slide property, plant and equipment ias 16

Property, Plant and Equipment: IAS 16 2 IAS 16 - Overview  Objective and scope  Recognition  Measurement at recognition  Measurement after recognition (CM, RM)  Derecognition  Disclosure 3 IAS 16 - Objective and Scope  Property, plant and equipment are 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” 4 Example 3: An entity (parent) holds a building to earn rentals under an operating lease from its subsidiary. The subsidiary uses the building as a retail outlet for its products. In the parent’s consolidated financial statements the building is classified as an item of property, plant and equipment. The consolidated financial statements present the parent and its subsidiary as a single entity. The consolidated entity uses the building for the supply of goods over more than one accounting period. In the separate financial statements of the parent (if prepared) the building is classified as an investment property and accounted for Investment Property. It is a property held to earn rentals. However, if the fair value of the investment property cannot be measured reliably without undue cost or effort on an ongoing basis, the parent accounts for the property as property, plant and equipment 5 IAS 16 - Objective and Scope  IAS 16 objective: standards for the recognition and derecognition of PP&E assets, measurement at and after acquisition, and disclosures  Scoped out: assets held for sale, agricultural biological assets, non-renewable natural resource rights and reserves  Includes investment property under construction and when ready, if cost model applied 6 Example 6: An entity purchases, for one combined payment, an existing building and the remaining 80- year interest in a 100-year right to use the land on which the building sits (freehold ownership of land is not possible in that jurisdiction). The building is occupied by the entity’s administrative staff. The purchase price is split between the land use right and the building on the basis of the relative fair values of the two assets. The land use right is accounted for as an operating lease and the building is accounted for as property, plant and equipment 7 IAS 16 - Recognition Costs are recognized as PP&E only if: 1. probable that future economic benefits associated with the item will flow to the entity, and 2. the cost can be measured reliably. Applies to costs at acquisition and after acquisition. 8 IAS 16 - Recognition The 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: 1. Future economic benefits 2. Reliable measure 9 IAS 16 - Measurement at Recognition Cost elements to include: 1. Purchase price net of discounts, rebates, and add non- recoverable taxes, duties 2. Costs to get in place and ready to use as management intended 3. Costs of obligation to decommission asset and restore site as a result of acquiring the asset 10 IAS 16 - Measurement at Recognition Cost elements to exclude: 1. Costs after asset in place and ready for use as management intended 2. Costs to open a new facility, introduce a product, move to new location 3. General and administrative overhead type costs [...]... class: land, office equipment, machinery, buildings 15 IAS 16 - Measurement after Recognition Cost Model (CM): PP&E are carried after acquisition at cost, less accumulated depreciation and accumulated impairment losses Revaluation Model (RM): PP&E are carried after acquisition at fair value at date of revaluation, less any accumulated depreciation and impairment losses after revaluation 16 IAS 16 - Measurement... of the plant is CU1,652,893 (ie the present value of the future payment) Calculation: CU2,000,000 future payment x 1/(1.1)2 Note: The unwinding of the discount results in interest expense recognized in profit or loss respectively of CU165,289 and CU181,818 in the first and second 12-month period after the sale Furthermore, two years after the sale, the liability of CU2,000,000 (CU1,652,893 + CU165,289... derecognized upon settlement of the debt IAS 16 - Measurement at Recognition Commercial substance exists if: 1 2 After-tax cash flows of part of business taking on new asset (entity specific value) have changed; and 3 14 Cash flows (amount, timing, risk) of new asset differ from those of old asset(s) transferred; or Difference in 1 or 2 is significant IAS 16 - Measurement after Recognition Choice.. .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 11 Exercise 5   12 An entity acquired a plant for CU2,000,000 on two-years’... 250,000 Credit Revaluation surplus 550,000 Statement of financial position (extract) Property, plant and equipment 800,000 Revaluation surplus 550,000 The revaluation increase should be shown as other comprehensive income in the entity’s SCI Note: you could also increase the carrying value to €800,000 by debiting €550,000 and crediting revaluation surplus with same Exercise 9  22 On 1 January 20X1 an... ends when PP&E is derecognized or classified as held for sale (IFRS 5)  Depreciate over useful life to entity 18 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 limits  Choose method based on pattern that asset’s economic benefits are expected to be... 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 17 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 use  Depreciation period ends when... machine However, fixed parts and the foundation may be grouped together in determining the depreciation charge as these components have the same useful life and both must be depreciated on the straight-line method One-third of the cost (or CU200,000) will be allocated to the moving parts and two-thirds of the cost (or CU400,000) will be allocated to the combined foundation and fixed parts Exercise 10... 20 years and its residual value as nil Furthermore, management believed that the straight-line method reflects the pattern in which it expects to consume the machine’s future economicbenefits.At the entity’s 31 December 20X5 financial year-end management’s assessments of the machine changed It now estimates the useful life of the machine as 25 years (measured from the date of acquisition) and its residual... benefits are expected to be received: SL, DB, or activity-based  If change in pattern, change method prospectively (change in estimate) 19 Exercise 6 (a) Asset X was bought for €500,000 five years ago and has been depreciated at 10% on cost per annum It is now revalued at €800,000 There is no change to the useful life Question: Show how the above items should be treated in the financial statements . as property, plant and equipment 5 IAS 16 - Objective and Scope  IAS 16 objective: standards for the recognition and derecognition of PP&E assets, measurement at and after acquisition, and. Property, Plant and Equipment: IAS 16 2 IAS 16 - Overview  Objective and scope  Recognition  Measurement at recognition  Measurement. recognition  Measurement after recognition (CM, RM)  Derecognition  Disclosure 3 IAS 16 - Objective and Scope  Property, plant and equipment are tangible items that: (a) are held for use in the production