lOMoAR cPSD| 49511909
FAC3702/501
1
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, lOMoAR cPSD| 49511909
EXAMPLE 1
In order to comply with environmental requirements, a manufacturer of chemical products has to
install new chemical air filters to prevent the emission of toxic gasses. The relevant values at
yearend, 30 April 20.10, were as follows:
R
Existing plant - Cost 5 000 000
Accumulated depreciation (1 250 000)
Carrying amount on 30 April 20.10 3 750 000
Cost of air filters (brought into use on 30 April 20.10) 800 000
New carrying amount on 30 April 20.10 4 550 000
1.4.2 Subsequent costs
Servicing cost
The normal day-to-day servicing (maintenance) costs of a PPE item are not recognised in the
carrying amount of the item, but in profit or loss (an expense) as incurred. The expense is described
as “repairs and maintenance” and consists mainly of the cost of labour, consumables and small (low
value) spares.
Replacement at regular intervals
Parts of some PPE items may require replacement at regular intervals. For example:
• the relining of a furnace
• the seats and galleys in an aircraft
• the interior walls of a building such as an office block.
The principle (main) asset (like the furnace, aircraft and building) has a much longer useful life than
the respective components (like the relining, seats and interior walls). An entity recognises in the
carrying amount of a PPE item the cost of replacing part of such an item when that cost is incurred
if the recognition criteria are met. The remaining carrying amount of the replaced part is then
derecognised (see 1.7 for derecognition).
Regular major inspections
Certain assets need regular major inspections for faults, regardless of whether parts of the item are
replaced (eg aircraft) to ensure continuing operations. When each major inspection is performed, its
cost is recognised in the carrying amount of the asset as a replacement (if the recognition criteria
are met) and depreciated. Any remaining carrying amount of the previous inspection (as distinct from
physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection
was identified in the transaction in which the item was acquired or constructed. If necessary, the
estimated cost of a future similar inspection may be used as an indication of what the cost of the
inspection component was when the item was acquired or constructed. In this way the depreciable
amount that needs to be separately depreciated, can be estimated.
2
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, lOMoAR cPSD| 49511909
FAC3702/501
EXAMPLE 2
Deens Ltd bought a machine on 1 January 20.12 for R1 600 000. The machine has to be inspected
every 6 000 hours which means that a major inspection will have to be carried out every 2 years.
The estimated cost of a major inspection is R150 000. The machine has an estimated useful life of
8 years.
REQUIRED
(a) Calculate the depreciation and carrying amount of the machine for 20.12
and 20.13 if everything goes according to plan.
(b) If, due to several factors, the inspection needed to be done after 20 months
instead of the planned two years and the cost of the first physical
inspection amounted to R200 000, show how this matter will be disclosed
in the note on property, plant and equipment for the year ended 31
December 20.13. The machine is the only asset of the entity.
SOLUTION 2
(a) Depreciation and carrying amount of the machine for 20.12 and 20.13
Inspection
Machine component Total
R R R
Cost (1 600 000 – 150 000) 1 450 000 150 000 1 600 000
Depreciation 20.12 (1 450 000/8); (150 000/2) (181 250) (75 000) (256 250)
Carrying amount on 31 December 20.12 1 268 750 75 000 1 343 750
Depreciation 20.13 (181 250) (75 000) (256 250)
Carrying amount on 31 December 20.13 1 087 500 – 1 087 500
LECTURER’S COMMENT
The inspection component forms a part of the machine and is not a separate
asset.
(b) DEENS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.13
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, lOMoAR cPSD| 49511909
5. Property, plant and equipment
Machinery
R
Carrying amount on 1 January 20.13 1 343 750
Gross carrying amount 1 600 000
Accumulated depreciation (256 250)
Depreciation (calc) (264 583)
Derecognition of initial inspection cost (75 000 – 50 000 (calc)) (25 000)
Capitalisation of inspection cost incurred 200 000
Carrying amount on 31 December 20.13 1 254 167
Gross carrying amount (1 600 000 – 150 000 + 200 000) 1 650 000 Accumulated
depreciation (256 250 + 264 583 – 75 000 – 50 000) (395 833)
CALCULATION
Depreciation – machine 181 250
Depreciation – inspection (initial) (150 000/2 x 81/12) 50 000
Depreciation – inspection (new) (200 000/2 x 41/12) 33 333
264 583
1.
Inspection of the machine is carried out after 20 months therefore the first 12 months falls within
the 20.12 financial year and the remainder 8 months in the current financial year – 20.13. 1 January
20.13 – 31 August 20.13 = 8 months (depreciation period for initial inspection cost) 1 September
20.13 – 31 December 20.13 = 4 months (depreciation period for new inspection cost)
1.5 MEASUREMENT AT RECOGNITION – IAS 16.15–28
A PPE item that qualifies for recognition as an asset shall be measured at its cost.
1.5.1 Elements of cost
The cost of a PPE item comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located. This obligation can arise either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than to
produce inventories during that period.
Examples of directly attributable costs are:
(a) costs of employee benefits arising directly from the construction or acquisition of the PPE item;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
4
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FAC3702/501
1
Downloaded by Vincent master
()
, lOMoAR cPSD| 49511909
EXAMPLE 1
In order to comply with environmental requirements, a manufacturer of chemical products has to
install new chemical air filters to prevent the emission of toxic gasses. The relevant values at
yearend, 30 April 20.10, were as follows:
R
Existing plant - Cost 5 000 000
Accumulated depreciation (1 250 000)
Carrying amount on 30 April 20.10 3 750 000
Cost of air filters (brought into use on 30 April 20.10) 800 000
New carrying amount on 30 April 20.10 4 550 000
1.4.2 Subsequent costs
Servicing cost
The normal day-to-day servicing (maintenance) costs of a PPE item are not recognised in the
carrying amount of the item, but in profit or loss (an expense) as incurred. The expense is described
as “repairs and maintenance” and consists mainly of the cost of labour, consumables and small (low
value) spares.
Replacement at regular intervals
Parts of some PPE items may require replacement at regular intervals. For example:
• the relining of a furnace
• the seats and galleys in an aircraft
• the interior walls of a building such as an office block.
The principle (main) asset (like the furnace, aircraft and building) has a much longer useful life than
the respective components (like the relining, seats and interior walls). An entity recognises in the
carrying amount of a PPE item the cost of replacing part of such an item when that cost is incurred
if the recognition criteria are met. The remaining carrying amount of the replaced part is then
derecognised (see 1.7 for derecognition).
Regular major inspections
Certain assets need regular major inspections for faults, regardless of whether parts of the item are
replaced (eg aircraft) to ensure continuing operations. When each major inspection is performed, its
cost is recognised in the carrying amount of the asset as a replacement (if the recognition criteria
are met) and depreciated. Any remaining carrying amount of the previous inspection (as distinct from
physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection
was identified in the transaction in which the item was acquired or constructed. If necessary, the
estimated cost of a future similar inspection may be used as an indication of what the cost of the
inspection component was when the item was acquired or constructed. In this way the depreciable
amount that needs to be separately depreciated, can be estimated.
2
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, lOMoAR cPSD| 49511909
FAC3702/501
EXAMPLE 2
Deens Ltd bought a machine on 1 January 20.12 for R1 600 000. The machine has to be inspected
every 6 000 hours which means that a major inspection will have to be carried out every 2 years.
The estimated cost of a major inspection is R150 000. The machine has an estimated useful life of
8 years.
REQUIRED
(a) Calculate the depreciation and carrying amount of the machine for 20.12
and 20.13 if everything goes according to plan.
(b) If, due to several factors, the inspection needed to be done after 20 months
instead of the planned two years and the cost of the first physical
inspection amounted to R200 000, show how this matter will be disclosed
in the note on property, plant and equipment for the year ended 31
December 20.13. The machine is the only asset of the entity.
SOLUTION 2
(a) Depreciation and carrying amount of the machine for 20.12 and 20.13
Inspection
Machine component Total
R R R
Cost (1 600 000 – 150 000) 1 450 000 150 000 1 600 000
Depreciation 20.12 (1 450 000/8); (150 000/2) (181 250) (75 000) (256 250)
Carrying amount on 31 December 20.12 1 268 750 75 000 1 343 750
Depreciation 20.13 (181 250) (75 000) (256 250)
Carrying amount on 31 December 20.13 1 087 500 – 1 087 500
LECTURER’S COMMENT
The inspection component forms a part of the machine and is not a separate
asset.
(b) DEENS LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.13
3
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, lOMoAR cPSD| 49511909
5. Property, plant and equipment
Machinery
R
Carrying amount on 1 January 20.13 1 343 750
Gross carrying amount 1 600 000
Accumulated depreciation (256 250)
Depreciation (calc) (264 583)
Derecognition of initial inspection cost (75 000 – 50 000 (calc)) (25 000)
Capitalisation of inspection cost incurred 200 000
Carrying amount on 31 December 20.13 1 254 167
Gross carrying amount (1 600 000 – 150 000 + 200 000) 1 650 000 Accumulated
depreciation (256 250 + 264 583 – 75 000 – 50 000) (395 833)
CALCULATION
Depreciation – machine 181 250
Depreciation – inspection (initial) (150 000/2 x 81/12) 50 000
Depreciation – inspection (new) (200 000/2 x 41/12) 33 333
264 583
1.
Inspection of the machine is carried out after 20 months therefore the first 12 months falls within
the 20.12 financial year and the remainder 8 months in the current financial year – 20.13. 1 January
20.13 – 31 August 20.13 = 8 months (depreciation period for initial inspection cost) 1 September
20.13 – 31 December 20.13 = 4 months (depreciation period for new inspection cost)
1.5 MEASUREMENT AT RECOGNITION – IAS 16.15–28
A PPE item that qualifies for recognition as an asset shall be measured at its cost.
1.5.1 Elements of cost
The cost of a PPE item comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located. This obligation can arise either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than to
produce inventories during that period.
Examples of directly attributable costs are:
(a) costs of employee benefits arising directly from the construction or acquisition of the PPE item;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
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