2. Date: Tuesday 3 May 2016 Venue: Engineering basement Time: 13:00 – 15:00 (seated at 12:45) Scope: Chapters 1 - 8, 12

3. PPE item: Cost 01 Jan 20.9-R100 000 Residual value R20 000-R20 000 Useful life (straight line)-5 years Required: Calculate depreciation on 31 Dec. 20.9 to 20.13

4. Depreciation Calculation Depreciation Accounting (carrying value) Cost100 000 Cost100 000 Residual value-20 000 Depreciable amount80 000 Depreciation 20.9 (80 000/5)-16 000 Accumulated Depreciation 20.9-16 000 Carrying value 31 Dec. 20.984 000 Depreciation 20.10-16 000 Accumulated Depreciation 20.10-32 000 (80 000/5) Carrying value 31 Dec. 20.1068 000 Depreciation 20.11-16 000 Accumulated Depreciation 20.11-48 000 (80 000/5) Carrying value 31 Dec. 20.1152 000 Depreciation 20.12-16 000 Accumulated Depreciation 20.12-64 000 (80 000/5) Carrying value 31 Dec. 20.1236 000 Depreciation 20.13-16 000 Accumulated Depreciation 20.13-80 000 (80 000/5) Carrying value 31 Dec. 20.1320 000

5. OT Entity, a VAT vendor, depreciates its specialized printing equipment on the units of production method based on the number of prints. The equipment is expected to produce 20 000 000 prints over its useful life. Up 31 Dec. 20.13, the equipment had produced 7 500 000 prints. The machine cost R5 000 000 (excl. VAT) with a R500 000 residual value. The machine was donated to a charity on 31 August 20.14. In the current year up to August 20.14, the machine produced 1 000 000 prints. Required: All the journal entries relating to the equipment for 20.14

6. Depreciation Calculation Depreciation Accounting (carrying value) Cost5 000 000 Cost5 000 000 Residual value-500 000 Depreciable amount4 500 000 (Accumulated) Depreciation (from inception to 31 Dec. 20.13) (4 500 000*7 500 000/20 000 000)-1 687 500 Accumulated depreciation (31 Dec. 20.13)-1 687 500 Carrying value (31 Dec. 20.13)3 312 500 Depreciation (up to 31 Aug. 20.14) (4 500 000*1 000 000/20 000 000)-225 000 Depreciation (31 Aug. 20.14)-225 000 Carrying value (31 Aug. 20.14)3 087 500

7. 20.14 DrCr 31 Aug.Accumulated Depreciation (SFP)1 912 500 PPE: Old computers (SFP) 5 000 000 VAT output (SFP) (3 087 500x14%) 432 250 Loss on disposal of Equipment (P&L) 3 519 750 Derecognise equipment donated, and loss on disposal. 20.14 DrCr 31 Aug.Depreciation225 000 Accumulated depreciation 225 000 Recognise depreciation on printing equipment

8.  Trade-in  Impairment of assets  Losses and compensation from an insurer  Miscellaneous items  Component approach  Asset register  Presentation and disclosure

9. When an old PPE asset is traded in, it reduces the amount owed on new PPE asset. Derecognise the old asset completely and recognise the new asset in full. Trade-in credit on asset that is traded in.

10. Class Example 1 EB Entity has a policy of replacing its computer equipment every three years. On 30 June 20.7, EB entity traded in its old computers and bought new ones from IT Entity. Both entities are registered VAT vendors. The old computers reflect a cost of R175 000 excl. VAT and Accumulated Depreciation of R150 000 on 30 June 20.7 (ie Depreciation has been accounted for on the old computers up to 30 June 20.7). Computers are depreciated on a straight-line basis over 3 years. IT Entity was willing to give EB Entity a trade-in credit R39 900 incl. VAT for the old computers. The new computers costing R216 600 incl. VAT, were delivered and set up, on 30 June 20.7. Payment to IT Entity was made on the same day. The residual value on the new computers is R50 000 excl VAT. The financial period of EB Entity ends on 31 December 20.7. Required: Journalise the above transactions for EB Entity for the period ended 31 Dec. 20.7

11. Old Computers: Cost175 000 Accumulated Depreciation-150 000 Carrying Value on 30 June 20.725 000 Trade-in Credit35 000 Total Trade-in Credit39 900 Less: VAT output (Due to SARS)-4 900 Profit on disposal10 000

12. Payment to IT Entity: Payment due on New computers216 600 Less: Trade-in Credit on Old computers-39 900 Net payment to IT Entity176 700

13. New computers: Cost on 1 July 20.7 (216 600*100/114)190 000 Residual Value-50 000 Depreciable amount140 000 Depreciation (140 000/3)*6/12months23 333

14. 20.7 DrCr 30 June.Accumulated Depreciation (SFP)150 000 PPE: New computers (SFP)190 000 VAT input (SFP)26 600 Bank (SFP) 176 700 PPE: Old computers (SFP) 175 000 VAT output (SFP) 4 900 Profit on disposal of PPE: computers (P&L) 10 000 Derecognise old computers (cost and accum. depn), recognise new computers, and profit on disposal. 20.7 DrCr 31 Dec.Depreciation23 333 Accumulated depreciation 23 333 Recognise depreciation on new computers

15. Historical Cost Method: Carrying Value = Cost less Accumulated Depreciation less Accumulated Impairment IAS 36 Impairment of Assets – to ensure that the carrying value of PPE is not overstated.

16. Indications of impairment External indicators: Significant decline in market values Negative effect of technological, market or economic environment Increase in market related interest rates (discount rates) Internal indicators: Physical damage/ obsolescence Changes with negative impact on how asset will be used Economic performance of asset worse than expected

17. An item of PPE is impaired where: CARRYING VALUE exceeds RECOVERABLE AMOUNT

18. Class Example 2 Should the following assets be impaired: 1. PPE item A has a carrying value of R12 000, and a recoverable amount of R10 000. 2. PPE item B has a carrying value of R10 000, and a recoverable amount of R12 000.

19. RECOVERABLE AMOUNT: The higher of: 1.Fair value less costs to dispose, and 2.Value in use

20. Fair value less costs to dispose: Estimated proceeds from selling the PPE item at arm’s length after deducting the costs that would be incurred to sell the item.

21. Value in use: The present value of the future nett cash flows from the PPE item.

22. Class example 3 PPE item C has a fair value of R12 500. It will cost the entity R1 000 to sell the item. The item has a value in use of R11 000. The carrying value of the PPE item is R12 000. 1. What is the recoverable amount of the PPE item? 2. What is the impairment on the PPE item?

23. Where the CARRYING VALUE exceeds RECOVERABLE AMOUNT: Reduce the Carrying Value to Recoverable Amount 20.X DrCr 31 Dec.Impairment loss (P&L)XX Accumulated impairment (SFP) XX Recognition of impairment loss on item of PPE

24. Important: The current year depreciation will not be affected by the impairment loss i.e. 1.calculate the current year depreciation first, 2.then test for impairment. Future depreciation will be based on the new carrying value less the residual value.

25. Class example 4a: JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The recoverable amount on 30 Dec. 20.7 (year end) is R350 000. Calculate the depreciation and impairment loss for the period ended Dec. 20.7 Cost750 000 Accumulated depreciation300 000

26. Step 1: Calculate the current year Depreciation Depreciable amount (Cost less residual value)750 000 Depreciation Dec. 20.7 (750 000/5 years)150 000 Step 2: Test for impairment Cost750 000 Accumulated Depreciation on 30 Dec. 20.7 (300 000+150 000)-450 000 Carrying Value on 31 Dec. 20.7 (750 000-450 000)300 000 Recoverable amount350 000 The carrying value is less than the recoverable amount - NO IMPAIRMENT -

27. Class example 4b: JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The recoverable amount on 31 Dec. 20.7 (year end) is R280 000 excl. VAT. Calculate the depreciation and impairment loss for the period ended Dec. 20.7 and Dec. 20.8. Cost750 000 Accumulated depreciation300 000

28. Step 1: Calculate the current year Depreciation Depreciable amount (Cost less residual value)750 000 Depreciation Dec. 20.7 (750 000/5 years)150 000 Step 2: Test for impairment Cost750 000 Accumulated Depreciation on 30 Dec. 20.7 (300 000+150 000)-450 000 Carrying Value on 31 Dec. 20.7 (750 000-450 000)300 000 Recoverable amount280 000 The carrying value EXCEEDS the recoverable amount – IMPAIRMENT!-20 000

29. Carrying Value on 31 Dec. 20.7 Cost750 000 Less: Accumulated Depreciation (300 000+150 000)-450 000 Less: Accumulated Impairment-20 000 Carrying value280 000 Depreciation for 31 Dec. 20.8 Carrying value 31 Dec. 20.7280 000 Depreciation (280 000/2 years remaining life)140 000

30. Businesses protect themselves from losses (theft, fire, accidental damage, etc) through Insurance. Replacement values (eg Buildings) Market values (eg Vehicles)

31. Recognition: Losses incurred – as soon as they are reliably measurable Proceeds from insurance – as soon as amount becomes receivable i.e. when insurer confirms the payout. Note: Do not set-off the insurance proceeds against the loss. Treat the income and loss separately.

32. Class example 5 JP entity, a VAT vendor, has an item of PPE (depreciated on a straight line basis) on 1 Jan 20.7 with no residual value and a useful life of 5 years: The PPE item was accidentally damaged on 30 Sept. 20.7 and can no longer be used. On 01 November, the insurance company gave indication that they would pay out R741 000 incl. VAT. The financial year ends on 30 Dec. 20.7. Provide journal entries for the above.

33. Carrying value 1 Jan. 20.7 Cost750 000 Accumulated Depreciation (1 Jan. 20.7)-300 000 Carrying Value on 1 Jan. 20.7450 000 Depreciation (30 Sept. 20.7) Depreciable amount (Cost less residual value)750 000 Depreciation (750 000/5 * 9/12 months)-112 500 Carrying Value 30 Sept. 20.7 Cost750 000 Accumulated Depreciation (30 Sept. 20.7) (300 000+112 500)-412 500 Carrying Value on 30 Sept. 20.7337 500

34. 20.7 DrCr 30 Sept.Depreciation (P&L)112 500 Accumulated Depreciation (SFP) 112 500 Recognise depreciation up to Sept 20.7 20.7 DrCr 30 Sept.Accumulated Depreciation (SFP)412 500 Loss on accidental damage of PPE Item (P&L)337 500 PPE: Item (SFP) 750 000 Derecognise PPE Item due to accidental damage 20.7 DrCr 01 Nov.Insurance Debtor (SFP)741 000 VAT Output (SFP) 91 000 Proceeds from insurance claim (P&L) 650 000 Recognise proceeds from insurance claim on damaged item

35. Some items of PPE are bought as a unit but have differing utilization patterns of economic benefits. Identifiable components Significantly different pattern of utilization of economic benefits. Example: Aircraft Depreciate the airplane frame and the engine separately.

36.  Miscellaneous costs: day-to-day running & maintenance costs for P&L  Asset Register: detailed breakdown of the assets  Presentation and disclosure: ◦ Financial Statements ◦ Accounting policy notes ◦ Other notes – detailed breakdown