Property, plant and equipment (IAS 16)

Framework link

• What is PPE?

• The crux of the definition?

• Ownership or not?

• Reach the objective?

• Relevant

• Faithfully represent

1

Other definitions

• Carrying amount

• Cost price,

• Depreciable amount,

• Fair value,

• Depreciation,

• Impairment loss,

• Useful life

2

Recognition

• Meets• Probable that• The cost

Basic JE

3

Initial measurement

Cost price = • Purchase :

• Import

• Non-refundable

• Less:

• Directly attibutable costs –

• Costs not included -

4

Recognition of components

• Significant components• Separately • What is a significant component?

• Example• Helicopter and engine• Can have different

• Exchanging of a component• Treat as

5

Spare parts and servicing equipment

• Small spare parts

• .

• Major spare parts

• Part of

• Will be used for more than 1 period

6

Safety and environmental costs

• Obliged to acquire certain PPE items for safety or environmental purposes

• Will not directly give rise to

• Obliged to acquire such assets for increased

• Examples:

• Special

• Fire

• Recognise as 7

Inspection costs

• Certain assets need regular major inspections (components not necessarily replaced)

• Cost is

• Depreciation is written off

• Derecognise previous inspection. When?

8

Exchange of assets

• Cost price of item acquired is fair value of asset given up• If fair value of asset given up cannot

be determined? –

• Derecognise

and

• calculate

9

Example

Exchange a vehicle with a cost price of R40 000 and acc depr of R18 000 for a machine with a fair value of R20 000

Journal

10

Subsequent measurement

• Cost price modelCost price Less Acc depr & Acc impairment loss= Carrying amount

or

• Revaluation modelAccounting 3A

11

DepreciationDepreciation is the systematic allocation of the: • Depreciable

• Cost • Less: Residual

• Over the

Depreciation begins:• When the asset is• Stop depreciation the earliest of:

• Asset being classified or

• derecognition12

Depreciation • Expense - SCI

• Unless capitalised• Asset purchased during the year• Fair value more than carrying amount – still depreciate• Residual value more than cost price – cease depr• Components – separately depreciated• Similar in nature and useful life – group together• Land and buildings shown separately• No depreciation on land• Factors that determine useful life – bl 66• Useful life, residual value and rate revised at every

year end (changes = IAS8)

13

Methods of depreciationDepreciation methods that can be used:

• Straight line• Depreciable amount / useful life• Depreciable amount x depr %

• Diminishing balance method• Carrying amount begin of year x depr %

• Sum of digits / Units of production method• Units produced / Total expected units x

Depreciable amount

14

Example• A Ltd buys a manufacturing machine from B Ltd for

R1 150 000 cash• The machine is expected to produce 650 000 units

over the next 5 years• The machine will then be sold for R150 000• During year there is 65 000 & 162 500 units produced

Required: Calculate depreciation for year 1 and 2:

• Straightline method• Diminishing balance method (Use 25% with no

residual value)• Sum of units method

15

Revaluation

• Entity has choice:

• Only for

• if FV can be Which assets?

• Why revalue?

• Market value:

• vs gross replacement value

• Accumulated depreciation:

• Use

Example

• C Ltd buys a machine for R100 000• The expected useful life is 10 years• Co. Policy is to revalue PPE every 2 years

after initial recognition• At end of 2 years:

• Gross replacement value = R150 000

Required: Calculate revaluation surplus

Derecognition• Examples

• Sell• Donate• Remove from use

• Accounting treatment

• Take an item off the SFP

• Profit or loss calculate – take to SCI

• Selling price – CA = Profit/Loss

• Remember: depreciation for period

16

DerecognitionJournal with sale:

Dr Bank xxxDr Acc depr. xxxDr Loss (Cr Profit) xxx

Cr Vehicle – cost xxxx

Closed off ff a/c:

The only a/c with balances

17

Presentation

Statement of financial position

ASSETS

Non-current assets

Property, plant and equipmentxxx

18

DisclosureAccounting policy• Measurement base • Depreciation method• Depreciation rate

SFP• Cost, acc. depr and carrying amount• Reconciliation of carrying amount

• Begin to end of period

19

Road mapwhere to go from here…

• You must now:• Work through the class notes together with

chapter 3 of the text book• Work through the class examples• Attempt all the other questions in the

question bank• Do the questions in IFRS applications

• PRE-READ UNIT 4 – Investment Property20