Accounting_for_Tangible_Non_current_Asset.pptx

Notes on property plant and equipment
Accounting

1. Accounting for Tangible Non current Assets Initial Recognition and Subsequent Measurement of NCA Expenditure

2. Introduction The main accounting starndard relating to the recognition and measurement of tangible non current assets is IAS16 Property, Plant and Equipment. However the following accounting standards are relevant as well:

3. Other relevant standards IAS 20 Accounting for Government grants IAS 23 Borrowing costs IAS 36 Imparements of assets IAS 40 Investment property

4. Definition IAS16 defines property, plant and equipment as " tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period . "

5. Definition It is clear that items which will benefit more than one accounting period fit the description of PPE. The ammendments 2009-2011 finalised in May 2011 clasifies that items of spareparts, standby equipemnt and servicing equipment that will be used during more than one period meet the definition of PPE.

6. Definition Items that are not used during more than one period are accounted for as inventories under IAS 2

7. Recognition of Property, Plant and Equipment An item of property, plant and equipment should be recognised as an asset if and only if: (a) it is probable that future economic benefits associated with the item will flow to the entity concerned, and (b) the cost of the item can be measured reliably .

8. Initial Measurement of Property, Plant and Equipment On initial recognition, property, plant and equipment should be measured at cost . Cost includes: Purchase price, including import duties and non-refundable purchase taxes, less trade discounts Costs that are directly attributable to bringing the item to the location and condition necessary for it to be operated as intended

9. Initial Measurement of Property, Plant and Equipment The estimated costs of dismantling and removing the item and restoring the site on which the item is located, as long as the obligation to meet these costs is incurred when the item is acquired

10. Subsequent Measurement of Property, Plant and Equipment After initial recognition, items of property, plant and equipment may be measured using either: The cost model ; items are carried at cost (initial cost plus subsequent expenditure) less any accumulated depreciation and less any accumulated impairment losses

11. Measuring non current assets Direct atributable costs might include: Proffesional fees Delivery costs Site prepartion costs Assembly and testing costs

12. EXAMPLE 1 On 1 March 20X0 Yucca Co acquired a machine from Plant Co under the following terms:

13. In addition to the above information, Yucca Co was granted a trade discount of 10% on the initial list price of the machine and a settlement discount of 5% if payment was received within one month of purchase. Yucca Co paid for the machine on 25 March 20X0. Required: Explain how the above information should be accounted for in the financial statements of Yucca Co for the year ended 28 February 20X1

14. Solution:

15. Self-constructed assets For self-constructed assets (non-current assets that are constructed by the entity itself): internal profits and abnormal costs should be excluded from cost administrative expenses and other similar overheads should also be excluded from cost interest costs incurred in the course of construction may be included, in accordance with IAS 23 Borrowing costs

16. Subsequent Expenditure Subsequent expenditure relating to non-current assets, after their initial acquisition, should be capitalized if it meets the criteria for recognising an asset. In practice, this means that expenditure is capitalized if it: improves the asset (for example, by enhancing its performance or extending its useful life)

17. Subsequent Expenditure is for a replacement part (provided that the part that it replaces is treated as an item that has been disposed of). Repairs and maintenance expenditure is revenue expenditure . It is recognised as an expense as it is incurred, because no additional future economic benefits will arise from the expenditure

18. Subsequent Expenditure Examples of subsequent expenditure on a building, for example, include:- constructing an extension to the building replacing the elevators or the heating or air conditioning system

19. Measuring non current assets Under the revaluation model , an item of property, plant and equipment is ‘carried’ in the statement of financial position at: its revalued amount (its fair value) less accumulated depreciation charges and impairment losses (since the revaluation).

20. Revaluation model Fair value is normally open market value. If there is no reliable market value (for example, because the asset is specialized or because sales are rare), depreciated replacement cost can be used. Valuation should normally be performed by a professionally qualified valuer

21. If the revaluation model is adopted: assets must be revalued regularly so that their carrying values do not differ materially from their fair values once an asset is revalued, all assets within that class must also be revalued

22. Revaluation model IAS 16 does not prescribe a time interval between revaluations. However it states that revaluations should be made with ‘sufficient regularity’ to ensure that its carrying value in the statement of financial position is not materially different from what its fair value would be

23. Measurement model A measurement model must be chosen for each class of non-current assets. It is an accounting policy choice. The chosen accounting policy for a class of assets should be applied consistently to all the assets in that class. For example, an entity may choose the revaluation model for all its land and buildings, and the cost model for all its plant and equipment.

24. Gains on revaluation When an asset is revalued upwards from its carrying amount, there is a gain on revaluation The gain on revaluation is included as other comprehensive income in the statement of comprehensive income and is not included in profit or loss for the period.

25. Exception There is an exception to this rule. If the gain on revaluation reverses a previous loss on revaluation, where the loss was recognised in profit or loss, the revaluation gain should be recognised in profit or loss, not ‘other comprehensive income’.

26. Gains on revaluation When a gain on revaluation is recognised in other comprehensive income, it is a requirement of IAS 1 and IAS 12 that the tax associated with the revaluation should also be included in other comprehensive income.

27. Gains on revaluation

28. Losses on revaluation When an asset is revalued down from its carrying value there is a loss on revaluation The amount of the reduction in valuation should be recognised in profit or loss (not in other comprehensive income).

29. Losses on revaluation There is an exception to this rule. If the loss on revaluation reverses a previous gain on revaluation that was reported in other comprehensive income, the decrease should be reported in other comprehensive income and not recognised as a loss.

30. Losses on revaluation

31. Reserves transfer The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset. As a result of this, IAS 16 permits a transfer to be made of an amount equal to the excess depreciation from the revaluation surplus to retained earnings.

32. Summarized as:

33. Example: Revaluation Surplus

34. Example: Revaluation Decrease

35. The objective of depreciation IAS 16 states that the objective of depreciation is to allocate the depreciable amount of an asset on a systematic basis over its useful life. The depreciable amount of a non-current asset is: its cost minus its expected residual value, where the cost model of valuation is used

36. The objective of depreciation the amount substituted for cost, less its expected residual value, where the revaluation model is used The depreciation charge has the effect of spreading the cost/fair value of the asset over the financial periods that will benefit from its use.

37. The depreciation charge for the year (whether based on cost or revalued amount) is recognised in profit or loss in the statement of comprehensive income. All tangible non-current assets must be depreciated. The only exception to this rule is land, which normally has an indefinite useful life (unless the land is used in mining or similar industries).

38. Depreciation methods Methods of depreciation that may be used include: the straight-line method the reducing balance method the units of production method.

39. The asset must continue to be depreciated following the revaluation. However, now that the asset has been revalued the depreciable amount has changed. In simple terms the revalued amount should be depreciated over the asset’s remaining useful life. Depreciation of revalued assets

40. A change in the method of measuring depreciation IAS 16 requires depreciation methods to be reviewed at least annually . It only allows a change in the method of measuring depreciation where this would give a fairer presentation of the entity’s financial results and financial position.

41. Reserves transfer The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset. As a result of this, IAS 16 permits a transfer to be made of an amount equal to the excess depreciation from the revaluation surplus to retained earnings. Journal entry: Dr Revaluation surplus Cr Retained earnings

42. A change in the method of measuring depreciation Where there is a change in the depreciation method used, this is a change in accounting estimate . A change of accounting estimate is applied from the time of the change, and is not applied retrospectively.

43. Example Entity L owns a machine which originally cost 30,000 on 1 January Year 1. It has no residual value. It was being depreciated over its useful life of 10 years on a straight line basis. At the end of Year 4, when preparing the financial statements for Year 4, Entity L decided to change the method of depreciation, from straight-line to the reducing balance method, using a rate of 25%.

44. Solution Cost on 1 January Year 1 = 30,000 Depreciation for Years 1 to 3 (30,000 × 3/10) = (9,000) Carrying amount at end of Year 3 = 21,000 Depreciation for Year 4 will therefore: $21,000 × 25% = 5,250

45. A change in the asset’s useful life IAS 16 requires useful lives to be reviewed at each year-end . Any change is a change in accounting estimate . The carrying amount (cost minus accumulated depreciation) of the asset at the date of change is written off over the (revised) remaining useful life of the asset

46. Example Entity M owns a machine which originally cost 60,000 on 1 January Year 1. It has no residual value. It was being depreciated over its useful life of 10 years on a straight-line basis. On 31 December Year 4 Entity L revised the total useful life for the machine to eight years. Required Calculate the depreciation charge for Year 4 and subsequent years.

47. Solution The change in accounting estimate is made at the end of Year 4 but may be applied to the financial statements from Year 4 onwards Cost on 1 January Year 1 = 60,000 Depreciation for Years 1 to 3 (60,000 × 3/10) = (18,000) Carrying amount at end of Year 3 = 42,000

48. Solution Remaining useful life at the end of Year 3 = 8 – 3 years = 5 years. Depreciation for Year 4 and subsequent years will be 42,000 ÷ 5 years = 8,400.

49. Derecognition of non current asset When an asset is de-recognised, its carrying amount is removed from the statement of financial position. IAS 16 Property, plant and equipment states that the carrying amount of an item of property, plant and equipment should be derecognized in the following circumstances

50. Derecognition of non current asset on disposal of the asset, or when no future economic benefits are expected to arise from its use or from its disposal If a non-current asset is disposed of, the gain or loss on the disposal should be included in profit or loss in the period in which the disposal occurs. The gain or loss should not be included in sales revenue .

51. EXAMPLE

52. Investment property: IAS 40 Definitions An investment property is property held to earn rentals or for capital appreciation or both. It differs from non-investment property, which is property:

53. used in the production or supply of goods, or for administrative purposes, or held for sale in the ordinary course of business. Property could be land or a building (or part of a building) or both, and it includes the building whilst it is under construction for eventual use as an investment property. Investment property: IAS 40

54. Investment property: IAS 40 The property could be held by: the owner, or the lessee under a finance lease or an operating lease.

55. The following are not investment property: Property intended for sale in the ordinary course of business property being constructed or developed on behalf of third parties owner-occupied property property being leased to another entity under a finance lease.

56. Accounting treatment of investment property The recognition criteria for investment property are the same as for property, plant and equipment under IAS 16. it is probable that future economic benefits associated with the property will flow to the entity, and the cost of the property can be measured reliably

57. Measurement Investment property should be measured initially at cost plus the transaction costs incurred to acquire the property . After initial recognition an entity may choose as its accounting policy: the fair value model, or the cost model

58. Fair Value Model

59. This is different to the revaluation model of IAS 16, where gains are reported as other comprehensive income in the statement of comprehensive income (and are not included in profit or loss) and credited to a revaluation reserve. Fair Value Model

60. Treatment of loss or gain Gains or losses on disposals of investment properties are included in profit or loss in the statement of comprehensive income in the period in which the disposal occurs.

61. Example

62. Cost Model

63. Fair Value Model

64. The End!