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IAS-16 Property, Plant and Equipment 1- Objective of IAS 16 The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are; Recognition of assets Determination of their carrying amounts Depreciation charges, and Impairment losses to be recognised in relation to them. 2- Scope: This standard should be applied in accounting for property plant and equipment except when another IAS requires or permits a different accounting treatment. IAS 16 does not apply to Assets classified as held for sale in accordance with IFRS 5 Exploration and evaluation assets (IFRS 6) Biological assets related to agricultural activity (see IAS 41) or 3- Definitions: Property, Plant and Equipment: Tangible assets that: (A) Are held by an enterprise 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 for more than one accounting period. Depreciation: It is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount: It is the cost of an asset or the amount that has replaced it, less its residual value.
Recoverable amount : It is the largest among the net sales price of an asset and its value in use. Useful Life is: (a) the period during which it is expected to use the depreciable assets by the entity, or (b) The number of production or similar units that are expected of it by the entity Residual Value: The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated cost of disposal. Carrying Amount: the amount at which an asset is recognized in the statement of financial position, after deducting any accumulated depreciation and accumulated impairment losses thereon. 4-Recognition: 4.1 initial expenditure on the asset Items of property, plant, and equipment should be recognized as assets when it meets the following two criteria: It is probable that the future economic benefits associated with the asset will flow to the entity, ((more than 50% chance) probability of inflow of future economic benefits) The cost of the asset can be measured reliably. The cost of the assets to the enterprise can be measured reliably. a) If the item is purchased the cost can be measured easily(the cash paid for item) b) If the item is self-constructed asset, the cost can be measured reliably by examining the cost of material, labor and other inputs used during construction process 4.2 Subsequent expenditure on the asset: If subsequent expenditure has been incurred on the item of property plant and equipment, which is already recorded in our books, we have two options: 4.2.1 Recognize the expenditure as an expense:
De-recognition of old parts (1,000) 38, Measurement: 5.1 measurement of Cost of assets: All reasonable costs incurred in bringing the asset in its present location prior to using the asset are capitalized. Example include assembly and installation Initial delivery, handling cost, cost of site preparation and Freight etc. suppliers invoice price Import duties and non-refundable taxes. Professional fee for architectures and engineers. Initial cost of dismantling and removing the items on the site on which asset are located. Cost of pre-production sampling.i.e.Cost of testing whether an asset is functioning properly or not. Admiration and other general overheads costs are not a component of the cost of property plant and equipment. Trade discounts and rebates are deducted from cost of fixed assets. “When an item is recognized as an asset, it should initially be measured at cost”. Example : Broadax has recently purchased an item of plant from plantco, the details of this are: Basic list price of plant 240, Trade discount applicable to Broadax 12.5% on list price Other cost: Shipping and handling costs 2, Estimated preproduction testing 12, Maintenance contract for three years 24,
Site preparation costs: Electrical cable installation 14, Concrete reinforcement 4, Wages 7, Broadax paid for plant within four weeks of order, thereby obtaining an early settlement discount of 3%. Solution: Initial measurement of the cost at which the plant would be capitalized is calculated as follows: $ Basic list price of plant 240, Less trade discount (12.5%) (30,000) 210, Shipping and handling costs 2, Estimated pre-production sampling 12, Site preparation costs: Electrical cable installation 14, Concrete reinforcement 4, Wages 7, Initial cost of plant 251, 6- EXCHANGE OF AN ASSET If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value of the asset acquired. Example: ABC ltd acquired a vehicle in exchange of furniture. Fair value of vehicle was Rs 400,000 and book value or carrying value, of furniture (given up) was Rs350, 000. Required : Pass journal entries in the books of the company. If the fair value of asset acquired is not determinable then new asset will be recognized at the fair value of an asset given up.
Superior limited exchange an automobile with a carrying value of $2500 and fair value $ with Saleem &co for furniture the fair value of which is not determinable. No differential payment was involved in the transaction. Solution: Dr Furniture a/c 3, Cr. Car a/c 2, Cr. Gain on exchange 500 7- Measurement after Initial Recognition IAS 16 permits two accounting models: 1- Cost Model. The asset is carried at cost less accumulated depreciation less any impairment loss. Example 2: On 1st^ January 2005 ABC ltd purchased machinery costing Rs 400,000. It has been decided to depreciate it at the rate of 10% on reducing balance basis. At 31st^ Dec 2008 symptoms of impairment exist and it was decided to calculate recoverable amount of that machinery, which was Rs250, 000 Required: 1- Prepare machinery account for 4 years 2- Pass journal entry for impairment. 3- Calculate balance of machinery at 31st^ Dec 2008. Example: XYZ ltd has an item of land carried in its book at Rs 25,000. There was a decrease in the land prices in the current year and the land is now worth Rs 20, Required : calculate impairment loss in the current year. 2-Revaluation Model. An asset whose fair value can be measured reliably may be carried at revalued amount. 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. 2.1 Revaluation of non-depreciable assets: The difference of carrying value and the fair value is credited to the revaluation reserve. EXAMPLE: (non-depreciable asset) ABC ltd carried land in its book at $40,000. There was a surge in prices and the land was revalued at $55,000.
Required: Account for revaluation in the current year. Solution: The entries required for this purpose are: Dr Fixed asset $ Cr Revaluation $ 2.2 Revaluation of Depreciable assets: when depreciable assets are revalued then following two steps shall be followed. STEP 1: Accumulated depreciation is first set off against the gross carrying amount of the asset. The following entry is passed Dr Accumulated depreciation xxxx Cr Fixed asset xxxx STEP 2: The net amount of the asset is then restated to the revalued amount. The following entry will be passed. Dr. Fixed asset xxxx Cr. Revaluation reserve xxxx EXAMPLE: An asset was purchased on 1st^ Jan 2000 for Rs 100 with a useful life of 10 years. After four years at 31st^ Dec 2003 asset was revalued to Rs 80.Prepare machinery account, accumulated depreciation account and revaluation account $ Cost 100 Acc. Dep 40 NBV 60 Then asset has to be revalued to $80. Following entries will take place: Dr. Accu dep 40 Cr. Fixed asset 40 (With the balance in accumulated dep account) Dr. Fixed Asset 20 Cr. Revaluation 20 (With the difference between the balance in the fixed asset and the revaluation amount) EXAMPLE: Steele limited bought a fixed asset for $100,000 01 Jan 1992 with an estimated useful life of 10 years. On 01 Jan 1995 the asset was revalued to $140,000. On 01 Jan 1998 it was sold for $100, Required : prepare fixed asset account, accumulated depreciation account and revaluation account at the time of revaluation. EXAMPLE: A building which cost $130,000, 12 years ago, has been revalued to $165,000. At the time of purchase it had an estimated useful life of 50 years and this is still felt to be true.
At the end of each year company will check symptoms of impairment if management concludes that market value of an asset is reduced from its carrying value then an asset is said to be impaired Which factors may result in impairment of an asset? External indications: The market value decreases significantly. Changes in legal factors or business climate adversely affect asset value. Increase in interest rates and as a result decrease in recoverable amount of assets. Internal indications: The use of an asset is significantly changed. Economic performance of the asset is significantly deteriorated. Physical damage to the asset. EXAMPLE: An asset is purchased by silicon ltd. On 1st^ Jan 2002 for Rs 840,000 and manufacturers estimate that its residual value at the end of 10 year is RS 40,000 and its useful life is 10 years, At the end of year 2006 carrying value of an asset is Rs440, 000. At the end of 2006 financial experts comes to know that the market prices of such type of an asset is low due to poor economic conditions and technology, so they are interesting to calculate the impairment loss of this asset at the end of 2006 due to existence of symptoms. At the end of 2006 they appoint an independent expert to know the fair value of that asset; he told that the fair value of this asset is Rs 430,000 and estimated cost of selling this asset is Rs 30,000. Besides this our assistant finance mangers calculate the value in use of the asset as Rs 380,000 by discounting the future cash flows (inflows and outflows) at the appropriate rate of interest. Required: a) Calculate impairment loss. b) Pass journal entries for impairment loss.
Example: Take a retail store that is recorded on the owner's balance sheet as a non-current
asset worth USD 20,000 (book value or carrying value is USD 20,000). Based on the asset's book value, assume the store has a historical cost of USD 25,000 and accumulated depreciation of USD 5,000. A hurricane sweeps through the town and damages the store's building. After
assessing the amount of the damage, the owner calculates that the building's market value has fallen to USD 12,000. Required: a) Calculate impairment loss. b) Pass journal entries for impairment loss. DE recognition: The parts of an item of property plant and equipment that have been replaced should be de- recognized. An item of property plant and equipment should be eliminated from the statement of financial position when: a) An asset is disposed off. b) The asset is permanently withdrawn form use c) When no future economic benefits are expected from its disposal. Any gain or loss arising on the disposal should be recognized as income or expense in the income statement. Problem No 01: On 1 March 2008 Yucca acquired a machine from Plant under the following terms: $ List price of machine 82, Import duty 1, Delivery fees 2, Electrical installation costs 9, Pre-production testing 4, Purchase of a five-year maintenance contract with Plant 7, In addition to the above information Yucca was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was received within one month of purchase. Yucca paid for the plant on 25 March 2008. Required: How should the above information be accounted for in the financial statements? Problem No 02: Construction of Deb and Ham’s new store began on 1 April 2009. The following costs were incurred on the construction: $ Freehold land 4, Architect fees 620 Site preparation 1,
Electrical cable installation 14, Concrete reinforcement 4, Wages 7, Broadax paid for plant within four weeks of order, thereby obtaining an early settlement discount of 3%. Problem No 06: An item of plant was purchased on 1 April 2008 for $200,000 and is being depreciated at 25% on a reducing balance basis. Prepare the extracts of the financial statements for the year ended 31 March 2010. Useful economic lives and residual values IAS 16 requires that these estimates be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful economic life remaining. Problem No 07: A machine was purchased on 1 April 2007 for $120,000. It was estimated that the asset had a residual value of $20,000 and a useful economic life of 10 years at this date. On 1 April 2009 (two years later) the residual value was reassessed as being only $15,000 and the useful economic life remaining was considered to be only five years. How the asset should be accounted for in the years ending 31 March 2008/2009/2010?
