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chapter 5

Property, plant and

equipmentTopic list

1 HKAS 16 Property, Plant and Equipment

1.1 Scope1.2 Definitions1.3 Recognition of non-current assets1.4 Measurement1.5 Depreciation1.6 Revaluations1.7 Impairment1.8 Retirements and disposals1.9 Disclosure

Learning focus

Non-current assets form a large part of many entities' statements of financial position.Accounting for them is not necessarily straightforward and you may need to think critically anddeal with controversial issues. This chapter deals with property, plant and equipment; how toaccount for transactions involving them, and the principles and methods of depreciation.

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Learning outcomes

In this chapter you will cover the following learning outcomes:

Competencylevel

Account for transactions in accordance with Hong Kong Financial

Reporting Standards

3.08 Property, plant and equipment 3

3.08.01 Identify the non-current assets which fall within or outside the scopeof HKAS 16

3.08.02 State and apply the recognition rules in respect of property, plantand equipment

3.08.03 Determine the initial measurement of property, plant andequipment, including assets acquired by exchange or transfer

3.08.04 Determine the accounting treatment of subsequent expenditure on

property, plant and equipment

3.08.05 Determine the available methods to measure property, plant andequipment subsequent to initial recognition

3.08.06 Account for the revaluation of property, plant and equipment

3.08.07 Define 'useful life' and allocate an appropriate useful life for anasset in a straightforward scenario

3.08.08 Explain the different methods of depreciation: straight line anddiminishing balance, and calculate the depreciation amount inrespect of different types of asset

3.08.09 Account for the disposal of property, plant and equipment

3.08.10 Disclose relevant information relating to property, plant andequipment in the financial statements

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1 HKAS 16 Property, Plant and Equipment

Topic highlights

HKAS 16 covers all aspects of accounting for property, plant and equipment. This represents the

bulk of items which are 'tangible' non-current assets.

1.1 Scope

HKAS 16 should be followed when accounting for property, plant and equipment unless anotheraccounting standard requires a different treatment.

HKAS 16 does not apply to the following:

(a) Property, plant and equipment classified as held for sale in accordance with HKFRS 5(b) Biological assets related to agricultural activity(c) The recognition and measurement of exploration and evaluation assets(d) Mineral rights and mineral reserves, such as oil, gas and other non-regenerative resources.

However, the standard applies to property, plant and equipment used to develop the assetsdescribed in (b) and (d).

1.2 Definitions

The standard gives a large number of definitions.

Key terms

Property, plant and equipment are tangible items that are:

x held for use in the production or supply of goods or services, for rental to others, or foradministrative purposes

x expected to be used during more than one period

Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given toacquire an asset at the time of its acquisition or construction.

Residual valueis the estimated amount that an entity would currently obtain from disposal of theasset, after deducting the estimated costs of disposal, if the asset were already of the age and inthe condition expected at the end of its useful life.

Entity specific valueis the present value of the cash flows an entity expects to arise from the

continuing use of an asset and from its disposal at the end of its useful life, or expects to incurwhen settling a liability.

Fair valueisthe price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date.

Carrying amountis the amount at which an asset is recognised after deducting any accumulateddepreciation and accumulated impairment losses.

An impairment lossis the amount by which the carrying amount of an asset exceeds itsrecoverable amount.

Recoverable amountis the higher of an asset's fair value less costs to sell and its value in use.(HKAS 16)

HKAS 16.2,3

HKAS 16.6

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1.3 Recognition of non-current assets

An item of property, plant and equipment should be recognised in the statement of financialposition as an asset when:

(a) it is probable that future economic benefits associated with the asset will flow to the entity.(b) the cost of the asset to the entity can be measured reliably.

1.3.1 First criterion: Future economic benefits

The degree of certainty attached to the flow of future economic benefits must be assessed. Thisshould be based on the evidence available at the date of initial recognition (usually the date ofpurchase). The entity should thus be assured that it will receive the rewards attached to the assetand it will incur the associated risks, which will only generally be the case when the rewards andrisks have actually passed to the entity. Until then, the asset should not be recognised.

1.3.2 Second criterion: Cost measured reliably

It is generally easy to measure the cost of an asset as the transfer amount on purchase, ie whatwas paid for it. Self-constructed assets can also be measured easily by adding together thepurchase price of all the constituent parts (labour, materials and so on) paid to external parties.

1.3.3 Application to specific types of asset

Small separate assets

Smaller items, such as tools, dies and moulds, are sometimes classified as consumables andwritten off as an expense. Where these are classified as property, plant and equipment, it is usualto aggregate similar items together and treat them as one.

Major spare parts and stand-by equipment

Major components or spare parts should be recognised as property, plant and equipment whenthey are expected to be used over more than one period, or where they can only be used in

conjunction with an item of property, plant and equipment.

Safety and environmental equipment

When items of safety and environmental equipment are acquired they will qualify for recognitionwhere they enable the entity to obtain future economic benefits from related assets in excess ofthose it would obtain otherwise. The recognition will only be to the extent that the carrying amountof the asset and related assets does not exceed the total recoverable amount of these assets.

Complex assets

For very large and specialised items, an apparently single asset should be broken down into itscomposite parts. This occurs where the different parts have different useful lives and differentdepreciation rates are applied to each part, eg an aircraft, where the body and engines are

separated as they have different useful lives. Expenditure incurred in replacing or renewing acomponent of an item of property, plant and equipment must be recognised in the carrying amountof the item (and then depreciated to the next replacement date).

Inspections and overhauls

Certain assets require periodic overhauls or inspections in order to operate. The cost of theseoverhauls/inspections should be included in the carrying amount of the relevant asset anddepreciated as a separate element of the asset to the date of the next overhaul/inspection.

1.3.4 Subsequent expenditure

Subsequent expenditure on a non-current asset may be capitalised where the expenditureenhances the economic benefits of the asset beyond its current standard or performance. This may

be achieved through extension of the asset's life, improved quality of output or an increased

HKAS 16.7

HKAS

16.8,9,11,13,14

HKAS 16.12

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operating capacity. Day to day servicing costs, repairs and maintenance do not meet this criteriaand therefore must be expensed to profit or loss.

1.4 Measurement

1.4.1 Initial measurement

Once an item of property, plant and equipment qualifies for recognition as an asset, it will initiallybe measured at cost.

The standard lists the components of the cost of an item of property, plant and equipment.

(a) Purchase price, less any trade discount or rebate

(b) Import duties and non-refundable purchase taxes

(c) Directly attributable costs of bringing the asset to working condition for its intended use,for example:

(i) The cost of site preparation(ii) Initial delivery and handling costs

(iii) Installation costs(iv) Testing(v) Professional fees (architects, engineers)

(d) Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring thesite on which it is located (HKAS 37Provisions, Contingent Liabilities and Contingent Assets).

(e) Any borrowing costs incurred related to building the asset may be capitalised within theassets too (HKAS 23Borrowing Costs).

Additional guidance is provided on directly attributable costs included in the cost of an item ofproperty, plant and equipment.

(a) These costs bring the asset to the location and working conditions necessary for it to be

capable of operating in the manner intended by management, including those costs to testwhether the asset is functioning properly.

(b) They are determined after deducting the net proceeds from selling any items produced whenbringing the asset to its location and condition.

The standard also states that income and related expenses of operations that are incidental to theconstruction or development of an item of property, plant and equipment should be recognised inprofit or loss. These include:

x costs of opening a new facility

x costs of introducing a new product or service

x costs of conducting business in a new location or with a new class of customer

x administration and other general overhead costs

In addition, the capitalisation of costs must cease when an asset is in the location and conditionnecessary for it to be capable of normal operation. Therefore, the following may not be capitalised:

x Costs incurred when an item is capable of normal use however is operating at less than fullcapacity

x Initial operating losses

x The costs of relocating or reorganising the entity's operations.

All of these will be recognised as an expense rather than an asset.

In the case ofself-constructed assets, the same principles are applied as for acquired assets.If the entity makes similar assets during the normal course of business for sale externally, then the

cost of the asset will be the cost of its production underHKAS 2Inventories. This also means that

HKAS 16.15-

22

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abnormal costs (wasted material, labour or other resources) are excluded from the cost of the asset.An example of a self-constructed asset is when a building company builds its own head office.

1.4.2 Exchanges of assets

HKAS 16 specifies that exchange of items of property, plant and equipment, regardless of whether

the assets are similar, are measured at fair value, unless the exchange transaction lackscommercial substance or the fair value of neither of the assets exchanged can be measuredreliably. If the acquired item is not measured at fair value, its cost is measured at the carryingamount of the asset given up.

Example: Exchange of assets

A ship owner has properties with a carrying value of $10m. He is going to exchange his propertiesfor a ship which has a market value of $20m by paying an additional sum of cash of $5m.

Solution

The ship owner shall capitalise the ship at a value of $20m. The properties are deemed to be

disposed of at $15m ($20m $5m), thus a gain of $5m ($15m $10m) is recognised on disposalof the properties.

Expressed as journal entries, we can see:$m $m

DEBIT Property, plant and equipment (Ship) 20

CREDIT Gain on disposal 5

Property, plant and equipment (Properties) 10

Cash 5

1.4.3 Measurement subsequent to initial recognitionHKAS 16 offers two possible treatments here, requiring you to choose between keeping an assetrecorded at cost or revaluing it to fair value.

(a) Cost model.Carry the asset at its cost less any accumulated depreciation and anyaccumulated impairment losses.

(b) Revaluation model.Carry the asset at a revalued amount, being its fair value at the date ofthe revaluation less any subsequent accumulated depreciation and subsequent accumulatedimpairment losses. HKAS 16 makes clear that the revaluation model is available only ifthe fair value of the item can be measured reliably.

Depreciation, revaluation and impairment are discussed in more detail in the next three sections of

the chapter.

1.5 Depreciation

Topic highlights

Where assets held by an entity have a limited useful life to that entity it is necessary to apportionthe value of an asset over its useful life.

HKAS 16.24

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With the exception of land held on freehold or very long leasehold, every non-current asseteventually wears out over time. Machines, cars and other vehicles, fixtures and fittings, and evenbuildings do not last for ever. When a business acquires a non-current asset, it will have some ideaabout how long its useful life will be, and it might decide what to do with it.

(a) Keep on using the non-current asset until it becomes completely worn out, useless, andworthless.

(b) Sell offthe non-current asset at the end of its useful life, either by selling it as asecond-hand item or as scrap.

Since a non-current asset has a cost, and a limited useful life, and its value eventually declines, itfollows that a charge should be made in profit or loss to reflect the use that is made of the asset bythe business. This charge is called depreciation.

Depreciation must be charged even where an asset appears to be increasing in value over time.Other than assets classified as held for sale, to which HKFRS 5 applies, the only type of asset forwhich non-depreciation is permissible is freehold land.

Key terms

Depreciationis the systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable assetsare assets which:

x areexpected to be used during more than one accounting period

x have a limited useful life

x are held by an entity for use in the production or supply of goods and services, for rental toothers, or for administrative purposes.

Useful lifeis one of two things:

x The period over which an asset is expected to be available for use by an entity.

x The number of production or similar units expected to be obtained from the asset by an entity.

Depreciable amountis the cost of an asset, or other amount substituted for cost, less its residualvalue.

1.5.1 The mechanics of depreciation

The standard states the following:

(a) The depreciable amount of an item of property, plant and equipment should be allocated ona systematic basis over its useful life.

(b) The depreciation method used should reflect the pattern in which the asset's economicbenefits are consumed by the entity.

(c) The depreciation charge for each period should be recognised as an expense unless it isincluded in the carrying amount of another asset.

Land and buildings are dealt with separately even when they are acquired together because landuse right normally is considered as a lease and accounted for in accordance with the requirementsunderHKAS 17. Buildings do have a limited life and must be depreciated. Any increase in thevalue of land on which a building is standing will have no impact on the determination of thebuilding's useful life.

Depreciation is usually treated as an expense, but not where it is absorbed by the entity in theprocess of producing other assets. For example, depreciation of plant and machinery can beincurred in the production of goods for sale (inventory items). In such circumstances, the

depreciation is included in the cost of the new assets produced.

HKAS 16.6

HKAS

16.48,50,55,

58,60

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Depreciation should commence when an asset is available for use. In other words it is in thelocation and condition necessary for ordinary use.

1.5.2 Useful life

The useful life of a depreciable asset is estimated based on the following factors:

x Expected physical wear and tearx Obsolescence

x Legal or otherlimits on the use of the assets

The judgment on useful life is based on the entity's past experience with similar assets or classesof assets. The task of estimating the useful life will be much more onerous when an entirely newtype of asset is acquired (ie through technological advancement or through use in producing abrand new product or service).

It is indicated in the standard that the useful life of an asset might be shorter than its physical life.The physicalwear and tearthe asset is likely to endure is one of the key factors that we need tolook at. It is affected by circumstances such as the entity's repair and maintenance programme andnumber of shifts for which the asset will be used, and so on. Other factors such as obsolescence

(due to technological advance, improvements in production, reduction in demand for the product orservice produced by the asset) and legal restrictions, for example, the length of a related lease,also play a role in determining the useful life of an asset.

1.5.3 Residual value

The residual value of an asset is likely to be immaterial in most instances. However, if theresidual value is expected to be significant, it must then be estimated at the date of acquisition or atany subsequent revaluation. The residual value should be estimated based on the current situationwith other similar assets, used in the same way, which are now at the end of their useful lives. Anyfuture cost relating to the disposal should be netted off against the gross residual value.

1.5.4 Depreciation methodsHKAS 16 requires the depreciation method used to reflect the pattern in which the asset's futureeconomic benefits are expected to be consumed by the entity. A variety of methods are availableand these include the straight line method, the diminishing balance method and the units ofproduction method.

Straight line depreciation results in a constant annual depreciation charge. This method simplyspreads the depreciable amount evenly over the useful life.

Diminishing balance depreciation results in a higher depreciation charge in the earlier years ofan asset's useful life and a lower charge in later years. It is calculated as a constant percentage ofan asset's carrying amount.

The units of production method results in a charge based on expected output. The charge is

therefore higher in periods of higher output and lower when there is a lower output.

Consistency is important. The depreciation method selected should be applied consistently fromperiod to period unless altered circumstances justify a change. When the method is changed, theeffect should be quantified and disclosed and the reason for the change should be stated. Changeof policy is not allowed simply because of the profitability situation of the entity.

HKAS

16.56,57

HKAS 16.53

HKAS

16.60,62

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Self-test question 1

A computer system cost $20,000 and is being depreciated at 10 per cent using the diminishingbalance method. How does this asset appear in the statement of financial position in the first andsecond year of ownership?

Why is the diminishing balance method more appropriate for such an asset?

(The answer is at the end of the chapter)


DSyne Co acquired an item of plant for $1.8m on 1 January 20X1. It identified that the asset hadthree major components as follows:

Component Useful life Cost$000

1 15 years 9002 5 years 6503 10 years 250

Under the terms of the 15-year licence agreement for the use of the plant, component 1 (but notthe other components) was to be dismantled at the end of the licence period.

Dismantling costs were initially estimated at a total cost of $280,000 payable in 15 years time.DSynes discount rate appropriate to the risk specific to this liability is 7 per cent per annum.

Component 1 developed a fault on 1 January 20X2 and had to be sold for scrap for $140,000.A replacement was purchased at a cost of $910,000 on 1 January 20X2, for use until the end of thelicence period, when dismantling costs on this component estimated at $250,000 would bepayable.

At a rate of 7 per cent per annum the present value of $1 payable in 15 years time is 0.3624 and of$1 payable in 14 years time is 0.3878.

Required

Calculate

(a) the carrying amount of the machinery at 31 December 20X2(b) the profit/loss on the disposal of the faulty component(c) the carrying amount of the machinery at 31 December 20X3


1.5.5 Review of useful life and residual value

A review of the useful life and residual value of property, plant and equipment should be carried

out at least at each financial year end and the depreciation charge for the current and futureperiods should be adjusted if expectations have changed significantly from previous estimates.Changes to the useful life or residual value are treated as changes in accounting estimates and areaccounted for prospectively as adjustments to future depreciation.

Example: Review of useful life

A machine costs $100,000 and has a useful life of 10 years since its acquisition in 20X7. At the endof the second year of use, the asset is assessed to have a remaining useful life of five years. Thecompany adopts the straight line depreciation method.

What will be the depreciation charge for 20X9?

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Solution$

Original cost 100,000Depreciation 20X7 20X8 (100,000 u

2/10) (20,000)

Carrying amount at 1 January 20X9 80,000

Remaining life = 5 years

Depreciation charge years 20X9 20Y35

80,000= $16,000

1.5.6 Review of depreciation method

The depreciation method should also be reviewed at least at each financial year end and, ifthere has been a significant change in the expected pattern of economic benefits from thoseassets, the method should be changed to suit this changed pattern. When such a change indepreciation method takes place the change should be accounted for as a change in accountingestimate and the depreciation charge for the current and future periods should be adjusted.

Example: Review of depreciation method

Using the same data as above, assume that at the end of the second year the company changesfrom the straight line method to the diminishing balance method of depreciation, at a rate of 25 percent per annum.

The carrying amount of $80,000 is therefore written off from 20X9 onwards using the diminishingbalance method over its remaining useful life.

The depreciation charge for 20X9 is therefore $20,000 (25% u $80,000).

1.6 RevaluationsWhere an entity chooses to apply the revaluation model to property, plant and equipment, therevalued assets are carried at a revalued amount less subsequent depreciation and impairmentlosses. Revalued amount is the fair value of the asset at the date of revaluation.

1.6.1 Fair value

HKFRS 13, issued in May 2011, amended the definition of fair value contained within HKAS 16 tothe 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.

HKFRS 13 also deleted the HKAS 16 guidance on establishing fair value and replaced this with arequirement to instead refer to the requirements of HKFRS 13 Fair Value Measurement.

This standard requires that the following are considered in determining fair value:

1 The asset being measured.

2 The principal market (ie that where the most activity takes place) or where there is no

principal market, the most advantageous market (ie that in which the best price could be

achieved) in which an orderly transaction would take place for the asset.

3 The highest and best use of the asset and whether it is used on a standalone basis or in

conjunction with other assets.

4 Assumptions that market participants would use when pricing the asset.

HKAS 16.61

HKAS 16.31

HKFRS 13.9-

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Having considered these factors, HKFRS 13 provides a hierarchy of inputs for arriving at fair value.It requires that level 1 inputs are used where possible:

Level 1 Quoted prices in active markets for identical assets that the entity can access at themeasurement date.

Level 2 Inputs other than quoted prices that are directly or indirectly observable for the asset.

Level 3 Unobservable inputs for the asset.

1.6.2 Frequency of revaluations

Valuations must be kept up to date so that the carrying amount of a revalued asset does not differmaterially from its fair value. In some cases annual revaluation is necessary, whereas in others itmay be necessary to revalue the item only every three or five years.

1.6.3 Consistency of revaluation

When an item of property, plant and equipment is revalued, the whole class of assets to which it

belongs should be revalued.

All items within a class should be revalued simultaneously. In this way, selective revaluation ofcertain assets and disclosure of a mixture of costs and values from different dates in the financialstatements can be avoided. Entities are permitted to have revaluation on a rolling basis if therevaluations are kept up to date and the revaluation of the entire class is accomplished in a shortperiod of time.

1.6.4 Accounting for a revaluation

How should any increase in value be treated when a revaluation takes place? The debit will bethe increase in value in the statement of financial position, but what about the credit? HKAS 16requires the increase to be credited to other comprehensive income and accumulated in a

revaluation surplus (ie part of owners' equity), unless the increase is reversing a previousdecrease which was recognised as an expense. Where this is the case, the increase is recognisedas income to the extent of the previous expense; any excess is then taken to the revaluationsurplus.

A decrease in value is recognised in the same way as an impairment loss (see section 1.7 below).

Example: Revaluation

Paddington has acquired numerous buildings and accounts for these using the revaluation model.

One particular piece of land is carried in Paddingtons statement of financial position at $560,000 at1 January 20X1. At 31 December 20X1, further to a revaluation exercise, a fair value of $710,000

is identified in respect of this building.How is this revaluation accounted for assuming that

(a) the buildings have only ever risen in value

(b) further to an economic downturn, at the time of the last revaluation exercise, an impairmentof $80,000 was identified and recognised in profit.

Ignore depreciation.

HKAS 16.34

HKAS

16.36,38

HKAS

16.39,40

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Solution

(a) On 1 January 20X6 the carrying value of the property is $9m (5 u $9m y 50) = $8.1m.For the revaluation:

DEBIT Asset value $400,000CREDIT Other comprehensive income (revaluation surplus) $400,000

(b) The depreciation for the year ended 31 December 20X6 will be $8.5m y 45 = $188,889,

compared to depreciation on cost of $9m y 50 = $180,000. So each year, the extra $8,889can be treated as part of the surplus which has become realised:

DEBIT Revaluation surplus $8,889CREDIT Retained earnings $8,889

This is a movement on owners' equity only, disclosed in the statement of changes in equity.

1.7 Impairment

An impairment loss should be treated in the same way as a revaluation decrease ie thedecrease should be recognised as an expense. However, a revaluation decrease (or impairmentloss) should be charged directly against any related revaluation surplus to the extent that thedecrease does not exceed the amount held in the revaluation surplus in respect of that same asset.

A reversal of an impairment loss should be treated in the same way as a revaluation increase,ie a revaluation increase should be recognised as income to the extent that it reverses arevaluation decrease or an impairment loss of the same asset previously recognised as anexpense.

1.8 Retirements and disposals

When an asset is permanently withdrawn from use, or sold or scrapped, and no futureeconomic benefits are expected from its disposal, it should be withdrawn from the statement offinancial position.

Gains or losses are the difference between the estimated net disposal proceeds and the carryingamount of the asset. They should be recognised as income or expense in profit or loss.

1.8.1 Derecognition

An entity is required to derecognise the carrying amount of an item of property, plant orequipment that it disposes of on the date the criteria for the sale of goods in HKAS 18Revenuewould be met. This also applies to parts of an asset.

An entity cannot classify as revenue a gain it realises on the disposal of an item of property, plant

and equipment.

However, an entity that, in the course of its ordinary activities, routinely sells items of property,plant and equipment that it has held for rental to others shall transfer such assets to inventories attheir carrying amount when they cease to be rented and become held for sale. The proceeds fromthe sale of such assets shall be recognised as revenue in accordance with HKAS 18 Revenue.HKFRS 5 does not apply when assets that are held for sale in the ordinary course of business aretransferred to inventories.

Example: Derecognition

A property was purchased at a cost of $10m and has a useful life of 50 years. At the end ofYear 20, the property was revalued to $30m and its useful life remains unchanged. The property

was sold at the beginning of Year 22 for $33m.

HKAS 16.68

HKAS

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Solution

Accounting entries:

At the end ofYear 20, the following accounting entries reflect the revaluation:

$m $m

DEBIT Property ($30m (

30

/50u

$10m)) 24CREDIT Revaluation surplus 24

InYear 21, the following adjustments are to be made:$m

Depreciation based on revalued amount ($30m u1/30) 1.0Depreciation based on original cost ($10m u1/50) 0.2Depreciation increase related to revaluation surplus is regarded as realised 0.8

DEBIT Revaluation surplus 0.8CREDIT Retained profits 0.8

Being realisation of part of revaluation reserve due to additional depreciation provided on

revaluation surplus.

InYear 22, the following adjustments are to be made:$m $m

DEBIT Bank (disposal proceeds) 33Accumulated depreciation 1

CREDIT Property 30Gain on disposal (in profit or loss) 4

Being revalued property disposed of at a profit

DEBIT Revaluation reserve ($24m $0.8m) 23.2CREDIT Retained profit 23.2

Being realisation of revaluation reserve upon disposal of asset.

The following analysis shows that the distributable profits remain the same, whether the property isrevalued or not:

$mWithout revaluation of the assetCost 10.0Less: Accumulated depreciation ($0.2 u 21 years) (4.2)Carrying amount 5.8Disposal proceeds (33.0)Profit realised on disposal 27.2

$m

With revaluation of the assetGain on disposal (as above) 4.0Revaluation surplus transferred to retained profits 23.2

27.2


A business purchased two rivet making machines on 1 January 20X5 at a cost of $15,000 each.Each had an estimated life of five years and a nil residual value. The straight line method ofdepreciation is used.

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Owing to an unforeseen slump in market demand for rivets, the business decided to reduce itsoutput of rivets, and switch to making other products instead. On 31 March 20X7, one rivet makingmachine was sold (on credit) to a buyer for $8,000.

Later in the year, however, it was decided to abandon production of rivets altogether, and thesecond machine was sold on 1 December 20X7 for $2,500 cash.

Required

Prepare the machinery account, provision for depreciation of machinery account and disposal ofmachinery account for the accounting year to 31 December 20X7.


1.9 Disclosure

The standard has a long list of disclosure requirements, for each class of property, plant andequipment.

(a) Measurement bases for determining the gross carrying amount (if more than one, the grosscarrying amount for that basis in each category).

(b) Depreciation methods used.

(c) Useful lives or depreciation rates used.

(d) Gross carrying amount and accumulated depreciation (aggregated with accumulatedimpairment losses) at the beginning and end of the period.

(e) Reconciliation of the carrying amount at the beginning and end of the period showing:

(i) Additions(ii) Disposals(iii) Acquisitions through business combinations (see Chapter 28)(iv) Increases/decreases during the period from revaluations and from impairment losses(v) Impairment losses recognised in profit or loss

(vi) Impairment losses reversed in profit or loss(vii) Depreciation(viii) Net exchange differences (from translation of statements of foreign entity)(ix) Any other movements.

The financial statements should also disclose the following:

(a) Any recoverable amounts of property, plant and equipment(b) Existence and amounts ofrestrictions on title, and items pledged as security for liabilities(c) Accounting policy forthe estimated costs of restoring the site(d) Amount of expenditures on account ofitems in the course of construction(e) Amount of commitments to acquisitions

Revalued assets require further disclosures, in addition to those required by HKFRS 13 Fair Value

Measurement:

(a) Basis used to revalue the assets

(b) Effective date of the revaluation

(c) Whether an independent valuer was involved

(d) Carrying amount of each class of property, plant and equipment that would have beenincluded in the financial statements had the assets been carried at cost less accumulateddepreciation and accumulated impairment losses

(e) Revaluation surplus, indicating the movement for the period and any restrictions on thedistribution of the balance to shareholders

HKAS

16.73,74,77,

79

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The standard also encourages disclosure of additional information, which the users of financialstatements may find useful.

(a) The carrying amount of temporarily idle property, plant and equipment

(b) The gross carrying amount of any fully depreciated property, plant and equipment that is stillin use

(c) The carrying amount of property, plant and equipment retired from active use and held fordisposal

(d) The fair value of property, plant and equipment when this is materially different from thecarrying amount

The following format (with notional figures) is commonly used to disclose non-current assetsmovements:

Land and Plant andbuildings equipment Total

$ $ $Cost or valuationAt 1 January 20X8 40,000 10,000 50,000

Revaluation surplus 12,000 12,000Additions in year 4,000 4,000Disposals in year (1,000) (1,000)At 31 December 20X8 52,000 13,000 65,000

DepreciationAt 1 January 20X8 10,000 6,000 16,000Charge for year 1,000 3,000 4,000Eliminated on disposals (500) (500)At 31 December 20X8 11,000 8,500 19,500

Carrying amountAt 31 December 20X8 41,000 4,500 45,500

At 1 January 20X8 30,000 4,000 34,000

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Topic recap

HEADINGHKAS 16 Property, Plant and Equipment

Recognise an asset when:(a) it is probable that future economic benefits

associated with the asset will flow to theentity and

(b) the cost of the asset can be measured reliably.

Subsequent expenditure is recognised as an asset onlywhere it enhances the benefits of the asset.

Initialmeasurement

Subsequent measurement Depreciation

Cost model Revaluation model

Allocate depreciableamount (revaluedamount) less residualvalue over useful life.

Land usually notdepreciated.

Review useful life,residual value anddepreciation methodat least each financialyear.

Changes accounted forprospectively.

Carrying amount =revalued amount accumulateddepreciation accumulatedimpairment losses.

Carrying amount =cost accumulateddepreciation accumulatedimpairment losses.

Rules:Valuations must be kept up to date.

Model must be applied to the whole class ofasset.

Measured at costincluding:

purchase priceduties andtaxesdirectlyattributablecostsdismantlingcosts (HKAS 37)borrowingcosts (HKAS 23)





Downwardsrevaluation

charged torevaluation surplus tothe extent it exists inrespect of the assetthen as an expense.

Upwards revaluationrecognised as other

comprehensiveincome in revaluationsurplus.

Disclosure requirements:

measurement basesdepreciation methods andestimationsreconciliation of cost/revaluedamount and accumulateddepreciation b/f to the sameamounts c/f

recoverable amountsrestrictions on titleestimated costs of restoring siteexpenditure on assets under constructioncapital commitmentsadditional disclosure for revalued assets

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Answers to self-test questions

Answer 1

First year ($) Second year ($)Cost 20,000 20,000Accumulated depreciation

Yr 1 ($20,000 u 10%) (2,000) (2,000)

Yr 2 ($18,000 u 10%) (1,800)

Carrying amount 18,000 16,200

The diminishing balance method of depreciation is used instead of the straight line method when itis considered fair to allocate a greater proportion of the total depreciable amount to the earlier yearsand a lower proportion to the later years on the assumption that the benefits obtained by thebusiness from using the asset decline over time.

It may be argued that this method links the depreciation charge to the costs of maintaining andrunning the computer system. In the early years these costs are low and the depreciation charge ishigh, while in later years this is reversed.

Answer 2

(a)

Cost$

Depreciation$

Carrying amount$

Component 1CostDismantling($280,000 u

0.3624)

900,000101,472

1,001,472 66,765 934,707

Component 2 650,000 130,000 520,000Component 3 250,000 25,000 225,000

1,679,707

(b) Proceeds 140,000

CV at disposal (934,707)

Loss on disposal (794,707)

(c)

Cost$

Depreciation$

Carrying amount$

Component 1CostDismantling

($250,000 u0.3878)

910,00096,950

1,006,950 71,925 935,025

Component 2 650,000 260,000 390,000Component 3 250,000 50,000 200,000

1,525,025

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Answer 3

20X7$ $

31 Mar DEBIT Loss on disposal 250Accumulated depreciation* 6,750

Account receivable (sale price) 8,000CREDIT Non-current asset (cost) 15,000

Being recording sales proceeds for disposal

31 Dec DEBIT Loss on disposal 3,750Accumulated depreciation** 8,750Cash (sale proceeds) 2,500

CREDIT Non-current asset (cost) 15,000

Being recording sales proceeds for disposal

* Depreciation at date of disposal = $6,000 + $750

** Depreciation at date of disposal = $6,000 + $2,750

You should be able to calculate that there was a loss on the first disposal of $250, and on thesecond disposal of $3,750, giving a total loss of $4,000.

WORKINGS

(1) At 1 January 20X7, accumulated depreciation on the machines will be:

2 machines u 2 years 5

$15,000per machine pa = $12,000, or $6,000 per machine

(2) Monthly depreciation is12

$3,000= $250 per machine per month

(3) The machines are disposed of in 20X7.

(a) On 31 March after 3 months of the year.

Depreciation for the year on the machine = 3 months u $250 = $750.

(b) On 1 December after 11 months of the year.

Depreciation for the year on the machine = 11 months u $250 = $2,750

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Exam practice

Phoenix Real Estate 16 minutesPhoenix Real Estate Limited ('Phoenix') is a property developer in China. In 20X3, Phoenixacquired the land use rights of two pieces of land in Beijing for hotel development:

Property One Since the date of the acquisition of the land, the board of Phoenix has decided torun the hotel on its own and commenced the pre-operating activities of the hotel on 1 January 20X5when the development is completed and the hotel is available for its intended use. The hotel'sgrand opening took place on 1 July 20X5.

Property Two Since the date of the acquisition of the land, the board of Phoenix decided to leasethe whole property to earn rental income. A lease agreement was entered into to lease the wholeproperty to its holding company (the 'Tenant') for a period of eighteen years for the operation of a

hotel.

The monthly revenue amount of the hotel operation is provided by the Tenant at the close ofbusiness of each month-end date.

Other information on these two properties:

Property One Property Two

RMB'000 RMB'000

Cost of land use right 45,000 48,000

Cost of construction (excluding the rightamortisation of land use right)

303,000 267,000

Fair value of land use right at 31 December20X5

60,000 100,000

Fair value of the building at existing status as at31 December 20X5

560,000 340,000

Date of purchase of land use right 1 July 20X3 1 October 20X3

Term of land use right of the property 75 years 60 years

Estimated useful life of the property 50 years 40 years

Completion of construction of the building December 20X4 June 20X5

Phoenix has adopted the cost model under HKAS 16 for property, plant and equipment and the fairvalue model under HKAS 40 for investment property (buildings only). Depreciation is provided towrite off the cost of property, plant and equipment using the straight-line method. The land use rightis considered as a lease and accounted for in accordance with the requirements under HKAS 17.Amortisation of the cost of the land during the construction period is capitalised as part of thedevelopment cost of the property.

Required

Calculate the amount of (1) land use right and (2) carrying amount of the building for each propertyto be reflected in Phoenix's statement of financial position as at 31 December 20X5. (9 marks)

HKICPA September 2006 (amended)

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