FAR PPE
PPE are tangible asset that...
1. are held for use in the production or supply of goods or services
2. are expected to be used during more than one period
Property, plant and equipment may be divided into classes for...
disclosure purposes
Accounting for PPE is considered in 4 steps:
1. Recognition of assets
2. Initial measurement of assets
3. Measurement subsequent to initial recognition
4. Derecognition of the Asset
The cost of an item of property, plant and equipment shall be recognised as an asset if (3):
1. It is probable that future economic benefits associated with the item will flow to the entity
2. The cost of the item can be measured reliably
Difference between conceptual framework and IAS 16:
Under the Conceptual Framework, an asset can be recognised when the cost or value can be measured with reliability
Under IAS 16, recognition can occur only if the cost can be measured reliably
The ‘significant parts’ approach entails:
The total property, plant and equipment of an entity may be broken down into separate assets
The identification of what constitutes a separate item of plant and equipment requires
the exercise of judgement and an analysis of what is going to happen in the future
Three items are specified as elements of costs
1. Purchase price
2. Directly attributable costs
3. Initial estimate of costs of dismantling and removing the item, or restoring the site on which it is located
Purchase prise includes:
1. import duties
2. non-refundable purchase taxes
all calculated after deducting trade discounts and rebates.
the definition of costs:
cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset
Cost is determined by...
reference to the fair value of what is given up by the acquirer rather than by the fair value of the item acquired
Cost is measured by...
fair value
gains and losses on the sale of non-current assets are reported by...
deducting from the proceeds on sale the carrying amount of the asset and related selling expenses
Where the transaction lacks commercial substance...
the asset acquired is measured at the carrying amount of the asset given up
an exchange transaction has commercial substance if:
1. The configuration of the cash flows (risk, timing and amount) of the asset received, differs from the configuration of the cash flows of the asset transferred
2. The entity-specific value of the portion of the entity’s operations affected by the transaction, changes as a result of the exchange.
These differences need to be significant, relative to the fair value of the assets exchanged
the acquisition date is the date when:
the acquirer obtains control of the asset
Directly attributable costs are (2)
1. incurred before the asset is used
2. and are necessary in order for the asset to be usable by the entity
Costs not be included in directly attributable costs:
1. Costs of opening a new facility
2. Costs of introducing a new product or service
3. Costs of conducting business in a new location or with a new class of customer
4. Administration and other general overhead costs
5. Costs incurred while an item capable of operating has yet to be brought into use or is operated at less than full capacity
6. Intial operating losses
7. Costs of relocating or reorganizing operations
The expected costs of dismantling, removal or restoration...
are measured on a present value basis
As with directly attributable costs, the dismantling and removal costs are...
depreciated over the life of the asset.
two possible measurement models
The cost model
The revaluation model
The choice of model is an
accounting policy decision
The entity may later change to the alternative basis. This change is only allowed if
1. The change is required by IFRS
2. The results in the financial statements provide a more reliable view
Methods of depreciation (3)
1. Straight line method
2. Diminishing-balance method (NRC)
3. Units-of-production method
4 factors determining the usefull life
1. The usage of the asset by the entity
2. The physical wear and tear
3. Technical or commercial obsolescence
4. Legal or other limits on the use of the asset
Residual value is an estimate based on what the entity would currently obtain from the asset's disposal:
that is, what could be obtained at the time of the estimate — not at the expected date of disposal at the end of the useful life
The residual value is based on...
what could be obtained from disposal of similar assets that are currently, at the date of the estimate, at the end of their useful lives
After recognition as an asset, an item of PPE whose fair value can be measured reliably...
shall be carried at a revalued amount
The revaluation model and accounting policy is applied to...
a class of assets
for each class of assets, management must choose whether
to apply the cost model or the revaluation model
two purposes for requiring revaluation to be done on a class rather than on an individual asset basis:
1. It limits the ability of the management to selectively choose which assets to revalue
2. Consistent measurement for the same type of assets in the entity
If an asset's carrying amount is increased as a result of a revaluation...
the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus.
The reason for the immediate recognition of the deferred tax effect is because...
the gain on revaluation is accumulated in equity
The asset revaluation surplus is disclosed in...
the reserve section of the statement of financial position
When the item of PPE is depreciable, there are two possible accounting treatments under the revaluation method:
1. Restate proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount; or
2. Eliminate the accumulated depreciation balance against the gross carrying amount of the asset and then restate the net amount to the fair value of the asset
Capitalized costs require...
increased probable future economic benefit
revaluations are done on... , the accounting is done on...
a class-by-class basis, an individual asset-by-asset basis.
If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in ... and accumulated in ... under the heading of
other comprehensive income, equity, revaluation surplus
The accounting for a revaluation decrease involves
an immediate recognition of a loss in the period of the revaluation
Where an asset revaluation surplus has been raised via a previous revaluation increase, in accounting for a subsequent revaluation decrease for the same asset, ...
the surplus must be eliminated before any expense is recognised.
There is no requirement that the asset revaluation surplus must be transferred, only a specification of situations where it may be transferred (2):
1. The asset is derecognised
2. An asset is used up over its usefull life (a proportion of the revaluation surplus may be transferred to retained earnings)
Advantages of the revaluation model (3):
1. Higher realiability & increased relevance
2. Higher price of assets and equity value
3. Higher depreciation amount
Disadvantage of the revaluatin model:
More costs associated (costs of reviewing the carrying amounts)
The revaluation model usually provides high asset values, in these two circumstances, it is handy to adopt the revaluation model:
1. Entities with debt convenants that often face constraints relating to their debt - asset ration
2. An entity's reported profit figure may be under strict regulation from a specific source
In the cost model, there is harminization with US GAAP, that does not allow...
the revaluation of non-current assets
Two occasions where derecognition of an item of property, plant and equipment should occur:
1. On disposal, such as the sale of the asset
2. When no future economic benefits are expected
The standard of derecognition does not apply to...
non-current assets classified as held for sale
Investment property is land and or buildings, held by an owner or leased by a lessee under a finance / operating lease:
1. To earn rentals or for capital appreciation or both
2. Rather than for use in the production or supply of goods or services or for administrative purposes or sale
3. Always used in the ordinary course of the business
Examples of properties that are classified as investment property:
1. Property held for long-term capital appreciation;
2. Leased out to a third party under an operating lease
3. A property being developed for future use as an investment property
4. Land whose use is undecided
Examples of properties that are not classified as investment property:
1. Property that is owner-occupied
2. Property that is leased out to a third party under a finance lease
3. Property held for sale in the ordinary course of business
If each portion can be sold or leased out separately (under a finance lease), then...
each portion is classified separately
If each portion cannot be sold or leased out separately, then ..., unless the owneroccupied portion is an ..., in which case the entire property is classified as ...
the entire property is classified as PPE, insignificant portion, investment property
Investment property measured at fair value is not ... ; and fair value changes are recognised ...
depreciated or tested for impairment, in profit or loss