Plus, we offer a money-back guarantee, meaning that if you are not satisfied with the course, we will refund your money. BC1-BC4) 5. More common errors when accounting for property, plant and equipment (IAS 16 - Part 4) IAS 16 Property, Plant and Equipment is a relatively simple standard to read and apply, yet it is a standard where preparers can easily make errors which affect amounts recognised as property, plant and equipment (PPE) in the statement of financial position. Visit our Leases hot topics page for more insight on lease accounting under IFRS Standards Elements of the cost of an item of PPE include: EXAMPLE 1 If Transaction of Exchange does not have Commercial Substance: If the transaction of exchange does not have commercial substance or the fair value of asset transferred and the asset acquired both are not determinable, then the new asset will be recognize at the carrying value of asset transferred, which will result in no gain or loss on exchange. Accounting for a revaluation However, entity will not charge any depreciation if the residual value of the asset exceeds its carrying value. revalue. Agriculture (IAS 41) Earnings per share (IAS 33) Business combinations (IFRS 3) Employee benefits (IAS 19) Business combinations under common control, transfers of investments within groups and capital re-organisations ; Equity accounting (IAS 28) Cash flow statements (IAS 7) Events after the reporting period and financial commitments (IAS 10) Be careful, in the exam a reserves transfer is only required if the examiner indicates that it is company policy to make a transfer to retained earnings in respect of excess depreciation on revalued assets. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. Thisis a particularly important area of the Financial Reporting (FR) syllabus and is also important assumed knowledge for the Strategic Business Reporting (SBR) exam. Practical Aspects In India- Series . mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. In January of year 1, an entity gives the right to use a building to independent third parties under in 15-year operating lease with annual payments of $2,000: The example mentioned above meets the definition of investment property because the entity uses the asset to obtain income, not for its use or the production of goods or services. These, Employee costs arising directly from the installation or construction of the asset. - If an asset contains different components and these components are different in nature with each component having different useful life, then each component will be recognized as property, plant and equipment separately. Theequity methodis used in international financial reporting standards to recognize an investment when a company hassignificant influenceover another entity. LsTMe)ZaK@@@QcB$967] A$OSHTM8\Vv+ !ki,0FuFe!`=P}+qUb`fCpn/ The following is the IAS 16 summary. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition in paragraph 5 of ias 40. In such circumstances, the entity will recognize the cost of replacement in. Any cash discount taken for the prompt payment of cash related to asset will not affect the cost of the asset, and it will be recorded as income separately in the statement of profit or loss. This standard deals with the four main aspects of financial reporting of property, plant and equipment (PPE) that are likely to be of major relevance in the FR exam, namely: initial measurement. 19 Exemples de cots qui ne sont pas des cots d'une immobilisation corporelle : les cots d'ouverture d'une nouvelle installation ; Additionally AB Ltd. has also paid $5 million along with the land. u3>= ABC Co., has acquired a heavy road transporter at a cost of Rs. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 11.). (a) The measurement model, (b) Method of depreciation 2 D1{?A4uDMX":Br|XgF`4&_pt(F1l ^d/ Gcwj`\ Then, the consolidated entity uses the building for the supply of goods. endobj The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. Please visit our global website instead. B/VK9\9[gZ.7g;(+,-6VIaQq9S&(*l9kZA ^ZX;URf2sriGVbs6J}&'y(x0YI,IB+pll_6AOMRi:K,uNPo2::=@d3(E@Wc`q( the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders. The objective of this paper is to describe the accounting treatment for property, plant and equipment, in according with the IAS 16, including: timing of the recognition of assets, determination . If an item is revalued, the entire class of assets to which that asset belongs should be revalued. Remember that IAS 40 establishes that an entity can choose between two models for the subsequent measurement of an investment property. IAS 16 permits the choice of two possible treatments in respect of PPE: If the revaluation model is adopted, this should be applied to all assets in the entire class (ie if you revalue a building, you must revalue all land and buildings in that class of asset). What will be the cost of the acquired plant in the financial statements of the AB Ltd.? Derecognition The loan carried an interest rate of 8% per annum and is repayable on 1 April 20X4. h&{kb! Revalued assets are depreciated in the same way as under the cost model (see below). Let us remember that IFRS 16 practically does not present changes from the point of view of the lessor. A company purchased a building on 1 April 20X1 for $100,000 at which point it was considered to have a useful life of 40 years. Approval by the Board of Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) issued in January 2016; Approval by the Board of Deferred Tax related to Assets and Liabilities arising from a Single Transaction issued in May 2021; IAS 12: Basis for Conclusions. Cost includes all costs necessary to bring the asset to working condition for its intended use. In such circumstances an entity must . CrNon-current asset cost [difference between valuation and original cost/valuation]. As an example, if a private company elects not to restate comparative periods, then all lessee leases would have a lease liability and right of use (ROU) asset established as of January 2022, and the comparative periods would be unchanged. (h)The entity will depreciate the asset even if the asset is idle, until the asset is fully depreciated. endstream It is the estimated net disposal proceeds that an entity would currently obtain from disposal of the asset, if the asset were already in the condition and situation which is expected to be at the end of its useful life. An investment property is also an asset held for capital gains. IAS-16 Property, Plant & Equipment The aircraft was acquired on 1 January 2001. At the end of this period there will be compulsory costs of $30,000 to dismantle the plant and $6,000 to restore the site to the original condition. There are many methods of depreciating a non-current asset with the most common being: EXAMPLE 4 The expected life of the new engine is 50,000 hours and in the year ended 31 December 2009 the aircraft had used its engines for 5,000 hours. The rectification cost of the error is charged to statement of profit or loss as expense. November 15, 2021. Such financial statements present the controlling entity and its subsidiary as a single entity. IAS-16: Property, Plant and Equipment with Practical Examples in Bangla: For each class of property, plant, and equipment, disclose: [IAS 16.73]: - basis fo. The cost of the asset held by the lessee under finance lease will be determined in accordance with IAS 17. Les obligations affrentes aux cots comptabiliss selon IAS 2 ou IAS 16 sont comptabilises et values selon IAS 37 Provisions, passifs ventuels et actifs ventuels. A practical guide to implementing IAS 19 (2011) - Employee Benefits 3. (k) Carrying values of the assets which are idle. A company purchased a building on 1 April 20X1 for $100,000. z%m".z@$BeXDEd+c.RB"Il BH$D$\``eH! Most subsequent expenditure is likely to be related to accessing the economic benefits already available (eg repairs and maintenance). After the upgrade to the cabin fittings its estimated remaining useful life was increased to five years (from the date of the upgrade). Explain whether the additional expenditure should be capitalised as part of PPE or expensed to the statement of profit or loss for the year ended 28 February 20X3. (See 'Related links' for the solution to Example 12.). for example, the introduction of three components into . The initial revaluation This guide illustrates the modified retrospective approach, using a number of the practical expedients available under this approach, and the retrospective method. Moreover, click here to Download IAS 16 summary pdf, The objective of IAS 16 property plant and equipment (PPE) is to prescribe the accounting treatment for property, plant and equipment. Calculate the revaluation loss and prepare the journal entry to account for the revaluation. On this date the property was revalued and was deemed to have a fair value of $95,000. Any expected change in the demand of the product related to the asset due to commercial or technical changes in the market. (1) Cape Explosives Works, Ltd. v South African Oil and Fat Industries, Ltd. 1921 CPD 244 (2) Cape E, Chapter 12 - Complete - Summary Law of Contract 202[4], Chapter 1 Introduction to Project Management, OPV 122 - Practice questions for Quiz 1 2020, Assignment 2 answers - ECS1601-multiple choice questions, Sck4811 exam portfolio 2022 reports and form 38, (6) Just Administrative Action - Setting the Scene. Plant, Property and Equipment (PPE) are assets which are held for use in the production of goods, rendering of services, administrative uses, or rental purposes and are expected to be used in more than one period. gross carrying amount and accumulated depreciation and impairment losses. (a) The depreciation method opted by the entity should be in accordance with the pattern of economic benefits which are to be consumed by the entity over its useful life. A company revalued its property on 1 April 20X1 to $20m ($8m of which related to land). The details of the cost of the aircrafts components are as follows: In the year ended 31 December 2008 the aircraft engine had experienced a serious trouble which had resulted in considerable compensation costs to AB Ltd. Explain how the disposal should be accounted for in the financial statements. Any additions and disposals during the year, Any assets acquired as part of a business combination, Any impairment loss recognized in the current year, Assets classified as held for sale under IFRS 5. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. [IAS 16.40], When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. 1121 0 obj hyphenated at the specified hyphenation points. The property does not qualify as investment property in the consolidated financial statements because the property is owner-occupied from the groups perspective. In practice, this means that expenditure is capitalized if it improves the asset (for example, by enhancing its performance or extending its useful life). IAS 19 (2011) - Employee Benefits . <> A revaluation loss should be charged to profit or loss. DrRevaluation surplus [to maximum of original gain/balance in revaluation surplus if lower] Therefore, the consolidated group accounts for the building as an item of property, plant, and equipment. Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. There are a series of accounting adjustments that must be undertaken when revaluing a non-current asset. All residual values can be taken as nil. IAS 16 Topic wise Selected Opinions The Institute of Chartered Accountants of Pakistan 1 IAS 16 'PROPERTY, PLANT AND EQUIPMENT' . With much of what is examinable feeding though from theFinancial Accountingexam, you must ensure that you are comfortable with the basics of dealing with PPE as well as the more advanced aspects. It is the amount of cash or cash equivalents paid or the fair value of the consideration transferred to acquire, purchase or construct an asset. (600 0 / 25yrs) 8 yrs (192), Acc. compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss. An asset will be recognized as property, plant and equipment if it meets: (a) The definition of property, plant & equipment and the initial estimate of the costs of dismantling and removing the asset and restoring the site on which it is located to its original condition (ie to the extent that it is recognised as a provision per IAS 37. borrowing costs in accordance with IAS 23, Cost less residual value divided by useful life. The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. However, IAS 16 is applicable to the property, plant & equipments, which are used to maintain or develop the biological assets under IAS 4 and mineral rights and reserves such as oil and gas and other non-regenerative resources which are covered under IFRS 6. AB Ltd. had wrongly specified the power loading of the original electrical cable to be installed by the contractor. Required endobj Many of the topics presented are further discussed in the articles listed . The remaining useful life was reassessed at the time of valuation and is considered to be 40 years at this date. The methodology presented is subdivided in a theoretical analysis, with a literature review, and in an empirical analysis, with a case study (Yin, 2018). hVnF}W1Aa%%:NF-,6csfIY rvvfv8TGB( OI#yb#k$5OYLT:g2R"fZEJ$z}6N%}dR+i$N|^b|~I Manufacturers or distributors list price. IFRS 16 offers a range of transition options. Installation and assembly cost. The cost of day to day or ongoing repair and maintenance will be charged to the statement of profit or loss as expense. (b) For the accounting treatment of biological assets related to agricultural activity which are covered under IAS 41 Are specialized in nature and can only be used with the specific asset; Their economic benefits are expected to be for more than one accounting period. (i) Any change in useful life, residual value or depreciation method related to the property, plant and equipment. endstream Calculate the revaluation gain and prepare the journal entry to account for the revaluation. Any other cost which is necessary to bring the asset into its operating use or intended use by the management. endobj Say Lease expense is 25,000 per month or 3lacs a year . <>]>>/Pages 1114 0 R/Type/Catalog>> Where this is the case, each of those parts must be depreciated separately over their own individual useful lives. This will enable Yucca to increase production without the need to purchase a new machine. Definition 1. <>stream IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005. Any remaining surplus on the revaluation surplus should be transferred to retained earnings as: Summary b) Deduct the depreciation amount from the right of use asset amount for each day. {PS0ge2mLveUWy>0\_KnC7+\{9ZKdzIb"o[M"Xe{.vlnXU9\(^%2$DPl?U2n>o[Y^_|f9j)l"&S(o3mn 7WVCf0mU+d$I2e }Ll7d Revaluations should be made with sufficient regularity to ensure the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Required Items of property, plant and equipment should be recognized as assets when: Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at cost. When PPE is to be derecognised, a gain or loss on disposal is calculated. When an asset is disposed of that has previously been revalued, a gain or loss on disposal is to be calculated (as above). Where an assets carrying amount is increased as a result of a revaluation (ie a revaluation gain), this gain is normally recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. 1\@jE@jb` U6v2jHX7HI 7dHXB@c@,8>N,,Mo8N.H30hnLg@)b 8 2.2 Reporting date (IAS 21.23 - .26) Refer to the following definitions in IAS 21.8: Monetary items If an item does not meet the definition of a monetary item, it is a non-monetary item Refer to IAS 21.16 for a further explanation and . If an asset is purchased on extended credit period or on deferred installment basis, then the cost of such asset will be its Cash Price Equivalent any excess paid over the cash price will be treated as Interest expense which will be recognized over the period of credit. (b) the cost of the item can be measured reliably. Depreciation of significant parts Calculate the value at which the plant will be measured at initialrecognition in the financial statements of the AB Ltd. Electrical cable placement (28,000 12,000), Dismantling and restoration costs (30,000 + 6,000). Cost of testing after deducting the net proceeds from selling any items produced. IAS16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. Our course is led by industry experts who have years of experience in the field, providing you with the most up-to-date and relevant information. depreciation. (See 'Related links' for the solution to Example 5.). Testing costs to assess whether the asset is function properly (net of any sales proceeds of items produced during the testing phase). 7 RU44BmN;=c5NXV3~4'mqo.bMo :8TA.pwT=A$Os8! Therefore, the initial purchase price of the asset should be: Required (b) If the fair value of asset transferred is not determinable , then it will be recognized at the fair value of asset acquired. Initial delivery and handling cost. EXAMPLE 5 startxref should the managment capitalized this cost? Determining whether land does have an undetermined future use is a task that the entitys management must carry out according to its judgment. Yucca agreed to purchase the upgrade package as the new components would lead to a reduction in production time per unit of 15%. Required: An entity leases a building for 5 years with payments of 20,000 per year and an implicit interest rate of 9%. %PDF-1.6 % Are you looking to stay ahead in the ever-changing business world and enhance your understanding of International Financial Reporting Standards (IFRS)? It is essential to clarify that if the type of lease were not operating but financial, it would not be an investment property; it would be an account receivable. Today we will talk about investment properties and carry out a series of practical examples where we will refer to IAS 40, IAS 16, and IFRS 16. It will be accounted for as change in accounting estimate and it will have Prospective Application in accordance with IAS 8. On 1 April 20X3 the company revalued the building to its fair value of $120,000. It is the value at which asset will be presented in the statement of financial position and it is determined as Cost less Accumulated Depreciation and Accumulated Impairment Loss. if the management have intention to build a Building in 2018 so the company incur expenses on geotechnical assesment of land however at the end of the year the construction of building has not yet started . it is probable that the future economic benefits associated with the asset will flow to the entity, and. xUMo0 If you are looking for a practical overview of IFRS 16, or just a refresher, you've come to the right place. How the plant will be recognized in the financial statements of the AB Ltd.? Moreover, click here to, Externally oriented Cost Management Techniques. Definition : Property, plant & Equipment (PPE)Definition : Property, plant & Equipment (PPE) Property Plant and Equipment defines Property Plant and Equipment as tangible assets that- 1) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and 2) are expected to be utilized in . [IAS 16.39], A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. IFRS 16 Leases Study Text: IAS 38 Intangible Assets Study Text 1 1312 downloads. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 9.). Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. (c) Revaluation should be performed regularly enough, so that the carrying value of asset should not be materially different from its revalued amount. Required (a) Prepare any necessary journal entries to account for this building during the year ended 31 March 20X2. As outlined in the first two articles, the four key areas when accounting for PPE that you must ensure that you are familiar with are: One of the easiest ways to remember what should be included in the initial cost of an item of PPE is that you should capitalise all costs to bring an asset to its present location and condition for its intended use. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16.67-71], If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. Out of the scope of IAS 40. hello can i please have clarity as to how we go about identifying components of PPE. EXAMPLE 2 This movement in reserves should also be disclosed in the statement of changes in equity, as should any revaluation gains and losses which impact the revaluation surplus. (b) No economic benefits are expected either from use or from sale of asset, For each class of property, plant and equipment, the entity is required to disclose the following: A company purchased a property with an overall cost of $100m on 1 April 20X1. An entity will de-recognize the asset from statement of financial position when: Written by a member of theFinancial Reportingexamining team, Becoming an ACCA Approved Learning Partner, Virtual classroom support for learning partners, Purchase of a five-year maintenance contract with Plant Co, Carrying amount of non-current asset at revaluation date, Valuation at fair value of non-current asset, purchase price of an asset, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, costs of testing whether the asset functions properly. (200 0 / 40,000 hrs) 30,000 hrs, Charge to profit or loss on replacement, Current yr Dep. The carrying amount of Zen Cos property at the end of the year amounted to $108,000 (cost/value $125,000 and accumulated depreciation $17,000). However, if an entity holds properties for sale in the short term in the ordinary course of business and thus obtains a profit, we would not be talking about an investment property but the sale of inventory. Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. A practical guide to implementing .
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