Characteristics: 1. 2. 3.
Tangible Used in business To be used more than one year
Does not apply to: a. ppe classified as held for sale b. biological assets related to AGRICULTURAL activity c. exploration and evaluation assets (mineral resources) d. mineral rights and reserves (oil, natural gas, non regenerative resources) Entity Specific Value – PV of all cash flows including cash flow from disposal Property, Plant and Equipment 1. held for use in the production/supply of goods/services goods/services for rental to others for administrative purposes 2. to be used for more than one period Recoverable amount – higher of FV less costs to sell and value in use Recognition of PPE Criteria: 1. Probable future economic benefits 2. Costs can be measured reliably Spare Parts and Servicing Equipment carried as inventory recognized in P/L when consumed MAJOR Spare Parts and Stand-by Equipment when used for more than one period – PPE when it can only be used ONLY in connection with PPE – PPE
c. initial delivery and handling costs d. installation and assembly costs e. cost of testing, net of proceeds from sale of prototype f. professional fees Obligations incurred for dismantling/removing/restoring dismantling/removing/restoring as a consequence of production of inventories – apply IAS 2, inventories NOT IAS 16 NOT COSTS OF PPE: a. cost of opening a new facility b. cost of introducing new product/service product/service (advertising/promotion) (advertising/promotion) c. conducting business in new location or to new customers d. administration/overhead administration/overhead When capitalization of cost to PPE CEASES? - when the item is in the location and condition necessary for it to be capable of operating e.g. a. costs incurred while item is capable of operation but NOT yet brought into use OR operated in less than capacity b. initial operating losses c. cost of relocation/reorganizing OPERATIONS Incidental Operations - its nature being unnecessary to bringing the asset to condition and location necessary for operation; hence, NOT CAPITALIZED, recorded separately as regular income and expense Self-Constructed Assets - internal profits deducted to arrive at net cost Abnormal Waste - NOT capitalized MEASUREMENT OF COST
INITIAL COSTS PPE acquired for safety/environmental reasons are recognized as PPE.
Cash Basis: Cash price equivalent Installment: At Cash price equivalent, difference between total payment and cash price recognized as interest
SUBSEQUENT COSTS Day-to-day costs of servicing of the PPE (repairs and maintenance) – NOT capitalized, outright expense Parts that are replaced – capitalized; the replaced parts are derecognized MAJOR inspection is performed – capitalized as a replacement INITIAL MEASUREMENT - recognized at COST ELEMENTS OF COST Cost of PPE comprises: a. purchase price, import duties, nonrefundable taxes, net of discounts and rebates b. cost to bring the asset at location AND condition for it to be capable of operating c. cost of dismantling/removing dismantling/removing the item d. restoration costs e. obligations incurred for purposes OTHER than to produce inventories Directly attributable costs: a. employee benefits b. cost of site preparation
Acquired Asset through exchange - measured at FAIR VALUE - unless a. LACKS commercial substance b. FV or asset received nor given up is RELIABLY measurable - if not measured at FV, measured at CARRYING amount of asset GIVEN up, NO GAIN OR LOSS IS RECOGNIZED WHEN THERE IS NO COMMERCIAL SUB WHEN IS THERE COMMERCIAL SUBSTANCE? a. configuration risk (risk, timing and amount) of c ash flows of asset received and given up differ b. entity-specific-value affected by the transaction changes c. difference in A and B is significant relative to FV of assets exchanged - CASH FLOWS REFERRED TO ARE POST-TAX WHEN FAIR VALUE MEASURABLE EVEN IF NO COMPARABLE COMPARABLE MARKET TRANSACTIONS EXISTS a. INsignificant variability of reasonable FV estimates b. Probability of various estimates are reasonably assured FV of asset given up is PREFERRED over FV of asset of acquired Except: when FV of acquired is MORE RELIABLE/CLEARLY EVIDENT Cost of PPE under Finance Lease is determined with IAS 17
CARRYING AMOUNT of PPE may be REDUCED by government grants
-
SUBSEQUENT MEASUREMENT Choose between: a. Cost model b. Revaluation Model COST MODEL - Cost less accumulated depreciation and accumulated impairment losses
-
Each item of PPE is depreciated SEPARATELY Parts of the same useful life and depreciation method may be depreciated in groups An entity may choose to depreciate separately items that have INSIGNIFICANT costs GR: Depreciation recorded in P/L E: when it forms part of another asset
WHEN RESIDUAL VALUE REVIEWED? - annually - changes in residual value accounted for as change in ESTIMATE
REVALUATION MODEL - revalued amount less SUBSEQUENT accumulated depreciation and SUBSEQUENT impairment losses
-
Fair Market Value – Determined by APPRAISAL
-
If no market-based evidence of FV due to specialized nature/rarely sold, an entity may use: a. income /depreciated replacement cost approach
WHEN DOES DEPRECIATION BEGIN? - When asset is in the location and condition for it to be capable of operating in the manner intended by management
Frequency of revaluation depends of frequency of changes in FV. Significant changes – ANNUAL Insignificant – every 3-5 years
WHEND DOES IT CEASE? Earlier of: a. date of classification as held for sale b. date of derecognition
TREATMENT OF ACCUMULATED DEPRECIATION when revaluing PPE a. restated proportionately (used when determining depreciated replacement cost) – PROPORTIONAL APPROACH b. eliminated against gross carrying amount, then gross amount revalued (commonly used for buildings) – ELIMINATION APPROACH If an item of PPE is revalued, the entire class is revalued Classes of PPE a. b. c. d. e. f. g. h.
Land Land and building Machinery Ships Aircraft Motor vehicles Furniture and fixtures Office equipment
Repair and maintenance does not negate the need to depreciate PPE. In practice, residual value of an asset is OFTEN INSIGNIFICANT When RESIDUAL VALUE > CARRYING AMOUNT, deprecation is 0
Depreciation DOES NOT cease when asset becomes idle or is retired from active use UNLESS fully depreciated. HOWEVER, depreciation may be 0 if there is no production under the usage method of depreciation. -
the useful life of an asset may be shorter than its economic life land and building are accounted for SEPARATELY if cost of land includes cost of site dismantlement, removal and restoration, that portion is depreciated
WHEN SHOULD DEPRECIATION BE REVIEWED? - annually COMPENSATION FOR IMPAIRMENT FROM THIRD PERSONS - shall be recognized when RECEIVABLE @ FV in OCI, if not, P/L DERECOGNITION
GR: Items must be revalued simultaneously E: Rolling basis is allowed if it revaluation will be completed within a short period
When: a. disposal b. when no future economic benefits are expected
INCREASE as a result of revaluation
Gains and Losses recorded in P/L. GAINS SHALL NOT BE CLASSIFIED AS REVENUE.
a. b.
Apply to previously recognized revaluation loss Apply to revaluation surplus
Previously rented out assets reclassified to inventory, gains on sale shall be classified as REVENUE.
DECREASE as a result of revaluation a. b.
Apply to previously recognized revaluation surplus Recognize as expense/loss
TREATMENT OF REVALUATION SURPLUS a. b.
May be transferred to RE upon DISPOSAL/RETIREMENT May be transferred to RE through DEPRECIATION *Piecemeal Realization
DEPRECIATION
Disposal may occur through a. sale b. disposal c. lease out under finance lease d. donation When an item is replaced, the replaced item is derecognized at its carrying amount. If the item was not previously recognized at a separate cost, the replacing item may serve as the estimate of the probable cost of the replaced item.
CHANGES in estimates may arise from changes in: a. b. c. d.
residual value estimated costs of dismantling, removing, restoring useful lives depreciation methods
ENCOURAGED ISCLOUSRES a. b. c. d.
idle PPE fully depreciated PPE retired from active use FV of PPE when cost model is used
