If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them. If either changes significantly, the change should be accounted for over the useful life remaining. [IAS 16.39], A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. endobj endstream Required BC1-BC4) [IAS 16.31], If an item is revalued, the entire class of assets to which that asset belongs should be revalued. Yucca Co paid for the machine on 25 March 20X0. You may find it useful in the exam to first determine if there is a gain or loss on the revaluation with a simple calculation to compare: Revaluation gains If an entity chooses to construct an item of property, plant & equipment using its own resources, then the cost of such self constructed asset will be determined as the cost of the asset which is constructed by the entity for sale in the normal course of the business under IAS 2, i.e. It is the amount of cash or cash equivalents paid or the fair value of the consideration transferred to acquire, purchase or construct an asset. Calculate the value at which the plant will be measured at initialrecognition in the financial statements of the AB Ltd. Electrical cable placement (28,000 12,000), Dismantling and restoration costs (30,000 + 6,000). If either changes significantly, the change should be accounted for over the useful life remaining. At the start of January 2009 a decision was taken to replace the engine at a cost of $280 million, due to the unreliability of the old engine. (See 'Related links' for the solution to Example 12.). The companys policy is to make a transfer to retained earnings in respect of excess depreciation. However, now that the asset has been revalued the depreciable amount has changed. EXAMPLE 7 Practical tip: disposals When an asset is to be disposed of, its cash inflows will be independent of the cash inflows of other assets. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. The cost of the asset held by the lessee under finance lease will be determined in accordance with IAS 17. This will be the most complicated situation and you must ensure that your workings are clearly structured to show the different amounts of depreciation charged across the year. [IAS 16.62A], The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. This entity gives the right to use this asset to entity B for 20 years. IAS 16 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005. (See 'Related links' for the solution to Example 3.). Examples of directly attributable costs are: (a) costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment; (b) costs of site preparation; (c) initial delivery and handling costs; (d) installation and assembly costs; (e) costs of testing These primarily related to: capitalising an item; derecognising a replaced part; splitting an asset into components; and calculating residual values. Property, plant and equipment may be requiring the replacement of some component parts during the useful life (such as the spare parts of a plant or walls of a building). However, IAS 16 is applicable to the property, plant & equipments, which are used to maintain or develop the biological assets under IAS 4 and mineral rights and reserves such as oil and gas and other non-regenerative resources which are covered under IFRS 6. In practice, this means that expenditure is capitalized if it improves the asset (for example, by enhancing its performance or extending its useful life). Required (b) The entity should review the depreciation method opted at each reporting date and if there is any change in the pattern of consumption of economic benefits related to the asset, then the entity should change the depreciation method in accordance with the new pattern of consumption of economic benefits and such change will be accounted for as change in accounting estimate, which will be applied prospectively from that date. Therefore, the initial purchase price of the asset should be: In the exam you must make sure that you pay attention to the date that the revaluation takes place. An asset will be recognized as property, plant and equipment if it meets: (a) The definition of property, plant & equipment and This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees and estimated cost of dismantling and removing the asset and restoring the site it the payment for an item of Property, Plant and Equipment is deferred, interest at a market rate must be recognized or imputed. IAS 16 provides examples of separate classes of assets including: land; land and buildings; machinery; motor vehicles; and office equipment. Even though the asset has not yet been brought into use, IAS 16 states depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. It does not include assets that are held for sale. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. endobj <>]>>/Pages 1114 0 R/Type/Catalog>> (b) If the fair value of asset transferred is not determinable , then it will be recognized at the fair value of asset acquired. However, entity will not charge any depreciation if the residual value of the asset exceeds its carrying value. Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS13 Fair Value Measurement. For this reason, the company expects the asset to appreciate in the long term and thus obtain a profit. However, this transfer is optional and if opted by the entity then it will be applicable annually till the disposal of related asset. Land held for long-term capital appreciation. [IAS 16.5], The standard does apply to bearer plants but it does not apply to the produce on bearer plants. depreciation. An investment property is a land or a building or part of a building or both held by the owner or by the lessee as a right-of-use asset to earn rentals or capital appreciation or both and not for: Its use is in the production or supply of goods or services, administrative purposes, or sale in the ordinary course of operations. startxref DrRevaluation surplus [to maximum of original gain/balance in revaluation surplus if lower] Students also viewed Clast test 5 memo 2020 CT 1 Q 2011 - CT 1 Q 2011 On 1 April 20X3 the company revalued the building to its fair value of $120,000. In such circumstances an entity must . Thisis a particularly important area of the Financial Reporting (FR) syllabus and is also important assumed knowledge for the Strategic Business Reporting (SBR) exam. endstream IFRS 16 Leases Study Text: IAS 38 Intangible Assets Study Text 1 1312 downloads. An asset that originally cost $16,000 and had accumulated depreciation of $8,000 was disposed of during the year for $5,000 cash. A practical guide to implementing IAS 19 (2011) - Employee Benefits 3. (a) Prepare any necessary journal entries to account for this building during the year ended 31 March 20X2. <>/MediaBox[0 0 595.27563 841.88977]/Parent 1115 0 R/Resources<>/ProcSet[/Text/ImageC]>>/Rotate 0/Type/Page>> International Financial Reporting Standards, IAS 1 Presentation of Financial Statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10 Events After the Reporting Period, IAS 15 Information Reflecting the Effects of Changing Prices (Withdrawn), IAS 19 Employee Benefits (1998) (superseded), IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 22 Business Combinations (Superseded), IAS 26 Accounting and Reporting by Retirement Benefit Plans, IAS 27 Separate Financial Statements (2011), IAS 27 Consolidated and Separate Financial Statements (2008), IAS 28 Investments in Associates and Joint Ventures (2011), IAS 28 Investments in Associates (2003), IAS 29 Financial Reporting in Hyperinflationary Economies, IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions, IAS 32 Financial Instruments: Presentation, IAS 35 Discontinuing Operations (Superseded), IAS 37 Provisions, Contingent Liabilities and Contingent Assets, IAS 39 Financial Instruments: Recognition and Measurement, (revised as part of the 'Comparability of Financial Statements' project), Property, Plant and Equipment Proceeds before Intended Use (Amendments to IAS 16), EFRAG discussion paper on variable consideration, European Union formally adopts May 2020 amendments, Educational material on applying IFRSs to climate-related matters, IASB publishes proposed IFRS Taxonomy update, IASB issues amendments to IAS 16 regarding proceeds before intended use, We comment on the IASB's proposed amendments to IAS 16, EFRAG endorsement status report 2 July 2021, EFRAG endorsement status report 23 October 2020, EFRAG endorsement status report 3 June 2020, IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, IFRIC 12 Service Concession Arrangements, IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, SIC-6 Costs of Modifying Existing Software, SIC-14 Property, Plant and Equipment Compensation for the Impairment or Loss of Items, IAS 16 Stripping costs in the production phase of a mine, International Valuation Standards Council (IVSC), Operative for financial statements covering periods beginning on or after 1 January 1983, Operative for financial statements covering periods beginning on or after 1 January 1995, Operative for annual financial statements covering periods beginning on or after 1 July 1999, Effective for annual periods beginning on or after 1 January 2005, Effective for annual periods beginning on or after 1 January 2009, Effective for annual periods beginning on or after 1 January 2013, Effective for annual periods beginning on or after 1 July 2014, Effective for annual periods beginning on or after 1 January 2016, Effective for annual periods beginning on or after 1 January 2022, assets classified as held for sale in accordance with, biological assets related to agricultural activity accounted for under, exploration and evaluation assets recognised in accordance with. On the other hand, in the parents separate financial statements, the building is classified as an investment property. Revaluation losses Depreciation of significant parts :($RB=ha!$JEK2ST|AV}?,Z-|))cI=c660ebY)D!rdTu/n*rMbQ jpD|o|k1+raTa[b5c10+F$&1rZbpTd{b. Calculate the carrying value of aircraft at 31 December 2009 in the statement of financial position and related expense in the statement of profit or loss for the year ended 31 December 2009. Under paragraph 12 of AASB 116, the day-to-day servicing of an asset (e.g. Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. (g) Any decrease in the carrying value of the asset resulting from the revaluation will be recognized in the statement of profit or loss as expense. Revaluation Model - The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be measured reliably. 1144 0 obj More common errors when accounting for property, plant and equipment (IAS 16 - Part 4) IAS 16 Property, Plant and Equipment is a relatively simple standard to read and apply, yet it is a standard where preparers can easily make errors which affect amounts recognised as property, plant and equipment (PPE) in the statement of financial position. The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of property, plant and equipment ('PP&E') any proceeds received from selling items produced while the entity is preparing the asset for its intended use (for example, the proceeds from selling samples produced when testing an item of PP&E to see if it is We introduced the key differences for lessee accounting under IAS 17 and IFRS 16, provided an example of a lessee amortization schedule and the related journal entries, and discussed the required disclosures. Paragraph 17 of IAS 16 specifies examples of directly attributable costs. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Manufacturers or distributors list price. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. The International accounting standards 16 pdf is available to download. IAS-16: Property, Plant and Equipment with Practical Examples in Bangla: For each class of property, plant, and equipment, disclose: [IAS 16.73]: - basis fo. Recognition of Fixed Assets: Fixed assets recognition is one of the most important things to know as it can be confused you when and how much the fixed assets should be capitalized. Ham Co took out a $25m loan on 1 April 20X1 to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23, Borrowing Costs). The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. The balance on the revaluation surplus relating to a previous revaluation gain for this property was $10,000. The expected life of the new engine is 50,000 hours and in the year ended 31 December 2009 the aircraft had used its engines for 5,000 hours. Calculate the revaluation gain and prepare the journal entry to account for the revaluation. <>stream ifrs 16 illustrative examples. An item of property, plant, or equipment shall not be carried at more than recoverable amount. This can be found by comparing the difference between: When the disposal proceeds are greater than the carrying amount there is a gain on disposal and when the disposal proceeds are less than the carrying amount there is a loss on disposal. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 9.). 1123 0 obj IAS 40 Notes and class examples financial accounting 300 ias 40: investment property department of accounting notes and class examples up kotze material already . It was estimated that the asset had a residual value of $20,000 and a useful life of 10 years at this date. hVnF}W1Aa%%:NF-,6csfIY rvvfv8TGB( OI#yb#k$5OYLT:g2R"fZEJ$z}6N%}dR+i$N|^b|~I The subsidiary uses the building to sell inventory. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. When an asset is disposed of that has previously been revalued, a gain or loss on disposal is to be calculated (as above). The assets which are recognized as property, plant and equipment are initially measured at Cost which is determined as: The capitalization of cost will cease when the asset becomes available for operating use or intended use by the management. With much of what is examinable feeding though from theFinancial Accountingexam, you must ensure that you are comfortable with the basics of dealing with PPE as well as the more advanced aspects. it is probable that the future economic benefits associated with the asset will flow to the entity, and. Required ABC Co., has acquired a heavy road transporter at a cost of Rs. The cost of an item of property, plant and equipment consists of: (adsbygoogle = window.adsbygoogle || []).push({}); Expenditure relating to non-current assets, after their initial acquisition, should be treated as expense unless it meets the criteria for recognizing an asset. Explain whether the additional expenditure should be capitalised as part of PPE or expensed to the statement of profit or loss for the year ended 28 February 20X3. 2. 1\@jE@jb` U6v2jHX7HI 7dHXB@c@,8>N,,Mo8N.H30hnLg@)b 8 IAS 16 requires that estimates of useful life and residual value be reviewed at the end of each reporting period. This will then become assumed knowledge for the SBR exam. A Practical Guide (Stephen Pete) Digital Fundamentals (Thomas L. Floyd) Commercial Law (Samantha J. Traves) . (See 'Related links' for the solution to Example 1.). [IAS 16.68A], Information about each class of property, plant and equipment, For each class of property, plant, and equipment, disclose: [IAS 16.73], The following disclosures are also required: [IAS 16.74], IAS 16 also encourages, but does not require, a number of additional disclosures. Depreciation of revalued assets [IAS 16.65], An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. A company purchased a property with an overall cost of $100m on 1 April 20X1. After the upgrade to the cabin fittings its estimated remaining useful life was increased to five years (from the date of the upgrade). There are many methods of depreciating a non-current asset with the most common being: EXAMPLE 4 Any gain or loss on the exchange transaction will be charged to the statement of profit or loss. Following elements of cost will not become the part of the cost of asset and will be charged to statement of profit or loss as expense: 2. They are as follows: In the scope of IAS 40. Acc. (a) Prepare any necessary journal entries to account for this property during the year ended 31 March 20X2. It does not prescribe the unit of measurement but states that judgement isneeded in applying the recognition criteria to an entity's particular circumstances [IAS 16.9]. derecognition. Practical Aspects In India- Series . 1124 0 obj All residual values can be taken as nil. Installation and assembly cost. Statement of profit or loss and other comprehensive income. Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. A revaluation loss should be charged to profit or loss. Thus, the building is not classified as an investment property item in the parent companys consolidated financial statements. IAS 16 requires that estimates of useful life and residual value be reviewed at the end of each reporting period. IAS 16 Property, Plant and Equipment permits TWO accounting models: Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. (b) The recognition criteria given in IASBs frame work i.e. not reflected in period end financial statements). Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. HD Co revalued the office building on 1 October 20X1 to its fair value of $2.2m. The cost model (carry an asset at cost less accumulated depreciation and any accumulated impairment losses). More information about IFRS COURSE (CLICK), An investment property is also an asset held for, However, if an entity holds properties for sale in the short term, In this way, if the entity subsequently decides that the asset is connected to housing construction, it must reclassify this asset to an, However, from the perspective of the entity that owns it, the property is, Therefore, the lessor treats the property as investment property in its, Thus, the building is not classified as an investment property item in the parent companys, Such financial statements present the controlling entity and its, Therefore, the consolidated group accounts for the building as an item of, On the other hand, in the parents separate financial statements, the building is classified as an, In other words, it is a property held for, In this example, entity B must recognize a, This is why the definition of investment property of paragraph 5 of, In that case, it must use the cost model of, How the impairment of assets held for sale is calculated. [IAS 16.3], The cost model in IAS 16 also applies to investment property accounted for using the cost model under IAS40 Investment Property. Approval by the Board of Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) issued in January 2016; Approval by the Board of Deferred Tax related to Assets and Liabilities arising from a Single Transaction issued in May 2021; IAS 12: Basis for Conclusions. Here are the steps to calculate this: a) Calculate the opening balance of the right of use asset and divide by the total number of days the asset will be used. (280 0 / 50,000 hrs) 5,000 hrs. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. endobj Definition : Property, plant & Equipment (PPE)Definition : Property, plant & Equipment (PPE) Property Plant and Equipment defines Property Plant and Equipment as tangible assets that- 1) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and 2) are expected to be utilized in . Derecognition for example, the introduction of three components into . Notes and summary about Psychopathology (third year level). [IAS 16.41]. QUESTION TWO: A plant and machinery was bought for $ 215,000. Please visit our global website instead. (f) Any compensation received from the third parties in respect of any impairment related to the asset. On 1 March 20X2, Yucca Co purchased an upgrade package from Plant Co at a cost of $18,000 for the machine it originally purchased in 20X0 (Example 1). In this article, I outline the common practice in South Africa, what IAS 16 (AC 123) requires and the implication for preparers. Continued use of this website indicates you have read and understood our, IAS 40 -Investment Property (detailed review), $4 Billion Accounting Scandal Puts More Scrutiny on PwCs Auditing Record, Ernst & Young Auditors Caught Cheating on Ethics Exam, KPMG Replaces EY as the Insurance Giants New External Auditor. Title: Slide 1 Author: Ahsan Abbas Last modified by: shoaib ahmed . - However, the cost of major spare parts will be capitalized as property, plant & equipment if these: These do not enhance the economic benefits of related asset, therefore, their cost will be charged to statement of profit or loss as expense such as fire alarms, sound proof equipments and smoke filters. However, the entity uses the cost model for the subsequent measurement of this asset and uses IAS 16 instead of IAS 40. 2 D1{?A4uDMX":Br|XgF`4&_pt(F1l ^d/ Gcwj`\ The details of the cost of the aircrafts components are as follows: In the year ended 31 December 2008 the aircraft engine had experienced a serious trouble which had resulted in considerable compensation costs to AB Ltd. The entity has two options to account for the property, plant and equipment at reporting date as a choice of accounting policy; If an entity chooses to measure the property, plant and equipment under Cost model at reporting date, then such assets will be measured at Cost less accumulated depreciation less accumulated impairment loss. IAS 1 Presentation of financial statements IAS 2 Inventories IAS 7 Statement of cash flows IAS 8 Accounting policies, changes in accounting estimates and errors IAS 10 Events after the reporting period IAS 16 Property, plant and equipment IAS 36 Impairment of assets IAS 37 Provisions, contingent liabilities and contingent assets Objective ; The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and . In May 2020, the Board issued Property, Plant and Equipment: Proceeds before Intended Use(Amendments to IAS 16) which prohibit a company from deducting from the cost ofproperty, plant and equipment amounts received from selling items produced while thecompany is preparing the asset for its intended use. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. IAS 16 permits the choice of two possible treatments in respect of PPE: If the revaluation model is adopted, this should be applied to all assets in the entire class (ie if you revalue a building, you must revalue all land and buildings in that class of asset). (c) The depreciation charge for the accounting period will be charged to the statement of profit or loss as an expense. (d) When the asset is revalued, its depreciation charge to the date of revaluation will be reset to zero, as it will be reflected in the revalued amount. Where an assets carrying amount is increased as a result of a revaluation (ie a revaluation gain), this gain is normally recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. Written by a member of theFinancial Reportingexamining team, Becoming an ACCA Approved Learning Partner, Virtual classroom support for learning partners, Purchase of a five-year maintenance contract with Plant Co, Carrying amount of non-current asset at revaluation date, Valuation at fair value of non-current asset, purchase price of an asset, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, costs of testing whether the asset functions properly. The estimated useful life is 10 This is the same approach we followed for land accounted for on the . The initial revaluation Here are what the standard said, The entity should consider the following points in revaluation: (a) Normally the revalued amount is taken as fair value of asset which is determined in accordance with IFRS 13. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. Therefore, the consolidated group accounts for the building as an item of property, plant, and equipment. Construction of Ham Cos new store began on 1 April 20X1. Subsequent costs Paragraph 16 of IAS 2 requires certain costs be excluded from the cost of inventories. 1122 0 obj hbbd``b` M@H2c)$8Aj 8HRADk$#,#i] e % However, if the asset is being used in the construction of another asset, then the depreciation charge will be added to the cost of such asset under construction or being produced, such as the depreciation of the manufacturing plant is added in the cost of inventory. endstream u3>= (a) The depreciation method opted by the entity should be in accordance with the pattern of economic benefits which are to be consumed by the entity over its useful life. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognized in the income statement. hyphenated at the specified hyphenation points. In January of year 1, an entity acquires a building to earn rentals under operating leases. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. EXAMPLE 5 3. If the revaluation takes place at the start of the year, then the revaluation should be accounted for immediately and depreciation should be charged in accordance with the rule above. If Transaction of Exchange does not have Commercial Substance: If the transaction of exchange does not have commercial substance or the fair value of asset transferred and the asset acquired both are not determinable, then the new asset will be recognize at the carrying value of asset transferred, which will result in no gain or loss on exchange.
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