Presentation on theme: "IAS 16: Property, Plant and Equipment (PPE)"— Presentation transcript:
1 IAS 16: Property, Plant and Equipment (PPE) IFRS Training ProgramDay 3 – December 4, 2008Submitted by – Mukesh ThakurIAS 16: Property, Plant and Equipment (PPE)
2 Purpose of the Standard To prescribe the accounting treatment for Property, Plant and Equipment (PPE)The principal issues areThe timing of Recognition of the assetsThe determination of their carrying amount andThe depreciation charge in relation to them
3 Scope Applies in accounting for PPE. Standard excludes PPE are tangible itemsthat are held foruse in the production or supply of goods or services orrentals to others, orfor administrative purposeANDare expected to be used during more than one periodStandard excludesPPE for which separate Accounting treatment has been prescribed by any other Standard.
4 Recognition criteriaThe cost of an item of PPE is recognised only and only ifIt is probable that future economic benefit will flow to the entity andThe cost of the item can be measured reliably
5 Spare Parts and Servicing Equipment If yes - it will qualify as PPEIf no - it will be charged to ExpensesIt is majorIt can be used only in connection with an item of PPERecognition Criteria is met
6 Subsequent Costs Replacement Costs Inspection Cost Day to day expenses is charged to Profit and Loss Account as repair and maintenance.Major replacement cost qualify as PPE if recognition criteria is met.The carrying amount of those parts that are replaced is derecognised.Inspection CostWhere major regulation inspection is required to operate the item of PPE, the cost of such item will qualify as PPE if recognition criteria is met.Any remaining carrying amount of the cost of previous inspection is derecognised.
7 ExampleABC & Co., has acquired a heavy road transporter at a cost of Rs. 100,000 (with no breakdown of component parts).The estimated useful life is 10 years.At the end of the sixth year, the power train requires replacement, as further maintenance is uneconomical due to the off-road time required. The remainder of the vehicle is perfectly road worthy and is expected to last for the next four years.The cost of the new power train is Rs. 45,000.Can the cost of new power train can be recognized as the asset, and if so, what treatment should be used?
8 SolutionThe new power train will produce economic benefits to the ABC & Co.; andCost of the power train can be measured reliably. Hence, the item should be recognized as the asset.The cost Rs. 45,000 of new power train will be added to the carrying amount.The original invoice of the transporter did not specify the cost of the power train. Therefore, the cost of replacement Rs. 45,000 will be used as indicative price and discount to year 1, i.e., (45,000/ 1.05^6) = 33,500.It is assumed that discount rate used is 5%.- Revised Cost = (100, , ,000) = 111,500
9 Cost Price Comprises of MeasurementAn item of PPE is measured at COSTCost Price Comprises ofPurchase PriceCosts directly Attributable to bringing the asset to location and condition intended by managementInitial estimate of dismantling the assets and restoring the site to its original condition
10 Measurement cont.Only costs that are directly attributable may be capitalised. The standard lists type that are not directly attributableCosts of opening new facilityCosts of introducing a new product or serviceCosts of conducting business in a new location or with a new class of customerAdministration and other general overhead costsSelf Constructed assets is determined using the same principles as for an acquired asset.Exchange of AssetsIf fair value can be measured – cost will be measured at fair value.If fair value can not be measured – cost will be recognised at carrying amount of asset given up.
11 Your turn!ABC & Co., is installing a new plant at its production facility. It has incurred these costs:Cost of the plant Rs. 250,000.Initial delivery and handling cost Rs. 20,000.Cost of site preparation Rs. 60,000.Consultants used to advice on the acquisition Rs. 70,000.Interest charges paid to supplier for deferred credit Rs. 20,000.Estimated dismantling cost to be incurred after 7 years Rs. 30,000.Operating losses before commercial production Rs. 40,000.Find out the costs to be capitalized as per IAS-16?
12 Solution Particulars Cost Cost of the plant Rs. 250,000. Initial delivery and handling cost Rs. 20,000.Cost of site preparation Rs. 60,000.Consultants used to advice on the acquisition Rs. 70,000.Interest charges paid to supplier for deferred credit Rs. 20,000.Estimated dismantling cost to be incurred after 7 years Rs. 30,000.Operating losses before commercial production Rs. 40,000.250,00020,00060,00070,00030,000-Total Costs450,000
13 Measurement after recognition An entity may choose either the cost model or the revaluation model as its accounting policyCost ModelCarrying amount =Cost – (Accumulated Depreciation + Accumulated Impairment Loss)Revaluation ModelRevalued amount – (Accumulated Depreciation + Accumulated Impairment Loss)
14 Revaluation ModelRevaluation will be made at sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.If an item of PPE is revalued, the entire class of PPE to which that asset belongs will be revalued.Revaluation GainSurplus from Revaluation is credited directly to equity under heading ‘Revaluation Surplus’. However if revaluation reverses a revaluation decrease on the same asset previously recognised as an expense, it will credited to Profit and Loss Account to that extent.i.e. Amount to be transferred to revaluation reserve =Revaluation increase (-) Earlier revaluation decrease recognised as expenses.Standard states that revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realised (i.e. when asset is derecognised). This transfer is made through reserves and surplus and not through profit and loss account.
15 Revaluation Model cont… Let us take an example:A company has a policy of revaluing its PPE. At value of asset was Rs Its useful life is 10 years and it is depreciated on straight line basis to nil residual value. It is revalued downward to Rs atAt market value has risen to Rs20072008Cost/Valuation Brought forward1000850Depreciation charge (1000/10); (850/9)(100)(94)900756(Loss)/Gain on revaluation – Profit and Loss(50)44Gain on Revaluation - Revaluation Surplus-250Carrying amount carried forward1050
16 Revaluation Model cont… Revaluation LossesRevaluation Losses is charged against earlier revaluation surplus. Any balance of decrease in charged to Profit and Loss Account.i.e. amount to be charged to the profit and loss =Revaluation Decrease (-) Earlier revaluation increase.Better to take an example again!Cost of the asset as on = 100 Useful life = 10 yearsRevalued amount at = 135 Method of Dep. = SLMRevalued amount at = 50
17 Revaluation Model cont… Alternative treatmentStandard also permits transfer to be made from revaluation surplus to retained earning as the asset is used and the surplus is realized. The surplus may be realized as the asset is depreciated. In that case, in 2008 Rs. 5 would have been transferred from revaluation reserve to retained earning. The balance left in the revaluation amount would be Rs. 40. Accordingly, out of revaluation loss of Rs. 70 , charge against revaluation reserve would be Rs. 40 and Rs. 30 would be charged to Profit and Loss Account.20072008Cost100135Depreciation(10)(15)90120Gain on Revaluation – Revaluation Surplus45(45)(Loss)/Gain on Revaluation – Profit and Loss-(25)Carrying amount carried forward50
18 DepreciationThe standard prescribe following principles for depreciationEach part of an item of PPE with a cost that is significant in relation to the total cost of the item will be depreciated separately.The depreciation charge for each year will be recognised in profit and loss account unless it is included in carrying amount of another asset.The depreciable amount of an asset will be allocated on a systematic basis over useful life.The residual value and useful life of an asset will be reviewed at least each financial year end.Any difference in estimates from previous expectation will be accounted for as a change in accounting estimates i.e. changes will be applied prospectively.
19 Depreciation MethodThe standard does not prescribe any depreciation method. An entity may choose any method as per the nature of business. However method adopted by the entity should reflect the following principles:The depreciation method will reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.The depreciation method applied will be reviewed at each financial year end. Any change from the previous year will be treated as change in accounting estimates.
20 IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities Cost model:- Changes in liability will be added/deducted from asset cost in current period.- No negative carrying amount possible; any excess recognised immediately in profit or loss.- Increase in carrying amount triggers consideration of impairment. Calculation of recoverable amount might be necessary.
21 previous revaluation deficit) (except credit balance IFIRC 1Revaluation model:Change in liability does not affect valuation of asset (impact on valuation reserve)Change in liability: indication that asset might have to be revalued.Revaluation surplus(except reversal ofprevious revaluation deficit)Decrease in liabilityProfit or loss(except credit balanceremaining inrevaluation surplus)Increase in liability
22 DisclosureFor each class of PPE, following should be disclosed in Financial StatementThe measurement base used for gross carrying amountThe depreciation method usedThe useful lives or the depreciation rates usedThe Gross Carrying amount and the accumulated loss at the beginning and at the end of the periodA reconciliation of carrying amount at the beginning and end of the period showingAdditionsAssets held for sale (IFRS 5)Acquisition through business combinationIncrease or decrease from revaluation or impairmentDepreciationExchange differences arising on the retranslation of the financial statement of a foreign entity
23 Disclosure cont… Other Disclosures Other changes. The carrying amount at the beginning and end of the period.Other DisclosuresThe existence and amount of restrictions on title, and PPE pledged as securities for liabilities.Amount of expenditure recognised in the carrying amount of an item of PPE in the course of construction.The amount of contractual commitments for the acquisition of PPE.
31 Comparison with Indian GAAP IAS 16IGAAPCostCost includesInitial estimates of dismantling and removing the item and restoring the site on which it is located.There is no guideline for capitalisation of dismantling and site restoration cost.Borrowing cost (before , it should be expensed off immediately)Capitalisation of borrowing cost is mandatory as per AS 16.Component AccountingEach major part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of an item is depreciated mandatorily separate.There is one line in AS 10 that states that accounting for tangible fixed assets may be improved if total cost thereof is allocated to its various parts.
32 Comparison with Indian GAAP IAS 16IGAAPSubsequent costThe cost of replacing of parts of assets is capitalized if recognition criteria are met. The carrying amount of those parts that is replaced is derecognized simultaneously.There is no requirement of decapitalizing the carrying amount of replaced part.If major inspection is carried out, it is capitalized if the recognition criteria are met. The remaining carrying amount of previous inspection is derecognized.
33 Comparison with Indian GAAP IAS 16IGAAPRevaluationIAS 16 gives option to an entity to choose either cost less depreciation method or revaluation method. If an item of property, plant and equipment is revalued, the entire class to which that asset belongs should be revalued.Revaluation approach adopted is ad-hoc in nature. When revaluation do not cover all the asset of the given class, it is appropriate that the selection of the asset to be revalued be made on systematic basis.Depreciation on revalued portion cannot be recouped out of revaluation reserve.Depreciation on revalued portion can be recouped out of revaluation reserve.Revaluation must be kept up to date so that the carrying amount does not differ materially from the fair value. Where policy of revaluation is adopted, regular revaluation of all PPE should be done.There is no such requirement.
34 Comparison with Indian GAAP IAS 16IGAAPDepreciationEach part of an item of PPE with a cost that is significant in relation to the total cost of an item will be depreciated separately.The depreciable amount of each asset should be allocated on a systematic basis. All companies need to ensure minimum depreciation as per rates prescribed in Schedule XIV to the Companies Act. There is no requirement for separate depreciation for each significant part of the asset.The residual value and useful life of an asset is reviewed at least each financial year end and if expectations differ from previous estimates, the changes will be accounted for as a change in accounting estimates.There is no need for annual review of estimates of useful life and residual value. It may be reviewed periodically.
35 Comparison with Indian GAAP Methods of DepreciationVarious method can be used like straight line method, diminishing balance method, unit of production method etc.Permitted methods of depreciation are straight line method and written down value method.Periodic review of depreciation method is required.Depreciation method selected should be applied consistently from period to period. Change is method should be made only in prescribed situation.Change in depreciation method is treated as change in accounting estimates and accounted for prospectively.Change in method is treated as change in accounting policy and is accounted retrospectively.
36 Comparison with Indian GAAP IAS 16IGAAPSpare parts, servicing equipment, etc.Spare parts are usually carried as inventories and recognised in profit and loss as consumed. Major spare parts qualify as PPE if entity expects to use them during more than one period. If spare parts can be used only in connection with PPE, they are accounted for as PPE.Machinery spares are usually charged to profit and loss account as and when consumed. If such items can only be used in connection of fixed assets and their use is expected to be irregular, it may be appropriate to allocate the total cost on a systematic basis over a period not exceeding the useful life of the principal asset.Servicing equipments are usually carried as inventory and recognised in profit and loss account as consumed.Servicing equipments are normally capitalized.