Summary FAC2601 Learning Unit 5- Property, plant & equipment.docx

Learning Unit 5
Property, plant & equipment




5.1 Objective:

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,SCHEMATIC REPRESENTATION OF IAS 16:

Objective:
 Prescribe accounting treatment of property, plant & equipment (PPE)
 Addressing timing of recognition of assets, determining carrying amount &
related depreciation

Recognition:
Items of PPE recognised as assets on a component basis when it is probable
that:
 Future economic benefits associated with assets will flow to entity
 Cost of asset can be measured reliably

Initial measurement:
Items of PPE initially recognised as cost.
 Costs include = all costs incurred to bring item of PPE to location & working
condition for intended use
 If payment deferred = interest at market-related rate must be recognised
 If asset acquired in exchange for another = cost of new asset will be at fair
value of asset given up unless:
o Transaction lacks commercial substance or
o Fair value of wither the asset not received nor given up can be
readily measured – in which case cost of new asset measured at
carrying amount of asset given up

Subsequent measurement:
Items of PPE are subsequently measured using 2 methods:
1. Cost model = cost less accumulated depreciation & accumulated
impairment losses or
2. Revaluation model = revalued amount less accumulated depreciation &
accumulated impairment losses since last revaluation



Revaluation: Depreciation:
 Increase in value = credit to equity  Commence when A available for
– other comp income (revaluation use & continues until derecognised
surplus) – even if idle
o Unless reversal of previous  Depreciation amount = cost less
decrease for same asset the residual value
recognised as expense –  Method must reflect pattern in
income – P/L which A’s benefits are consumed
 Decrease in value = expense – P/L  Methods include:
o Unless reversal of previous o Straight line
increase of same asset – debit o Reducing balance
to revaluation surplus – another o Sum of digits
comp income o Production unit
 Revaluation surplus = realised to  Recognised in P/L
retained earnings o Unless included in carrying
o when asset disposed amount of another A –
o or over its remaining useful life manufactured inventories
directly in statement of
changes in equity


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, Subsequent measurement:
Items of PPE are subsequently measured using 2 methods:
1. Cost model = cost less accumulated depreciation & accumulated
impairment losses or
2. Revaluation model = revalued amount less accumulated depreciation &
accumulated impairment losses since last revaluation

Derecognition:
 A removed from statement of fin position
o on disposal
o or when withdrawn from use – & no expected future benefits from
disposal
 Gain or loss on derecognition recognised in P/L section in statement of P/L



PRINCIPLE ISSUES OF ACCOUNTING FOR PPE
1. Recognition of PPE as assets
2. Determination of carrying amounts
3. Related depreciation charges & impairment losses


NATURE OF PPE
 Tangible A = ‘fixed A’
 Held for use in production of goods, supply of services, rental to others or
admin purposes
 Expected to be used during more than 1 fin year
 Intention to use A to generate revenue rather than to sell them


RECOGNITION OF PPE ASSETS
= Resource controlled by entity as result of past events from which future
economic benefits are expected to flow to entity
 Entity controlling asset = power to obtain future economic benefits of
resource & can restrict access of others to asset
 Past events = date of acquisition or date of completion on which asset
becomes ready for intended use
 Future economic benefits = revenue from goods sold or services rendered,
cost savings & other benefits resulting from use of A


5.2 Background:
The standard shall be applied to PPE except when another standard requires or
permits a different accounting standard (tangible long-term assets)


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, Standard also applies to the following:
a) Where other standards may require recognition of an PPE item based on
approach different from that in the standard (leases),
- other aspects of accounting treatment for these A, incl. depreciation –
prescribed by this standard
b) Investment property being accounted for in accordance with cost model


The standard does not apply to (this does not form part of this module):
a) PPE items classified as held for sale in accordance with IFRS 5 Non-current
assets held for sale and discontinued operations (done in later studies);
b) biological assets related to agricultural activity;
c) the recognition and measurement of exploration and evaluation assets; or
d) mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.


IAS 16 allows 2 alternative accounting treatments for PPE:
After initial recognition of an PPE item at cost – assets may either be shown:
1. At cost less accumulated depreciation & accumulated impairment losses =
cost model
2. At a revalued amount = being the fair value of the A on date of
revaluation less accumulated depreciation & accumulated impairment
losses since last revaluation = revaluation model




5.3 Definitions:
CARRYING AMOUNT
 amount at which an asset is recognised in the statement of financial
position
 after deducting any accumulated depreciation and accumulated
impairment losses
 (Impairment does not form part of this module).


COST
 amount of cash or cash equivalents paid and
 the fair value of the other consideration given to acquire an asset
 at the time of its acquisition or construction or,

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