Date: Tuesday 3 May 2016 Venue: Engineering basement Time: 13:00 – 15:00 (seated at 12:45) Scope: Chapters 1 - 8, 12

PPE item: Cost 01 Jan 20.9-R Residual value R R Useful life (straight line)-5 years Required: Calculate depreciation on 31 Dec to 20.13

Depreciation Calculation Depreciation Accounting (carrying value) Cost Cost Residual value Depreciable amount Depreciation 20.9 (80 000/5) Accumulated Depreciation Carrying value 31 Dec Depreciation Accumulated Depreciation (80 000/5) Carrying value 31 Dec Depreciation Accumulated Depreciation (80 000/5) Carrying value 31 Dec Depreciation Accumulated Depreciation (80 000/5) Carrying value 31 Dec Depreciation Accumulated Depreciation (80 000/5) Carrying value 31 Dec

OT Entity, a VAT vendor, depreciates its specialized printing equipment on the units of production method based on the number of prints. The equipment is expected to produce prints over its useful life. Up 31 Dec , the equipment had produced prints. The machine cost R (excl. VAT) with a R residual value. The machine was donated to a charity on 31 August In the current year up to August 20.14, the machine produced prints. Required: All the journal entries relating to the equipment for 20.14

Depreciation Calculation Depreciation Accounting (carrying value) Cost Cost Residual value Depreciable amount (Accumulated) Depreciation (from inception to 31 Dec ) ( * / ) Accumulated depreciation (31 Dec ) Carrying value (31 Dec ) Depreciation (up to 31 Aug ) ( * / ) Depreciation (31 Aug ) Carrying value (31 Aug )

20.14 DrCr 31 Aug.Accumulated Depreciation (SFP) PPE: Old computers (SFP) VAT output (SFP) ( x14%) Loss on disposal of Equipment (P&L) Derecognise equipment donated, and loss on disposal DrCr 31 Aug.Depreciation Accumulated depreciation Recognise depreciation on printing equipment

 Trade-in  Impairment of assets  Losses and compensation from an insurer  Miscellaneous items  Component approach  Asset register  Presentation and disclosure

When an old PPE asset is traded in, it reduces the amount owed on new PPE asset. Derecognise the old asset completely and recognise the new asset in full. Trade-in credit on asset that is traded in.

Class Example 1 EB Entity has a policy of replacing its computer equipment every three years. On 30 June 20.7, EB entity traded in its old computers and bought new ones from IT Entity. Both entities are registered VAT vendors. The old computers reflect a cost of R excl. VAT and Accumulated Depreciation of R on 30 June 20.7 (ie Depreciation has been accounted for on the old computers up to 30 June 20.7). Computers are depreciated on a straight-line basis over 3 years. IT Entity was willing to give EB Entity a trade-in credit R incl. VAT for the old computers. The new computers costing R incl. VAT, were delivered and set up, on 30 June Payment to IT Entity was made on the same day. The residual value on the new computers is R excl VAT. The financial period of EB Entity ends on 31 December Required: Journalise the above transactions for EB Entity for the period ended 31 Dec. 20.7

Old Computers: Cost Accumulated Depreciation Carrying Value on 30 June Trade-in Credit Total Trade-in Credit Less: VAT output (Due to SARS) Profit on disposal10 000

Payment to IT Entity: Payment due on New computers Less: Trade-in Credit on Old computers Net payment to IT Entity

New computers: Cost on 1 July 20.7 ( *100/114) Residual Value Depreciable amount Depreciation ( /3)*6/12months23 333

20.7 DrCr 30 June.Accumulated Depreciation (SFP) PPE: New computers (SFP) VAT input (SFP) Bank (SFP) PPE: Old computers (SFP) VAT output (SFP) Profit on disposal of PPE: computers (P&L) Derecognise old computers (cost and accum. depn), recognise new computers, and profit on disposal DrCr 31 Dec.Depreciation Accumulated depreciation Recognise depreciation on new computers

Historical Cost Method: Carrying Value = Cost less Accumulated Depreciation less Accumulated Impairment IAS 36 Impairment of Assets – to ensure that the carrying value of PPE is not overstated.

Indications of impairment External indicators: Significant decline in market values Negative effect of technological, market or economic environment Increase in market related interest rates (discount rates) Internal indicators: Physical damage/ obsolescence Changes with negative impact on how asset will be used Economic performance of asset worse than expected

An item of PPE is impaired where: CARRYING VALUE exceeds RECOVERABLE AMOUNT

Class Example 2 Should the following assets be impaired: 1. PPE item A has a carrying value of R12 000, and a recoverable amount of R PPE item B has a carrying value of R10 000, and a recoverable amount of R

RECOVERABLE AMOUNT: The higher of: 1.Fair value less costs to dispose, and 2.Value in use

Fair value less costs to dispose: Estimated proceeds from selling the PPE item at arm’s length after deducting the costs that would be incurred to sell the item.

Value in use: The present value of the future nett cash flows from the PPE item.

Class example 3 PPE item C has a fair value of R It will cost the entity R1 000 to sell the item. The item has a value in use of R The carrying value of the PPE item is R What is the recoverable amount of the PPE item? 2. What is the impairment on the PPE item?

Where the CARRYING VALUE exceeds RECOVERABLE AMOUNT: Reduce the Carrying Value to Recoverable Amount 20.X DrCr 31 Dec.Impairment loss (P&L)XX Accumulated impairment (SFP) XX Recognition of impairment loss on item of PPE

Important: The current year depreciation will not be affected by the impairment loss i.e. 1.calculate the current year depreciation first, 2.then test for impairment. Future depreciation will be based on the new carrying value less the residual value.

Class example 4a: JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The recoverable amount on 30 Dec (year end) is R Calculate the depreciation and impairment loss for the period ended Dec Cost Accumulated depreciation

Step 1: Calculate the current year Depreciation Depreciable amount (Cost less residual value) Depreciation Dec ( /5 years) Step 2: Test for impairment Cost Accumulated Depreciation on 30 Dec ( ) Carrying Value on 31 Dec ( ) Recoverable amount The carrying value is less than the recoverable amount - NO IMPAIRMENT -

Class example 4b: JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The recoverable amount on 31 Dec (year end) is R excl. VAT. Calculate the depreciation and impairment loss for the period ended Dec and Dec Cost Accumulated depreciation

Step 1: Calculate the current year Depreciation Depreciable amount (Cost less residual value) Depreciation Dec ( /5 years) Step 2: Test for impairment Cost Accumulated Depreciation on 30 Dec ( ) Carrying Value on 31 Dec ( ) Recoverable amount The carrying value EXCEEDS the recoverable amount – IMPAIRMENT!

Carrying Value on 31 Dec Cost Less: Accumulated Depreciation ( ) Less: Accumulated Impairment Carrying value Depreciation for 31 Dec Carrying value 31 Dec Depreciation ( /2 years remaining life)

Businesses protect themselves from losses (theft, fire, accidental damage, etc) through Insurance. Replacement values (eg Buildings) Market values (eg Vehicles)

Recognition: Losses incurred – as soon as they are reliably measurable Proceeds from insurance – as soon as amount becomes receivable i.e. when insurer confirms the payout. Note: Do not set-off the insurance proceeds against the loss. Treat the income and loss separately.

Class example 5 JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The PPE item was accidentally damaged on 30 Sept and can no longer be used. On 01 November, the insurance company gave indication that they would pay out R incl. VAT. The financial year ends on 30 Dec Provide journal entries for the above.

Carrying value 1 Jan Cost Accumulated Depreciation (1 Jan. 20.7) Carrying Value on 1 Jan Depreciation (30 Sept. 20.7) Depreciable amount (Cost less residual value) Depreciation ( /5 * 9/12 months) Carrying Value 30 Sept Cost Accumulated Depreciation (30 Sept. 20.7) ( ) Carrying Value on 30 Sept

20.7 DrCr 30 Sept.Depreciation (P&L) Accumulated Depreciation (SFP) Recognise depreciation up to Sept DrCr 30 Sept.Accumulated Depreciation (SFP) Loss on accidental damage of PPE Item (P&L) PPE: Item (SFP) Derecognise PPE Item due to accidental damage 20.7 DrCr 01 Nov.Insurance Debtor (SFP) VAT Output (SFP) Proceeds from insurance claim (P&L) Recognise proceeds from insurance claim on damaged item

Some items of PPE are bought as a unit but have differing utilization patterns of economic benefits. Identifiable components Significantly different pattern of utilization of economic benefits. Example: Aircraft Depreciate the airplane frame and the engine separately.

 Miscellaneous costs: day-to-day running & maintenance costs for P&L  Asset Register: detailed breakdown of the assets  Presentation and disclosure: ◦ Financial Statements ◦ Accounting policy notes ◦ Other notes – detailed breakdown