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Property, plant and equipment (Depreciation (Assets that last for more…
Property, plant and equipment
Almost all business need property in which to house their operations, be they administrative, manufacturing or other operations. Depending on the nature of the business they will often have plant and machinery and other forms of equipment
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IAS 16 Property Plant and Equipment covers the generality of longer life assets held for ongoing use within a business and it will affect nearly all business to some extent
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The cost model
After recognition as an asset, an item of PPE is carried at its cost less any accumulated deprecation and any accumulated impairment losses
The revaluation model
After recognition as an asset, an item of PPE whose fair value can be measured reliably is carried at a revealed amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses
There are some restrictions and requirements in relation to the revaluation model which make it more onerous
Revaluations do have to be made annually but must be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. In addition if an item of PPE is revalued, the entire class of PPE to which that asset belongs must also be revealed and all the assets in the class must be valued at the same time
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Depreciation
Assets that last for more than one accounting period are still consumed by the entity and so there is a need to allocate the cost or value of the asset as an expense over time as it is used
IAS 16 deals with this by requiring depreciation to be charged which is deducted from the cost or value of the asset and taken as an expense in each period the asset is in use, across its useful life
Each part of an item of PPE with a cost that is significant in relation to the total cost of the item is depreciated separately
The depreciation method used should reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity and this should also be reviewed at least annually (with any charge again being a change in accounting estimate)
The depreciation charge for each period is usually recognised in profit or loss. The depreciable amount of an asset is allocated on a systematic basis
The residual value and the useful life of an asset must be reviewed at least at each financial year end and if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8
Derecognition
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Any net gain or loss arising from the derecongition of an item of PPE is included in profit or loss at the point when the item is derecongised. This is an example of where offset is allows in financial reports. The proceeds of sale are offset against the carrying value to produce a net gain or loss
Disclosure
To the extent that PPE is a material asset balance for an entity, the standard requires substantial disclosures including all movements in year for each class of asset such as additions, disposals, depreciation, impairments and revaluations
Also required on any restrictions of title includes pledges of assets as security for borrowings and any contractual commitments for purchase of items of PPE in the future