Financial Reporting
IAS 16 Property, Plant, and Equipment (PPE) (chapter 4 F7 book)
IAS 16 applies to accounting for property plant and equipment. According to IAS 16 accounting for PPE
involves four stages:
1.
2.
3.
4.
Initial Recognition
Depreciation
Revaluation
Derecognition/Disposal
Doesn't apply to (1) biological assets such as agriculture and (2) mineral assets such as oil, gas, and nonregenerative assets.
1.3 Recognition
(1) it's probable that future economic benefits are expected.
(2) Cost can be fully measured reliably.
A PPE can be broken down into separate items each of them having their own depreciable lives and
rates. Major components and spare parts should also be considered as PPE.
1.6 Initial Measurement
Cost components include purchase price (less any discounts), import duties and non-refundable taxes,
directly attributable costs (deduct any proceeds arising from sale of units produced during testing
phase) to bring asset to working condition eg. cost of site prep, initial delivery and handling, testing,
installation, etc. (Admin costs and initial losses are not part of cost components)
An asset for which the payment goes beyond the normal credit terms, you have to take present value of
the payments as the value of asset. To calculate:
Step 1. Calculate annuity of the cashflow stream. (Annuity = NPV of all CF)
Step 2. Add downpayment to the PV of annuity.
Step 3. Take the annuity value and multiply it by the interest rate to get the annual financing charges.
Year
0
1
2
3
4
5
amount
$ 163,723.60
$ 113,723.60
$ 95,095.96
$ 74,605.56
$ 52,066.12
$ 27,272.73
installment
$ 50,000.00
$ 30,000.00
$ 30,000.00
$ 30,000.00
$ 30,000.00
$ 30,000.00
interest
$
$ 11,372.36
$ 9,509.60
$ 7,460.56
$ 5,206.61
$ 2,727.27
principal
$ 50,000.00
$ 18,627.64
$ 20,490.40
$ 22,539.44
$ 24,793.39
$ 27,272.73
balance
$ 113,723.60
$ 95,095.96
$ 74,605.56
$ 52,066.12
$ 27,272.73
$
(0.00)
Exchange of Assets
When an exchange of assets occurs, the newly exchanged asset should be recognized at fair value. If fair
value can not be determined, then the carrying amount of the asset given up should be taken.
Expenses associated with renewal (replacement) of an asset should be made part of carrying amount.
Derecognition of an exchanged asset entry
Debit
Credit
Accumulated Depreciation
xxx
New Asset
xxx
Old Asset
xxx
First preference – FV of old asset
second preference – FV of new asset
Third preference – carrying value of old asset
Never take carrying value of new asset
1.7 Subsequent Recognition/Revaluation
An asset can be valued at either:
1. Cost Model: Initial cost less accumulated depreciation less accumulated impairment losses
2. Revaluation Model: Revalued Fair value less any subsequent depreciation and subsequent
impairment losses. This provision is only available if the fair value can be reliably measured.
Revaluation
A property’s market value is its fair value. For Plant and Equipment, the market value can also be taken
as fair value. If it’s not available, then the cost of replacement of that asset (less depreciation) should be
taken. If an asset is revalued, then the whole class of that asset should be revalued.
Revaluation Book Entry
If a revaluation results in an increase in price of an asset, then the entry will be as follows:
Debit
Asset Value (Balance Sheet)
xxx
Credit
Revaluation Surplus (Balance Sheet Owner’s Equity)
xxx
If a revaluation results in a decrease in price of an asset, then the entry will be as follows:
Debit
Income Statement (Expense)
xxx
Credit
Asset Value (Balance Sheet)
xxx
Depreciation and revaluation
The surplus in realized upon disposal of the asset. If revaluation results in an increase in asset value, then
its annual depreciation will increase too. To make this right, a portion of surplus is realized to make up
for the increased depreciation charge. The entry is as follows:
Depreciation charge is $4000 now, before revaluation it was $2000.
Debit
Revaluation Surplus
xxx
Credit
Retained Earnings
xxx
1.11 Depreciation
Land is not depreciated, the building is. The revaluation of land has no affect on depreciation of the
building.
Depreciation is sometimes not recognized as an expense. For example, a plant and machinery asset used
in producing inventory is depreciated. Its depreciation charge will not go to income statement, rather it
will be reflected in the cost of inventory produced (CPU) (Management Accounting Principle) because
the depreciation charged is cost of producing inventory asset and should be matched with it.
A review of the useful life of the asset should be done at least once in a financial year to determine
whether current estimates are accurate.
Depreciation of an asset begins when it is available for use.
Derecognition
An asset has different components which have different useful lives, and they should be recognized and
derecognized accordingly.