2 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.CONTACT:R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.
3 Property, Plant and Equipment Related standardsIAS 16Current GAAP comparisonsIFRS financial statement examplesLooking aheadEnd-of-chapter practice
4 Related Standards IAS 17 Leases IAS 20 Accounting for government grantsand disclosure of governmentassistanceIAS 23 Borrowing costsIAS 36 Impairment of assetsIAS 40 Investment propertyIFRS 2 Share-based paymentIFRS 5 Non-current assets held for sale anddiscontinued operations
5 IAS 16 - Overview Objective and scope Recognition Measurement at recognitionMeasurement after recognition (CM, RM)DerecognitionDisclosure
6 IAS 16 - Objective and Scope IAS 16 objective: standards for the recognition and derecognition of PP&E assets, measurement at and after acquisition, and disclosuresScoped out: assets held for sale, agricultural biological assets, non-renewable natural resource rights and reservesIncludes investment property under construction and when ready, if cost model applied
7 IAS 16 - Objective and Scope Property, plant and equipment (IAS 16.6):“Tangible items that:(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and(b) are expected to be used during more than one period”
8 IAS 16 - Recognition Costs are recognized as PP&E only if: probable that future economic benefits associated with the item will flow to the entity, andthe cost can be measured reliably.Applies to costs at acquisition and afteracquisition.
9 IAS 16 - RecognitionThe government requires HTY Ltd. to affix new pollution reduction equipment to existing equipment. Is this a PP&E cost…or an expense?Apply general principle:Future economic benefitsReliable measure
10 IAS 16 - RecognitionMeets the future economic benefits criterion if costs are incurred to obtain the economic benefits or to increase the economic benefits from other assetsCost of pollution reduction equipment = PP&E asset costSame criteria apply to major repairs and overhauls
11 IAS 16 - Recognition Works in combination with a “components approach” Recognize major components as separate PP&E assets and depreciate separatelyWhen major overhaul or replacement takes place, remove old component’s remaining undepreciated costRecognize new component as PP&E assetGain/loss to income statement
12 IAS 16 - Measurement at Recognition Need to know:What elements of cost are includedHow to measure cost
13 IAS 16 - Measurement at Recognition Cost elements to include:Purchase price net of discounts, rebates, and add non-recoverable taxes, dutiesCosts to get in place and ready to use as management intendedCosts of obligation to decommission asset and restore site as a result of acquiring the asset
14 IAS 16 - Measurement at Recognition Cost elements to exclude:Costs after asset in place and ready for use as management intendedCosts to open a new facility, introduce a product, move to new locationGeneral and administrative overhead type costs
15 IAS 16 - Measurement at Recognition If self constructed:Apply same principlesCharge abnormal costs to P or LInterest costs during construction: IAS 23Government assistance: IAS 20
16 IAS 16 - Measurement at Recognition Situation-equipment:$100 cost, 7% sales tax, 5% GST$10 to transport to plant, $5 storage cost (plant not ready)$3 labour, $2 materials to calibrate machine. $4 recovered from trial run productionUsed at 50% of capacity: costs = $50, sales = $55$11 to consultant for services related to choice of machine and calibration$1 interest cost during one month storage
17 IAS 16 - Measurement at Recognition Equipment cost:Invoice and tax: = $107TransportationCalibration: – 4 =Professional fees$129
18 IAS 16 - Measurement at Recognition How to measure cost?“Cost” is defined (IAS 16.6) as:Cash or cash equivalents paid or the FV of other consideration given to acquire asset when acquired or constructed…Other IFRS such as IFRS 2: Share-based payment may have other specific requirements
19 IAS 16 - Measurement at Recognition If non-monetary transaction, exception to FV principle if:FV cannot be reliably determined, orTransaction lacks commercial substance – i.e., transaction has no economic effect on the entity
20 IAS 16 - Measurement at Recognition Commercial substance exists if:Cash flows (amount, timing, risk) of new asset differ from those of old asset(s) transferred; orAfter-tax cash flows of part of business taking on new asset (entity specific value) have changed; andDifference in 1 or 2 is significant
21 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.CONTACT:R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.
22 IAS 16 - Measurement after Recognition Choice of two models:Cost modelRevaluation modelSeparate decision for each class of PP&Eassets. Examples of a class: land, officeequipment, machinery, buildings
23 IAS 16 - Measurement after Recognition Cost Model (CM):PP&E are carried after acquisition at cost, lessaccumulated depreciation and accumulatedImpairment lossesRevaluation Model (RM):PP&E are carried after acquisition at fair value atdate of revaluation, less any accumulated depreciationand impairment losses after revaluation
24 IAS 16 - Measurement after Recognition: Cost Model (CM) Depreciation:Each major component may have a different depreciation policyDepreciable amount: carrying amount less residual valueResidual value defined:- estimate of net amount entity would receive now from asset’s disposal, if asset was as old and in same condition as expected at end of its useful life
25 IAS 16 - Measurement after Recognition: Cost Model (CM) Depreciation (continued):Depreciation period begins when PP&E is in place and ready to use, continues even if not used or is retired from active useDepreciation period ends when PP&E is derecognized or classified as held for sale (IFRS 5)Depreciate over useful life to entity
26 IAS 16 - Measurement after Recognition: Cost Model (CM) Depreciation (continued):Useful life – consider capacity, wear and tear, technology changes, changes in product demand, contractual or legal limitsChoose method based on pattern that asset’s economic benefits are expected to be received: SL, DB, or activity-basedIf change in pattern, change method prospectively (change in estimate)
27 IAS 16 - Measurement after Recognition: Revaluation Model (RM) Apply only to assets whose FV can be reliably measuredRevalue often enough that carrying amount is close to FVDepreciate revalued amount using same principles as for CM
28 IAS 16 - Measurement after Recognition: Revaluation Model (RM) RM accounting - what happens if anincrease in asset’s carrying amount?
29 IAS 16 - Measurement after Recognition: Revaluation Model (RM) RM accounting - what happens if a decreasein asset’s carrying amount?
30 IAS 16 - Measurement after Recognition: Revaluation Model (RM) Debits and credits to Revaluation Surplusare reported in OCIChoice of entries to revalue assets andaccumulated depreciation:Proportionately, orEliminate existing accumulated depreciation
31 IAS 16 - Measurement after Recognition: Revaluation Model (RM) Situation:On January 1, Year 1, ABC Co. acquires a building at a cost of $1,000. The building is expected to have a 25-year life and no residual value. The asset is accounted for under the revaluation model and revaluations are carried out every three years.On December 31, Year 3, the fair value of the building is appraised at $900. Prepare the entries required on December 31, Year 3
32 IAS 16 - Measurement after Recognition: Revaluation Model (RM)
33 IAS 16 - Measurement after Recognition: Revaluation Model (RM)
34 IAS 16 - Measurement after Recognition: Revaluation Model (RM)
35 IAS 16 - Measurement after Recognition: Revaluation Model (RM) New depreciation rate is needed as ofJanuary 1, Year 4:$900 carrying amount = $41 per year25 – 3 years
36 IAS 16 - Measurement after Recognition: Revaluation Model (RM) Revaluation Surplus account?As asset is used, transfer difference between depreciation taken using RM and amount if CM had been used - directly to Retained Earnings, ORTransfer directly to Retained Earnings when asset derecognized
37 IAS 16 - Measurement after Recognition Note - Revaluation Model is not widely used.KPMG : The Application of IFRS: Choicesin Practice – International FinancialReporting Standards, December2006: see page 16 of 44
38 IAS 16 - DerecognitionWhen disposed of, or when no future economic benefits to be received from use or disposalRemove carrying amount from statement of financial positionGain or loss = difference between carrying amount of asset (or part of asset if a replacement) and net proceeds on disposal
39 IAS 16 - Disclosure Whether CM or RM : Depreciation methods used Depreciation rate or useful livesBeginning and ending balances and reconciliation of the two for gross amount and total of accumulated depreciation and impairment losses
40 IAS 16 - Disclosure If RM used: Date of revaluation Independent valuation?Methods, techniques usedAssumptions made in determining FVAmounts if CM had been usedDetails of changes in Revaluation Surplus
41 Looking AheadNo significant changes are expected to IAS 16 in the foreseeable future
42 End-of-Chapter Practice 10-1 The following assets have been recognized as items of property, plant, and equipment.Head office boardroom table and executive chairsA landfill siteWooden pallets in a warehouseForklift vehicles in a manufacturing plantStand-alone training facility for pilot training, including a flight simulator, classrooms equipped with desks, whiteboards and electronic instructional aidsInstructionsFor each of the items listed:Identify what specific costs are likely to be included in acquisition cost.Explain whether any components of this asset should be given separate recognition, and why.Suggest what should be taken into consideration in determining each component’s depreciable amount and depreciation period.Suggest and explain what depreciation method might be most appropriate for each component separately identified.Identify whether the periodic depreciation is recognized as an expense on the income statement, or whether another accounting treatment is more appropriate. Explain.
43 End-of-Chapter Practice 10-2Vedat Corporation acquires new equipment with a list price of $100 to expand its product line, paying $50 on delivery and agreeing to pay $25 in one year’s time and the remaining $25 in two year’s time. The company extends a portion of its factory wall in order to fit the new machine in place and then rearranges existing equipment into a more efficient layout. The new equipment is dropped on installation requiring repairs prior to use. At the end of the equipment’s useful life, Vedat Corporation is required to dismantle and dispose of it, paying a special environmental levy due to hazardous materials in its construction. Vedat is licensed to manufacture products with this equipment, and is required to pay a royalty for each unit produced.InstructionsDiscuss how the cost of the new equipment should bedetermined.
44 End-of-Chapter Practice 10-3Teyal Limited has just finished the construction of its new head office building. About the same time, one of Teyal’s major suppliers, Layet Corporation, also moved into its new head office building. Layet Corporation did not construct its own building, but contracted it out in a fixed price total contract. The total expenditures were approximately the same for both buildings.Instructionsa) Assume you are a co-op student in the accounting department of Teyal Limited. You are asked to write a short report on what the chief accountant needs to consider in accounting for the cost of the new building and its subsequent depreciation policy. Write the report.b) Assume you are a co-op student in the accounting department of Layet Corporation. If you were asked to write a report similar to the one required in part (a) above, identify in what respect it might differ, and why.
45 End-of-Chapter Practice 10-4 Resorts Ltd. has occupied its plant facility for 15 years, about one-third of its expected useful life. Although still very functional, numerous repairs have been required in recent months. The accounts indicate the original cost of the plant building was $500. The entire inside of the plant was painted at a cost of $2; the old wooden roof was replaced with a new one at a cost of $45; and part of the plumbing system was upgraded at a cost of $25 due to a change in the manufacturing process used. The plant was closed down while the roof was replaced, but overhead and administrative costs of $10 continued to be incurred even though production was at a standstill. The original roof had been identified as a separate component of the building when it was constructed with a cost of $30 and a useful life of 20 years. No separate records were kept of the original cost of the plumbing or painting.InstructionsPrepare entries to record the recent repairs.
46 JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.CONTACT:R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.