Property Plant Equipment/IAS 16/

Presentation Outline

Definition Depreciation

Recognition Impairment

Measurement Disclosure

04/27/2023 1
Cont’d… HERE

This standard doesn’t particularly applied to

a) IFRS 5
b) IFRS 16
c) AIS 40
d) IFRS 6

04/27/2023 2
 Asset

CA
NCA

Operational Asset Investment Asset

Tangible Asset Intangible Asset

PPE
NR

04/27/2023 3
 Definition of PPE

Are tangible items that are

a) Are held for use in the production/supply of goods or

service/rental/for administrative

b) Are expected to be used during more than one period.

04/27/2023 4
 Brainstorming
o Land acquired and held for speculation?

Is it PPE?

o Land held by a real estate concern for resale?

Is it PPE?

04/27/2023 5
Cont’d…

o Spare parts that will be consumed with in 12 month or in one

operating cycle shall be classified as what?

o If they will be in use for more than 12 month they should be

categorized as what?

04/27/2023 6
Recognition of PPE

An item of PPE is recognized as an asset (Element of FP) if

a) Its probable that FEB associated with given item of entity.

b) The cost of the item can be reliably measured.

04/27/2023 7
 Measurement of PPE
Case 1) Initial Measurement of PPE

An item of PPE which qualifies for recognition Anticipated costs of dismantling and

as asset should initially be measured at its cost removing the item and restoring the site

Purchase price, including import duties and Cost of financing that are directly
non-refundable purchase taxes, less trade attributable for readiness of intended use
discounts and rebates
Cost of Installation, related professional
Costs directly attributable to bringing the asset
fees for architects and engineers.
to the location and condition for intended use.

04/27/2023 8
 Brainstorming
Proceeds from selling items produced while bringing an item of property, plant
and equipment to the location and condition necessary for it to be capable of
operating in the manner intended by management are
a) Deducted from the cost of PPE

b) Not deducted from of PPE

So if not deducted, how we can treat it?

04/27/2023 9
Cont’d…
• Here IAS 16 provides application guideline

a) If the payment for an item PPE is deferred beyond normal credit terms,
the difference between the cash price equivalent and total payment is
recognized as the interest over the period of credit unless such interest is
capitalized just IAS 23.

b) If a customer transfer an item of PPE to the entity and this item satisfies
the definition of the asset, the entity measure its cost at initial recognition
at FV.
04/27/2023 10
 Cont’d…
c) If an item of PPE is acquired in exchange for a non-monetary asset, the cost of the acquired item of
PPE is measured at FV unless;
i. The exchange lacks commercial substance

ii. The FV of asset received or given up not reliably measured.

Note1: If the acquired item is not measured at fair value, its cost is measured at the carrying amount of
the asset given up.
Note2: CS exist if

a) Cash flows of new asset should differ from those old asset
b) After tax, cash flow of business taking new asset have changed
c) The difference is significant.
04/27/2023 11
 Numerical Example
e q ui red
o Given R
n Pr i ce!
og n it io
o List price=Br 8.4M it ia l R e c
In
o TD=12.5%
o Initial delivery and handling cost=Br 55,000
o Consultants used to advice on the acquisition= Br300,000
o Pre-operation testing costs=Br 250,000
o Repair and maintenance for 3 years= Br 480,000
o Replacing cost for broken component while testing= Br 200,000
o Interest deferred=Br 400,000
04/27/2023 12
 ….Ceasing recognition of costs

• The recognition part of PPE asset should be stop when the item is the capable of
operating the manner intended by BOD/Mgmt.

• Even this include the asset yet has not been put in use as long I & T.

Question

Can we cease any operating losses that incurred during the early part of asset
life?????????

No

Because any operating losses that incurred during the early part of asset life should not
recognized
04/27/2023
as part of asset. 13
 …Subsequent Expenditure
• in condition subsequent condition enhance assets FEB, additional expenditure
should be recognized as part of asset’s cost. Replacements and overhauls should be
capitalised if they lead to an enhancement in performance via Capacity, Quality
EUL and Reduce OC.
• All other subsequent expenditure should be recognised as an expense in the period
in which it is incurred. Here this routine repairs and maintenance costs should
normally be recognized in PLA when cost are incurred.

04/27/2023 14
 Brainstorming

If a building is repainted, how should this expenditure

be treated?
oWhere should it written off?

04/27/2023 15
Numerical Exercise
• Illustration: Lenard Company purchases a delivery truck at a cash price
of Br.22,000. Related expenditures are sales taxes Br.1,320, painting
and lettering Br.500, motor vehicle license $80, and a three-year
accident insurance policy Br.1,600.

Required

a) Compute the cost of the delivery truck

b) Prepare the journal entry to record these costs

04/27/2023 16
 Case ii) Measurement subsequent to initial recognition

Once the PPE has been recognized at cost, entity has a choice of how it should be
recognized in the subsequent period. Accordingly,

IAS 16 permits two accounting models:

a) Cost model. The asset is carried at cost less accumulated depreciation and

impairment.

b) Revaluation model. The asset is carried at a revalued amount, being its fair value at
the date of revaluation less subsequent depreciation and impairment, provided that fair
value can be measured reliably.
04/27/2023 17
 a) Cost model
For all depreciable assets:

• The depreciable amount (cost less residual value) should be allocated on a

systematic basis over the asset's useful life

• The residual value and the useful life of an asset should be reviewed at
least at each financial year-end and, if expectations differ from previous
estimates, any change is accounted for prospectively as a change in
estimate under IAS 8.

04/27/2023 18
 Cont.d…
• The depreciation method should be reviewed at least annually and, if the
pattern of consumption of benefits has changed, the depreciation method
should be changed prospectively as a change in estimate under IAS 8. Expected
future reductions in selling prices could be indicative of a higher rate of
consumption of the future economic benefits embodied in an asset.

• In each period, the carrying amount of the asset in the statement of financial
position is reduced by the depreciation charged.

04/27/2023 19
Note
Depreciation

RV

ELU

Depreciation Method (SLM, DBM and UPM)

Changes in Accounting estimates

04/27/2023 20
 b) Revaluation model

• Under the revaluation model, revaluations should be carried out regularly, so that the
carrying amount of an asset does not differ materially from its fair value at the balance
sheet date. If an item is revalued, the entire class of assets to which that asset belongs
should be revalued.

• If a revaluation results in an increase in value, it should be credited to OCI and

accumulated in equity under the heading "revaluation surplus" and a decrease arising as
a result of a revaluation should be recognized as an expense to the extent that it exceeds
any amount previously credited to the revaluation surplus relating to the same asset.

04/27/2023 21
 Cont.d…
• When a revalued asset is disposed of, any revaluation surplus may be
transferred directly to retained earnings, or it may be left in equity under the
heading revaluation surplus. The transfer to retained earnings should not be
made through profit or loss.

04/27/2023 22
 Let me make it clear
Upward valuation

Under this, an increase in the value of revaluation of an asset is recognized in

OCI under the heading of revaluation surplus. However, if an upward valuation
reverse an earlier downward valuation which was recognized in PCA, so our
UV also recognized in PLA. Behalf, any excess above previous decrease go
under OCI.

04/27/2023 23
Cont’d…
Downward Valuation
Under this, an decrease in the value of revaluation of an asset is
recognized in OCI under PLA. However, if an downward valuation
reverse an earlier upward valuation which was recognized in OCI, so
our DV also recognized in OCI. Behalf, any excess above previous
decrease go under PLA.

04/27/2023 24
 Numerical Example
KIYA PLC has an item of machinery carried in its books at Birr 1M. Before five
months, asset value’s of company’s was 1.5M. However, company’s asset prices
in the current year is 1.8M.

Required?
How do we record revaluation ?

04/27/2023 25
 e r
An sw
Machinery …………………800,000
P & L…………………….. 500,000
Revaluation Surplus…… 300,000

04/27/2023 26
 Numerical Example

KIYA PLC has an item of machinery carried in its books at Birr 1.8M. Before
five months, asset value’s of company’s was 1.5M. However, company’s asset
prices in the current year is 1M.

Required?
How do we record revaluation ?

04/27/2023 27
 e r
An sw
Revaluation surplus-----------300,000
P & l-------------------------------500,000
Land ----------------------------800,000

04/27/2023 28
 De-recognition of PPE
• An asset should be removed from the statement of financial position on disposal or when it is

withdrawn from use and no FEB are expected from its disposal. The gain or loss on disposal is the

difference between the proceeds and the carrying amount and should be recognized in profit and loss.

Note:

a) Any gain should not be classified under part of entity income

b) The date of disposal of and presentation of an asset held for resale decided by IFRS 15 and NCA
held for sale by IFRS 5.

c) If on disposal of revalued asset there is remains a balance on the revaluation surplus, the balance
should be transferred to retained earning.
04/27/2023 29
 Disclosure Requirement
IAS 16 requires that a reconciliation of carrying amount at the beginning and
the end of each of period in relation to the movement in PPE. The
reconciliation should show all movements.

In addition to a full reconciliation, the entity should disclose its depreciation
policy and rates. Where the entity adopts a policy of revaluation, this should be
explained along with information on when the last valuation exercise was
carried out.

04/27/2023 30
 Think Ahead!

u A l l!
n k Yo
Th a

04/27/2023 31