CHAPTER ELEVEN - Property, Plant and Equipment

Tangible Items are

held for use in the production or supply of goods or services or for admin purposes and are expected to be used for more than one period

Under IAS16

an asset must be recognised in the statement of financial position, if it

• can bring future economic benefits

• can be measured reliably

Measurement of PPE:

• Initial Measurement

• Subsequent Measurement

Initial Measurement

• cost of bringing the assets to the present location + in its condition

• exchange = fair value of the Asset given up

• replacement of parts capitalised

Subsequent Measurement

• Cost Model

• Revaluation Model

Subsequent Measurement - Cost Model

• Initial Cost - Accumulated Depreciation and Impairment Costs

Subsequent Measurement - Revaluation Model

• Fair Value - Accumulated Depreciation and Impairment Losses

Subsequent Measurement

revaluation gains are recognised in other comprehensive income; a revaluation surplus in equity

Depreciation

• all assets (except land) should be depreciated over their useful lives, with each significant part being depreciated separately

• depreciation commences when the asset is available for use

• depreciation methods, useful lives and residual values should be reviewed at each financial YE

• any change is a change in an accounting estimate under IAS 8

• IAS 16 allows a reserves transfers of the eaves depreciation on revalued assets.

To be Recognised as PPE

• probable that future economic benefits will flow to the entity

• cost can be measured reliably

Initial Measurement

• the cost of bringing the asset to its present location and condition

• present value of any estimated dismantling/setting up costs, but not repairs or maintenance expenditure

• exchange of items of PPE - cost should be the FV of the asset given up

• replacement parts should be capitalised

Subsequent Measurement

• accounting choice between the cost and revaluation model

PPE - Cost Model

Initial Cost - Accumulated Depreciation and Impairment Losses

PPE - Revaluation Model

Fair Value - Accumulated Depreciation and Impairment Losses

Fair Value - Land and Buildings

market based evidence from professionally qualified valuers

Fair Value - Plant and Equipment

usually market value by appraisal

Fair Value - Specialised Items of PPE

depreciated replacement cost as there is no market based evidence of fair value

If the Revaluation Model is followed

all assets in the same class must be revalued with sufficient regularity that the carrying amount is not materially different to their fair value

PPE is covered across:

• IAS 16 - life of the asset

• IAS 36 - impairment of the asset

• IFRS 5 - the disposal of the asset

PPE is held for

use by the business for more than one business period, as opposed to selling asap

Recognition of PPE Journal

Dr PPE

Cr Cash/Payables

Costs that can be capitalised are all

attributable costs to bring the assets to its present location and condition

Capitalised Costs as part of the asset

• delivery

• installation fees

• testing

• set up costs

• legal fees

• site preparation

Training staff capitalisation

is not allowed as they can always leave and are not guaranteed to stay there

Revaluation attempts to provide

a current market value that is more up to date and accurate

Revaluation Gains are

recognised in other comprehensive income in the revaluation surplus

Revaluation Gains are

credited as they increase

Land is considered to have

an indefinite useful life

When NCAs are being depreciated, it is important that

each significant part is depreciated separately

Replacement costs can always be

capitalised

Depreciation remains a

judgemental issue - so all elements are reviewed at each end of the financial year.

Under IAS 8, any change applies

to the present and the future.

Depreciation Steps

1. Recognition of an Asset

2. Initial Measurement

3. Subsequent Measurement (Cost Model vs Revaluation)

4. Subsequent Depreciation

General Classes of PPE includes

• land

• machinery

• aircraft

Initial Measurement must also include

any estimated dismantling and site restoration costs, or decommissioning it at the end of its useful life

Decommission must be recorded and capitalised as (journal)

Dr PPE

Cr Provision (NCL)

Repairs and Maintenance must

not be capitalised at all

Exchange Assets

amount that has been paid for the asset, is the fair value of the asset that has been exchanged

• e.g. an exchange between a £3,000 watch and a jumper

  • jumper is now worth £3,000 even if it was purchased for £50

Likely to be Revalued:

• land and buildings

Not Likely to be Revalued:

• plant and equipment

• specialised items of PPE

If Revaluation Model is followed:

all assets in the same class must also be revalued on a regular basis

Assets should be depreciated in a way that

reflects the pattern in which future economic benefits are consumed, with each significant part being depreciated separately

IAS 16 requires at every YE a review of:

• depreciation method

• useful lives

• residual lives

IAS 16 allows a

reserves transfer of the excess depreciation on revalued assets

• revaluation surplus to retained earnings

Factors affecting useful life:

• expected usage (expected capacity/output/management’s intentions on replacement)

• expected wear and tear

• technical/commercial obsolescence

• legal/other limits on the use of an asset

Increases in Valuation

• may be revalued using the revaluation model

• new value can be depreciated over the rest of UL

Revaluation Surplus

• when an asset has been revalued, and the fair value amount is bigger than the carrying amount, this can be recognised in Revaluation Surplus

Revaluation Surplus (and changes in equity) - journals

• credits = make it bigger

• debits = make it smaller

Revaluation Gains and Surplus are added into

Other Comprehensive Income

• cannot be put in the P/L

• but will be part of statement of changes in equity

Revaluation Journals (working backwards from Cr first)

Dr Building - Cost

Dr Building - Accumulated Depreciation

Cr Revaluation Surplus

Revaluation Surplus =

Fair Value - Carrying Amount

If depreciation gets bigger under revaluation model,

profit and retained earnings decreases

Extra depreciation between cost and revaluation model can move from:

Dr Revaluation Surplus

Cr Retained Earnings

IAS 16 allows

a transfer of the excess deprecation from the revaluation surplus to retained earnings

• this will top up R.E. to what it would be if no revaluation had taken place

Impairment - PPE

IAS 16

An Impairment has occurred when

the carrying amount of a NCA exceeds its recoverable amount

Impairment Tests should be carried out when:

• an asset is impaired

• at period end if required by standards

• for indefinite intangible assets - annually (e.g. goodwill)

Recoverable Amount is the higher of:

• Value in Use (Keep)

• Fair Value - Costs of Disposal (Sell)

Value in Use

• from keeping and using the asset

• PV of future cash flows expected to be derived from the asset

• no more than 5 years

• using management approved budgets

Fair Value - Costs of Disposal

• selling the item

Internal Indicators of Impairment

• evidence of physical damage/obsolescence

• adverse changes in the use of the asset

• evidence that the assets performance is worse than expected

• policies on sustainability impact on the use of certain assets

External Indicators of Impairment

• significant decline in the market value of the asset

• significant changes in the technological, market, legal to economic environment

• increase in market interest rates likely to affect the present value calculation of value in use

• carrying amount of the company’s net assets exceeding market capitalisation

• change in government policy related to climate change.

Stranded Assets

are assets that have become economically stranded, experiencing unexpected or early write-downs, devaluation, or being turned into liabilities

Accounting for Impairment Losses

Dr Revaluation Surplus

Dr Profit or Loss (Remainder of impairment)

Cr Carrying amount of NCA

NCA held for sale - IFRS 5

a non-current asset should be classified as held for sale if the entity intends to recover its carrying amount through sale

With selling NCAs,

there will be a time lag between deciding when an asset will be sold and when it is actually sold

In order for an NCA to be held for sale, it must:

• be available for immediate sale in its current condition

• sale must be highly probable

• sake should be expected within a year of the reclassification

SALE - NCA holding for SALE acronym

Seek a buyer

Available for sale in condition

Likely to be sold

Expected to complete within a year

Reclassification as held-for-sale usually occurs

at the time of the decision to sell

Reclassification of the Asset is:

1. shown separately in the SFP as ‘NCA held for Sale’

2. valued at lower of C.A. and FV - Costs of Disposal

3. no longer depreciated

Disposal of PPE under Revaluation Model

1. asset must be revalued at fair value under IAS16 before classification

2. revaluation means either a loss/gain will be recognised under IAS 16

3. once revalued, measurement is then adjusted to the normal basis for held for sale assets (FV - cost of disposal)

Reclassification as Held for Sale - Cost Model

• transfer to current assets

• value at lower of:

  • carrying amount

  • fair value - costs of disposal

• stop depreciating

Reclassification as Held for Sale - Revaluation Model

• revalue to fair value

• transdermal to current assets

• value at fair value - costs of disposal

• stop depreciating

Abandonment of NCA

• there will be no sales proceeds

• any recovery will be through continued use

Abandoned NCAs

• assets must be classified within their NCA categories

• depreciation charges continue

• any profit/loss is recognised then

Disclosure Notes - for each class of PPE

1. Measurement basis used (cost vs revaluation)

2. Depreciation methods, useful lives, depreciation rates

3. Gross Carrying Amounts and Accumulated Depreciation at the start and end of the period

4. A reconciliation of the net carrying amounts at the start and end of the period

5. Details of the assets pledged as security for loans and of commitments to acquire PPE

6. Assets that have been re-evaluated

Disclosure Notes - A reconciliation of the net carrying amounts at the start and end of the period

• additions

• disposals

• acquisitions through business combinations

• effects of revaluation

• impairment losses

• exchange differences

• other changes

Disclosure Notes - Assets that have been re-evaluated

• the effective dates

• whether an independent valuer was involved

• the extent to which fair values were determined by reference to prices in active markets

• carrying amount under cost model

• total revaluation surplus

Key Issues for PPE

• choice of accounting treatment

• awareness of needed changes

• impairment

Assurance Risks

• appropriate recognition/derecognition

• appropriate choice of accounting treatment

• fair value judgements

• accounting estimates on depreciation (RV and UL)

• indicators of impairment

• possible stranded assets

• appropriate disclosures

Assurance Procedures - PPE Valuation

• obtain a list of additions in the year and inspect purchase invoices to ensure costs are appropriate

• inspect a sample of purchases from overseas and inspect exchange rate applies vs reliable source to ensure its been translated correctly

• enquire management the basis for estimating useful lives and consider whether these are reasonable

• inspect sales invoices of assets disposed ascertain if estimates of residual value are reasonable

Assurance Procedures - PPE Completeness

• select a sample of physical assets and inspect the asset register to make sure they are recorded

• inspect other P&L accounts such as repairs and renewals for items that should be capitalised to ensure no gaps in recognition

Assurance Procedures - PPE Presentation

• inspect other P&L accounts such as repairs and renewals for items that should be capitalised to ensure no gaps in recognition

• inspect assets capitalised in the year and ensure they are capital expenditure per relevant standard to ensure correctly classified and presented

• inspect financial statement disclosures for completeness and accuracy