1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE / Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA Fin ( Col)

2. IAS 16/ LKAS 16 Property, Plant & Equipment

3. Objective:
The objective of LKAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are:
the timing of recognition of asset;
the determination of their carrying amounts; and
the depreciation charges to be recognized.

4. Non-current definition
Non Current Assets
CONSIDERATIONS
Recognition criteria
Asset definition
Non-current definition
Intangible LKAS 38
Tangible LKAS 16
Investment Prop. LKAS 40

5. Definition
Property, plant and equipment (PPE) are tangible items that are
Held for use in the production or supply of goods or services, for rental to others, or for administration purposes; and
Are expected to be used during more than one period.
Cost. The amount paid or fair value of other consideration given to acquire or construct an asset.

6. Depreciation - Systematic allocation of the depreciable amount of an asset over its useful life.
Carrying amount: Carrying amount is the amount which an asset is included in the Statement of financial Position after deducting any accumulated depreciation
Residual Value: is the net amount which the enterprise expects to obtain for an asset and the end of its useful life after deducting the expected costs of disposal

7. Following are relevant for determining the life time of asset.
Useful life:
The period of time over which an asset is expected to be used by the enterprise or
The no of production or similar units expected to be obtained from the asset by the enterprise
Following are relevant for determining the life time of asset.
Expected usage of asset
Expected Physical wear & tare
Technical obsolescence
Legal Limits
Land usually has an indefinite useful life and consequently land is not usually depreciated.

8. RECOGNITION OF AN ASSET
An item of property, plant, and equipment should be recognized as an asset
if and only if it is probable that future economic benefits associated with the asset will flow to the entity
and the cost of the item can be measured reliably

9. Initial Recognition - Cost
Purchase price :
including import duties, nonrefundable purchase taxes, less trade discounts and rebates
Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by the entity

10. Examples of Directly Attributable Costs:
Cost of employee benefits.
Cost of site preparation.
Initial delivery and handling cost.
Installation and assembly cost.
Cost of testing after deducting the net proceeds from selling any items produced.
Professional fees.

11. Examples of costs that are not directly attributable costs and therefore must be expensed in the income statement include
Costs of opening a new facility (often referred to as preoperative expenses)
Costs of introducing a new product or service
Advertising and promotional costs
Costs of conducting business in a new location or with a new class of customer
Training costs
Administration and other general overheads
Costs incurred while an asset, capable of being used as intended, is yet to be brought into use, is left idle, or is operating at below full capacity
Initial operating losses
Costs of relocating or reorganizing part or all of an entitys operations

12. Initial estimates of dismantling, removing, and site restoration if the entity has an obligation that it incurs on acquisition of the asset or as a result of using the asset other than to produce inventories
i.e
Asian Capital Ltd installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (cost per supplier invoice plus taxes) 2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of the plant 700,000
Interest charges paid to supplier of plant for deferred credit 200,000
Estimated dismantling costs to be incurred after 7 years 300,000
Operating losses before commercial production 400,000
Determine the cost that can be capitalized under LAKS 16

13. Measurement of cost – Repairs and Maintenance
Routine repairs and maintenance and servicing costs should normally be recognised in the Statement of comprehensive income when the costs are incurred.
However, when the subsequent expenditure enhances the value of the asset to the extent that additional economic benefits will flow to the entity, that additional expenditure should be recognised as part of the assets costs.

14. DEPRECIATION Methods: Straight line Units of production
Diminishing balance (Reducing balance)
Approach:
Depreciation charge for each period is recognized directly in Statement of comprehensive Income
Methods should be reviewed annually
Charges start when asset ready for use and stop when asset derecognized

15. Depreciation per annum = (Cost - Residual Value) / Useful Life
Straight line method
Straight line method depreciates cost evenly through out the useful life of the asset. Straight line depreciation is calculated as follows:
Depreciation per annum = (Cost - Residual Value) / Useful Life
Accounting for Depreciation
Depreciation Dr ( Expense Account)
Accumulated Deprecation Cr

16. i.e: Cost of the Asset 110,000 Residual Value 10,000 Expected Life time period : 10 years Determine the annual depreciation amount

17. Subsequent measurement
An entity may choose between:
Cost model (i.e. cost less accumulated depreciation and accumulated impairment losses, if any)
Revaluation model (i.e. fair value at the date of revaluation less subsequent accumulated depreciation/impairment losses)
However, the same policy must be applied to each entire class of property, plant and equipment.
Subsequent measurement (as opposed to “subsequent costs”). = Measurement subsequent to initial recognition
Classes include land, land and buildings, factory plant, aircraft, vehicles, office equipment, fixtures and fittings’ etc.
To use this model fair values must be reliably measurable.
Before the revision of IAS 16, these were referred to as the “benchmark” and “allowed alternative” treatments, respectively. The elimination of alternatives was one of the principal objectives of the Improvements project (see Session 1).

18. Disclosure requirements
For each class of PPE
Measurement bases used for determining the gross carrying amount
The depreciation methods used
The gross carrying amount and the accumulated depreciation at the beginning and end of the period
A reconciliation of the carrying amount at the beginning and end of the period
Depreciation policy and rates
Details on revaluation (if any)
The number of ancillary items which involve PPE
For each class of PPE
Measurement bases used for determining the gross carrying amount
The depreciation methods used
The gross carrying amount and the accumulated depreciation at the beginning and end of the period
A reconciliation of the carrying amount at the beginning and end of the period which must show;
a) additions
b) assets classified as held for sale or included in the disposal group classified as held for sale in accordance with IFRS 5 and other disposals
c) acquisitions thorough business combinations
d) increases and decreases resulting from revaluations and from impairment losses recognised or reversed in other comprehensive income in accordance with IAS 36.
e) impairment losses recognised in profit and loss in accordance with IAS 36
f) depreciation
g) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentational currency.