Study unit 4
Property, plant and equipment
Tangible items, that are held for use in the production cycle, for rental to others or for administration
purposes and are expected to be used during more than one period
Definitions
Carrying amount The amount at which the asset is recognised in the statement of financial
position after deducting accumulated depreciation
Depreciable amount Cost less estimated residual value at the end of the asset’s economic
lifetime
Depreciation The systematic allocation of the depreciable amount of an asset over its
estimated useful life
Residual value The estimated value of an asset at the end of its useful life in today’s terms
Useful life The period during which the depreciable asset will be used by the entity
Significant components each significant part must be recognised in a separate asset account
Initial measurement
Cost = the amount of cash/cash equivalents paid; or the fair value of the consideration given (if it’s not
cash) at the time of acquisition or construction; or the amount attributed to that asset if recognition is
per other IFRS.
ELEMENTS OF COST
Purchase price
Includes: import duties, non- Excludes: Refundable taxes Reduce cost by rebates and
refundable taxes discounts
Directly attributable costs
Is the cost necessary to get asset to its current location & condition that enables it to be used as
intended by management?
Yes No
Capitalise Expense
cost of preparing site training cost, admin & other general overheads
initial delivery & handling cost advertising & other costs
installation & assembly cost conducting business in a new location & to
professional fees (employee benefits relating di erent type of customers
directly to construction/acquisition and cost to any cost not necessary to bring asset to
test if asset is functioning correctly) current location & condition
borrowing cost cost incurred after asset is in required location
& condition
Initial estimate of some future costs
(dismantling, removal, restoration cost)
If obligated (obligation may come with ownership of PPE):
On acquisition date – capitalised as initial cost
Over time – capitalised as subsequent cost
Future costs arising on acquisition are capitalised as initial cost and is measured at present value if
FV – PV = a material amount
Future costs arising due to usage are capitalised as subsequent costs, unless asset has reached
the end of its useful life, then future costs = recognised in P/L & measured @ PV if FV – PV = material
, E ect of method of acquisition on measurement:
Paid for in cash: Based on cash price equivalent
Exchange for other asset(s): FV of asset given up, FV of asset or CA of asset given up
Government grant: FV or at nominal amount, if government gave us cash to subsidise acquisition of
asset, asset could be reduced by amount of the grant
Acquired by way of cash:
Payment occurs immediately/normal credit terms measure @ amount of cash paid
Payment delayed beyond normal credit terms measure @ the present value
Total amount to be paid less present value of cost = interest (expensed/capitalised over period)
Acquired via an asset exchange:
Measured at fair value of asset given up, UNLESS:
- Fair value of asset given up is not available, or
Measure @ FV of asset received
- Fair value of asset received is more clearly evident
If fair value of neither assets can’t be determined reliable OR exchange of assets is deemed to have no
commercial substance measure at carrying amount of asset given up
Won’t change future cash flows
Won’t change value of operation that is to use the asset, or
Any expected changes in cash flow/value is insignificant relative to FV of asset exchanged
Subsequent costs
Capitalised only if IAS 16’s recognition criteria are met.
Replacement of parts
Derecognise old carrying amount & capitalise new cost
Major inspections
Day-to-day servicing always expensed
Replacement of parts and de-recognition of assets
Derecognition of old part CA of old part must be removed from asset account by expensing CA
in P/L
If part replace had been recognised & depreciated as a separate component:
1 Dt Depreciation: Asset
Cr Accumulated depreciation: Asset (Significant part)
Depreciation of significant part up to the date of replacement
2 Dt Impairment loss: Asset
Cr Accumulated impairment loss: Asset (Significant part)
Impairment of significant part up to the date of replacement
3 Dt Accumulated depreciation: Asset (Significant part)
Dr Accumulated impairment loss: Asset (Significant part)
Cr Cost: Asset (Significant part)
Derecognition of significant part
If part replaced was not originally recognised separately, CA must be estimated:
e.g. Plant was bought on 1 Jan 2011 Purchase price = R1 000 paid in cash (no significant parts
identified), estimated useful life = 10 years.
The engine of the plant was scrapped and had to be replaced on 1 Jan 2012: New engine cost =
R500 cash, estimated useful life = 5 years, estimated cost of old engine = R300
Calculations: Original asset Original engine Asset w/o engine
Cost: 1 Jan 2011 1 000 300 700
Acc depr (1 000/10) (300/10) (100) (30) (70)
Carrying amount: 31 Dec 2011 900 270 630
Property, plant and equipment
Tangible items, that are held for use in the production cycle, for rental to others or for administration
purposes and are expected to be used during more than one period
Definitions
Carrying amount The amount at which the asset is recognised in the statement of financial
position after deducting accumulated depreciation
Depreciable amount Cost less estimated residual value at the end of the asset’s economic
lifetime
Depreciation The systematic allocation of the depreciable amount of an asset over its
estimated useful life
Residual value The estimated value of an asset at the end of its useful life in today’s terms
Useful life The period during which the depreciable asset will be used by the entity
Significant components each significant part must be recognised in a separate asset account
Initial measurement
Cost = the amount of cash/cash equivalents paid; or the fair value of the consideration given (if it’s not
cash) at the time of acquisition or construction; or the amount attributed to that asset if recognition is
per other IFRS.
ELEMENTS OF COST
Purchase price
Includes: import duties, non- Excludes: Refundable taxes Reduce cost by rebates and
refundable taxes discounts
Directly attributable costs
Is the cost necessary to get asset to its current location & condition that enables it to be used as
intended by management?
Yes No
Capitalise Expense
cost of preparing site training cost, admin & other general overheads
initial delivery & handling cost advertising & other costs
installation & assembly cost conducting business in a new location & to
professional fees (employee benefits relating di erent type of customers
directly to construction/acquisition and cost to any cost not necessary to bring asset to
test if asset is functioning correctly) current location & condition
borrowing cost cost incurred after asset is in required location
& condition
Initial estimate of some future costs
(dismantling, removal, restoration cost)
If obligated (obligation may come with ownership of PPE):
On acquisition date – capitalised as initial cost
Over time – capitalised as subsequent cost
Future costs arising on acquisition are capitalised as initial cost and is measured at present value if
FV – PV = a material amount
Future costs arising due to usage are capitalised as subsequent costs, unless asset has reached
the end of its useful life, then future costs = recognised in P/L & measured @ PV if FV – PV = material
, E ect of method of acquisition on measurement:
Paid for in cash: Based on cash price equivalent
Exchange for other asset(s): FV of asset given up, FV of asset or CA of asset given up
Government grant: FV or at nominal amount, if government gave us cash to subsidise acquisition of
asset, asset could be reduced by amount of the grant
Acquired by way of cash:
Payment occurs immediately/normal credit terms measure @ amount of cash paid
Payment delayed beyond normal credit terms measure @ the present value
Total amount to be paid less present value of cost = interest (expensed/capitalised over period)
Acquired via an asset exchange:
Measured at fair value of asset given up, UNLESS:
- Fair value of asset given up is not available, or
Measure @ FV of asset received
- Fair value of asset received is more clearly evident
If fair value of neither assets can’t be determined reliable OR exchange of assets is deemed to have no
commercial substance measure at carrying amount of asset given up
Won’t change future cash flows
Won’t change value of operation that is to use the asset, or
Any expected changes in cash flow/value is insignificant relative to FV of asset exchanged
Subsequent costs
Capitalised only if IAS 16’s recognition criteria are met.
Replacement of parts
Derecognise old carrying amount & capitalise new cost
Major inspections
Day-to-day servicing always expensed
Replacement of parts and de-recognition of assets
Derecognition of old part CA of old part must be removed from asset account by expensing CA
in P/L
If part replace had been recognised & depreciated as a separate component:
1 Dt Depreciation: Asset
Cr Accumulated depreciation: Asset (Significant part)
Depreciation of significant part up to the date of replacement
2 Dt Impairment loss: Asset
Cr Accumulated impairment loss: Asset (Significant part)
Impairment of significant part up to the date of replacement
3 Dt Accumulated depreciation: Asset (Significant part)
Dr Accumulated impairment loss: Asset (Significant part)
Cr Cost: Asset (Significant part)
Derecognition of significant part
If part replaced was not originally recognised separately, CA must be estimated:
e.g. Plant was bought on 1 Jan 2011 Purchase price = R1 000 paid in cash (no significant parts
identified), estimated useful life = 10 years.
The engine of the plant was scrapped and had to be replaced on 1 Jan 2012: New engine cost =
R500 cash, estimated useful life = 5 years, estimated cost of old engine = R300
Calculations: Original asset Original engine Asset w/o engine
Cost: 1 Jan 2011 1 000 300 700
Acc depr (1 000/10) (300/10) (100) (30) (70)
Carrying amount: 31 Dec 2011 900 270 630
