value (if any) and its estimated
remaining useful life.
PPE
78
Impairment _ IAS 36
Cash generating unit (CGU)
Not always be possible to base the impairment review on individual
assets. → The impairment calculation should be based on CGU.
CGU: the smallest identifiable group of assets which generate CFs
independent of those of other assets.
Impairment loss attributable to CGU should be allocated to write down the
assets in the following order:
1. Worthless assets (damaged, destroyed) (write down to zero*)
2. Goodwill (write down to zero)
3. Other assets (pro-rata the remaining impairment based on the
carrying amount)
! No individual asset should be written down below its recoverable
amount.
*: if there is enough impairment
PPE
79
Impairment _ IAS 36 _ Example
A CGU comprises the following:
£
40
12
10
18
80
Building
PPE
Goodwill
Current Assets
Total
Following a recession, an impairment review has estimated the
recoverable amount of the CGU to be £60 million.
Required: Allocate the impairment loss.
PPE
80
Impairment _ IAS 36 _ Example
CGU Assets
Building
PPE
Goodwill
Current Assets
Total
Recoverable amount
Impairment loss
£
40,000,000
12,000,000
10,000,000
18,000,000
80,000,000
60,000,000
-20,000,000
Pro rata
Impairment
Carrying amount
(%)
loss (£)
after impairment (£)
PPE
81
Impairment _ IAS 36 _ Example
CGU Assets
Building
PPE
Goodwill
Current Assets
Total
Recoverable amount
Impairment loss
£
40,000,000
12,000,000
10,000,000
18,000,000
80,000,000
60,000,000
-20,000,000
Pro rata
Impairment
Carrying amount
(%)
loss (£)
after impairment (£)
-10,000,000
-
PPE
0
82
Impairment _ IAS 36 _ Example
Pro rata
CGU Assets
Building
PPE
Goodwill
Current Assets
Total
Recoverable amount
Impairment loss
£
40,000,000
12,000,000
10,000,000
18,000,000
80,000,000
60,000,000
-20,000,000
(%)
76.92
23.08
Impairment
Carrying amount
loss (£)
after impairment (£)
-10,000,000
-
0
(40,000,000 / (40,000,000 + 12,000,000)) x 100%
PPE
83
Impairment _ IAS 36 _ Example
Pro rata
CGU Assets
Building
PPE
Goodwill
Current Assets
Total
Recoverable amount
Impairment loss
£
40,000,000
12,000,000
10,000,000
18,000,000
80,000,000
60,000,000
-20,000,000
(%)
76.92
23.08
Impairment
Carrying amount
loss (£)
after impairment (£)
-7,692,308
32,307,692
-2,307,692
9,692,308
-10,000,000
0
18,000,000
-20,000,000
60,000,000
(20,000,000-10,000,000) x 76.92%
PPE
84
Impairment
Reversal of an impairment loss
IF the recoverable amount of an asset that has previously
been impaired higher than the asset’s carrying value. →
reversal of some of the previous impairment loss
 the carrying amount of the asset should be increased to its
new recoverable amount
 recognised immediately as income in SPL
Except: goodwill; an impairment loss for goodwill should not
be reversed in a subsequent period
Note: The asset cannot be revalued to a carrying amount that
is higher than its value would have been if the asset had not
been impaired originally. (ie. The increased carrying amount due to
reversal should not be more than what the depreciated historical cost would have
been if the impairment had not been recognised.)
PPE
85
Impairment _ Disclosure

for each class of assets, the amount of
 impairment losses recognised and
 impairment losses recovered (ie reversal of impairment
losses)
 for each individual asset or cash generating unit that has
suffered a significant impairment loss
 details of the nature of the asset
 the amount of the loss
 the events that led to recognition of the loss
 whether the recoverable amount is fair value price less costs
of disposal or value in use
 if the recoverable amount is value in use, the basis on which
this value was estimated (e.g. the discount rate applied)
PPE
86
IAS 40 Investment properties
Definition
“Investment property is property (land or building – or part
of a building – or both) held (by the owner or the lessee
under a finance lease) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or
for administrative purposes; or
(b) sale in the ordinary course of business.” [IAS 40: 5]
Examples of investment property: [IAS 40.8]
 land held for long-term capital appreciation
 land held for a currently undetermined future use
 building leased out under an operating lease
 vacant building held to be leased out under an operating lease
 property that is being constructed or developed for future use as
investment property
PPE
87
IAS 40 Investment properties
Definition
The following are not investment property and, therefore, are
outside the scope of IAS 40: [IAS 40.5 and 40.9]
 property held for use in the production or supply of goods or
services or for administrative purposes
 property held for sale in the ordinary course of business or in
the process of construction of development for such sale (IAS 2
Inventories)
 property being constructed or developed on behalf of third
parties (IFRS 15 Revenues, e.g. Construction Contracts)
 owner-occupied property (IAS 16 Property, Plant and
Equipment), including property held for future use as owneroccupied property, property held for future development and
subsequent use as owner-occupied property, property occupied
by employees and owner-occupied property awaiting disposal
 property leased to another entity under a finance lease
PPE
88
IAS 40 Investment properties
Measurement
Measurement
on recognition
after recognition
at cost
(IAS 16)
PPE
89
IAS 40 Investment properties
Measurement / Accounting treatment
FAIR VALUE MODEL
COST MODEL







in effect this treats investment properties
in a similar manner to owner-occupied
properties (normal accounting treatment
set out in IAS 16)
carrying value = cost – accumulated
depreciation
depreciated
fair values of the investment properties
must be disclosed



SPL → depreciation
SFP → property at depreciated cost

PPE
IASB considers this model to be desirable
the asset is revalued to fair value* (the
amount for which the property could be
exchanged between knowledgeable, willing
parties in an arm’s length transaction) at the
end of each year
gains / losses → SPL (surplus / benefit on
investment property)
NO depreciation is charged on the asset
disclosure: reconciliation of the carrying
amount of the investment property at the
beginning and end of end of the year
SPL → gain / loss on property
SFP → property at fair value
*: Where the entity cannot determine the fair value of an
investment property reliably, the cost model in IAS 16
90 to be
must be applied & residual value must be assumed
zero.
IAS 40 Investment properties
Accounting treatment
Once the model is chosen it should be used for all
investment properties.
Change is only permitted if this results in a more appropriate
presentation. (IAS notes that this is highly unlikely for a change from
the fair value model to the cost model).
Fair value model
!
≠
↓
gain / loss
SPL
Revaluation model
↓
revaluation surplus
EQUITY
IAS 16
IAS 40
PPE
91
IAS 40 Investment properties
Example
Prospect plc moved into Property A from a smaller building,
Property B, which it retained as an investment for renting.
Property B, which originally cost £4,200,000 (of which land
is £1,200,000) has been leased under an operating lease to
Future plc.
Future plc is a company totally independent of Prospect plc
and the lease rentals were agreed on an arm’ length basis.
Property B has an open market value of £6,000,000 as at 31
March 20X9. The remaining useful life of the Property B
building is 30 years from 1 April 20X8.
Required: Show and explain the possible accounting
treatments of Property B under relevant IAS as at the yearending 31 March 20X9.
PPE
92
IAS 40 Investment properties
Example
Property B is being retained as an investment for
renting and is currently being leased to Future plc
under an operating lease with rentals agreed on
arm’s length basis. → Therefore it meets the IAS
40 definition of an investment property.
PPE
93
IAS 40 Investment properties
Example
COST MODEL
Land: No depreciation required
Buildings: Depreciation based on
cost (4,200,000 – 1,200,000) / 30 =
100,000
A (↓) – L = OI (↓)
FAIR VALUE MODEL
Cost
Fair value
Gain
£4,200,000
£6,000,000
£1,800,000
A (↑) – L = OI (↑)
Assets: decrease carrying value of Assets: increase in NCA
assets (increase in accumulated
Owners’ interest: increase in SPL
depreciation)
Owners’ interest: decrease by Plus valuation needs to be kept up
to date: annual revaluation is
expense
required as fair value should reflect
Plus disclose fair value of £6m.
PPE market conditions at the SFP date
94
Decision tree
PPE
Source: BPP P2 Study Text (2015); p97
95
IAS 20 Accounting for Government Grants …
Definitions [IAS 20:3]
 Government assistance: “is action by government designed
to provide an economic benefit specific to an entity or range
of entities qualifying under certain criteria. “
 Government grants: “are assistance by government in the
form of transfers of resources to an entity in return for past
or future compliance with certain conditions relating to the
operating activities of the entity. “
 Grants related to assets: “are government grants whose
primary condition is that an entity qualifying for them
should purchase, construct or otherwise acquire longterm assets. “
 Grants related to income: “are government grants other
PPE
than those related to assets.”
96
IAS 20 Accounting for Government Grants …
Recognition of government grants
An entity should not recognise government grant until it has
reasonable assurance that:
 the entity will comply with any conditions attached to the
grant
 the entity will actually receive the grant (received in cash;
given as a reduction in a liability to government)
PPE
97
IAS 20 Accounting for Government Grants …
Approach to recognising government grants
INCOME APPROACH
CAPITAL APPROACH
IAS 20
credited directly to
shareholders’ interest
PPE
“the government grants shall be
recognised in profit or loss [as
income] on a systematic basis
over the periods in which the
entity recognises as expenses
the related costs for which the
grants
are
intended
to
compensate” [IAS 20:12]
98
IAS 20 Accounting for Government Grants …
Recognition of Government Grants
GOVERNMENT GRANT
Related to ASSETS
Related to INCOME
choice
Deferred
Income
Deduct from
PPE*
Dr: Cash/Bank
Cr: Deferred Income
(full amount)
Dr: Cash/Bank
Cr: PPE
(full amount)
Dr: Deferred income
Cr: Income from
government grant
(match the grant
income with the
relevant
cost
–
depreciation)
Dr: Depreciation (E)
Cr: Acc. Depr. (A)
(smaller depreciation
charge!)
For past costs
incurred
Dr: Cash/Bank
Cr: Income from
government grant
(full amount)
PPE
*: or intangible asset
For current /
future costs
Dr: Cash/Bank
Cr: Deferred income
(full amount)
Dr: Deferred income
Cr: Income from
government grant
(Choice: match the grant
income with the relevant
expense – see above - OR
deduct it from the relevant
expense
Dr: 99 Deferred
income – Cr: Expense)
IAS 20 Accounting for Government Grants …
Lecture example _ Question
Clean Energy receives the following government grants in 20X6:
1. Grant of £60,000 to acquire a pollution reducing equipment.
The cost of the equipment was £150,000 and its useful life is
8 years. Clean Energy acquired the equipment on 1 July
20X6 and recognised the depreciation on a straight – line
monthly basis.
2. Grant of £20,000 to cover the expenses for environmental
impact measures during 20X6 – 20X9. Clean Energy assumes
to spend £6,000 in 20X6-20X8 and £4,000 in 20X9 (£22,000
in total).
3. Grant of £10,000 to cover the expenses for environmental
impact measures made by Clean Energy in 20X4-20X5.
Prepare the journal entries in thePPEyear ended 31 December 20X6.
100
IAS 20 Accounting for Government Grants …
Lecture example _ Suggested Solution
Grant to acquire PPE _ Option1: Deferred Income
£60,000
£60,000
JE/1 Dr: Cash/Bank
Cr: Deferred income
Being the receipt of the Grant
JE/2 Dr: Deferred income
£3,750
Cr: Income from government grant
£3,750
Being recognition in P/L in 20X6
(working: 60,000 / 8 * 6 / 12 = 3,750)
PPE
101
IAS 20 Accounting for Government Grants …
Lecture example _ Suggested Solution
Grant to acquire PPE _ Option2: Deduction from
PPE
£60,000
£60,000
JE/1 Dr: Cash/Bank
Cr: PPE
Being the receipt of the Grant
JE/2 Dr: Depreciation (E)
£5,625
Cr: Accumulated depr. of PPE (A)
£5,625
Being recognition in P/L in 20X6
(working: (150,000 – 60,000) / 8 * 6 / 12 = 5,625)
PPE
102
IAS 20 Accounting for Government Grants …
Lecture example _ Suggested Solution
Grant for environmental impact measures in 20X6 –
20X9 (→ grant for current & future expenses →
Deferred Income)
JE/1 Dr: Cash/Bank
Cr: Deferred Income
Being the receipt of the Grant
JE/2 Dr: Deferred Income
Cr: Income from grants
Being recognition in P/L in 20X6
PPE
(working: 6,000 / 22,000 * 20,000 = 5,455)
£20,000
£20,000
£5,455
£5,455
103
IAS 20 Accounting for Government Grants …
Lecture example _ Suggested Solution
Grant for environmental impact measures in 20X4 –
20X5 (→ grant for past expenses → Recognised
immediately in P/L)
JE/1 Dr: Cash/Bank
£10,000
Cr: Income from government grant
£10,000
Being the receipt of the Grant
PPE
104
IAS 20 Accounting for Government Grants …
Repayment of government grants
If a grant must be repaid it should be accounted for as a revision of an accounting
estimate (IAS 8).
a.
Repayment of a grant related to an asset

increase the carrying amount of the asset
Dr: PPE – Cr: Bank
OR

reduce the deferred income balance by the amount repayable
Dr: Deferred Income – Cr: Bank
+ the cumulative additional depreciation that would have been recognised to date
in the absence of the grant should be immediately recognised as an expense.
Dr: Expenses (IS) – Cr: PPE
b.
Repayment of a grant related to income
 apply first against any unamortised deferred income set up in respect of the
grant
Dr: Deferred Income – Cr: Bank
 any excess should be recognised immediately as an expense
PPE
105
Dr: Expenses (IS) – Cr: Bank
IAS 20 Accounting for Government Grants …
Disclosure [IAS 20: 39]
 The accounting policy adopted for government grants,
including the methods of presentation adopted in the FSs.
 The nature and extent of government grants recognised in
the FSs and an indication of other forms of government
assistance from which the entity has directly benefited
 Unfulfilled conditions and other contingencies attached to
governments assistance that has been recognised
PPE
106
Reference
 Elliot, B. and Elliot, J. (2022) Financial Accounting and
Reporting, 20th edition, Pearson, Chapter 17;
 Alexander, D. et al. (2020) International Financial
Reporting and Analysis, 8th edition, Cengage Learnings,
Chapter 12 & 14;
 BPP Learning Media (2022) FR Financial Reporting
Workbook, Chapter 3, 5 & 6
PPE
107