AO01 2022 PPE
You are the senior accountant of BuildUp and you have been given the information above. Based on your knowledge of IAS 16: Property, plant and equipment, IAS 36: Impairment of assets and IAS 40: Investment property, critically analyse (describe and explain in detail including relevant definitions, application to these definitions and calculations where necessary), the inconsistencies in the property, plant and equipment note.
General Comments on the PPE Note
Residual values should not be included separately in the notes to the financial statements
Investment property should not be included in the property plant and equipment note but should instead be disclosed separately
What can go under the PPE note
Revaluations (OCI)
Additions
Accumulated depreciation and impairment
Cost
Carrying value at beginning of the year
Disposals
Depreciation
Impairment
Fair value adjustments (P/L)
Cost
Accumulated depreciation and impairment
Carrying value at the end of the year
Inconsistency with Land
In financial reporting, companies must account for their property, plant, and equipment (PPE), which includes items such
Buildings
Machinery
Land
and Equipment
PPE is initially recorded at its cost, which includes all expenditures necessary to acquire and prepare the asset for its intended use.
After Initial Recognition, companies have two options for accounting for their PPE:
they can use the
Cost Model
The Revaluation Model
The asset is carried at its Cost LESS Accumulated Depreciation and any Accumulated Impairment Losses
The asset is carried at its Fair Value LESS any Subsequent Accumulated Depreciation and Impairment Losses.
In this case, BuildUp has chosen to use the revaluation model for its land.
Each year, the company has its Land Revalued, and any Increase or Decrease in Fair Value is recorded in a Revaluation Reserve
However, there are some issues with the accounting for the land, as follows:
The Total Rand Value of R670 000 included as a Revaluation Reserve is incorrect. Based on the calculations presented, it should be R630 000.
The R20 000 decrease in the fair value of Erf 1932 - Great North Road was incorrectly disclosed as a fair value adjustment loss
As the Revaluation Decrease was smaller than the Reserve for that asset, the balance should have been first deducted from the reserve before being recorded as a loss in the income statement.
The Cost of the Land at the end of the year should have been R6 750 000, not R6 120 000, as the cost should have taken into account the revaluations that were performed.
How to ⭐Calculate the Revaluation Reserve
=Total Fair Value of Land LESS Total Previous Fair Value