It does not prescribe the unit of measurement but states that judgement isneeded in applying the recognition criteria to an entity's particular circumstances [IAS 16.9]. 2. Derecognition Written by a member of theFinancial Reportingexamining team, Becoming an ACCA Approved Learning Partner, Virtual classroom support for learning partners, Purchase of a five-year maintenance contract with Plant Co, Carrying amount of non-current asset at revaluation date, Valuation at fair value of non-current asset, purchase price of an asset, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, costs of testing whether the asset functions properly. (d) When the asset is revalued, its depreciation charge to the date of revaluation will be reset to zero, as it will be reflected in the revalued amount. Thisis a particularly important area of the Financial Reporting (FR) syllabus and is also important assumed knowledge for the Strategic Business Reporting (SBR) exam. Required If the asset is sold on extended credit period or on deferred installment basis, then the disposal proceeds will be taken as cash price equivalent and any excess over the cash price will be treated as Interest Income which will be recognized over the period of credit. If Transaction of Exchange does not have Commercial Substance: If the transaction of exchange does not have commercial substance or the fair value of asset transferred and the asset acquired both are not determinable, then the new asset will be recognize at the carrying value of asset transferred, which will result in no gain or loss on exchange. This standard deals with the four main aspects of financial reporting of property, plant and equipment (PPE) that are likely to be of major relevance in the FR exam, namely: initial measurement. IAS 16 Property, Plant and Equipment permits TWO accounting models: Cost Model - The asset is carried at cost less accumulated depreciation and impairment. <>/MediaBox[0 0 595.27563 841.88977]/Parent 1115 0 R/Resources<>/ProcSet[/Text/ImageC]>>/Rotate 0/Type/Page>> The following is the IAS 16 summary. Les obligations affrentes aux cots comptabiliss selon IAS 2 ou IAS 16 sont comptabilises et values selon IAS 37 Provisions, passifs ventuels et actifs ventuels. xUQ;n09RIR DB.gb)^J33gY]:Je0(DU@Ws}wm{Z@xoAZ0M^y3?k798up5BzBRM (Ma_ h 4umM}&aF.%"zD,Rd_,o*J$$|Bv>a gzrJBrJLR_ Items of property, plant and equipment should be recognized as assets when: Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at cost. Once the asset has been revalued, the remaining depreciation for the year will be based on the revalued amount. If you have a Facebook or Twitter account, you can use it to log in to ReadyRatios: i have a question. endstream Dep. Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. B/VK9\9[gZ.7g;(+,-6VIaQq9S&(*l9kZA ^ZX;URf2sriGVbs6J}&'y(x0YI,IB+pll_6AOMRi:K,uNPo2::=@d3(E@Wc`q( November 15, 2021. The companys policy is to make a transfer to retained earnings in respect of excess depreciation. In June of this year, 170 computers were sold for $1,500 per unit. Professional fees. The following example, which is reproduced from the illustrative examples accompanying IFRS 16, illustrates the application of IFRS 16:13 and 14. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. The Issue. AB Ltd. acquired a plant at a cost of $15 million. Required A practical guide to implementing . Therefore, the consolidated group accounts for the building as an item of property, plant, and equipment. It is essential to clarify that if the type of lease were not operating but financial, it would not be an investment property; it would be an account receivable. 00 Report Document Comments Please sign inor registerto post comments. Demonstrate how the machine should be accounted for in the years ended 31 March 20X1, 20X2 and 20X3 and prepare extracts of the statement of profit or loss and statement of financial position for each year. The rectification cost of the error is charged to statement of profit or loss as expense. These, Employee costs arising directly from the installation or construction of the asset. Are you looking to stay ahead in the ever-changing business world and enhance your understanding of International Financial Reporting Standards (IFRS)? (a) That are held for use in the production, supply of goods or services, rental For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. endobj You can log in if you are registered at one of these services: This website uses cookies. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. 1132 0 obj DrRevaluation surplus [to maximum of original gain/balance in revaluation surplus if lower] Under paragraph 12 of AASB 116, the day-to-day servicing of an asset (e.g. The example of those fixed assets include: Land Office Building Machinery Cars Computers Table Chair and others related. Revalued assets are depreciated in the same way as under the cost model (see below). (a) The measurement model, (b) Method of depreciation The companys policy is to make a transfer to retained earnings in respect of excess depreciation. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. AB Ltd. had wrongly specified the power loading of the original electrical cable to be installed by the contractor. Construction of Ham Cos new store began on 1 April 20X1. An entity (parent) owns a building that it leases to its subsidiary under an operating lease in exchange for annual payments of 2,000. - This Standard does not prescribe that what items constitute property, plant & equipment. We have included examples and insights to help you understand the requirements and their impacts on the financial statements. The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset. It is the systematic allocation of the depreciable amount of an asset over its related useful life. *E|![eZVx?W7 ^ mH`g.)Le|aslp 1. z%m".z@$BeXDEd+c.RB"Il BH$D$\``eH! Entity B sub-leases this asset to Entity C for eight years. Any cash discount taken for the prompt payment of cash related to asset will not affect the cost of the asset, and it will be recorded as income separately in the statement of profit or loss. cleaning, minor repairs and grounds maintenance) is expenditure that should be expensed. (f) Any increase in the carrying value of the asset resulting from revaluation will be recognized in other comprehensive income and will be accumulated in a separate column of the statement of changes in equity. An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. endobj An asset will be recognized as property, plant and equipment if it meets: (a) The definition of property, plant & equipment and (j) The entity should disclose the date of revaluation, involvement of the expert and the revaluation surplus in respect of the assets which are revalued in the current period. This is the final article in the series of three which consider the accounting for property, plant and equipment by applying IAS 16, Property, Plant and Equipment. It was estimated that the asset had a residual value of $20,000 and a useful life of 10 years at this date. The property does not qualify as investment property in the consolidated financial statements because the property is owner-occupied from the groups perspective. Recognition Principle. (a) The depreciation method opted by the entity should be in accordance with the pattern of economic benefits which are to be consumed by the entity over its useful life. 1121 0 obj This will enable the carrying amount of the asset to be known at the revaluation date, at which point the revaluation can be accounted for. AB Ltd. exchanged a land with a carrying value of $15 million and fair value of $ 20 million, for an imported plant. The objective of this paper is to describe the accounting treatment for property, plant and equipment, in according with the IAS 16, including: timing of the recognition of assets, determination . Under the old IAS 17 Leases, entities were able to classify a significant number of liabilities as operating leases and as a result keep both the assets and liability off balance sheet . IAS 16 qualify for recognition as assets because they enable an entity to derive future economic benefits from related assets in excess of what could be derived had those items not been acquired. However, if any costs do meet the recognition criteria noted above, then they should be capitalised as part of PPE. LsTMe)ZaK@@@QcB$967] A$OSHTM8\Vv+ !ki,0FuFe!`=P}+qUb`fCpn/ <>stream Our course is led by industry experts who have years of experience in the field, providing you with the most up-to-date and relevant information. For example, each branch of a retail chain will generally be . Elements of the cost of an item of PPE include: EXAMPLE 1 Definition 1. The upgrade work took a total of two days where new components were added to the machine. [IAS 16.55]. endobj 3. They are as follows: In the scope of IAS 40. The entity cannot recognize an investment property because this entity does not control the asset, but rather the right to use it. EXAMPLE 2 IAS 40 provides examples of investment property which are in the scope and outside the scope of the standard. An entity will de-recognize the asset from statement of financial position when: It is amount that is expected to be received to sell an asset or required to be paid to transfer a liability, in an orderly transaction between market participants at the date of measurement (IFRS 13). Dep. should the managment capitalized this cost? The International accounting standards 16 pdf is available to download. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). This will then become assumed knowledge for the SBR exam. EXAMPLE 12 reconciliation of the carrying amount at the beginning and the end of the period, showing: acquisitions through business combinations, net foreign exchange differences on translation, restrictions on title and items pledged as security for liabilities, expenditures to construct property, plant, and equipment during the period, contractual commitments to acquire property, plant, and equipment. This can be found by comparing the difference between: When the disposal proceeds are greater than the carrying amount there is a gain on disposal and when the disposal proceeds are less than the carrying amount there is a loss on disposal. 7 RU44BmN;=c5NXV3~4'mqo.bMo :8TA.pwT=A$Os8! V;O_G%VL6cf[{6l1j-wx?7ZE;Mrf:muP7z,-hU;szqiTPj6 Property, Plant & Equipment Dr Accumulated depreciation [eliminate any accumulated depreciation] Costs such as these should be charged to the statement of profit or loss in the period that they are incurred. The plant is expected to have a useful life of 20 years. Calculate the revaluation gain and prepare the journal entry to account for the revaluation. The entity will apply the initial recognition rule to the following items as follows: - Normally these are treated as inventory and their cost will be charged to the statement of profit or loss as expense when these are consumed by the entity. Continued use of this website indicates you have read and understood our, IAS 40 -Investment Property (detailed review), $4 Billion Accounting Scandal Puts More Scrutiny on PwCs Auditing Record, Ernst & Young Auditors Caught Cheating on Ethics Exam, KPMG Replaces EY as the Insurance Giants New External Auditor. How the plant will be recognized in the financial statements of the AB Ltd.? For this reason, the company expects the asset to appreciate in the long term and thus obtain a profit. Proposed Solution: As per IAS 16, PPE should be measured at cost at time of recognition of the same in books of accounts. The gain or loss on disposal is the, The International accounting standards 16 pdf is available to download. 1118 0 obj 1122 0 obj [IAS 16.65], An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. Calculate the amount to be included as PPE in respect of the new store and describe the impact that the above information would have on the statement of profit or loss (if any) for the year ended 31 March 20X2. u3>= for example, the introduction of three components into . The expected life of the new engine is 50,000 hours and in the year ended 31 December 2009 the aircraft had used its engines for 5,000 hours. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 9.). If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. International Financial Reporting Standards, IAS 1 Presentation of Financial Statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10 Events After the Reporting Period, IAS 15 Information Reflecting the Effects of Changing Prices (Withdrawn), IAS 19 Employee Benefits (1998) (superseded), IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 22 Business Combinations (Superseded), IAS 26 Accounting and Reporting by Retirement Benefit Plans, IAS 27 Separate Financial Statements (2011), IAS 27 Consolidated and Separate Financial Statements (2008), IAS 28 Investments in Associates and Joint Ventures (2011), IAS 28 Investments in Associates (2003), IAS 29 Financial Reporting in Hyperinflationary Economies, IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions, IAS 32 Financial Instruments: Presentation, IAS 35 Discontinuing Operations (Superseded), IAS 37 Provisions, Contingent Liabilities and Contingent Assets, IAS 39 Financial Instruments: Recognition and Measurement, (revised as part of the 'Comparability of Financial Statements' project), Property, Plant and Equipment Proceeds before Intended Use (Amendments to IAS 16), EFRAG discussion paper on variable consideration, European Union formally adopts May 2020 amendments, Educational material on applying IFRSs to climate-related matters, IASB publishes proposed IFRS Taxonomy update, IASB issues amendments to IAS 16 regarding proceeds before intended use, We comment on the IASB's proposed amendments to IAS 16, EFRAG endorsement status report 2 July 2021, EFRAG endorsement status report 23 October 2020, EFRAG endorsement status report 3 June 2020, IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, IFRIC 12 Service Concession Arrangements, IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, SIC-6 Costs of Modifying Existing Software, SIC-14 Property, Plant and Equipment Compensation for the Impairment or Loss of Items, IAS 16 Stripping costs in the production phase of a mine, International Valuation Standards Council (IVSC), Operative for financial statements covering periods beginning on or after 1 January 1983, Operative for financial statements covering periods beginning on or after 1 January 1995, Operative for annual financial statements covering periods beginning on or after 1 July 1999, Effective for annual periods beginning on or after 1 January 2005, Effective for annual periods beginning on or after 1 January 2009, Effective for annual periods beginning on or after 1 January 2013, Effective for annual periods beginning on or after 1 July 2014, Effective for annual periods beginning on or after 1 January 2016, Effective for annual periods beginning on or after 1 January 2022, assets classified as held for sale in accordance with, biological assets related to agricultural activity accounted for under, exploration and evaluation assets recognised in accordance with. the cost of the asset can be measured reliably. Copyright 2023 StudeerSnel B.V., Keizersgracht 424, 1016 GC Amsterdam, KVK: 56829787, BTW: NL852321363B01, ________________________________________________, _________________________________________________________________________________, Calculate depreciation expenses for 20 year, Principles & Practice of Physics (Eric Mazur; Daryl Pedigo; Peter A. Dourmashkin; Ronald J. Bieniek), The Law of Contract in South Africa (Dale Hutchinson and Others), SILKE: South African Income Tax (M Stiglingh, AD Koekemoer, L van Heerden, JS Wilcocks, RD de Swart, P van der Zwan), Strategic Management (Lynette Louw; Peet Venter), Applied Business Statistics (Trevor Wegner), Law of Persons and the Family (Amanda Barratt), Fundamentals of Business Management (McGraw Hill), Introduction to Business Management (Gawie S. Du Toit; Barney Erasmus; Johan Wilhelm Strydom), Civil Procedure: A Practical Guide (Stephen Pete), Head First Design Patterns (Elisabeth Freeman), Discovering Psychology (Cacioppo John T.; Freberg Laura), IAS 40 Suggested solutions - Investment Property, University of the Witwatersrand, Johannesburg, Teaching Intermediate Social Science (TISS5111), The Geography of Services Provision (GGH 2602), Orientation to teaching Economic and management Sciences (OTE2601), Mathematics for Intermediate Phase Teachers iii (MIP2601), Communication Dynamics in African Languages 2601 (AFL2601), Law of Payment and Negotiable Instruments (NEG321), Economics For Education: Introduction To Micro-Economics | Ekonomie Vir Onderwys: Inleiding Tot Mikro-Ekonomie (ECOE112), Law of Succession and Administration of Estates (LPS321E), Mathematics for Natural Sciences (MATH150), Alternative Dispute Resolution 431 (ADR431), Collective Bargaining and Collective Labour Law 503 (JMLV503). 2 D1{?A4uDMX":Br|XgF`4&_pt(F1l ^d/ Gcwj`\ not reflected in period end financial statements). [IAS 16.24], 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. h&{kb! Agriculture (IAS 41) Earnings per share (IAS 33) Business combinations (IFRS 3) Employee benefits (IAS 19) Business combinations under common control, transfers of investments within groups and capital re-organisations ; Equity accounting (IAS 28) Cash flow statements (IAS 7) Events after the reporting period and financial commitments (IAS 10) The subsidiary uses the building to sell inventory. The revaluation model (carry an asset at its fair value at the revaluation date less subsequent accumulated depreciation and subsequent impairment losses). Yucca agreed to purchase the upgrade package as the new components would lead to a reduction in production time per unit of 15%. Property, plant and equipment may be requiring the replacement of some component parts during the useful life (such as the spare parts of a plant or walls of a building). In this example, entity B must recognize a right-of-use asset as a consequence for the building leased from entity A. We want to introduce you to our IFRS course, which has a new methodology based on answers and questions using videos and training tests. [IAS 16.39], A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. The cost of the asset held by the lessee under finance lease will be determined in accordance with IAS 17. However, IAS 16 is applicable to the property, plant & equipments, which are used to maintain or develop the biological assets under IAS 4 and mineral rights and reserves such as oil and gas and other non-regenerative resources which are covered under IFRS 6. (See 'Related links' for the solution to Example 7.). This is why the definition of investment property of paragraph 5 of IAS 40, the standard refers to a right-of-use asset. In January of year 1, an entity acquires land worth 30,000. (280 0 / 50,000 hrs) 5,000 hrs. Required: All the work on the aircraft can be assumed to have been completed on 1 January 2009. Required: In this article, I outline the common practice in South Africa, what IAS 16 (AC 123) requires and the implication for preparers. Practical example 1 - changes in accounting policies. [IAS 16.51], The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. An investment property is also an asset held for capital gains. <>]>>/Pages 1114 0 R/Type/Catalog>> A company purchased a building on 1 April 20X1 for $100,000 at which point it was considered to have a useful life of 40 years. - The cost of the asset is reliably measurable. Required What is the carrying amount of the right-of-use asset and the lease liability at the end of year 4? (a) Prepare any necessary journal entries to account for this building during the year ended 31 March 20X2. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. These adjustments are indicated below. Say Lease expense is 25,000 per month or 3lacs a year . - The requirements of this standard are applicable for the accounting treatment of property, plant and equipment. Required :($RB=ha!$JEK2ST|AV}?,Z-|))cI=c660ebY)D!rdTu/n*rMbQ jpD|o|k1+raTa[b5c10+F$&1rZbpTd{b. However first, it will reverse any loss related to the asset up to the extent it is recognized in the previous years. This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. (d) A statement reconciling the carrying value at the start of the period to the carrying value at reporting date which includes: (e) Any expense on the asset during the year which was capitalized as part of the carrying amount of the asset. The cost of rectifying this error of $12,000 is included in the above figure of $28,000. However, if an entity indentifies that it will enhance the economic benefits of related asset then its cost will be capitalized as part of property, plant & equipment. If either changes significantly, the change should be accounted for over the useful life remaining. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. <>stream If an asset is purchased on extended credit period or on deferred installment basis, then the cost of such asset will be its Cash Price Equivalent any excess paid over the cash price will be treated as Interest expense which will be recognized over the period of credit. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. IAS 19 (2011) - Employee Benefits . [IAS 16.62A], The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. It will be accounted for as change in accounting estimate and it will have Prospective Application in accordance with IAS 8. Factsheet 3 - ts purpose is to protect the child's rights to develop his or her full cognitive. If you want to know more, see our detailed publications on lease accounting available at home.kpmg/ifrs16. (b) the cost of the item can be measured reliably. endstream There are a series of accounting adjustments that must be undertaken when revaluing a non-current asset. IAS 16 A436IASCF Measurement at recognition: asset dismantlement, removal and restoration costs IN7 The cost of an item of property, plant and equipment includes the costs of its dismantlement, removal or restoration, the obligation for which an entity incurs as a consequence of installing the item. If either changes significantly, the change should be accounted for over the useful life remaining. Accounting for a revaluation DrNon-current asset cost [difference between valuation and original cost/valuation] Visit our Leases hot topics page for more insight on lease accounting under IFRS Standards derecognition. More information about IFRS COURSE (CLICK), An investment property is also an asset held for, However, if an entity holds properties for sale in the short term, In this way, if the entity subsequently decides that the asset is connected to housing construction, it must reclassify this asset to an, However, from the perspective of the entity that owns it, the property is, Therefore, the lessor treats the property as investment property in its, Thus, the building is not classified as an investment property item in the parent companys, Such financial statements present the controlling entity and its, Therefore, the consolidated group accounts for the building as an item of, On the other hand, in the parents separate financial statements, the building is classified as an, In other words, it is a property held for, In this example, entity B must recognize a, This is why the definition of investment property of paragraph 5 of, In that case, it must use the cost model of, How the impairment of assets held for sale is calculated. Most subsequent expenditure is likely to be related to accessing the economic benefits already available (eg repairs and maintenance). 1123 0 obj IAS 16 "PROPERTY, PLANT AND EQUIPMENT" PRACTICE QUESTONS: QUESTION ONE: What are the purposes of providing for depreciation? On 1 April 20X3 the company revalued the building to its fair value of $120,000. It does not include assets that are held for sale. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition in paragraph 5 of ias 40. If the revaluation takes place at the start of the year, then the revaluation should be accounted for immediately and depreciation should be charged in accordance with the rule above. (b) Each component of property, plant and equipment having substantial cost will be depreciated separately. In such circumstances an entity must . Paragraph 17 of IAS 16 specifies examples of directly attributable costs. A company purchased a building on 1 April 20X1 for $100,000. (f) Any compensation received from the third parties in respect of any impairment related to the asset. (Segmenting). This group listed and narrates the policy adopted and also indicate the life span of all PPE to indicate how they have been accounted for base on the IAS 16. The separate components of the property are made up as follows: Required 900 but BC1-BC4) endobj What will be the cost of the acquired plant in the financial statements of the AB Ltd.? The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. IAS 16 principles 5. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. Notes and summary about Psychopathology (third year level). Plus, we offer a money-back guarantee, meaning that if you are not satisfied with the course, we will refund your money. It is the value at which asset will be presented in the statement of financial position and it is determined as Cost less Accumulated Depreciation and Accumulated Impairment Loss. On this date the property was revalued and was deemed to have a fair value of $95,000. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X6: (See 'Related links' for the solution to Example 10.). (b) Their economic benefits are for more than one accounting period. EXAMPLE 7 However, the entity uses the cost model for the subsequent measurement of this asset and uses IAS 16 instead of IAS 40. Any additions and disposals during the year, Any assets acquired as part of a business combination, Any impairment loss recognized in the current year, Assets classified as held for sale under IFRS 5. Each word should be on a separate line. Moreover, click here to, Externally oriented Cost Management Techniques. whether an independent valuer was involved, for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model. IAS16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment.
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