ACCA FINANCIAL REPORTING (FR)

Chapter 2 — Revision Notes

Tangible Non-Current Assets

IAS 16 · IAS 20 · IAS 23 · IAS 40

1. IAS 16 — Property, Plant and Equipment (PPE)

Recognition
An item of PPE is recognised as an asset only when BOTH conditions hold:
● Probable: it is probable that future economic benefits will flow to the entity
● Measurable: the cost of the asset can be measured reliably

Initial measurement — what's included in cost

DEFINITION
• Purchase price + all costs of bringing the asset to the location/condition for its intended use.
• Includes: delivery, installation, site preparation, professional fees, borrowing costs (IAS 23), and the PV
of dismantling/decommissioning costs.
• Excludes (expense as incurred): staff training, fuel, general overheads, warranty costs, and costs after
the asset is ready for use.

● Abnormal costs are always excluded, even during construction: cost of wasted/spoiled materials, cost of
correcting design errors, and labour cost during a stoppage/delay are expensed, not capitalised — only
normal, unavoidable construction costs qualify.

Dismantling / decommissioning costs

● Capitalise the present value of the future dismantling cost, and set up a matching liability.
● Each year the liability is 'unwound' (increased) by the discount rate — the increase is charged as a
finance/interest expense in P/L, not depreciation.
● Discount factor used: 1 ÷ (1+r)ⁿ, where r = discount rate, n = years to settlement.

EXAM TIP
• Two effects to remember for a dismantling provision: (1) capitalise PV + depreciate it over the asset's
life, and (2) unwind the discount each year through finance costs, increasing the liability.

Subsequent expenditure
Capitalise (add to cost) only if it:
 ● Enhances economic benefits — extends life, expands capacity, or improves output/quality
● Relates to a major inspection/overhaul required for continued use — capitalise and depreciate to the next
inspection
● Replaces a component of a multi-component asset — capitalise the new part and derecognise the old
(component) part
Everything else (e.g. routine repairs and servicing) is expensed to P/L as it merely maintains, rather than enhances,
the asset.

2. Depreciation

DEFINITION
• Depreciation = the systematic allocation of the depreciable amount of an asset over its useful life.
• Depreciable amount = cost (or valuation) less residual value.

● Depreciation starts when the asset is available for use (ready for its intended use), NOT necessarily when it is
actually used.
● Depreciation continues even while an asset is idle or held for use, and only stops when the asset is
derecognised or classified as held for sale.
● Common methods: straight line, reducing balance, machine hours — method should reflect the pattern of
consumption of benefits.
● A change of depreciation method is a change in accounting estimate (applied prospectively), NOT a change in
accounting policy.
● Useful life and residual value must be reviewed at each year end; if expectations change significantly, the
remaining carrying amount is depreciated over the revised remaining useful life (prospective change).
● Componentisation: where an asset has significant parts with different useful lives (e.g. aircraft body vs
engine), depreciate each component separately.

3. Revaluation of Non-Current Assets

The two models under IAS 16

Model Measurement basis
Cost model Cost less accumulated depreciation less
impairment
Revaluation model Fair value at revaluation date less subsequent
accumulated depreciation and impairment

● If revaluation is chosen: (1) must be kept up to date so carrying amount ≈ fair value, and (2) the ENTIRE
CLASS of assets must be revalued (no cherry-picking).

Accounting for a revaluation gain (steps)

1. Restate the asset's cost/valuation to the new (fair) value.
2. Eliminate the existing accumulated depreciation against the asset.
3. Record the gain in Other Comprehensive Income (OCI), accumulated in the Revaluation Surplus (equity) — a
non-distributable capital reserve.
Revaluation gains and losses — the rules
● Gains: normally go to OCI / revaluation surplus.
● Losses: normally go to P/L as an expense (this is effectively an impairment).
● Exception — losses: if there is a previous revaluation surplus on that SAME asset, the loss is first offset
against that surplus (through OCI); only any excess loss goes to P/L.
● Exception — gains: if a previous loss on that same asset was charged to P/L, a subsequent gain is first
recognised in P/L (reversing the old loss) up to that amount; any excess goes to OCI/surplus.
● Gains and losses on DIFFERENT assets/properties can never be offset against each other.

Depreciation of a revalued asset

● Depreciate the revalued amount (less residual value) over the remaining useful life — the FULL charge goes
through P/L.
● Optional 'excess depreciation' transfer: each year, the extra depreciation caused by the revaluation
(depreciation on valuation less depreciation on original cost) MAY be transferred from revaluation surplus
directly to retained earnings via the Statement of Changes in Equity (SOCIE) — never through OCI or P/L.

Disposal of a revalued asset

● Profit/loss on disposal = sale proceeds less carrying amount at disposal — recognised in P/L.
● Any remaining balance on the revaluation surplus for that asset is transferred straight to retained earnings
via SOCIE (not through OCI or P/L, since OCI only moves when an asset is actually revalued).

4. IAS 20 — Government Grants

Two guiding principles: prudence (don't recognise until conditions are met and receipt is reasonably assured) and
accruals (match the grant to the expenditure it compensates).

Revenue grants (e.g. towards payroll/running costs)

Presentation choice — either:
● Show as separate credit/income in P/L, or
● Deduct from the related expense
Recognise over the period of the related expenditure/conditions (e.g. released evenly over the period a job-
retention condition applies); the unreleased balance sits in deferred income (split current/non-current).

Capital grants (e.g. towards buying a non-current asset)

Method Treatment
1 — Netting off Deduct grant from the cost of the asset;
depreciate the reduced (net) cost
2 — Deferred income Recognise grant as deferred income; release to
P/L over the asset's useful life, offsetting the
(higher) depreciation on the gross cost

● Both methods are equally acceptable under IAS 20 and give the same net effect on P/L profit each year,
though SOFP presentation differs.
Repayment of grants
● Treated as a change in accounting estimate.
● Deferred income method: reduce/eliminate the remaining deferred income balance; any shortfall is an
expense.
● Netting-off method: increase the cost of the asset by the amount repaid (as if the grant had never reduced it)
and set up a liability for the repayment.
● If repayment is only probable (not yet required), provide for it under IAS 37.

5. IAS 23 — Borrowing Costs

DEFINITION
• A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended
use or sale (e.g. self-constructed buildings, plant).
• Borrowing costs directly attributable to acquiring, constructing, or producing a qualifying asset MUST
be capitalised as part of its cost.

Capitalisation period
Starts when ALL of the following are met:
● Expenditure on the asset is being incurred
● Borrowing costs are being incurred
● Activities necessary to prepare the asset for use/sale are in progress

Suspended / ceases when:

● Construction is suspended for an extended period (e.g. industrial action), or
● Substantially all activities necessary to get the asset ready are complete

Which interest rate to capitalise

● Specific borrowings: capitalise the actual interest incurred, LESS any investment income earned on
temporarily investing the unused loan funds.
● General borrowings: capitalise using the weighted average cost of the general borrowings outstanding during
the period, applied to expenditure on the asset.
Weighted average rate = (Σ loan amount × rate) ÷ Σ loan amounts, e.g. ($10m×6% + $2m×8%) ÷ $12m = 6.33%.

EXAM TIP
• Timing matters: only interest incurred, and investment income earned, DURING the capitalisation
period is netted off and capitalised.
• Interest incurred or investment income earned BEFORE the capitalisation period starts, or AFTER it
ends, goes straight to P/L as a normal finance cost/income — it is never capitalised or netted off.

6. IAS 40 — Investment Property

DEFINITION
• Investment property = land and/or buildings held to earn rentals and/or for capital appreciation, rather
 than for use in the business or for sale in the ordinary course of business.

● Owner-occupied property is PPE (IAS 16), not investment property.

● Mixed-use property: split if the parts can be sold/leased separately; if not, treat as investment property only
if an insignificant portion is owner-occupied.
● Group context: property let to another group company is investment property in the OWNER'S individual
financial statements, but PPE (IAS 16) in the CONSOLIDATED financial statements (the group uses it).

Measurement
● Initial measurement: at cost.
● Subsequent measurement — choose ONE model for ALL investment property: cost model (as IAS 16) or fair
value model.
Fair value model — key rules
Revalue to fair value at every year end
Gain or loss goes to P/L (not OCI) — unlike IAS 16 revaluations
No depreciation is charged

Transfers between IAS 16 and IAS 40 (fair value model in use)

● PPE → Investment property: revalue first under IAS 16 (gain/loss to OCI/P&L as normal IAS16 rules), THEN
transfer at fair value into investment property.
● Investment property → PPE: revalue first under IAS 40 (gain/loss to P/L), THEN transfer at fair value into PPE,
which becomes the new 'cost' for future depreciation.
● If the cost model is used for investment property, transfers simply happen at the existing carrying amount (no
gain/loss), and depreciation continues.

Chapter Summary — memory checklist

REVISION CHECKLIST
• IAS 16: recognise if probable + measurable; capitalise cost to bring asset to working condition (incl.
dismantling PV & borrowing costs); depreciate from availability for use.
• Revaluation: whole class revalued; gains → OCI/surplus; losses → P/L (unless offsetting own prior
surplus); optional annual transfer of excess depreciation to retained earnings.
• IAS 20: revenue grants matched to expense; capital grants — net-off OR deferred income method, both
acceptable.
• IAS 23: capitalise borrowing costs on qualifying assets; specific borrowing = actual cost less investment
income; general borrowing = weighted average rate.
• IAS 40: investment property held for rental/capital growth; fair value model — no depreciation,
gain/loss to P/L.