2 Overview of session 1. Scope of application and key concepts 2. Recognition3. Measurement4. Additional learning points5. DisclosuresRecognition: P,P&E, inventory or expense?Measurement: initialsubsequent - consumption of value- impairment6. E.C. specific implications7. Questions
3 Property, Plant and Equipment 1. Scope of application and key concepts
4 P,P&E Assets = Resources Controlled by the E.C. as a result of past events; andFrom which future economic benefits or service potential are expected to flow to the E.C.Property, plant and equipment = tangible assets that:Are held by the E.C. for use in the production or supply of goods or services, for rental to others, or for administrative purposes; andAre expected to be used during more than one reporting period.Service potential – because most of the E.C.s’ assets have no commercial rate of returnLast bullet: introduce the example of spare parts (spare parts are usually carried as inventory and recognised as an expense as consumed – BUT major spare parts and stand-by equipment qualify as P,P&E if to be used for more than 1 accounting period or if they can only be used in connection with an item of P,P&E
5 Classes of P,P&EAssets of a similar nature or function in the E.C.s’ operations are grouped into classes of property, plant and equipment for the purpose of disclosure in the financial statements:Land and buildings;Plant and equipment;Furniture and vehicles;Computer hardware;Other tangible (non-financial) assets;Pre-financing and tangible assets under construction;andLeased assets.
6 Cost and Fair valueCost = the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or constructionFair value = the amount for which an asset could be exchanged (or a liability settled) between knowledgeable, willing parties in an arm’s length transaction
7 Useful life and Depreciation Useful life = the period of time over which an asset is expected to be used by the entityDepreciation = the systematic allocation of the depreciable amount of an asset over its useful lifeDepreciable amount = the cost of an asset (or other amount substituted for cost in the financial statements) less its residual valueResidual value = the net amount which the entity expects to obtain for a asset at the end of its useful life after deducting the expected costs of disposalUseful life: introduce the « components approach » - e.g. buildings and partitions do not have the same useful life
8 Owner-occupied V. Investment property Owner-occupied propertyOf general applicationProperty held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposesInvestment propertyOf specific applicationProperty (land or a building – or part of a building – or both) held to earn rentals or for capital appreciation or both
10 Initial recognitionAn item of property, plant, equipment and investment property should be recognised as an asset when:Future economic benefits or service potential are expected to flow to the E.C.; andThe cost or fair value of the asset can be measured reliably.Future economic benefits: from use + from ultimate disposalFuture economic benefits or service potential – example: assets acquired for safety or environmental reasons are recognised as assets if the service potential from the related assets is more than what could be derived if the assets had not been acquired BUT carrying amount should not exceed future service potential from use and ultimate disposal
11 P,P&E or not? Materiality threshold: € 420 P,P&E No Yes EXPENSE No Yes Resource controlled by the E.C.?YesEXPENSEFuture economic benefits are expected?NoYesASSETNoTo be used for production, commercial or administrative purposes?ANOTHER ASSETYesNoExpected to be used during more than one reporting period?YesNoCan be measured reliably??YesMateriality threshold: € 420P,P&E
12 Timing of initial recognition Date of acquisition = the date on which the risks pertaining to ownership get transferred to the E.C. – generally corresponds to the acceptance of delivery of the assetConsider cut-off at year-endDelivered not billed: recognise asset and accrue invoiceBilled not delivered: transfer asset to a suspense account
14 Initial measurementAn item of property, plant, equipment and investment property which qualifies for recognition as an asset should initially be measured at costWhere an asset is acquired at no cost, or for a nominal cost, its cost is its fair value at the date of acquisition
15 Components of cost The cost of an item = its purchase price, plus Import duties and non-refundable purchase taxes (including property transfer taxes); andAny directly attributable costs of bringing the asset to working condition for its intended use, such as:Cost of site preparation;Initial delivery and handling costs;Installation costs;Professional fees such as architects and engineers, legal services; andThe estimated cost of dismantling the asset and restoring the site (set up of a provision).Any trade discounts or rebates are deducted.Cost of dismantling the asset and restoring the site: Dr. Tangible fixed assets / Cr. Provision
16 Specific initial measurement issues Self-constructed asset:Cost is determined using the same the same principles as for an acquired assetWhere an asset is acquired at no cost, or for a nominal cost, cost is the fair value at the date of acquisitionExchange of assets:Cost is measured at the fair value of the asset received (equivalent to: Fair value of the asset given up + cash transferred)Self-constructed asset: include direct labour costs and indirect labout costs to the extent that they can be directly related to the construction of the asset
17 Subsequent expenditure Subsequent related expenditure should be added to the carrying amount of the asset, when:It is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset will flow to the European Communities; andThey improve the condition of the asset;Otherwise subsequent expenditures must be recognised as expenses<> Repairs and maintenance
18 Subsequent expenditure Examples of improvements which result in increased future economic benefits or service potential include:Modification of an item of plant to extend its useful life, including an increase in its capacity;Upgrading machine parts to achieve a substantial improvement in the quality of output;Adoption of new production processes enabling a substantial reduction in recently assessed operating costs.
19 Subsequent expenditure Repairs, renovations and maintenance are made to restore or maintain the future economic benefitsASSETEXPENSE
20 Subsequent measurement - Depreciation All assets entered as tangible assets shall be depreciated, except for:Land;Fixed asset under construction;Pre-financing on property;Work of art.The depreciable amount should be allocated on a systematic basis over useful life (costs subsequently capitalised over the remaining useful life)The depreciation method used should reflect the pattern in which the asset’s economic benefits or service potential is consumed by the E.C.Monthly pro rata temporis depreciation from the date of acquisitionThe depreciation charge of each period expense
21 Subsequent measurement - Useful life Estimation of the useful life of an itemJudgement based on the experience of the E.C. with similar assetsUseful life and depreciation basis should be reviewedon a regular basisChange in accounting estimates – give an exampleWhere a change is justified Accounted for as a change inaccounting estimates with no prior year restatement
22 Subsequent measurement Subsequent to initial recognition as an asset, an item of property, plant and equipment should be carried atIts cost less any accumulated depreciation and any accumulated impairment lossesA revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment lossesThe E.C. will elect to apply the benchmark treatmentBenchmark treatmentAllowed alternative treatment
24 Worked exampleThe E.C. acquire a mainframe computer on July 1, N (delivery date). The following costs are incurred:Costs on consultancy helping the E.C. specify the nature and performance level of the mainframe: € 4,000Purchase price: € 50,000Import duties: € 2,000Transportation expenses: € 3,000Installation expenses: € 5,000The estimated useful life is initially 5 years
25 Worked example N N+1 N N+1 Balance sheet 60,000 (6,000) 54,000 Cost of acquisition = € 60,000 (50, , , ,000)Cost of acquisition excludes the costs on consultancy because they are not directly attributable to the system that was boughtMonthly depreciation expense: € 1,000 (= 60,000 / 60)Depreciation expense: N: € 6,000 (= 1,000 * 6) - N+1: € 12,000 (= 1,000 * 12)Balance sheetNN+160,000(6,000)54,000(18,000)42,000NN+16,00012,000Economic outturn a/cGross carrying amountDepreciationexpenseAccumulated depreciationNet carrying amount
26 Worked example N + 1 N+2 N+1 N+2 Balance sheet On 1/1/N+2 the E.C. revise useful life, which is decreased to 4 yearsCarrying amount: € 42,000Remaining useful life: 30 months (= 48 – 18)Revised monthly depreciation expense: € 1,400 (= 42,000 / 30)Balance sheetN + 1N+260,000(18,000)42,000(34,800)25,200N+1N+212,00016,800Economic outturn a/cGross carrying amountDepreciationexpenseAccumulated depreciationNet carrying amount
27 Worked example Balance sheet On 1/1/N+3 the E.C. incur expenses of € 9,000 to increase the mainframe computer’s CPU and € 6,000 to fix various bugsCapitalise: € 9,000 – to be depreciated over the remaining useful life (18 months)Expense: € 6,000Revised monthly depreciation expense: € 1,900 = € 1,400 + € 500 (= 9,000 / 18)N + 2N+360,000(34,800)25,20069,000(57,600)11,400Balance sheetN+2N+316,800-22,8006,000Economic outturn a/cGross carrying amountDepreciationexpenseAccumulated depreciationNet carrying amountR&M expense
28 Subsequent measurement - Impairment An impairment is a loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciationIAS 36 is the current text addressing impairment of assetsE.C. accounting rule based on ED 23 (issued for comment by the IFAC), which recognises the specificities of the public sector and addresses impairment of non-cash generating assets, i.e. those assets that are not held to generate a commercial rate of return
29 Subsequent measurement - Impairment If indicators are present that suggest thatCarrying amount of the asset > Recoverable service amountImpairment testing should be performed
30 Indicators of impairment External sources of information:Cessation of the demand or need for services provided by the assetSignificant long-term changes with an adverse effect on the entity have take place during the period or will take place in the near future, in the technological, legal or government policy environmentInternal sources of information:Physical damage of an assetSignificant long-term changes with an adverse effect on the entity have taken place during the period or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or expected to be usedA decision to halt the construction of the asset before it is complete or in a usable conditionEvidence from internal reporting that indicates that the service performance of an asset is/will be worse than expectedExamples:External:Cessation of demand: canteenLT changes: new safety regulations or obsolescence of computer hardwareInternal:Physical damage: fireLong-term changes: building used for storage rather than for administrative purposesInternal reporting: output of printing machine
31 Recoverable service amount Max (net selling price, value in use)Net selling price:Price in a binding sale agreement in an arm’s length transaction, less costs attributable to the disposal of the assetMarket price (bid price) less costs attributable to the disposal of the asset Information from similar sale transactionsValue in use:Depreciated replacement costorRestoration cost approach or Service units approachIf NSP > carrying value – STOPDepreciated replacement cost: on an optimised basisRestoration cost: substract the cost of restoration from the cost of replacing the remaining service potential of the asset before impairmentService units approach: reduced no. of service units
32 Impairment lossIf, and only if, the recoverable service amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amountThat reduction is an impairment loss to be immediately recognised as an expense in the economic outturn accountIf the estimated impairment loss is greater than the carrying amount of the asset, the carrying amount of the asset is reduced to zero
34 Worked example - Impairment It was estimated when the mainframe computer was purchased that on average 80% of CPU would be used (a buffer of excess CPU time of 20% was expected and needed to accomodate peak period deadlines).CPU declined to 20% in N+4 because many applications were converted to run on desktop computers or servers.A computer is available on the market at a price of € 24,000 that can provide the remaining service potential of the mainframe computer using the remaining applications.A broker is offering € 4,500 for the mainframe computerThe indicator of impairment is the significant long-term change in technological environment resulting in conversion of applications from the mainframe to other platforms and therefore decreased usage of the mainframe computer.
35 Worked example - Impairment Evaluation of impairment:aCarrying amount, N+3 (acquisition cost: 69,000 less accumulated depreciation: 57,600)11,400Replacement cost24,000Accumulated depreciation (c x 42 / 48)(21,000)bValue in use: Depreciated replacement cost3,000cNet selling price4,500dMax (depreciated replacement cost, net selling price)Impairment loss (a - d)6,900To be depreciated over the remaining useful life (6 months)An expense
36 Subsequent measurement - Investment property Subsequent to initial recognition as an asset, all investment property should be measured following the:Fair valuemodelCostmodelorIPSAS 17 –Benchmark treatment
37 Property, Plant and Equipment 4. Additional learning points
38 Retirements and disposals An item of property, plant and equipment should be eliminated from the balance sheet:On disposal; orWhen the asset is permanently withdrawn from use.Gain or losses arising from the retirement or disposal should be determined as:Retirement or disposal value – Carrying amount of the assetRecorded as a gain or a loss in the Economic Outturn Account as incurred
39 Worked exampleOn 28/2/N+4 the computer mainframe is disposed of to Oxfam for free.aCarrying amount, 28/2/N+4 = (4,500 – 4,500 * 2/6)3,000bSales price-Loss = b – a(3,000)
41 Key disclosuresKey disclosures required for each class of property, plant and equipment:Measurement bases used for determining the gross carrying amountDepreciation method used and estimated useful livesThe gross carrying amount and accumulated depreciation at the beginning and at the end of the periodA reconciliation of the carrying amount at the beginning and the end of the period
42 Key disclosures (cont’d) Existence and amounts of restrictions on title for property, plant and equipment pledged as securities for liabilitiesThe amount commitments for the acquisition of property, plant and equipmentIf applicable, the basis used to revalue a class of property, plant and equipmentWhen the benchmark treatment is used, the fair value of the assets should be disclosed if it is materially different from the carrying amountInformation on impairment
43 Investment property – Additional specific disclosures The criteria developed to distinguish investment property from owner-occupied propertyThe methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors because of the nature of the property and lack of comparable market dataThe extent to which the fair value of investment property is based on a valuation by an independent appraiser who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact should be disclosed.
44 Property, Plant and Equipment 6. E.C. specific implications
45 Key differences with the current E.C. practices Individualisation of assets i.o. Global depreciation of assets with similar characteristicsProrata temporis depreciation i.o. Full year in the year of acquisitionRequired segregation of land and buildingsComponents approachImpairment testingNeed for the reconciliation of aphysical inventory with the fixed assets ledger
Your consent to our cookies if you continue to use this website.