IAS/IFRS Note
IAS 16 ( Property,Plant ,Equipment)
1.
2.
3.
4.
5.
6.
7.
Objective
Scope
Definition
Recognition criteria
Measurement
De-recognition
Disclosure
1. Objective: Accounting treatment for PPE.
2. Scope: Outside of scope of IAS 16
I.
II.
III.
IV.
Noncurrent assets Held for sell (IFRS 5)
Agriculture (Biological Asset) IAS 41
Mineral Resource (IFRS 6)
Property for Rental – Investment Property IAS 40
3. Definition: (Key words)
•
•
•
Tangible ( has physical substance)
Use more than one year/ accounting period(long term)( more than one operating cycle)
Owners occupied (use for business purpose e.g. manufacturing, selling & distribution,
administration purpose and rental purpose)
4. Recognition criteria:
i)
ii)
It is probable that future economic benefit will inflow to the entity (revenue
generate or cost save)
Cost should be measured reliably.
5. Measurement
Measurement
Initial measurement
Subsequent measurement
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
Initial measurement
Initial record
At cost
General ledger
•
•
Purchase price – trade discount + Import duty +non refundable Vat
Directly attributable cost to bring the asset it’s intended usable
condition and location.
Example of some directly attributable cost:
For ready made purchase assets:
✓ Delivery cost
✓ Installation cost
✓ Assembling cost
✓ Handling cost
✓ Professional cost
✓ Borrowing cost (IAS-23)
For Self- constructed assets:
❖ Direct martial+ direct labour+ direct overhead.
Future unavoidable cost: it should be capitalized with initial cost at present value.
•
•
•
Restoration cost
Decontamination cost.
Dismantling cost
Pretesting Cost and sales proceeds from pretesting product should record on P/L
Some expenses can’t be capitalized:
✓ General overhead
✓ Administrative overhead
✓ Wastage/Idle time
✓ Ratification cost
✓ Employee training cost
✓ Initial operating loss
✓ Relocation cost
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
✓ Reconstructing cost
✓ Initial marketing cost
✓ Initial startup cost.
Subsequent expenditure:
❖ Repair and maintenance: generally cannot capitalize charge to P/L but if it can improve
the asset then can be capitalized. Sign of improvement are:
• Useful life increase
• Productivity increase
• Revenue increase
• Cost savings/wastage minimize
❖ Parts replacement (Spare parts) / Componentisation: Can capitalize if
I. Useful life should consider.
II. Material
III. Aggregation
❖ Due to parts replacement old parts should be de-recognize and disposal gain or loss
should calculate. If it is not possible to calculate the C.V of old parts then the C.V of old
parts will be calculated based on original cost of new parts as replacement cost
method.
❖ Complex Assets: Separate component of complex asset may disclose separately. E.g.
Aircraft , Ship
❖ Overhaul cost / Major inspection: Can capitalize when it will incur.
Subsequent measurement
Cost model
Revaluation model
Cost Model: Cost-accumulated dep’s - Impairment = Carrying value
Depreciation? : It is a systematic allocation of depreciable amount over it’s estimated useful life.
Residual value? : Estimated disposal value after it’s useful life
Depreciation method?:
Estimated useful life?
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
❖ Residual value and Useful life of assets must review annually each reporting date
❖ Depreciation will begins when asset is available for use rather date purchase and
depreciation will continue until the asset is derecognized even it is idle.
❖ Generally use Pro-rata basis
If any change occur like as following: (method, residual value, useful life review annually)
Useful life change
Residual value change
Depreciation method change
New capital expenditure (will add with net book value at time of new capital expenditure).
Then depreciation of changing year should be calculate as following formula:
Depreciation = (C.V- New residual value)/ Remaining useful life
Example:
ABC company purchase a machine for $6,00,000 which estimated useful life 6
year and estimated residual value $20,000, date of purchase 1st jan 2011 and accounting period
close 31st December each year .What should be 2nd year depreciation? Ans:$96,667(cost-RV)/UL
Same math: In 3rd year useful life reassess and determine as 4 year and residual value also
change $22,000. Depreciation of 3rd year ?
Ans: If useful life and residual value didn’t change then depreciation should be same $96,667
But here due to change of useful life and residual value, depreciation calculation need to
change as following:
Depreciation for 3rd year =(CV-new RV)/remaining useful life
C,V=6,00,000-1,93,334(previous 2year dep’n) = $4,06,666
Depreciation for 3rd year = ($4,06,666-$22,000)/4years = $96,166(Ans:)
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
❖ Depreciation method based on the revenue generated by an activity are not
appropriate. This is because revenue reflects many factors, such as inflation, sales prices
and sales volumes rather than economic consumption of an asset. Method should base
on nature of assets and pattern of use of assets
Revaluation Model:
➢
Revalued amount - accumulated dep’n - impairment
Before selecting revaluation model following condition must be fulfill for asset.
The asset must have active market.
Must have fair value (from orderly transaction with market participators as IFRS 13)
Market price
After choosing Revaluation model entity should confirm following condition:
1. When the entity decided to revalue it’s assets it can not “cherry pick” of asset for
revalue. Means: if the entity selects an asset to revalue then entire class of asset to
which it is belong must be revalued not only favorable asset.
2. Revaluations must be made with sufficient regularity to ensure that the carrying value
does not differ materially from the fair value at each reporting date.
Revaluation gain or loss must be calculated compare with carrying value of asset.
Exercise: Machine cost $500,000
Accumulated depreciation $ 260,000
Revalued amount $300,000
Revaluation gain/loss?
= $(500,000 – 260,000) = $240,000(C.V) - $300,000(R.V) = $ 60,000 (gain)
Double entry:
Accumulated depreciation Dr: $260000
Revaluation surplus
Cr: $60000
Machine cost
Cr: $200000
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
Machine account
$500,000 Accu: dep:
c/d
$500,000
$300,000
b/d
b/d
$200,000
$300,000
$500,000
Accumulated depreciation account
$60000
b/d
$200,000
$260,000
Revaluation
Machine cost
$260,000
$260,000
Revaluation account
Bal: c/d
$60000
$60,000
Acc:dep:
$60,000
Bal: b/d
$60,000
$60000
Revaluation reserve should be reported through other comprehensive income (OCI) and statement of
change in equity (SOCIE)
Revaluation gain will be transferred to revaluation reserve as equity in the statement of change in
equity and other comprehensive income . Unless it has previous year reversal in P/L.
Revaluation loss will be charged in to the profit and loss (P/L) unless it has revaluation reserve (same
assets) in the equity.
$180
OCI
$100
P/L
Revaluation
Revaluation gain
Add with revaluation reserve (equity)
and show at OCI
Revaluation loss
Should be charge in P/L unless it has
revaluation reserve (same asset)
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
Example 1:
Revaluation loss $5,000 .and no reserve available of the related assets. Ans: P/L = ($5,000).
Example 2:
Revaluation loss $5,000, Revaluation reserve = $8,000
Ans: 1st revaluation loss will adjust with revaluation reserve up to the reserve available of the
related assets and this adjustment also show on OCI as negative.
Loss should not charge on P/L because reserve is available. Show in OCI as ($5000) negative
figure and adjust with equity as follows:
Equity:
Revaluation reserve $8,000
Revaluation loss
$(5,000)
$3000
Example 3: Revaluation loss =$5,000 Revaluation reserve =$2,000
Ans: 1st revaluation loss will adjust with revaluation reserve up to the reserve available of the
related assets and this adjustment also show on OCI as negative amount. If reserve is eliminate
then remaining LOSS charge on P/L.
SOCIE :
Revaluation reserve $2,000
Revaluation loss
$(2,000)
(This LOSS also shows on OCI as negative figure as $(2000))
Nil
Then remaining LOSS $3000 will charge on P/L
Excess depreciation on revalued assets:
Machine cost $100,000
Remaining useful life 10 years.
Revalued amount at beginning of $120,000 the year.
Depreciation for the year($120,000/10y) = $12,000
If revalue does not occur then depreciation would be ($100,000/10y)=$10,000
So, Excess depreciation ($12,000-$10,000)=$2000
Company can deduct excess depreciation from revaluation reserve and add back to retain
earning(RE).
✓ (It is allowed by IAS – 16 but not mandatory, it is company discretionary policy).
✓ In exam it will be provided what to do.
➢ Double entry: For excess depreciation transfer from reserve to RE.
Revaluation Reserve ------------- Dr
Retain earning --------------------- Cr
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
PPE derecognition: (It is also relevant for all assets related IAS/IFRS (e.g.IAS40, 38, IFRS9)
➢
➢
➢
➢
➢
➢
Useful life expire/contract expire
Providing economic benefit stop
Ownership transfer to third party
Sold
Scraped
Part-exchange/Traded in ( or FULL exchange)
De-recognition: disposal gain/loss = (Carrying value – disposal proceed)
Disposal gain/loss
statement of profit & loss.
Disposal journal.
➢ 1.Cost should be eliminated
➢ 2.Acc. Depreciation should be eliminated
➢ 3.Proceeds (received)
➢ 4.Disposal loss/gain
➢ 5.Revaluation reserve of disposal asset transfer to retain earning
1) Disposal a/c
Asset cost a/c
Dr
Cr
$100,000
$100,000
2) Acc. Depreciation a/c Dr
Disposal a/c
Cr
$60,000
$60,000
3) Cash/Assets a/c
Disposal a/c
Dr
Cr
$50,000
$50,000
4) P/L
disposal loss
Dr
Cr
P/L
Disposal gain
Cr
Dr
5) Revaluation reserve
Retain earning
Dr
Cr
When revalue asset dispose
then any remaining reserve
of that asset will transfer to
Retain earning.
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
Disposal a/c
$100,000
Acc.dep
$10,000
Cash
$110,000
Cost
Gain (bal:fig:)
$60,000
$50,000
$110,000
NOTE: Disposal a/c creates for to determine disposal gain/loss.
Transition from IAS 16 to IAS 40/IAS2: transition should be at FV then any gain /loss should be
record as revaluation gain/loss as per IAS 16
.
❖ Exchange of assets: During new purchase: New asset value will be the value of
asset giving up.
❖ Disclosures:
For eac h class of property,
For each class of property, plant, and equipment, disclose:
•
•
•
•
•
•
basis for measuring carrying amount
depreciation method(s) used
useful lives or depreciation rates
gross carrying amount and accumulated depreciation and impairment losses
reconciliation of the carrying amount at the beginning and the end of the period,
showing:
o additions
o disposals
o acquisitions through business combinations
o revaluation increases or decreases
o impairment losses
o reversals of impairment losses
o depreciation
o net foreign exchange differences on translation
o other movement
gross carryi ng am ount and acc umul ated depr eci ation and im pairment
Additional disclosures
• restrictions on title and items pledged as security for liabilities
• expenditures to construct property, plant, and equipment during the period
• contractual commitments to acquire property, plant, and equipment
• compensation from third parties for items of property, plant, and equipment
that were impaired, lost or given up that is included in profit or loss.
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
Disclosure for Revalue assets:
• the effective date of the revaluation
• whether an independent valuer was involved
• for each revalued class of property, the carrying amount that would have been recognised had
the assets been carried under the cost model
• the revaluation surplus, including changes during the period and any restrictions on the
distribution of the balance to shareholders.
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
IAS -40 (Investment Property)
1. Objective: Accounting treatment for Land and building that are use for rental & capital
appreciation purpose
2. Definition:
i) land & building property
ii) long term
iii) use for capital appreciation or rental purpose
iv) no owners occupied (IAS 16)
v) no ordinary course of activities (IAS 2)
vi) Unique cash flow
3. Scope:
I. Land and building for long term capital appreciation
II.
Property held for currently undermined future use
III.
Vacant building held for rental/ operating lease out
IV. Building lease out under operating lease
V. Property construction for future use as investment property
Not Investment property:
I. Property for sale in the ordinary course of business (IAS 2)
II.
Property construct on behalf of third party (IFRS 15)
III.
Owner Occupied (IAS 16)
IV. Property construction for future use as owner occupied
V. Property rented to own employee (Capacity of being an employee)
Property let out with ancillary service
Determine the significant
Ancillary service significant (IAS 16)
Ancillary service not significant (IAS 40)
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
2.Recognition criteria – (as IAS 16)
3.Measurement:
Measurement
Initial measurement (as IAS 16)
Subsequent measurement
Cost model
(As IAS 16)
Fair value model
➢ No depreciation
➢ Fv gain/loss=P/L
➢ Closing FV=SOFP
IAS 40 generally suggests using fair value model because it is more practical and showing fair
presentation. But still the entity can use cost model.
If the entity chose any model (whether cost model/fair value) for any investment property then
the entity has to use the same model for rest of investment property.
If the entity makes rent out its property for operating lease purpose then there is no choice
except fair value model.
There may be exceptional cases where an entity adopts the fair value model, but is unable to
reliably measure the fair value of a particular property on a continuing basis. In such situations,
the entity should measure that property at cost less depreciation and any impairment losses.
The residual value of the property should be assumed to be zero. This basis should be applied
until the property is disposed of.
Multi-purpose property: Separate accounting should be applied where a property is used for
both investment purposes and administrative or productive purposes. One portion should be
accounted for as an investment property (IAS-40) and the other as PPE (IAS-16). Separate
accounting can only be applied if it is possible for the portions to be sold separately (or leased
separately under a finance lease).
The entire property is treated as PPE (IAS-16) only if a significant portion is held for use in the
production or supply of goods or services or for administrative purposes.
Transition from :
IAS 40 to IAS 16/IAS 2: transition should be at FV then any gain /loss should be record as FV
gain/loss as per IAS 40.
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.
IAS/IFRS Note
IAS 16 to IAS 40/IAS2: transition should be at FV then any gain /loss should be record as
REVALUATION gain/loss as per IAS 16
IAS 2 to IAS 40/IAS 16: transition should be at FV then any gain /loss should charge to P/L
❖ Disclosures:
•
Which method used ( FV or Cost model )
•
If used cost model still disclose FV
•
FV gain /loss recognized for the period
•
A reconciliation of carrying amounts at the beginning and end of the period
Reminder: Please must practice text book math and past question paper along with examiner
report and read examiner technical article to success in your ACCA exam.