 Definition  Recognition  Measurement  Depreciation

 Tangible ASSETS  Held for: ◦ use in production, ◦ supply of goods or services, ◦ for rental to others, or ◦ for administrative purposes  Expected usage over more than one reporting period

Definition component Tangible? Used in production, rental, supply of goods and services, or for administrative purposes? Expected usage over more than one period? Class Example 1: AE Entity purchased a new BMW X5 for R Is it PPE?

1. Meets the definition of an asset Control: when risks and rewards of ownership are obtained Typically at deliver of asset Vehicles: on registration of vehicle into owner’s name Property : registration in the deeds office 2. Meets the recognition criteria of an asset Probable that economic benefits will flow Cost or value that can be reliably measured

Initial recognition at cost Cost elements: 1.Purchase price including fees and duties, non- refundable taxes, excl. trade discounts and rebates (i.e. if VAT is refundable, it must be excluded) 2.Costs directly attributable to bringing asset to location and condition necessary for operating in manner intended by management 3.Initial estimates of costs for dismantling, removing asset, and restoring the site.

 Examples of costs included: ◦ Initial delivery costs ◦ Installation and assembly costs ◦ Costs to test whether item functions properly, less proceeds from sale of test products  Examples of costs excluded: ◦ Opening a new facility ◦ Introducing new products ◦ Conducting business in a new area/new class of customers ◦ Administration and general overhead costs

Class Example 2: Prosperity Entity purchased and paid for, a delivery vehicle from True Lemons Dealership for R on 01 April 20.7 for inclusion in its fleet of vehicles. Both entities are VAT vendors. The vehicle was registered on 15 April 20.7 for R The vehicle was taken to Tim’s Mods for the necessary addition of shelves in the vehicle used for carrying goods on 10 April The vehicle was finally delivered to Prosperity on 30 April. Tim’s Mods charged R for the modifications and True Lemons charged R1 368 for delivery. Mr C processed the administration of the purchase and modifications (ordering, goods receipt, payments, etc) at Prosperity Entity. His monthly employee benefit on 30 April 20.7 is R The insurance premium of R1 026 on the vehicle was paid on 30 April Is the vehicle PPE? 2. If so, at what cost should it be recognized in the books of Prosperity Entity? 3. Process the journal entries for the vehicle purchase and the modifications.

Cost CategoryAmount Purchase cost Registration cost Vehicle branding Delivery costs Mr C’s employee benefits Insurance Total cost of the vehicle

Cost CategoryAmount Purchase cost ( *100/114) Registration cost (1 140*100/114)1 000 Vehicle modifications (15 390*100/114) Delivery costs (1 368*100/114)1 200 Mr G’s employee benefits- Insurance- Total cost of the vehicle

20.7 DrCr 01 Apr.Delivery Vehicle (SFP) VAT Input (SFP) Bank (SFP) Recognise purchase of vehicle 20.7 DrCr 30 Apr.Vehicle modification costs (P/L) VAT Input (SFP)1 890 Bank (SFP) Recognise the payment for the vehicle modification costs 20.7 DrCr 30 Apr.Delivery Vehicle (SFP) Vehicle modification costs (P/L) Recognition of the capitalisation of vehicle delivery costs

 Cost is the cash price equivalent  Payment deferred beyond normal terms of credit  Cost will include an element of interest, NOT included as part of cost elements  Interest recognised separately  Cash price equivalent over the period is the Present Value of payments

Class Example 3 In order to ensure that it always had sufficient fuel for its fleet of vehicles, Prosperity Entity purchased an underground fuel storage tank from Leaky Tanks (a VAT vendor). The cost including delivery and installation was R Leaky Tanks provided an in-house finance facility of R at 10% interest per annum to facilitate the purchase. The facility will be paid in a lumpsum of R after 3 years. Interest for the period ending 31 December 20.7 is R The fuel tank was delivered and installed on 1 May. Fuel regulations however require that at the end of the 10 years, the fuel tank must be removed and the ground on which it is placed must be rehabilitated for damage due to fuel leaks that may occur. It is envisaged that it will cost R to conduct the necessary rehabilitation in 10 years time. The present value of the rehabilitation cost is R

Class Example 3 Required: 1. Process the journal entries to recognize the purchase of the fuel tank. 2. Process the journal entries for the interest on the finance facility on 31 December 20.7.

20.7 DrCr 01 May.Fuel Tank (SFP) VAT Input (SFP) Loan: Leaky Tanks (SFP) Recognise purchase of fuel tanks with a supplier's loan DrCr 01 May.Fuel Tank (SFP) Provision for rehabilitation (SFP) Recognise the provision of rehabilitation of land to fuel tanks DrCr 31 Dec.Interest on loan (P/L) Supplier Loan: Leaky Tanks (SFP) Recognise the interest on supplier’s loan

 Historical cost (HC) method and revaluation model  For our purposes, we will use the historical cost model  HC: Land - Cost price less Accumulated Impairment losses  HC: Other PPE - Cost price less Accumulated Depreciation less Accumulated Impairment losses

 Definition: A systematic allocation of the depreciable amount of an asset over its useful life.  No depreciation on Land  Commences when PPE item available for utilisation i.e. in location and condition necessary for operation as intended by management.  Depreciation suspended: 1.When fully depreciated 2.Decision to scrap 3.Decision to dispose

Depreciable amount = Cost Price – Residual Value Cost price: as per the initial recognition Residual value: Estimated amount that would be currently obtained on disposal, less Estimated costs of disposal At the age/condition expected at the end of its useful life Therefore we recoup the cost (economic benefits) of the PPE item through: 1.Depreciation, and 2.Residual value i.e. disposal

Useful life: 1. Period over which PPE item is expected to be used by the entity, or 2. Number of production or similar units (eg. km, hours) to be obtained from the asset by the entity. Land and Buildings: Often purchased together but treated separately Land has unlimited life Buildings have a limited life and are depreciated

Class Example 4 Prosperity Entity purchased office furniture on 02 January 20.7 from a VAT vendor for R including VAT. It expects to sell the furniture to a second-hand furniture dealer for R5 000 (excl VAT) in 5 years time. Required: Calculate the depreciable amount.

Cost (28 500*100/114) Less: Residual Value(5 000) Depreciable amount20 000

Depreciation Methods 1. Straight line method (period) Pattern of utilisation or usage of PPE item assumed to be even A function of time and not units Depreciation = Depreciable amount Useful life Apportionment of depreciation if item purchased during the period Changes in useful life – changes in estimates, not corrected retrospectively.

Class Example 5 Entity purchased office furniture on 02 January 20.7 for R including VAT. It expects to sell the furniture to a second-hand furniture dealer for R5 000 (excl. VAT) in 5 years time. The policy of the company is to depreciate furniture on a straight-line basis. Required: 1. Journalise the depreciation expense for the period ended 31 December Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

DrCr 31 Dec.Depreciation4 000 Accumulated Depreciation : Office Furniture Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) Less: Residual value Depreciable amount Depreciation (20 000/5 years) 4 000

Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Office Furniture ( ) Notes to the financial statements for the year ended 31 December Depreciation The company depreciates office furniture on a straightline basis over 5 years.

Example 5A: Change in estimated useful life At December 20.8, Prosperity Entity revised the estimated remaining useful life of the furniture to 5 years. Required: 1.Journalise the depreciation expense for the period ended 31 December Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

20.8 DrCr 31 Dec.Depreciation2 667 Accumulated Depreciation : Office Furniture Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) Less : Depreciation Carring value 01 Jan Less: Residual value Depreciable amount Depreciation 20.8 (16 000/6 years) 2 667

I year 5 years remaining

Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Office Furniture ( ) Notes to the financial statements for the year ended 31 December Depreciation During the year, Prosperity Entity revised its estimate of the useful life of the office furniture from 5 to 7 years. This has resulted in a reduction in the depreciation from R4 000 to R2 667 per annum.

Class Example 5B: Change in estimated residual value At December 20.8, Prosperity Entity revised the estimated residual value of the furniture to R Required: 1.Journalise the depreciation expense for the period ended 31 December Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

20.8 DrCr 31 Dec.Depreciation3 375 Accumulated Depreciation : Office Furniture Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) Less : Depreciation Carrying value 01 Jan Less: New residual value New depreciable amount Depreciation for 20.8 (13 500/4 years) 3 375

Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.8 NotesRand Gross Profit Depreciation Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.8 NotesRand Assets Non-Current Assets Office Furniture ( ) Notes to the financial statements for the year ended 31 December Depreciation During the year, Prosperity Entity revised its estimate of the residual value of the office furniture from R5 000 to R This has resulted in a reduction in the depreciation from R4 000 to R3 375 per annum.

2. The Diminishing balance method (period) Pattern of utilisation/usage of PPE item assumed to decrease over time A function of time and not units Depreciation = Carrying amount at the beginning of period x fixed depreciation rate (%) (Carrying amount = Cost – Accumulated depreciation) Depreciation rate already includes the useful life and residual value (see formula on p. 427) Apportionment of depreciation if item purchased during the period

Class Example 6 Prosperity Entity purchased a delivery vehicle on 02 January 20.7 for R including VAT. It expects to sell the vehicle to a second-hand vehicle dealer for R (excl. VAT) in 5 years time. The policy of the company is to depreciate vehicles using the diminishing balance method. The depreciation rate is 39% per annum. Required: Calculate the depreciation expense for the life of the delivery vehicle.

Cost (R *100/114) Depreciation Dec Carrying value Depreciation Dec Carrying value Depreciation Dec Carrying value Depreciation Dec Carrying value Depreciation Dec Carring Value

3. The units of production method Depreciation with reference to the estimated units Units can be units produced (machinery) or kilometres (vehicles) or hours (earth moving machinery) Depreciation = Depreciable amount* x Units produced / Total estimated units

Class Example 7 Prosperity Entity purchased a delivery vehicle on 02 January 20.7 for R including VAT. It expects to sell the vehicle to a second-hand vehicle dealer for R (excl. VAT). The policy of the company is to depreciate vehicles using the units of production method. It is also the policy of the company to dispose of vehicles after they have travelled km. During the year, the vehicle covered km. Required: Recognise the depreciation expense for the period ended 31 December 20.7.

20.7 DrCr 31 Dec.Depreciation (P/L) Accumulated Depreciation : Delivery Vehicle (SFP) Recognise depreciation on delivery vehicle. Cost(R * 100/114) Residual value Depreciable amount Depreciation (R * / )

Choice of depreciation method Based on the expected pattern of utilization/usage of economic benefits – a “systematic allocation” Depreciation based on professional judgement Reviewed annually Change in circumstances – change in depreciation policy Corrected in the current and future periods, not retrospectively.

Class Example 8: Change in depreciation method At 1 Jan 20.7, Machine A on the books of Prosperity reflected the following values: Cost: R Accumulated depreciation: R The policy on Machine A had been to depreciate it over 4 years on a straight line basis with no residual value. On 1 Jan 20.7 however, the policy was revised to reflect a more accurate utilization of the economic benefits. Machine A would be depreciated going forward on the units of production method. It is expected that it will produce units over its remaining life. For the period ended 31 Dec 20.7, Machine A produced units. Required: 1.Journalise the depreciation expense for the period ended 31 December Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

20.7 DrCr 31 Dec.Depreciation Accumulated Depreciation : Machine A Recognise depreciation on Machine A. WorkingsDepreciation: Carrying value 01 Jan Depreciation (R * units/ units)

Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Machine A ( ) Notes to the financial statements for the year ended 31 December Depreciation During the year, the company changed the depreciation method on Machine A from a straight-line basis to a units-of-production to better reflect the utilisation of benefits. The change in the method has resulted in reduced depreciation from R per annum to R