Property, Plant and Equipment

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Property, Plant and Equipment

• Week 6
• MN20018

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Property, Plant Equipment IAS 16

• Deals with PPE which are TANGIBLE items which
  are
• Held for use in the production of goods or supply
  of services or are held for rental to others or
  held for administrative purposes
• Are expected to be used in more than one
  accounting period
• Does not apply to things like
• Mineral rights
• Oil reserves
• But does apply to PPE used to develop maintain
  these resources
• Does not apply to Leased Assets Investment
  Properties
• They have separate accounting treatments

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Definitions

• Carrying amount
• Amount recorded in BS after deduction of
  accumulated depreciation impairment losses
• Depreciable amount
• Cost (or re-stated cost) less residual value
• Fair Value
• Effectively market value (arms-length transaction
  value)
• Impairment loss
• Amount by which carrying amount exceeds
  recoverable amount
• Recoverable amount
• Higher of
• Net Selling Price and
• Value in Use
• Residual value
• Estimated current disposal value at end of useful
  life (to the business)

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Example

• Aardvark Co buys item of equipment costing
  100,000
• Expected life 10 years
• Residual value estimated at 20,000, but because
  of inflation expected to fetch 45,000 on
  disposal.
• What is depreciable amount?
• Also has item of equipment that cost 80,000 and
  has accumulated depreciation of 30,000. It is
  now estimated the assets has value in use of
  35,000 but could be sold for 32,000 net of
  selling costs.
• Should accounts be adjusted?

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Matters dealt with in IAS 16

• Recognition of asset
• Measurement of asset value at time of recognition
• Measurement of asset value after recognition
• Derecognition of assets
• Disclosure requirements

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Recognition

• When to recognise
• It is probable that future economic benefits
  associated with the asset will flow to the
  enterprise and
• The costs of the asset can be measured reliably

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Odd situations

• All costs of an asset to be recognised at the
  time they are incurred
• These include
• Initial costs of acquiring or constructing
• Costs later incurred to add to or replace parts
• Assets acquired for health safety to be classed
  under IAS 16 even though they produce no
  economic benefit
• Repairs maintenance are EXPENSES (include in
  IS)
• If significant part of asset replaced include
  in cost
• But de-recognise carrying cost of any parts
  replaced.
• Eg re-lining furnaces
• Costs of major inspections (overhauls) included
  in cost
• De-recognise carrying amount of past inspections
  capitalised
• (Eg airworthiness inspections of aircraft)

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Measurement at recognition

• Value measured at cost
• Purchase price net of trade discounts
• Directly attributable costs of
• bringing the asset to the location and condition
  necessary for it to be capable of operating in
  the manner intended by management
• employee costs
• site preparation
• delivery handling costs
• installation assembly costs
• costs of testing
• professional fees
• Initial estimate of dismantling / restoring site
  after asset life
• NOT admin costs / other general costs

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Example

• Aardvark Co has just bought a new building.
  Before occupation they have extensive refitting
  carried out. They have employed an architect to
  plan the work and supervise builders.
• Are the costs of refitting part of the cost of
  the asset?
• What about the architects fees?

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Measurement after recognition

• How do you treat the carrying amount of asset
  after recognition?
• Cost model
• Carrying amount
• Cost
• Less accumulated depreciation
• Less accumulated impairment loss
• Revaluation model
• Provided FAIR VALUE can be measured reliably
  carrying amount
• Fair value at date of revaluation
• Less subsequent accumulated depreciation
• Less subsequent impairment loss
• Company can apply different models to assets, but
  same model to classes of assets
• Revaluations to be applied at same time and on
  all class

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Accumulated depreciation at revaluation - 1

• Proportional restatement
• Aardvark Co has a machine at cost 150,000 and
  depreciated by 50,000.
• Now been revalued to 180,000.
• This is 20 increase, so increase accumulated
  depreciation by 20
• Accumulated depreciation 60,000
• Carrying amount before revaluation 100,000
• Now (180,000 60,000) 120,000 20 increase

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Accumulated depreciation at revaluation - 2

• Restatement at revalued amount eliminate
  depreciation against revaluation reserve
• Aardvark Co has a building valued at 2,000,000
  with accumulated depreciation of 100,000.
  Revalued to 3,000,000. Show in BS at 3m.
  Credit increase to reserve debit accumulated
  depreciation to reserve.

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Use of Revaluation Reserve

• Revaluation upward credit increase to Reserve
• Revaluation downward Debit decrease to Income
  Statement (loss)
• Except
• If asset was revald down and charged to IS and
  is now revald upward.
• Credit as profit to IS it reverses previous
  entry.
• If asset was revald upward and charged to
  Reserve and is now revald down.
• Charge to Reserve it reverses previous entry.

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Example

• Aardvark Co has
• Machine P revalued from carrying amount of
  50,000 to revalued amount of 65,000
• Machine Q revalued from carrying amount of
  70,000 to revalued amount of 60,000
• Machine R revalued from carrying amount of
  50,000 to revalued amount of 65,000. This
  machine last year was revalued down by 6,000 and
  this was charged to IS as a loss.
• How do you deal with these?

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Depreciation

• Each part of an item of PPE with cost
  significant in relation to total asset cost be
  depreciated separately.
• E.g. An aircraft cost 10m and has life of 12
  years. 1m relates to interior which is replaced
  every 3 years.
• Depreciate 9m over 12 years and depreciate 1m
  over 3 years.
• Depreciation should be allocated on a systematic
  basis over useful life
• Residual value and useful life to be reviewed
  every year

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Specific points about depreciation

• Residual value is often immaterial thus treated
  as 0
• An asset should be depreciated even if its fair
  value exceeds its carrying amount.
• It should not be depreciated if RV gt carrying
  amount (when would this happen??)
• Depreciation begins when asset available for use
• Ceases at the earlier of
• When asset classified as held for sale (see IFRS
  5)
• When asset derecognised
• Land buildings should be separated for
  depreciation purposes

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Depreciation methods

• Should reflect pattern of economic benefits
  provided
• Straight line
• Diminishing balance
• Units of production
• Review each year
• If pattern of benefits change then amend
  depreciation method

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Derecognition of PPE

• On derecognition asset removed from balance
  sheet
• This happens when
• Asset disposed of
• No future economic benefits expected from use or
  disposal
• Derecognition leads to gain/loss
• Difference between
• Net disposal proceeds and
• Carrying value of asset

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Example

• Aardvark Co purchased item of plant on 1 January
  2004.
• Cost 750,000
• Useful life 10 years
• RV 0
• Straight line method used.
• At 31 December 2004 revalued to carrying value of
  810,000
• Asset sold on 31 December 2006 for 850,000 with
  selling costs of 5,000
• What was gain or loss on disposal?

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Questions - A

• Aardvark Co runs a fleet of delivery vans.
  During the year to 31 December 2005 it incurred
  these costs on a van it had bought the previous
  year.
• Costs of installing a new engine that
  significantly increases expected working life of
  the van
• Costs of repainting the van with companys new
  logo
• Costs of buying and fitting new, safer tyres.
  They have same estimated life as those originally
  fitted to van
• Which items should be recognised in the cost of
  the van?

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Questions - B

• Which items of PPE should NOT be depreciated?
• Quarry
• Machine kept idle and no longer used
• Asset classified as held for sale
• Plant with fair value greater than carrying amount

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Questions - C

• Aardvark Co has a machine with a carrying value
  of 76,000. Two years ago the asset was revalued
  down by 7,000 and this was reported as a loss.
  It has now been sold for 83,000 less selling
  costs of 1,000.
• What is gain/loss on disposal and how do you
  report it?

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Questions - D

• Aardvark Co has another machine (how many have
  they got??) with a carrying value of 78,000.
  Two years ago it was revalued down by 7,000 and
  this was reported as a loss. The asset has now
  been revalued upwards to be sold for 82,000.
• What is gain/loss on revaluation and how do you
  report it?

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Questions - E

• Which of these items can be included in cost of
  an item of PPE?
• General overheads relating to installation
• Spare parts
• Cost of moving asset to another location
• Delivery costs