THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE 2015/2016
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA, MBA Fin ( Col)
IAS 16/ LKAS 16
Property, Plant & Equipment
Objective:
 The objective of LKAS 16 is to prescribe the accounting
treatment for property, plant, and equipment. The principal
issues are:
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- the timing of recognition of asset;
- the determination of their carrying amounts; and
- the depreciation charges to be recognized.
Non Current Assets
CONSIDERATIONS
Recognition
criteria
Asset
definition
Intangible
LKAS 38
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Non-current
definition
Tangible
LKAS 16
Investment Prop.
LKAS 40
Definition
Property, plant and equipment (PPE) are tangible items
that are
Held for use in the production or supply of goods
or services, for rental to others, or for
administration purposes; and
Are expected to be used during more than one
period.
Cost. The amount paid or fair value of other
consideration given to acquire or construct an
asset.
 Depreciation - Systematic allocation of the depreciable
amount of an asset over its useful life.
 Carrying amount: Carrying amount is the amount which an
asset is included in the Statement of financial Position after
deducting any accumulated depreciation
 Residual Value: is the net amount which the enterprise
expects to obtain for an asset and the end of its useful life
after deducting the expected costs of disposal
Useful life:
 The period of time over which an asset is expected to be used by
the enterprise or
 The no of production or similar units expected to be obtained
from the asset by the enterprise
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Following are relevant for determining the life time of asset.
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Expected usage of asset
Expected Physical wear & tare
Technical obsolescence
Legal Limits
Land usually has an indefinite useful life and consequently land is
not usually depreciated.
RECOGNITION OF AN ASSET
An item of property, plant, and equipment should be
recognized as an asset
 if and only if it is probable that future economic benefits
associated with the asset will flow to the entity
 and the cost of the item can be measured reliably
Initial Recognition - Cost
Purchase price :
including import duties, nonrefundable purchase taxes, less trade
discounts and rebates
Costs directly attributable to bringing the asset to the location and
condition necessary for it to be used in a manner intended by the
entity
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Examples of Directly Attributable Costs:
Cost of employee benefits.
Cost of site preparation.
Initial delivery and handling cost.
Installation and assembly cost.
Cost of testing after deducting the net proceeds from selling any
items produced.
Professional fees.
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Examples of costs that are not directly attributable costs and
therefore must be expensed in the income statement include
Costs of opening a new facility (often referred to as preoperative
expenses)
Costs of introducing a new product or service
Advertising and promotional costs
Costs of conducting business in a new location or with a new class
of customer
Training costs
Administration and other general overheads
Costs incurred while an asset, capable of being used as intended, is
yet to be brought into use, is left idle, or is operating at below full
capacity
Initial operating losses
Costs of relocating or reorganizing part or all of an entitys
operations
Initial estimates of dismantling, removing, and site restoration if
the entity has an obligation that it incurs on acquisition of the
asset or as a result of using the asset other than to produce
inventories
i.e
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Asian Capital Ltd installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (cost per supplier invoice plus taxes) 2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of the plant 700,000
Interest charges paid to supplier of plant for deferred credit 200,000
Estimated dismantling costs to be incurred after 7 years 300,000
Operating losses before commercial production 400,000
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Determine the cost that can be capitalized under LAKS 16
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Measurement of cost – Repairs and Maintenance
Routine repairs and maintenance and servicing costs
should normally be recognised in the Statement of
comprehensive income when the costs are incurred.
However, when the subsequent expenditure enhances
the value of the asset to the extent that additional
economic benefits will flow to the entity, that
additional expenditure should be recognised as part
of the assets costs.
DEPRECIATION
Methods:
Straight line
Units of production
Diminishing balance (Reducing balance)
Approach:
Depreciation charge for each period is recognized directly in Statement of
comprehensive Income
Methods should be reviewed annually
Charges start when asset ready for use and stop when asset derecognized
Straight line method
Straight line method depreciates cost evenly through out
the useful life of the asset. Straight line depreciation is
calculated as follows:
 Depreciation per annum = (Cost - Residual Value) /
Useful Life
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Accounting for Depreciation
◦ Depreciation
◦ Accumulated Deprecation
Dr ( Expense Account)
Cr
i.e:
Cost of the Asset 110,000
Residual Value 10,000
Expected Life time period : 10 years
Determine the annual depreciation amount
Subsequent measurement
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An entity may choose between:
◦ Cost model (i.e. cost less accumulated depreciation and
accumulated impairment losses, if any)
◦ Revaluation model (i.e. fair value at the date of revaluation
less subsequent accumulated depreciation/impairment
losses)
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However, the same policy must be applied to each entire class
of property, plant and equipment.
Disclosure requirements
For each class of PPE
• Measurement bases used for determining the gross
carrying amount
• The depreciation methods used
• The gross carrying amount and the accumulated
depreciation at the beginning and end of the period
• A reconciliation of the carrying amount at the beginning
and end of the period
• Depreciation policy and rates
• Details on revaluation (if any)
• The number of ancillary items which involve PPE