5-1 Part C Financial Statement 1. Tangible non-current assets 2. Intangible assets 3. Impairment of assets 4. Inventory and biological assets 5. Financial Instruments 6. Leases 7. Provisions and events after the reporting period 8. Taxation 9. Reporting financial performance 10. Revenue 11. Government grants

5-2 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Definition Property, plant and equipment are tangible assets held by an enterprise for more than one accounting period for use in the production or supply of goods or services, for rental to others or for administrative purposes.

Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. Residual value is the net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal. Carrying amount is the amount at which an asset is recognised in the statement of financial position after deducting any accumulated depreciation and accumulated impairment losses. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-3

5-4 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Initial measurement An item of property, plant and equipment which qualifies of recognition as an asset should initially be measured at its cost. That is all costs involved in bringing the asset into working condition. You should be familiar with the idea that all capital costs should be included in this initial cost (e.g. the cost of site preparation, delivery costs, installation costs, etc.) whereas revenue costs should be written off as incurred (e.g. general overhead costs)

5-5 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Subsequent expenditure Subsequent expenditure on property, plant and equipment should only be capitalized if it improves the asset beyond its originally assessed standard of performance e.g. faster production or higher quality output. All other subsequent expenditure should be written off. For example, the cost of an extension to a building should be capitalized, while the cost of general repairs should be written off immediately.

5-6 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Revision of lives The useful economic lives of assets should be reviewed at least at each financial year-end, when necessary, revised. When a material change becomes necessary, the depreciation charge for the current and future periods should be adjusted.

Example: review of useful life B Co acquired a non-current asset on 1 January 20X2 for $80,000. It had no residual value and a useful life of 10 years. On 1 January 20X5 the remaining useful life was reviewed and revised to 4 years. What will be the depreciation charge for 20X5? Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-7

Solution Original cost 80,000 Depreciation (24,000) Carrying amount at 31 December 20X4 56,000 Remaining life 4 years Depreciation charge 14,000 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-8

5-9 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Change in method A change from on method of providing depreciation to another is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position. Such a change does not constitute c\a change of accounting policy; it is a change in accounting estimate, so the net book amount should be written off over the remaining useful economic life, commencing with the period in which the change is made.

Example Rose purchased plant for $20 million on 1 May 20X4 with an estimated useful life of six years. Its estimated residual value at that date was $1.4 million. At 1 May 20X7, the estimated residual value changed to $2.6 million Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-10

Solution 2004/05/1 20 Dep (20-1.4)/6* /05/ Dep ( )/ /04/30 8 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-11

5-12 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Separate components Some items of property, plant and equipment comprise separate components with different useful lives. In such situations the separate components should be capitalized as separate assets and each depreciated over their useful lives.

Example An aircraft could be considered as having the following components: Cost $’000 Useful life Fuselage 20, years Undercarriage 5, landings Engines 8,000 1,600 flying hours Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-13

Depreciation at the end of the first year, in which 150 flights totaling 400 hours were made would then be: $’000 Fuselage 1,000 Undercarriage (5,000 x 150/500) 1,500 Engines (8,000 x 400/1,600) 2,000 4,500 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-14

5-15 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Major inspection or overhaul costs Normally all inspection and overhaul costs are expensed as they are incurred. However, to the extent that they satisfy the IAS 16 rules for separate components, such costs should be capitalized separately as a non-current asset and depreciated over their useful lives. Every five years the cost of overhauling the interior of the plane should be capitalized as a non-current asset and depreciated over the five-year period before the next overhaul is carded out.

Example If, in the case of the aircraft above, an overhaul was required at the end of year 3 and every third year thereafter at a cost of $1.2m this would be capitalised as a separate component. $1.2m would be added to the cost and the depreciation (assuming 150 flights again) would therefore be: $’000 Total as above 4,500 Overhaul ($1,200,000 / 3) 400 4,900 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-16

5-17 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Subsequent Measurement Revaluations The standard offers two possible treatments here, essentially a choice between keeping an asset recorded at cost or revaluing it to fair value. a)Cost model. Carry the asset at its cost less depreciation and any accumulated impairment loss. b)Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably.

5-18 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Revaluations If the revaluation alternative is adopted, two conditions must be complied with. Revaluations must subsequently be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at each balance sheet date. When an item of property plant and equipment is revalued, the entire class of assets to which the item belongs must be revalued.

5-19 Topic 1 Tangible Non-current Assets IAS 16 Property, Plant and Equipment Revaluations Revaluation gains are reported in the Statement of Changes in Equity, which is fully explained in the precious session. Revaluation losses which represent an impairment are recognized in the income statement.

5-20 Topic 1 Tangible Non-current Assets Accounting for revaluation Steps: 1. Restate asset from cost to valuation. 2. Remove any existing depreciation provision. 3. Include increase in carrying value in revaluation reserve. Journal: Dr: Non-current asset (NBV) XXX Cr: Revaluation reserve XXX

Example Binkie Co has an item of land carried in its books at $13,000.Two years ago a slump in land values led the company to reduce the carrying value from $15,000. This was taken as an expense in profit or loss. There has been a surge in land prices in the current year, however, and the land is now worth $20,000. Account for the revaluation in the current year. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-21

Example Let us simply swap round the example given above. The original cost was $15,000, revalued upwards to $20,000 two years ago. The value has now fallen to $13,000. Account for the decrease in value. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-22

5-23 Topic 1 Tangible Non-current Assets Accounting for revaluation Depreciation of revalued asset There is a further complication when a revalued asset is being depreciated. As we have seen, an upward revaluation means that the depreciation charge will increase. Normally, a revaluation surplus is only realised when the asset is sold, but when it is being depreciated, part of that surplus is being realised as the asset is used. The amount of the surplus realised is the difference between depreciation charged on the revalued amount and the (lower) depreciation which would have been charged on the asset's original cost. This amount can be transferred to retained (ie realised) earnings but not through profit or loss

Example: revaluation and depreciation Crinckle Co bought an asset for $10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January 20X8 the asset was revalued to $12,000. The expected useful life has remained unchanged (ie three years remain). Account for the revaluation and state the treatment for depreciation from 20X8 onwards. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-24

Solution On 1 January 20X8 the carrying value of the asset Is $10,000 – (2*$10,000/5) = $6,000. For the revaluation: Dr. Accumulated depreciation $4,000 NCA $2,000 Cr. Revaluation surplus $6,000 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-25

The depreciation for the next three years will be $12,000/3 = $4,000, compared to depreciation on cost of $10,000 /5 = $2,000. So each year, the extra $2,000 can be treated as part of the surplus which has become realised: Dr. Revaluation surplus $2,000 Cr. Retained earnings $2,000 This is a movement on owners' equity only, not an item in profit or loss. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-26

Disposals Gains or losses are the difference between the estimated net disposal proceeds and the carrying amount of the asset. They should be recognised as income or expense in profit or loss. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-27

5-28 Topic 1 Tangible Non-current Assets Disclosure Key disclosures For each class of depreciable asset these include: 1. Depreciation methods used 2. UELs or depreciation rates used 3. Total depreciation charged for the period 4. Gross amount of depreciable assets and related accumulated depreciation 5. If material, the reason for any change in depreciation method.

5-29 Topic 1 Tangible Non-current Assets Disclosure Key disclosures For revalued assets are include: 1. Name and qualification of value 2. Basis of the valuation 3. Date and amount of valuations.

IAS 16 Exercise 1.Which of the following items should be capitalized within the initial carrying amount of an item of plant? i) Cost of transporting the plant to the factory ii) Cost of installing a new power supply required to operate the plant iii) A deduction to reflect the estimated realizable value iv) Cost of a 3 year maintenance agreement v) Cost of a 3 week training course for staff to operate the plant A i) and ii) only B i), ii) and iii) C. ii), iii) and iv) D. i), iv) and v) Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-30

Which of the following items should be capitalised within The initial carrying amount of an item of plant? I. Cost of transporting the plant to the factory II. Cost of installing a new power supply required to operate the plant III. A deduction to reflect the estimated realisable value IV. Cost of a three-year maintenance agreement V. Cost of a three-week training course for staff to operate the plant A. (i) and (ii) only B. (i), (ii) and (iii) C. (ii), (iii) and (iv) D. (i), (iv) and (v) Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-31

Tibet acquired a new office building on 1 October Its initial carrying Amount consisted of: $’000 Land 2,000 Building structure 10,000 Air conditioning system 4,000 16,000 The estimated lives of the building structure and air conditioning system are 25 years and 10 years respectively. When the air conditioning system is due for replacement, it is estimated that the old system will be dismantled and sold for $500,000. Depreciation is time apportioned where appropriate. At what amount will the office building be shown in Tibet’s statement of financial position as at 31 March 2015? $’000 A. 15,625 B. 15,250 C. 15,585 D. 15,600 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-32

The following trial balance extract relates to a property which is owned by Veeton as at 1 April 2014: Dr Cr $’000 $’000 Property at cost (20 year original life) 12,000 Accumulated depreciation as at 1 April ,600 On 1 October 2014, following a sustained increase in property prices, Veeton revalued its property to $10·8 million. What will be the depreciation charge in Veeton’s statement of profit or loss for the year ended 31 March 2015? A. $540,000 B. $570,000 C. $700,000 D. $800,000 Copyright © 2007 Pearson Addison-Wesley. All rights reserved.5-33