IAS 16
PROPERTY PLANT AND
EQUIPMENT
Slides Prepared & presented
By
Nelson Pande
LECTURE OBJECTIVES
1. Definition of key terms used under IAS 16
2. Recognition and Measurement
3. Calculating cost including Future costs
4. Cost and the Revaluation Model
5. Other comprehensive income
6. Transfers to realised profits
7. Exam type questions
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Property, Plant and Equipment(PPE)
Tangible assets held by the business for use in the
production, supply of goods or services,
for rental to others, or
for administrative purposes; and
are expected to be used during more than one
period.
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Recognition
It is probable that future economic benefits will
flow to the entity and
the cost of the asset can be measured reliably.
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MEASUREMENT
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INITIAL SUBSEQUENT
MEASUREMENT MEASUREMENT
Choose
between the
Initially
Cost model
measure PPE
and the
at cost.
Revaluation
model
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Cost comprises:
1. Purchase price (net of trade discounts and
rebates)
2. Import duties
3. Carriage inwards on the PPE
4. Professional fees
5. Site preparation
6. Assembly and testing fees
7. Removal and restoration costs
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EXAMPLE 1
During the year ended 31 March 20X8, Family
purchased a computer for use in his business. The
invoice for the computer shows the following:
Computer $1,780
Additional memory $190
Delivery $20
Installation $40
Maintenance (1 year) $50
What is the cost of the Computer.
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Example 2
On 1 January 2009 Apple acquired a piece of equipment. Details
of the invoice are given below:
List Price $120,000, the cost of preparing the site for easy
installation $1,317. Installation Fees were $28,000, however
Apple is required by law to restore the site back to its original
state at the end of the asset’s life (4 years). it is estimated that
site restoration costs will be $1000 (assume the cost of capital is
10%)
Required
1. Calculate the cost of the equipment
2. Calculate the depreciation charge for the year ended 31 December
2009
3. Show the subsequent treatment of the provision for site restoration
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Future costs are measured at present value
If the present value of the future cost is already
given no need to discount again
Unwinding of interest is a finance cost in the SOPL
Present value plus unwinding of interest to date is
a non current liability in the SOFP
PRACTICE
QUESTION
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James acquired a gold mine on 1 April 20X8 at a cost
of $8 million. As a consequence of constructing the
mine, Jack is obligated to rectify the damage caused to
the environment. This will cost James $2 million. This
work will be done in 5 years, at the end of the mine’s
useful life. The company's cost of capital is 10%
You are required to Calculate
a) The cost of the mine
b) The depreciation Charge for the first year
c) The finance cost or unwinding of interest for the first
year
d) The provision for rectification costs liability for year
ended 31 March 20X9 to be recorded in the SOFP
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SUBSEQUENT
MEASUREMENT
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REVALUATION
COST MODEL
MODEL
Carried at a
Carried at
revalued
historical
amount less
cost less
subsequent
accumulated
accumulated
depreciation
depreciation
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Upward Downward
Revaluation Revaluation
Revaluation
of Assets
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Upward Revaluation
If an asset’s carrying amount is increased as a result
of a revaluation, the increase shall be recognised in
Other Comprehensive Income (OCI) section of the
SOPL&OCI and
included in the Equity section of the Statement of
Financial Position (SOFP) under the heading of a
revaluation surplus
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Downward Revaluation
A revaluation loss shall be recognised in profit or
loss. However, the loss shall be recognised in OCI to
the extent of any credit balance existing in the
revaluation surplus in respect of that asset.
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Determine
new value
(fair value)
Depreciating
Depreciate
a revalued
new value asset Determine
over remaining
remaining life
life
Example 2
A company revalues its buildings and decides to incorporate the
revaluation into the financial statements. The following info is
available at 31 December 2007:
$000
Buildings at cost 2,000
Accumulated depreciation (400)
Net book value 1,600
On the 1st of January 2008 the building is revalued at $4million. Its
economic life is 40 years as at that date. Before the revaluation the
building had been depreciated over its life of 50 years
Show the relevant extracts from the financial statements as at 31
December 2008.
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Annual reserves transfers
IAS 16 permits an annual transfer to be made from
the revaluation surplus to retained earnings to offset
the additional depreciation charged as a result of the
revaluation.
Debit Revaluation Surplus
Credit Retained Profit
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Example 3 transfers
A company revalues its buildings and decides to incorporate the
revaluation into the financial statements. The following info is
available at 31 December 2007:
$000
Buildings at cost 2,000
Accumulated depreciation (400)
Net book value 1,600
On the 1st of January 2008 the building is revalued at $4million. Its
economic life is 40 years as at that date. Before the revaluation the
building had been depreciated over its life of 50 years. It is
company policy to make transfers to realized profits resulting from
increase in Depreciation charges.
Show the relevant extracts from the financial statements as at 31
December 2008.
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Practice Question 1
A company revalues its buildings and decides to incoporate the
revaluation into the financial statements. The following info is
available at 31 December 2007:
$000
Buildings at cost 3,600
Accumulated depreciation -1,440
Net book value 2,160
Depreciation has been provided at 2% p.a on a straight line basis. The
building is revalued at 1 January 2008 at $$4 500 000. There is no
change in its remaining estimated useful life. Transfers from
revaluation reserve to retained profit are made for the amount of
revaluation surplus realised each period.
Show the relevant extracts from the financial statements as at 31
December 2008.
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Before depreciating a revalued asset
identify the new value and calculate the
remaining life
50 years useful life is the same as 2%
depreciation per annum straight line
method
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Disposal of a revalued asset
Profit or loss on disposal of a revalued asset is the
difference between sales proceeds and the carrying
amount on the date of disposal.
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Example
A company revalues its buildings and decides to incorporate the
revaluation into the financial statements. The following info is
available at 31 December 2007:
$000
Buildings at cost 2,000
Accumulated depreciation (400)
Net book value 1,600
On the 1st of January 2008 the building is revalued at $4 million. Its
economic life is 40 years as at that date. Before the revaluation the
building had been depreciated over its life of 50 years. On 31
December 2008 the building was sold for $5 million.
Calculate the Profit or loss on disposal of the building and show the
journal entry to account for the revaluation surplus balance after
disposal.
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Any revaluation surplus relating to the sold
asset becomes realised and should be
transferred to retained profits
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Examination Type
27
Questions
Which of the following items should be capitalised within the
initial carrying amount of an item of plant?
(i) Cost of transporting the plant to the factory
(ii) Cost of installing a new power supply required to
operate the plant
(iii) A deduction to reflect the estimated realisable value
(iv) Cost of a three-year maintenance agreement
(v) Cost of a three-week training course for staff to operate
the plant
A (i) and (ii) only
B (i), (ii) and (iii)
C (ii), (iii) and (iv)
D (i), (iv) and (v)
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An item of plant costing $1,500,000 was purchased on 1 January 20X1
and is being depreciated over its useful economic life of 10 years.
Residual value is taken as nil. On 1 January 20X2 the asset was valued
at $1,620,000. There was no change to its useful economic life. On 31
December 20X3 the asset was sold for $1,800,000. The company
prepares financial statements at 31 December each year.
What is the gain on disposal reported for the year to 31 December
20X3?
A $180 000
B $300 000
C $270 000
D $540 000
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Jack acquired a gold mine on 1 April 20X8 at a cost of
$8 million. As a consequence of constructing the mine,
Jack is obligated to rectify the damage caused to the
environment. This has a present value of $800,000.
This work will be done in 5 years, at the end of the
mine’s useful life. The company's cost of capital is 10%
What total amount should be accounted for in Jack's
Statement of Profit or Loss, in respect of the above for
the year ended 31 March 20X9?
A $1,760,000
B $1,749,020
C $1,699,347
D $1,840,000
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Foster has built a new factory incurring the following costs:
$'000
Land 1,200
Materials 2,400
Labour 3,000
Architect's fees 25
Surveyor's fees 15
Site overheads 300
Apportioned administrative overheads 150
Testing of fire alarms 10
Business rates for first year 12
7,112
What will be the total amount capitalised in respect of the factory?
A $6,112,000
B $6,950,000
C $7,112,000
D $7,100,000
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Now do a Constructed
Response Question
“SHRUB”
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End of Session
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