2.  Definition  Recognition  Measurement  Depreciation

3.  Tangible ASSETS  Held for: ◦ use in production, ◦ supply of goods or services, ◦ for rental to others, or ◦ for administrative purposes  Expected usage over more than one reporting period

4. Definition component Tangible? Used in production, rental, supply of goods and services, or for administrative purposes? Expected usage over more than one period? Class Example 1: AE Entity purchased a new BMW X5 for R850 000. Is it PPE?

5. 1. Meets the definition of an asset Control: when risks and rewards of ownership are obtained Typically at deliver of asset Vehicles: on registration of vehicle into owner’s name Property : registration in the deeds office 2. Meets the recognition criteria of an asset Probable that economic benefits will flow Cost or value that can be reliably measured

6. Initial recognition at cost Cost elements: 1.Purchase price including fees and duties, non- refundable taxes, excl. trade discounts and rebates (i.e. if VAT is refundable, it must be excluded) 2.Costs directly attributable to bringing asset to location and condition necessary for operating in manner intended by management 3.Initial estimates of costs for dismantling, removing asset, and restoring the site.

7.  Examples of costs included: ◦ Initial delivery costs ◦ Installation and assembly costs ◦ Costs to test whether item functions properly, less proceeds from sale of test products  Examples of costs excluded: ◦ Opening a new facility ◦ Introducing new products ◦ Conducting business in a new area/new class of customers ◦ Administration and general overhead costs

8. Class Example 2: Prosperity Entity purchased and paid for, a delivery vehicle from True Lemons Dealership for R171 000 on 01 April 20.7 for inclusion in its fleet of vehicles. Both entities are VAT vendors. The vehicle was registered on 15 April 20.7 for R1 140. The vehicle was taken to Tim’s Mods for the necessary addition of shelves in the vehicle used for carrying goods on 10 April 20.7. The vehicle was finally delivered to Prosperity on 30 April. Tim’s Mods charged R15 390 for the modifications and True Lemons charged R1 368 for delivery. Mr C processed the administration of the purchase and modifications (ordering, goods receipt, payments, etc) at Prosperity Entity. His monthly employee benefit on 30 April 20.7 is R12 500. The insurance premium of R1 026 on the vehicle was paid on 30 April 20.7 1. Is the vehicle PPE? 2. If so, at what cost should it be recognized in the books of Prosperity Entity? 3. Process the journal entries for the vehicle purchase and the modifications.

9. Cost CategoryAmount Purchase cost Registration cost Vehicle branding Delivery costs Mr C’s employee benefits Insurance Total cost of the vehicle

10. Cost CategoryAmount Purchase cost (171 000*100/114)150 000 Registration cost (1 140*100/114)1 000 Vehicle modifications (15 390*100/114) 13 500 Delivery costs (1 368*100/114)1 200 Mr G’s employee benefits- Insurance- Total cost of the vehicle165 700

11. 20.7 DrCr 01 Apr.Delivery Vehicle (SFP)150 000 VAT Input (SFP)21 000 Bank (SFP) 171 000 Recognise purchase of vehicle 20.7 DrCr 30 Apr.Vehicle modification costs (P/L)13 500 VAT Input (SFP)1 890 Bank (SFP) 15 390 Recognise the payment for the vehicle modification costs 20.7 DrCr 30 Apr.Delivery Vehicle (SFP)13 500 Vehicle modification costs (P/L) 13 500 Recognition of the capitalisation of vehicle delivery costs

12.  Cost is the cash price equivalent  Payment deferred beyond normal terms of credit  Cost will include an element of interest, NOT included as part of cost elements  Interest recognised separately  Cash price equivalent over the period is the Present Value of payments

13. Class Example 3 In order to ensure that it always had sufficient fuel for its fleet of vehicles, Prosperity Entity purchased an underground fuel storage tank from Leaky Tanks (a VAT vendor). The cost including delivery and installation was R313 500. Leaky Tanks provided an in-house finance facility of R313 500 at 10% interest per annum to facilitate the purchase. The facility will be paid in a lumpsum of R417 269 after 3 years. Interest for the period ending 31 December 20.7 is R23 513. The fuel tank was delivered and installed on 1 May. Fuel regulations however require that at the end of the 10 years, the fuel tank must be removed and the ground on which it is placed must be rehabilitated for damage due to fuel leaks that may occur. It is envisaged that it will cost R70 000 to conduct the necessary rehabilitation in 10 years time. The present value of the rehabilitation cost is R44 500.

14. Class Example 3 Required: 1. Process the journal entries to recognize the purchase of the fuel tank. 2. Process the journal entries for the interest on the finance facility on 31 December 20.7.

15. 20.7 DrCr 01 May.Fuel Tank (SFP)275 000 VAT Input (SFP)38 500 Loan: Leaky Tanks (SFP) 313 500 Recognise purchase of fuel tanks with a supplier's loan. 20.7 DrCr 01 May.Fuel Tank (SFP)44 500 Provision for rehabilitation (SFP) 44 500 Recognise the provision of rehabilitation of land to fuel tanks. 20.7 DrCr 31 Dec.Interest on loan (P/L)23 513 Supplier Loan: Leaky Tanks (SFP) 23 513 Recognise the interest on supplier’s loan

16.  Historical cost (HC) method and revaluation model  For our purposes, we will use the historical cost model  HC: Land - Cost price less Accumulated Impairment losses  HC: Other PPE - Cost price less Accumulated Depreciation less Accumulated Impairment losses

17.  Definition: A systematic allocation of the depreciable amount of an asset over its useful life.  No depreciation on Land  Commences when PPE item available for utilisation i.e. in location and condition necessary for operation as intended by management.  Depreciation suspended: 1.When fully depreciated 2.Decision to scrap 3.Decision to dispose

18. Depreciable amount = Cost Price – Residual Value Cost price: as per the initial recognition Residual value: Estimated amount that would be currently obtained on disposal, less Estimated costs of disposal At the age/condition expected at the end of its useful life Therefore we recoup the cost (economic benefits) of the PPE item through: 1.Depreciation, and 2.Residual value i.e. disposal

20. Useful life: 1. Period over which PPE item is expected to be used by the entity, or 2. Number of production or similar units (eg. km, hours) to be obtained from the asset by the entity. Land and Buildings: Often purchased together but treated separately Land has unlimited life Buildings have a limited life and are depreciated

21. Class Example 4 Prosperity Entity purchased office furniture on 02 January 20.7 from a VAT vendor for R28 500 including VAT. It expects to sell the furniture to a second-hand furniture dealer for R5 000 (excl VAT) in 5 years time. Required: Calculate the depreciable amount.

22. Cost (28 500*100/114)25 000 Less: Residual Value(5 000) Depreciable amount20 000

23. Depreciation Methods 1. Straight line method (period) Pattern of utilisation or usage of PPE item assumed to be even A function of time and not units Depreciation = Depreciable amount Useful life Apportionment of depreciation if item purchased during the period Changes in useful life – changes in estimates, not corrected retrospectively.

24. Class Example 5 Entity purchased office furniture on 02 January 20.7 for R28 500 including VAT. It expects to sell the furniture to a second-hand furniture dealer for R5 000 (excl. VAT) in 5 years time. The policy of the company is to depreciate furniture on a straight-line basis. Required: 1. Journalise the depreciation expense for the period ended 31 December 20.7. 2. Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

25. 1. 20.7 DrCr 31 Dec.Depreciation4 000 Accumulated Depreciation : Office Furniture 4 000 Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) 25 000 Less: Residual value 5 000 Depreciable amount 20 000 Depreciation (20 000/5 years) 4 000

26. Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation34 000 Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Office Furniture (25 000 - 4 000) 21 000 Notes to the financial statements for the year ended 31 December 20.7 3. Depreciation The company depreciates office furniture on a straightline basis over 5 years.

27. Example 5A: Change in estimated useful life At December 20.8, Prosperity Entity revised the estimated remaining useful life of the furniture to 5 years. Required: 1.Journalise the depreciation expense for the period ended 31 December 20.8. 2.Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

28. 20.8 DrCr 31 Dec.Depreciation2 667 Accumulated Depreciation : Office Furniture 2 667 Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) 25 000 Less : Depreciation 20.7 4 000 Carring value 01 Jan. 20.8 21 000 Less: Residual value 5 000 Depreciable amount 16 000 Depreciation 20.8 (16 000/6 years) 2 667

29. 31.12.0 8 01.01.0 8 31.12.0 9 31.12.1 0 31.12.1 1 31.12.1 2 31.12.1 3 I year 5 years remaining

30. Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation32 667 Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Office Furniture (25 000 - 4 000-2 667) 18 333 Notes to the financial statements for the year ended 31 December 20.7 3. Depreciation During the year, Prosperity Entity revised its estimate of the useful life of the office furniture from 5 to 7 years. This has resulted in a reduction in the depreciation from R4 000 to R2 667 per annum.

31. Class Example 5B: Change in estimated residual value At December 20.8, Prosperity Entity revised the estimated residual value of the furniture to R7 500. Required: 1.Journalise the depreciation expense for the period ended 31 December 20.8. 2.Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

32. 20.8 DrCr 31 Dec.Depreciation3 375 Accumulated Depreciation : Office Furniture 3 375 Recognise depreciation on office furniture WorkingsDepreciation: Cost(28 500*100/114) 25 000 Less : Depreciation 20.7 4 000 Carrying value 01 Jan. 20.8 21 000 Less: New residual value 7 500 New depreciable amount 13 500 Depreciation for 20.8 (13 500/4 years) 3 375

33. Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.8 NotesRand Gross Profit Depreciation33 375 Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.8 NotesRand Assets Non-Current Assets Office Furniture (25 000 - 4 000 - 3 375) 17 625 Notes to the financial statements for the year ended 31 December 20.8 3. Depreciation During the year, Prosperity Entity revised its estimate of the residual value of the office furniture from R5 000 to R7 500. This has resulted in a reduction in the depreciation from R4 000 to R3 375 per annum.

34. 2. The Diminishing balance method (period) Pattern of utilisation/usage of PPE item assumed to decrease over time A function of time and not units Depreciation = Carrying amount at the beginning of period x fixed depreciation rate (%) (Carrying amount = Cost – Accumulated depreciation) Depreciation rate already includes the useful life and residual value (see formula on p. 427) Apportionment of depreciation if item purchased during the period

35. Class Example 6 Prosperity Entity purchased a delivery vehicle on 02 January 20.7 for R138 600 including VAT. It expects to sell the vehicle to a second-hand vehicle dealer for R10 000 (excl. VAT) in 5 years time. The policy of the company is to depreciate vehicles using the diminishing balance method. The depreciation rate is 39% per annum. Required: Calculate the depreciation expense for the life of the delivery vehicle.

36. Cost (R138 600*100/114)121 579 Depreciation Dec. 20.7-47 808 Carrying value73 771 Depreciation Dec. 20.8-29 009 Carrying value44 763 Depreciation Dec. 20.9-17 602 Carrying value27 161 Depreciation Dec. 20.10-10 680 Carrying value16 481 Depreciation Dec. 20.11-6 481 Carring Value 10 000

37. 3. The units of production method Depreciation with reference to the estimated units Units can be units produced (machinery) or kilometres (vehicles) or hours (earth moving machinery) Depreciation = Depreciable amount* x Units produced / Total estimated units

38. Class Example 7 Prosperity Entity purchased a delivery vehicle on 02 January 20.7 for R138 600 including VAT. It expects to sell the vehicle to a second-hand vehicle dealer for R10 000 (excl. VAT). The policy of the company is to depreciate vehicles using the units of production method. It is also the policy of the company to dispose of vehicles after they have travelled 150 000km. During the year, the vehicle covered 15 000km. Required: Recognise the depreciation expense for the period ended 31 December 20.7.

39. 20.7 DrCr 31 Dec.Depreciation (P/L)11 158 Accumulated Depreciation : Delivery Vehicle (SFP) 11 158 Recognise depreciation on delivery vehicle. Cost(R138 600 * 100/114) 121 579 Residual value -10 000 Depreciable amount 111 579 Depreciation (R111 579 * 15 000/150 000) 11 158

40. Choice of depreciation method Based on the expected pattern of utilization/usage of economic benefits – a “systematic allocation” Depreciation based on professional judgement Reviewed annually Change in circumstances – change in depreciation policy Corrected in the current and future periods, not retrospectively.

41. Class Example 8: Change in depreciation method At 1 Jan 20.7, Machine A on the books of Prosperity reflected the following values: Cost: R200 000 Accumulated depreciation: R100 000 The policy on Machine A had been to depreciate it over 4 years on a straight line basis with no residual value. On 1 Jan 20.7 however, the policy was revised to reflect a more accurate utilization of the economic benefits. Machine A would be depreciated going forward on the units of production method. It is expected that it will produce 100 000 units over its remaining life. For the period ended 31 Dec 20.7, Machine A produced 20 000 units. Required: 1.Journalise the depreciation expense for the period ended 31 December 20.7. 2.Provide disclosure in the Statement of Profit and Loss, and Statement of Financial Position.

42. 20.7 DrCr 31 Dec.Depreciation20 000 Accumulated Depreciation : Machine A 20 000 Recognise depreciation on Machine A. WorkingsDepreciation: Carrying value 01 Jan. 20.7 100 000 Depreciation (R100 000 * 20 000 units/100 000 units) 20 000

43. Prosperity Entity Statement of Profit or Loss for the year ended 31 December 20.7 NotesRand Gross Profit Depreciation320 000 Profit for the year Prosperity Entity Statement of Financial Position at 31 December 20.7 NotesRand Assets Non-Current Assets Machine A (200 000 - 100 000 - 20 000) 80 000 Notes to the financial statements for the year ended 31 December 20.7 3. Depreciation During the year, the company changed the depreciation method on Machine A from a straight-line basis to a units-of-production to better reflect the utilisation of benefits. The change in the method has resulted in reduced depreciation from R50 000 per annum to R20 000.