Property, Plant and Equipment Pt 2

Subsequent Measurement

  • If an item of PPE is revalued, the entire class to which it belongs must be revalued, and revaluations must be done regularly to ensure the carrying amount of the asset does not differ substantially from the fair value at the end of the reporting period.
  • The Carrying Amount of an Asset is calculated by
  • When an item of property, plant and equipment (PPE) is recognized as an asset
  • Aspects such as Depreciation, Impairment, and Useful Life are important in the Measurement process of PPE, regardless of the Model used.

It must be carried at either.

(Revaluation model)

(Cost model)

  • Fair value at date of revaluation Less subsequent accumulated depreciation and accumulated impairment losses
  • Cost less any Accumulated Depreciation and Impairment Losses.
  • Subtracting Accumulated Depreciation, Accumulated Impairment Losses, and Any Residual Value from the Cost/Revalued Amount.

Depreciation

  • Allocation of Cost
  • Depreciable amount refers to the Cost of an Asset, Less Residual Value.
  • The Depreciable amount is calculated by Subtracting the Estimated Current Residual Value from the historical cost (or Revalued Amount) of an asset.
  • Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
  • Three aspects should be considered when deciding on the amount of depreciation allocated:
  • What's Residual Value
  • Residual value is the estimated amount that the entity would currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Expected Residual Value

Method of Depreciation.

Useful Life

4 Step process to account for change when there's change in the depreciation method

  • Step 2: Calculate the remaining useful life at the beginning of the current year using the new estimate method

Beginning of the year you need to calculate what is the remaining useful life of the asset using new estimates When doing this take into account:

How long has it been depreciated before the change in estimate

  • Step 3: New depreciation = Carrying amount/Remaining useful life

With Units of production and Sum of digits

  • Step 4: Calulate Change in estimate

Taking the Carrying Amount DIVIDING BY Remaining Useful Life you get Depreciation per unit

Step 1 Divided by Step 2

How much has the asset been used before the change in estimate

  • Step 1: Calculate the carrying amount at the beginning of the year

(New depreciation less old depreciation)

Therefore take this amount and multiply it by the number of units produced for the year

Previous year from when the asset was brand new

Using the old method

However different if the units of production or sum of digits changes

Depreciation Methods

2.) Diminishing Balance Method

1.) Straight Line Depreciation

3.) Units of production method

Depreciation Expense = (Cost of Asset - Residual value) / Useful Life

Depreciation Expense = (Beginning Book Value of Asset - Residual Value) x Depreciation Rate

Beginning Book Value = (Original Cost of an Asset MINUS any Accumulated Depreciation)

i.) Depreciation Expense per Unit = (Total cost of asset - Residual value) / Total Units of Production

ii.) Total Depreciation Expense = Depreciation Expense per Unit x Actual units of Production during the Period

Total units of production is the estimated total number of units the asset can produce over its useful life

Actual units of production during the period is the number of units the asset actually produced during the current period

Revaluation Model

  • Frequency of revaluations depends on change in fair value
  • Fair value of PPE measured using revaluation model should be determined according to IFRS 13
  • Property, plant, and equipment items are Initially Measured at Cost
  • Three widely used valuation techniques to determine fair value According to IFRS 13

Entity can choose to use Cost Model or Revaluation Model for subsequent measurement

  • Revaluation Surplus must be Viewed and Disclosed as Part of Equity

Revaluation model can only be chosen if fair value can be measured reliably

Cost Approach

Income Approach

Market Approach

Impairment

  • Revaluation surplus can only be used to Absorb Subsequent Revaluation Deficits or Impairment Losses or for Capitalization Issues
  • Deficits of one item cannot be set off against surpluses of another, even if they are from the same category

IFRS 13 provides guidance on how to determine fair value for financial reporting purposes.

According to IFRS 13, fair value should reflect the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

  • The Carrying Amount of a PPE is recovered systematically over its useful life through usage

In other words, the Cost of the asset is recognized as an expense in the financial statements over the period that it is being used.

  • If an item or group of similar items are impaired by damage, obsolescence or economic factors, the recoverable amount may be less than its carrying amount, and the carrying amount is written down to its recoverable amount
  • IAS 36 is used to determine whether there has been a decline in the value of an item of PPE
  • Difference between Depreciation and Impairment

Depreciation

Impairment

Depreciation refers to the systematic allocation of the purchase price of an asset to the profit or loss statement over time

While impairment refers to the permanent diminution in value of an asset and is recognized in the profit or loss statement

  • If an item of PPE is impaired, destroyed, or lost, any compensation received for that item should be recognized as income in the period in which it is received, but only up to the carrying amount of the asset

Recoverable amount

Carrying amount

The Original Cost of the asset less any Accumulated Depreciation or Impairment Charges.

Recoverable amount is the value of an asset that a company expects to receive from its use or sale

  • It is the higher of an asset's:

Fair Value less Costs to Sell (market value)

or its Value in Use (the present value of future cash flows expected from the asset's use).

If compensation is received for future operating losses or for the restoration of an asset, it should be recognized as revenue over the period necessary to compensate for the loss or restoration of the asset

Examples of Compensation are

compensation related to involuntary conversion of PPE

physical replacement of impaired or lost assets

compensation by the government for expropriated assets

reimbursement by insurance companies

However

Impairment: IAS 36

PPE: IAS 16

Retirement or disposal of items of PPE must be recognized according to IAS 16

Impairments of items of PPE must be recognized and measured according to IAS 36

Compensation received for PPE that was impaired, lost, or given up must be included in the profit or loss statement when received

Derecognition

An item of PPE is derecognised in the statement of financial position:

When no future economic benefits are expected from its use or disposal

Mere withdrawal from use does not necessarily lead to derecognition, unless the withdrawn asset can no longer be used or sold to produce any further economic benefits

On disposal

The gain or loss arising from the derecognition of an item of PPE is determined as the

Difference between the net disposal proceeds (if any) and the carrying amount of the item on the date of disposal

Is recognised in the profit or loss section of the statement of profit or loss and other comprehensive income

The disposal of an item of property, plant and equipment may occur in a variety of ways, such as

  • Sale
  • or Donation
  • Entering into a Finance Lease

The following criteria should be considered in determining the date of disposal:

The entity retains neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold

The amount of revenue can be measured reliably

The entity has transferred the significant risks and rewards of ownership of the goods to the buyer

It is probable that the economic benefits associated with the transaction will flow to the entity

The costs incurred or to be incurred in respect of the transaction can be measured reliably

When an item of property, plant and equipment is sold, the amount of money that the seller expects to receive from the buyer is recognized as revenue at its

Fair Value (the price at which it could be sold in an open market).

the Present Value of the right to receive cash in the future

Depreciation on an item of PPE ceases at the earlier of the date that the asset is

classified as held for sale

date that the asset is derecognised.

Disclosure

International Accounting Standard (IAS) 16 outlines requirements for disclosing information related to property, plant, and equipment (PPE)

Disclosures include:

Depreciation methods and useful lives or depreciation rates for each class

Information about revaluations, such as whether revaluation surplus realizes through use

Accounting policies for each class of PPE

Statement of profit or loss and other comprehensive income must include information about:

Compensation received for impairment

Changes in estimates for useful lives

Depreciation

Including Breakdown between different classes of assets

  • Giving up, or Loss of items of PPE

Residual values, Dismantling, Removal or Restoration Costs, and Depreciation Methods

Statement of financial position and notes must include:

Detailed reconciliation of movements in carrying amount, including comparative amounts

Information on PPE still under construction, serving as security for liabilities, and voluntarily disclosed carrying amounts and fair values

Gross carrying amount and accumulated depreciation for each class of asset at the beginning and end of the period

Additional information required for revalued PPE, including:

Whether revaluation was done independently

Carrying amount of each class of revalued PPE if cost model was used

Effective date of last revaluation

Revaluation surplus, including movement and limitations on distributions to shareholders