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CH 4 IAS 16: Property, Plant and EquipmentDepreciation AccountingIAS 20: Government GrantsIAS 40: Investment PropertiesIAS 23: Borrowing CostsNon Current AssetsAli Nyondo (MBA, FCCA, CPA(M), B.Sc)Ali Nyondo (MBA, FCCA, CPA(M), B.Sc)1. PPE: Some DefinitionsProperty, plant and equipment are tangible assets:Held for use in production, or supply of goods or services, for rental to others or for admin purposes.Are expected to be used during more than one period.Cost: Amount of cash or cash equivalents paid to acquire an asset.Residual value: Net amount an entity expects to obtain for an asset at the end of its useful life.

Defns continuesEntity specific value: Present value of cash flows an entity expects to arise from continuing use of an asset and from its disposal.Fair value: Amount an asset could be exchanges btn willing parties, at arms length transaction.Carrying amount: NBV of an asset.Impairment loss: An amount by which the carrying amount of an asset exceeds its recoverable amount. Recognition Recognise as an asset when:

It is probable that future economic benefits associated with the asset will flow to the entityThe cost of the asset to the entity can be measured reliably.

Separate itemsFor very large and specialized items, an asset should be broken down into its parts

Initial recognitionInitially measured at cost.Components of costPurchase priceTaxesOther direct costsInitial estimates of the unavoidable cost of dismantling and removing the asset and restoring the location on which it is located.Measurement subsequent to initial recognition Two choices:Cost modelRevaluation modelRevaluationsExample1: Revaluation surplus

BC has an item of land carried in its books at $13,000. Two years ago, a slump in land values led the company to reduce the carrying value from $15,000. This was taken as an expense in the income statement. There has been a surge in the land prices in the current year and the land is now at $20,000.Example 2: Revaluation decrease.the original cost was $15,000, revalued upwards to $20,000 two years ago. The value has now fallen to $13,000.Example 3: Revaluation and depreciationC company bought an asset for $10,000 at the beginning of 20x6. It had a useful life of five years. On 1 January 20x8 the asset was revalued to $12,000. The expected useful life has remained unchanged. Account for the revaluation and state the treatment for depreciation from 20x8 onwards.Review of useful lifeReview of useful life of PPE should be carried out at least at each financial year.

Ex: B co acquired a non current asset on 1 Jan 20x2 for $80,000. It had no residual value and a useful life of 10 years. On 1 Jan 20x5, the remaining useful life was reviewed and revised to 4 years. What will be the depreciation charge for 20x5?Complex assetsAre assets made up of separate components.Each component is separately depreciated over their useful life.

Example on complex assetCost $;000Useful lifeFuselage20,00020 yearsUndercarriage 5,000500 landingsEngine 8,0001,600 flying hrs

Depreciation at the end of first year , in which 150 flights totaling 400 hours were made would then be..DisclosureDisclose the following:Measurement baseDepreciation methodUseful livesGross carrying amountReconciliation of carrying amount at the beginning and end of the period.2. Depreciation accountingSome definitions:Depreciation: Systematic allocation of the depreciable amount of an asset over its estimated useful life.Useful life: Period over which a depreciable asset is expected to be used by the entity.Depreciable amount: Cost less estimated residual value.DepreciationThe depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of an asset.Useful lifeThe following factors are taken into account when estimating the useful life:Expected physical wear and tearObsolescenceLimits on use of the assetsResidual valueLikely to be immaterial If significant (material), estimate the value at date of purchase.Depreciation methodShould be consistent.If changes made, quantify the effect, disclose it, and give reason for change.DisclosureDisclose:Depreciation methodUseful livesTotal depreciationGross amountQuestionA lorry bought for a business cost $17,000. It is expected to last for five years and then be sold for scrap for $2,000. Usage over the five years is expected to be:Year 1200 daysYear 4150 daysYear 2100 daysYear 540 daysYear 3100 daysWork out depreciation under:Straight line(b) Reducing balance rate of 35%(c) Machine hour method (d)Sum of digitsFurther exampleTo project and work out in groups example on page 71 (2012 F7 manual)3. IAS 20: Government grantsDo not recognise a government grant until:The entity will comply with conditionsThe entity will actually receive the grant.Accounting TreatmentRecognize over the relevant periods to match them with related costs, on a systematic basis

.DO NOT CREDIT DIRECTLY TO EQUITY..DO NOT RECOGNISE ON CASH RECEIPT BASIS.

IAS 20 Example 1ABC ltd receives a government grant representing 50% of the cost of depreciating asset which costs $40,000. How will the grant be recognised if ABC depreciated the asset:(a) Over 4 years straight line(b) 40% reducing balanceGrants related to assetsTWO ALTERNATIVES:Set up a grant as deferred incomeDeduct the grant in arriving at the carrying amount of the asset. IAS 20 Example 2A company receives a 20% grant towards the cost of machinery, which cost $100,000. The machinery has an expected life of four years and a nil residual value. The expected profit of a company , before accounting for depreciation or grant, amount to $50,000 per annum in each year of machineries life. Extract statements by (a) deducting the grant from cost (b) treating the grant as deferred income. Presentation of grants related to incomePresent as a separate credit or under a general heading, eg, other income.Deduct from the related expense.4. IAS 40: INVESTMENT PROPERTYInvestment property: Is property (land or buildings) heldTo earn rentals orFor capital appreciation or both of the above.More definitionsOwner occupied property: Property held by the owner for use in the production or supply of goods.Fair value: the amount for which an asset could be exchanged between knowledgeable willing parties in an arms length transaction.Cost: Amount of cash paid or fair value of consideration given.

Examples of investment propertiesLand held for long term capital appreciationA building owned by an entity and leased out on short term leaseBuilding owned by the parent leased to a subsidiary (not inv property in group accounts).Property being developed for future use as an investment property.Initial and subsequent measurementInitially, measure at cost

Subsequently, choose between:Fair value modelCost modelFair value modelAfter initial recognition, an entity that chooses fair value model should measure all of its investment property at fair value.Cost modelThis is the IAS 16 cost modelDisclose the fair value of investment property.Changing modelsDo not changeunless the change will result in a more appropriate presentation.TransfersShould be made only when there is change in use..When change is from investment property to owner occupation, fair value at date of change should be the property cost for subsequent accounting.When it is the other way.Example, transfer to investment property ABC owns a building which it has been using as head office. On 30 June 20x9, it moved its head office to one of its production centers and is now letting out its head office. Company policy is to use its fair value model.The building had an original cost of $250,000 on 1 January 20x0 and was depreciated over 50 years. At 31 Dec 20x9, its fair value was judged to be $350,000. How will this appear in the financial statements of 31 Dec 20x9?DisclosuresModel used (Fair value or cost model)Criteria for classification as investment prop.Assumptions in determining fair valueUse of independent professional valuer (encouraged, but not required)Rental income and expensesAny restrictions or obligations

Additional disclosuresFor fair value modelDisclose a reconciliation of the carrying amount of the investment property at the beginning and end of period.

For cost modelDisclose the fair value of the investment property.5. IAS 23: BORROWING COSTSBorrowing cost: Interest and other costs incurred when you borrow money.Qualifying asset: An asset which necessarily takes a long time to be completed for use or sale.Examples of borrowing costsInterest on bank overdrafts and borrowingsAmortisation of discounts or premiums relating to borrowingsFinance charges in respect of finance leasesExamples of qualifying assetsInventories that require a long period of time to bring them to saleable condition.Manufacturing plantsPower generation facilitiesInvestment properties.CapitalisationBorrowing costs must be capitalised ExampleSee example on capitalisation;

See another example on constructionDisclosureAmount of borrowing costs capitalizedCapitalization rate used to determine the amount of borrowing costs eligible for capitalization..?