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Property, Plant and Equipment - Coggle Diagram
Property, Plant and Equipment
IAS 16 prescribes accounting treatment for PPE so that users of the FSs have information on PPE investments and changes to them.
Main issues addressed are recognition of assets, determining their carrying value and associated depreciation charges
IAS 16 definitions
Property, plant and equipment
Tangible items held for use in producing goods/services
Carrying amount
amount at which an asset is recognised after deducting accumulated depreciation/impairment losses (also called net book value)
Cost
amount paid and the fair value of any other consideration given to acquire an asset at the time of acquisition
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Residual value
amount an asset would fetch in disposal, after deducting estimated costs to dispose assuming the asset was already at the point where it would be disposed
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Self constructed assets
When an entity constructs its own asset for use, cost is determined using the same principles as normal assets.
Measurement models of assets
IAS 16 states that entire class of asset must have the same measurement policy applied to it
Cost model
Item should be entered at its cost less any accumulated depreciation and accumulated impairment losses
Revaluation model
Asset should be recorded at its revalued amount less any accumulated depreciation and impairment losses.
Revalued amount is fair value amount at time of revaluation. Fair value is IFRS 13 , the price that would be received to sell the asset/transfer the liability
IFRS 13 Fair value
price received in selling an asset/transferring a liability in an orderly transaction between market participants at the measurement date
Entity must determine:
particular characteristic of the asset/liability that is subject to measurement e.g. condition or location and restrictions on its sale
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valuation technique for the measurement which gives sufficient data to increase observable inputs compared to unobservable ones
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Subsequent expenditure
IAS 16 recognizes subsequent expenditure by implying that it is probable that future economic benefits associated with the asset will flow to the entity, and the cost of the expenditure can be measured reliably
When to capitalise:
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it is the cost of a major inspection for faults and the carrying amount of the previous inspection is derecognised
Derecognition
An asset may be recognised as PPE by capitalising all elements for which there will be subsequent expenditure in future years
When subsequent expenditure occurs, the original element of the asset should be derecognised and the new part treated as an acquisition
If the element has been depreciated during ownership, when it is replaced it will be treated as a disposal
If a criteria of owning a PPE is to undergo major inspection, the costs are added to the carrying amount as a replacement and previous inspection derecognised on an annual basis
Costs of general maintenance/day to day servicing for PPE should be viewed as expenditure and expensed to SPL as incurred
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Revaluation of assets
Property is often revalued to reflect a better fair value of an asset plus changes in property valuations
Valuation is normally performed by professional and if fluctuations are frequently expected, may be done annually. If not, every 3 to 5 years is sufficient.
If an item of PPE is revalued then the whole class of that asset must be revalued also e.g. if one building is, all buildings must be
IAS 16 requires this as it prevents companies from distorting the results of the revaluation by selecting those that may increase in value
Surplus
When an asset is revalued and its carrying amount is increased, the corresponding increase to equity is recorded as revaluation surplus
Gain will appear in the SoCI under Other Comprehensive Income, whilst corresponding entry is made in SoCIE as a movement in revaluation surplus
Accumulated depreciation is removed as part of the double entry (Acc dep & cost DR, reval surplus CR)
Entity then has a choice whether to make an annual transfer of excess depreciation within equity (reval. surplus DR, retained earnings CR), and is calculated by Annual depreciation charge on revalued amount less annual depreciation charge based on historic cost
Deficit
If revaluation results in a fair value that is less than the carrying value, revaluation surplus is reduced by the amount of deficit instead.
If there is insufficient amount in the revaluation reserve for the asset, the balance of the deficit will be charged to the SPL. Revaluation surplus DR, SPL DR, Acc. dep DR, Cost CR.
If the asset has not been previously revalued, the deficit will be charged to SPL regardless
Disposal of revalued asset
Gain on disposal is measured against the difference between carrying amount (after reval. and new depreciation) and proceeds
Must remove revaluation surplus once asset is disposed of as it has been realized, therefore a transfer from reval. surplus to retained earnings is made and shown in SoCIE
Cash DR, Acc. dep DR, Cost CR, SPL CR (if profit), Reval. surplus DR, Retained earnings CR
Disposals of PPE
Asset should be removed from accounts when it is disposed of or when there is no future economic benefit expected from its continued use
Asset at cost is reduced, whilst depreciation is removed from the accounts also. Further entry is made for any proceeds received from the sale/scrapping of the asset
Difference between the net book value and proceeds on disposal are treated as a gain or loss, and is recognized with entries in the SPL when transferred at the end of the period
IAS 36 Impairment of Assets
Assets should not be carried in the SFP at more than their recoverable amount, and is therefore impaired to adjust for this
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IAS 36 means entities cannot deliberately value assets at cost less depreciation in order to avoid recognizing a loss on revaluation
Impairment losses are treated in same was a revaluation loss; charged to SPL. If revaluation is a gain, the impairment losses can be charged to revaluation surplus.
Entities are required to consider impairment whenever FSs are prepared. Outside of this, review would be carried out annually on intangible assets and only when there is indication of impairment on other assets
Assessing impairment
When assessing whether an asset is impaired, there are internal and external factors to consider
External
Decline in market value
declined signifcantly more than expected during normal use of passage of time
Changes to business environment
e.g. technology, economic, environment, legal
Increase in interest rates
Market interest or ROI rates have increased resulting an affect on the discount rate used to calculate asset value, decreasing recoverable amount
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Internal
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Changes in use of asset
e.g. asset becoming idle, plans to discontinue/restructure operations, plans to dispose of an asset before previously expected date
Poor performance forecast
reporting indicates that economic performance of an asset is/will be worse than expected