→ number of production or similar units expected to
be
obtained from the asset
Scope
Recognition
→ Applies to PPE except when a nother Standard requires or
permits a different accounting treatment to its produce → Does not apply to: PPE held for sale Exploration and evaluation assets ( of Mineral Resources) Non-regenerative resources (oil, natural gas, minerals) But IAS 16 applies to PPE used to develop and maintain items above. → Investment property – use cost model in this Standard → Applies to bearer plants, but not
Definitions items that are 1. PPE – ❶ tangible items that ❷ used in business → held for use ✓ in the production ✓ or supply of goods and services, ✓ for rental to others, ✓ for administrative purposes ❸expected to be use during more than one period
● RECOGNITION CRITERIA 1. probable future economic benefits will flow 2. cost of item can be measured reliably
● COST include 1. costs incurred initially 2. subsequent costs to add to, replace, or service PPE
● spare parts, stand-by equipment, servicing equipment → PPE when it meets recognition criteria → otherwise, inventory
● Judgment – used when applying recognition criteria ● It may be appropriate to aggregate individually significant items
Initial Costs ● Items acquired for safety or environmental reasons → although not directly increasing the future economic
2. Bearer plant – living plant used in: → production or supply of a gricultural produce → expected to bear produce for more than one period → not sold as agricultural produce, except for incidental scrap sales 3. Depreciable amount – cost of an asset less residual value 4. Depreciation – systematic allocation of the depreciable amount of an asset over its useful life 5. Entity-specific value – PV of cash flows an entity expects to arise from continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability 6. Impairment loss – amount by which carrying amount of an asset exceed its recoverable amount 7. Recoverable amount – higher of FVLCTS and its value in use 8. Residual value – estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal – if the asset were already of age and in the condition expected at the end of its useful life – cost is often immaterial/insignificant in calculating depreciable amount 9. Useful life → period over which an asset is expected to be available for use, or
benefits of any particular existing item of PPE → qualify as PPE because they enable entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired
Subsequent Costs
● Cost of day-to-day servicing – costs of labor and consummables – cost of small parts → expense as incurred → “Repairs and Maintenance” ● Cost of replacement → recognition criteria met ? capitalized
● Cost of major inspection → capitalized → remaining carrying amount of previous inspection –
derecognized WHY? considered cost of replacement if recognition criteria is satisfied
Measurement at Recognition ● initial recognition - at COST Elements of Cost
1. Purchase price includes import duties non-refundable taxes after deducting trade discounts/rebates
2. Directly attributable costs to bring the asset to its location and condition for it to be capable of operating in a way intended by management 3. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.*
*IAS 2 applied if costs incurred are because it was used in producing inventory
● Capitalizing cost stops when the item is in the location and condition necessary for it to be capable of operating in a way intended by management Measurement of Cost →
Revaluation Model
● After initial recognition – measure reliably at REVALUED AMOUNT ● REVALUED AMOUNT – FV at the date of revaluation LESS Acc Dep and Acc Impairment Loss ● TWO APPROCHES IN RECORDING REVALUATION adjust carrying amount: 1) proportional 1) proportional approach – ACC DEP at the date of revaluation is RESTATED PROPORTIONARELY with change in GROSS CARRYING AMOUNT of asset – asset after revaluation = revalued amount
COST – cash price equivalent at recognition date
→
Payment deferred beyond normal credit terms? Interest expense recognized over period of credit
2) elimination approach – ACC DEP is eliminated against GROSS CARRYING AMOUNT of asset – Net amount restated to revalued amount of asset
→
Exchange of Non-monetary assets Cost is measured at fair value UNLESS: 1. exchange transaction lacks commercial substance 2. FV of asset given up or received cannot be measured
● REVALUATION – made at sufficient regularity – to ensure carrying amount does not differ
Not measured at FV? Cost Cost measured at carrying a mount of asset given up COMMERCIAL SUBSTANCE – considering extent of change in future ca sh flows due to transaction – exists when: 1. configuration of asset received is diff erent from asset transferred 2. entity-specific value of operations affected changes* 3. difference in #1 and #2 is SIGNIFICANT →
*should reflect post-tax cash flows FAIR VALUE is reliably measured if a. variability in the range of reasonable fair value measurements is NOT significant b. probabilities of various estimates within the range can be reasonably assessed and used when measuring fair value →
→
Cost of PPE held under fina nce lease – IAS 17
→
Carrying amount of PPE – may be reduced by government
grant (IAS 20)
Subsequent Measurement → choose between cost model and revaluation model
materially from the year-end FV
● Frequency of Revaluation – depends upon changes in FV of PPE – changes are significant and volatile – ANNUAL NOT – every 3-5 years ● REVALUATION OF ALL ITEMS IN CLASS – when an item is revalued, revalue the entire class of PPE to which it belongs – class – grouping of assets of similar nature and use in
an entity’s operations – items within a class a re revalued simultaneously WHY? to avoid selective revaluation to avoid reporting a mixture of costs and values at different dates e.g. land machinery ships aircraft motor vehicles furniture and fixtures office equipment bearer plants
● REVALUATION SURPLUS aka revaluation increment = FV (or depreciated replacement cost) – carrying amount of PPE ● Increase in value – CR Revaluation Surplus in OCI reversal of a revaluation decrease of the same asset previously recognized as an expense? expense ? P&L
Cost Model
Cost LESS Acc Dep and Acc Impairment Loss
● Decrease in value – P&L
reversal of a revaluation increase of the same asset previously recognized as an expense? expense ? decrease Revaluation Surplus in OCI
● DISPOSAL OF REVALUED ASSET ASSET – revaluation surplus transferred to RE The transfer to RE is not made through P&L
● TAX EFFECT OF REVALUATION – IAS 12
Depreciation
Depreciation Method
● reflects the pattern in which future economic benefit s are expected to be consumed
● reviewed at least annually at reporting date Change – Change in Accounting Estimate ● DEPRECIATION METHODS 1. STRAIGHT LINE – constant charge over the useful life 2. DIMINISHING BALANCE –decreasing charge over the useful life 3. UNITS OF PRODUCTION – charge based on the expected use or output
● Each item of PPE – depreciated separately ● Each part of an item – if possible, depreciate separately Significant parts of the same item have the same useful life and depreciation method? – GROUP GROUP TOGETHER Remainder parts not significant – depreciate depreciate separately
Applied consistently unless consistently unless there is a change in the expected pattern of consumption of those future economic benefits
Impairment (a) impairment of PPE – IAS 36 (b) derecognition of PPE retired or disposed – IAS 16 (c) Compensation from third parties for PPE that were impaired, lost or given up shall be included in P&L when the compensation becomes receivable. (d) cost of PPE restored, purchased, constructed as replacements – IAS 16
● DEPRECIATION – charged to P&L – unless included in carrying amount of another asset (e.g. as cost of conversion) – allocated on a systematic basis over useful life of asset
● Residual value, Useful life, Depreciation method – reviewed annually at reporting date Changes - Change in Accounting Estimate ● When residual value > carrying amount, DEPRECIATION = 0 until residual value < carrying amount
● Depreciation begins when the asset is available for use. ● Depreciation stops when (whichever is earlier): asset is classified as held for sale asset is derecognized
● Future economic benefits consumed through
Derecognition
● Derecognize PPE when:
1. for disposal 2. no future economic benefits are expected to f rom use or disposal
● Gain/loss from derecognition – P&L Difference between net disposal proceeds and carrying amount
– assessed through expected capacity or physical output
● PPE held for rental to others – ceased to be rented and becomes held for sale – transferred to inventory at carrying
2. physical wear and tear
amount
1. usage
– depends on operational factors (number of shits used, care, maintenance)
3. obsolescence (technical, commercial) – changes/improvements changes/improvements in production change in market demand for product – change 4. legal limits – expiry expiry dates of related lease
● Useful life may be shorter than economic life JUDGMENT is used in determining useful life
● LAND AND BUILDING – separable assets – Building: limited useful life, depreciated – Land: unlimited useful life, not depreciated unless it has limited useful life – Cost of site dismantlement, removal, a nd restoration related to Land – depreciated over period of benefits obtained by incurring said costs
● Date of disposal = date recipient obtains control of item ● Carrying amount of replacement parts – derecognized regardless of whether depreciated separately Carrying amount not determined? Cost of replacement
