1. Property, Plant and Equipment

2. Overview of session 1. Scope of application and key concepts
2. Recognition
3. Measurement
4. Additional learning points
5. Disclosures
Recognition: P,P&E, inventory or expense?
Measurement: initial
subsequent - consumption of value
- impairment
6. E.C. specific implications
7. Questions

3. Property, Plant and Equipment
1. Scope of application and key concepts

4. P,P&E Assets = Resources
Controlled by the E.C. as a result of past events; and
From which future economic benefits or service potential are expected to flow to the E.C.
Property, plant and equipment = tangible assets that:
Are held by the E.C. for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
Are expected to be used during more than one reporting period.
Service potential – because most of the E.C.s’ assets have no commercial rate of return
Last bullet: introduce the example of spare parts (spare parts are usually carried as inventory and recognised as an expense as consumed – BUT major spare parts and stand-by equipment qualify as P,P&E if to be used for more than 1 accounting period or if they can only be used in connection with an item of P,P&E

5. Classes of P,P&E
Assets of a similar nature or function in the E.C.s’ operations are grouped into classes of property, plant and equipment for the purpose of disclosure in the financial statements:
Land and buildings;
Plant and equipment;
Furniture and vehicles;
Computer hardware;
Other tangible (non-financial) assets;
Pre-financing and tangible assets under construction;
and
Leased assets.

6. Cost and Fair value
Cost = 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
Fair value = the amount for which an asset could be exchanged (or a liability settled) between knowledgeable, willing parties in an arm’s length transaction

7. Useful life and Depreciation
Useful life = the period of time over which an asset is expected to be used by the entity
Depreciation = the systematic allocation of the depreciable amount of an asset over its useful life
Depreciable amount = the cost of an asset (or other amount substituted for cost in the financial statements) less its residual value
Residual value = the net amount which the entity expects to obtain for a asset at the end of its useful life after deducting the expected costs of disposal
Useful life: introduce the « components approach » - e.g. buildings and partitions do not have the same useful life

8. Owner-occupied V. Investment property
Owner-occupied property
Of general application
Property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes
Investment property
Of specific application
Property (land or a building – or part of a building – or both) held to earn rentals or for capital appreciation or both

9. Property, Plant and Equipment
2. Recognition

10. Initial recognition
An item of property, plant, equipment and investment property should be recognised as an asset when:
Future economic benefits or service potential are expected to flow to the E.C.; and
The cost or fair value of the asset can be measured reliably.
Future economic benefits: from use + from ultimate disposal
Future economic benefits or service potential – example: assets acquired for safety or environmental reasons are recognised as assets if the service potential from the related assets is more than what could be derived if the assets had not been acquired BUT carrying amount should not exceed future service potential from use and ultimate disposal

11. P,P&E or not? Materiality threshold: € 420 P,P&E No Yes EXPENSE No Yes
Resource controlled by the E.C.?
Yes
EXPENSE
Future economic benefits are expected? No
Yes
ASSET No
To be used for production, commercial or administrative purposes?
ANOTHER ASSET
Yes No
Expected to be used during more than one reporting period?
Yes No
Can be measured reliably? ?
Yes
Materiality threshold: € 420
P,P&E

12. Timing of initial recognition
Date of acquisition = the date on which the risks pertaining to ownership get transferred to the E.C. – generally corresponds to the acceptance of delivery of the asset
Consider cut-off at year-end
Delivered not billed: recognise asset and accrue invoice
Billed not delivered: transfer asset to a suspense account

13. Property, Plant and Equipment
3. Measurement

14. Initial measurement
An item of property, plant, equipment and investment property which qualifies for recognition as an asset should initially be measured at cost
Where an asset is acquired at no cost, or for a nominal cost, its cost is its fair value at the date of acquisition

15. Components of cost The cost of an item = its purchase price, plus
Import duties and non-refundable purchase taxes (including property transfer taxes); and
Any directly attributable costs of bringing the asset to working condition for its intended use, such as:
Cost of site preparation;
Initial delivery and handling costs;
Installation costs;
Professional fees such as architects and engineers, legal services; and
The estimated cost of dismantling the asset and restoring the site (set up of a provision).
Any trade discounts or rebates are deducted.
Cost of dismantling the asset and restoring the site: Dr. Tangible fixed assets / Cr. Provision

16. Specific initial measurement issues
Self-constructed asset:
Cost is determined using the same the same principles as for an acquired asset
Where an asset is acquired at no cost, or for a nominal cost, cost is the fair value at the date of acquisition
Exchange of assets:
Cost is measured at the fair value of the asset received (equivalent to: Fair value of the asset given up + cash transferred)
Self-constructed asset: include direct labour costs and indirect labout costs to the extent that they can be directly related to the construction of the asset

17. Subsequent expenditure
Subsequent related expenditure should be added to the carrying amount of the asset, when:
It is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset will flow to the European Communities; and
They improve the condition of the asset;
Otherwise subsequent expenditures must be recognised as expenses
<> Repairs and maintenance

18. Subsequent expenditure
Examples of improvements which result in increased future economic benefits or service potential include:
Modification of an item of plant to extend its useful life, including an increase in its capacity;
Upgrading machine parts to achieve a substantial improvement in the quality of output;
Adoption of new production processes enabling a substantial reduction in recently assessed operating costs.

19. Subsequent expenditure
Repairs, renovations and maintenance are made to restore or maintain the future economic benefits
ASSET
EXPENSE

20. Subsequent measurement - Depreciation
All assets entered as tangible assets shall be depreciated, except for:
Land;
Fixed asset under construction;
Pre-financing on property;
Work of art.
The depreciable amount should be allocated on a systematic basis over useful life (costs subsequently capitalised over the remaining useful life)
The depreciation method used should reflect the pattern in which the asset’s economic benefits or service potential is consumed by the E.C.
Monthly pro rata temporis depreciation from the date of acquisition
The depreciation charge of each period expense

21. Subsequent measurement - Useful life
Estimation of the useful life of an item
Judgement based on the experience of the E.C. with similar assets
Useful life and depreciation basis should be reviewed
on a regular basis
Change in accounting estimates – give an example
Where a change is justified  Accounted for as a change in
accounting estimates with no prior year restatement

22. Subsequent measurement
Subsequent to initial recognition as an asset, an item of property, plant and equipment should be carried at
Its cost less any accumulated depreciation and any accumulated impairment losses
A revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses
The E.C. will elect to apply the benchmark treatment
Benchmark treatment
Allowed alternative treatment

23. Measurement – Accounting summary
Balance sheet
Economic outturn account
Expenses
Revenue
Net tangible asset
Revaluation
Depreciation
Repairs &
Maintenance
Initial amount + Costs improving condition + Revaluation
<Accumulated depreciation> <Accumulated impairment> Carrying amount
Revaluation decrease

24. Worked example
The E.C. acquire a mainframe computer on July 1, N (delivery date). The following costs are incurred:
Costs on consultancy helping the E.C. specify the nature and performance level of the mainframe: € 4,000
Purchase price: € 50,000
Import duties: € 2,000
Transportation expenses: € 3,000
Installation expenses: € 5,000
The estimated useful life is initially 5 years

25. Worked example N N+1 N N+1 Balance sheet 60,000 (6,000) 54,000
Cost of acquisition = € 60,000 (50, , , ,000)
Cost of acquisition excludes the costs on consultancy because they are not directly attributable to the system that was bought
Monthly depreciation expense: € 1,000 (= 60,000 / 60)
Depreciation expense: N: € 6,000 (= 1,000 * 6) - N+1: € 12,000 (= 1,000 * 12)
Balance sheet N
N+1
60,000
(6,000)
54,000
(18,000)
42,000 N
N+1
6,000
12,000
Economic outturn a/c
Gross carrying amount
Depreciation
expense
Accumulated depreciation
Net carrying amount

26. Worked example N + 1 N+2 N+1 N+2 Balance sheet
On 1/1/N+2 the E.C. revise useful life, which is decreased to 4 years
Carrying amount: € 42,000
Remaining useful life: 30 months (= 48 – 18)
Revised monthly depreciation expense: € 1,400 (= 42,000 / 30)
Balance sheet
N + 1
N+2
60,000
(18,000)
42,000
(34,800)
25,200
N+1
N+2
12,000
16,800
Economic outturn a/c
Gross carrying amount
Depreciation
expense
Accumulated depreciation
Net carrying amount

27. Worked example Balance sheet
On 1/1/N+3 the E.C. incur expenses of € 9,000 to increase the mainframe computer’s CPU and € 6,000 to fix various bugs
Capitalise: € 9,000 – to be depreciated over the remaining useful life (18 months)
Expense: € 6,000
Revised monthly depreciation expense: € 1,900 = € 1,400 + € 500 (= 9,000 / 18)
N + 2
N+3
60,000
(34,800)
25,200
69,000
(57,600)
11,400
Balance sheet
N+2
N+3
16,800 -
22,800
6,000
Economic outturn a/c
Gross carrying amount
Depreciation
expense
Accumulated depreciation
Net carrying amount
R&M expense

28. Subsequent measurement - Impairment
An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation
IAS 36 is the current text addressing impairment of assets
E.C. accounting rule based on ED 23 (issued for comment by the IFAC), which recognises the specificities of the public sector and addresses impairment of non-cash generating assets, i.e. those assets that are not held to generate a commercial rate of return

29. Subsequent measurement - Impairment
If indicators are present that suggest that
Carrying amount of the asset > Recoverable service amount
Impairment testing should be performed

30. Indicators of impairment
External sources of information:
Cessation of the demand or need for services provided by the asset
Significant long-term changes with an adverse effect on the entity have take place during the period or will take place in the near future, in the technological, legal or government policy environment
Internal sources of information:
Physical damage of an asset
Significant long-term changes with an adverse effect on the entity have taken place during the period or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or expected to be used
A decision to halt the construction of the asset before it is complete or in a usable condition
Evidence from internal reporting that indicates that the service performance of an asset is/will be worse than expected
Examples:
External:
Cessation of demand: canteen
LT changes: new safety regulations or obsolescence of computer hardware
Internal:
Physical damage: fire
Long-term changes: building used for storage rather than for administrative purposes
Internal reporting: output of printing machine

31. Recoverable service amount
Max (net selling price, value in use)
Net selling price:
Price in a binding sale agreement in an arm’s length transaction, less costs attributable to the disposal of the asset
Market price (bid price) less costs attributable to the disposal of the asset Information from similar sale transactions
Value in use:
Depreciated replacement cost or
Restoration cost approach or Service units approach
If NSP > carrying value – STOP
Depreciated replacement cost: on an optimised basis
Restoration cost: substract the cost of restoration from the cost of replacing the remaining service potential of the asset before impairment
Service units approach: reduced no. of service units

32. Impairment loss
If, and only if, the recoverable service amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount
That reduction is an impairment loss to be immediately recognised as an expense in the economic outturn account
If the estimated impairment loss is greater than the carrying amount of the asset, the carrying amount of the asset is reduced to zero

33. Measurement – Accounting summary
Balance sheet
Economic outturn account
Expenses
Revenue
Net tangible asset
Revaluation
Depreciation
Repairs &
Maintenance
Initial amount + Costs improving condition + Revaluation
<Accumulated depreciation> <Accumulated impairment> Carrying amount
Revaluation decrease
Impairment loss

34. Worked example - Impairment
It was estimated when the mainframe computer was purchased that on average 80% of CPU would be used (a buffer of excess CPU time of 20% was expected and needed to accomodate peak period deadlines).
CPU declined to 20% in N+4 because many applications were converted to run on desktop computers or servers.
A computer is available on the market at a price of € 24,000 that can provide the remaining service potential of the mainframe computer using the remaining applications.
A broker is offering € 4,500 for the mainframe computer
The indicator of impairment is the significant long-term change in technological environment resulting in conversion of applications from the mainframe to other platforms and therefore decreased usage of the mainframe computer.

35. Worked example - Impairment
Evaluation of impairment: a
Carrying amount, N+3 (acquisition cost: 69,000 less accumulated depreciation: 57,600)
11,400
Replacement cost
24,000
Accumulated depreciation (c x 42 / 48)
(21,000) b
Value in use: Depreciated replacement cost
3,000 c
Net selling price
4,500 d
Max (depreciated replacement cost, net selling price)
Impairment loss (a - d)
6,900
To be depreciated over the remaining useful life (6 months)
An expense

36. Subsequent measurement - Investment property
Subsequent to initial recognition as an asset, all investment property should be measured following the:
Fair value
model
Cost
model or
IPSAS 17 –
Benchmark treatment

37. Property, Plant and Equipment
4. Additional learning points

38. Retirements and disposals
An item of property, plant and equipment should be eliminated from the balance sheet:
On disposal; or
When the asset is permanently withdrawn from use.
Gain or losses arising from the retirement or disposal should be determined as:
Retirement or disposal value – Carrying amount of the asset
Recorded as a gain or a loss in the Economic Outturn Account as incurred

39. Worked example
On 28/2/N+4 the computer mainframe is disposed of to Oxfam for free. a
Carrying amount, 28/2/N+4 = (4,500 – 4,500 * 2/6)
3,000 b
Sales price -
Loss = b – a
(3,000)

40. Property, Plant and Equipment
5. Disclosures

41. Key disclosures
Key disclosures required for each class of property, plant and equipment:
Measurement bases used for determining the gross carrying amount
Depreciation method used and estimated useful lives
The gross carrying amount and accumulated depreciation at the beginning and at the end of the period
A reconciliation of the carrying amount at the beginning and the end of the period

42. Key disclosures (cont’d)
Existence and amounts of restrictions on title for property, plant and equipment pledged as securities for liabilities
The amount commitments for the acquisition of property, plant and equipment
If applicable, the basis used to revalue a class of property, plant and equipment
When the benchmark treatment is used, the fair value of the assets should be disclosed if it is materially different from the carrying amount
Information on impairment

43. Investment property – Additional specific disclosures
The criteria developed to distinguish investment property from owner-occupied property
The methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors because of the nature of the property and lack of comparable market data
The extent to which the fair value of investment property is based on a valuation by an independent appraiser who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact should be disclosed.

44. Property, Plant and Equipment
6. E.C. specific implications

45. Key differences with the current E.C. practices
Individualisation of assets i.o. Global depreciation of assets with similar characteristics
Prorata temporis depreciation i.o. Full year in the year of acquisition
Required segregation of land and buildings
Components approach
Impairment testing
Need for the reconciliation of a
physical inventory with the fixed assets ledger

46. Property, Plant and Equipment
7. Questions