1 Property, Plant and Equipment Week 6 MN20018

2 Property, Plant & Equipment – IAS 16 Deals with PP&E which are TANGIBLE items which are Held for use in the production of goods or supply of services or are held for rental to others or held for administrative purposes Are expected to be used in more than one accounting period Does not apply to things like Mineral rights Oil reserves But does apply to PP&E used to develop & maintain these resources Does not apply to Leased Assets & Investment Properties They have separate accounting treatments

3 Definitions Carrying amount Amount recorded in BS after deduction of accumulated depreciation & impairment losses Depreciable amount Cost (or re-stated cost) less residual value Fair Value Effectively market value (arms-length transaction value) Impairment loss Amount by which carrying amount exceeds recoverable amount Recoverable amount Higher of Net Selling Price and Value in Use Residual value Estimated current disposal value at end of useful life (to the business)

4 Example Aardvark Co buys item of equipment costing $100,000 Expected life = 10 years Residual value estimated at $20,000, but because of inflation expected to fetch $45,000 on disposal. What is depreciable amount? Also has item of equipment that cost $80,000 and has accumulated depreciation of $30,000. It is now estimated the assets has value in use of $35,000 but could be sold for $32,000 net of selling costs. Should accounts be adjusted?

5 Matters dealt with in IAS 16 Recognition of asset Measurement of asset value at time of recognition Measurement of asset value after recognition Derecognition of assets Disclosure requirements

6 Recognition When to recognise: It is probable that future economic benefits associated with the asset will flow to the enterprise and The costs of the asset can be measured reliably

7 Odd situations All costs of an asset to be recognised at the time they are incurred These include Initial costs of acquiring or constructing Costs later incurred to add to or replace parts Assets acquired for health & safety to be classed under IAS 16 – even though they produce no economic benefit Repairs & maintenance are EXPENSES (include in IS) If significant part of asset replaced – include in cost But de-recognise carrying cost of any parts replaced. Eg re-lining furnaces Costs of major inspections (overhauls) included in cost De-recognise carrying amount of past inspections capitalised (Eg airworthiness inspections of aircraft)

8 Measurement at recognition Value measured at cost = Purchase price net of trade discounts Directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management = employee costs site preparation delivery & handling costs installation & assembly costs costs of testing professional fees Initial estimate of dismantling / restoring site after asset life NOT admin costs / other general costs

9 Example Aardvark Co has just bought a new building. Before occupation they have extensive refitting carried out. They have employed an architect to plan the work and supervise builders. Are the costs of refitting part of the cost of the asset? What about the architects fees?

10 Measurement after recognition How do you treat the carrying amount of asset after recognition? Cost model Carrying amount = Cost Less accumulated depreciation Less accumulated impairment loss Revaluation model Provided FAIR VALUE can be measured reliably carrying amount = Fair value at date of revaluation Less subsequent accumulated depreciation Less subsequent impairment loss Company can apply different models to assets, but same model to classes of assets Revaluations to be applied at same time and on all class

11 Accumulated depreciation at revaluation - 1 Proportional restatement Aardvark Co has a machine at cost $150,000 and depreciated by $50,000. Now been revalued to $180,000. This is 20% increase, so increase accumulated depreciation by 20% Accumulated depreciation = $60,000 Carrying amount before revaluation = $100,000 Now (180,000 – 60,000) = $120,000 = 20% increase

12 Accumulated depreciation at revaluation - 2 Restatement at revalued amount & eliminate depreciation against revaluation reserve Aardvark Co has a building valued at $2,000,000 with accumulated depreciation of $100,000. Revalued to $3,000,000. Show in BS at $3m. Credit increase to reserve & debit accumulated depreciation to reserve.

13 Use of Revaluation Reserve Revaluation upward – credit increase to Reserve Revaluation downward – Debit decrease to Income Statement (loss) Except If asset was revald down and charged to IS and is now revald upward. Credit as profit to IS – it reverses previous entry. If asset was revald upward and charged to Reserve and is now revald down. Charge to Reserve – it reverses previous entry.

14 Example Aardvark Co has Machine P revalued from carrying amount of $50,000 to revalued amount of $65,000 Machine Q revalued from carrying amount of $70,000 to revalued amount of $60,000 Machine R revalued from carrying amount of $50,000 to revalued amount of $65,000. This machine last year was revalued down by $6,000 and this was charged to IS as a loss. How do you deal with these?

15 Depreciation Each part of an item of PP&E with cost significant in relation to total asset cost be depreciated separately. E.g. An aircraft cost $10m and has life of 12 years. $1m relates to interior which is replaced every 3 years. Depreciate $9m over 12 years and depreciate $1m over 3 years. Depreciation should be allocated on a systematic basis over useful life Residual value and useful life to be reviewed every year

16 Specific points about depreciation Residual value is often immaterial thus treated as 0 An asset should be depreciated even if its fair value exceeds its carrying amount. It should not be depreciated if RV > carrying amount (when would this happen??) Depreciation begins when asset available for use Ceases at the earlier of When asset classified as held for sale (see IFRS 5) When asset derecognised Land & buildings should be separated for depreciation purposes

17 Depreciation methods Should reflect pattern of economic benefits provided Straight line Diminishing balance Units of production Review each year If pattern of benefits change then amend depreciation method

18 Derecognition of PP&E On derecognition – asset removed from balance sheet This happens when Asset disposed of No future economic benefits expected from use or disposal Derecognition leads to gain/loss = Difference between Net disposal proceeds and Carrying value of asset

19 Example Aardvark Co purchased item of plant on 1 January Cost = $750,000 Useful life = 10 years RV = 0 Straight line method used. At 31 December 2004 revalued to carrying value of $810,000 Asset sold on 31 December 2006 for $850,000 with selling costs of $5,000 What was gain or loss on disposal?

20 Questions - A Aardvark Co runs a fleet of delivery vans. During the year to 31 December 2005 it incurred these costs on a van it had bought the previous year. Costs of installing a new engine that significantly increases expected working life of the van Costs of repainting the van with companys new logo Costs of buying and fitting new, safer tyres. They have same estimated life as those originally fitted to van Which items should be recognised in the cost of the van?

21 Questions - B Which items of PP&E should NOT be depreciated? Quarry Machine kept idle and no longer used Asset classified as held for sale Plant with fair value greater than carrying amount

22 Questions - C Aardvark Co has a machine with a carrying value of $76,000. Two years ago the asset was revalued down by $7,000 and this was reported as a loss. It has now been sold for $83,000 less selling costs of $1,000. What is gain/loss on disposal and how do you report it?

23 Questions - D Aardvark Co has another machine (how many have they got??) with a carrying value of $78,000. Two years ago it was revalued down by $7,000 and this was reported as a loss. The asset has now been revalued upwards to be sold for $82,000. What is gain/loss on revaluation and how do you report it?

24 Questions - E Which of these items can be included in cost of an item of PP&E? General overheads relating to installation Spare parts Cost of moving asset to another location Delivery costs