ias 16 non current assets

8/10/2019 Ias 16 Non Current Assets

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STATE UNIVERSITY OF ZANZIBAR(SUZA)

PROPERTY, PLANT AND EQUIPMENT:

IAS 16


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Related Standards

IAS 17 Leases

IAS 20 Accounting for government grants

and disclosure of government

assistance

IAS 23 Borrowing costs

IAS 36 Impairment of assets

IAS 40 Investment property

IFRS 2 Share-based payment

IFRS 5 Non-current assets held for sale and

discontinued operations

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IAS 16 - Overview

Objective and scope

Recognition

Measurement at recognition

Measurement after recognition (CM, RM)

Derecognition

Disclosure

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IAS 16 - Objective and Scope

IAS 16 objective: standards for therecognition and derecognition of PP&Eassets, measurement at and afteracquisition, and disclosures

Scoped out: assets held for sale,agricultural biological assets, non-renewable natural resource rights and

reserves Includes investment property under

construction and when ready, if costmodel applied

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IAS 16 - Objective and Scope

Property, plant and equipment (IAS 16.6):Tangibleitems that:

(a) are held for use in the production or

supply of goods or services, for rental toothers, or for administrative purposes;

and

(b) are expected to be used during morethan one period

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IAS 16Recognition Criteria

Costs are recognized as PP&E only if:1. Probable that future economic

benefits associated with the item will

flow to the entity, and2. The cost can be measured reliably.

Applies to costs at acquisition and

after acquisition.

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Spare Parts and Servicing Equipment

If yes - it will qualify as PPE

If no -it will be charged to Expenses

It is majorIt can be used only in

connection with an item ofPPE

Recognition Criteriais met


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IAS 16 - Recognition

The government requires HTY Ltd. to

affix new pollution reduction

equipment to existing equipment. Is

this a PP&E costor an expense?

Apply general principle:

1. Future economic benefits

2. Reliable measure

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IAS 16 - Recognition

Meets the future economic benefits

criterion if costs are incurred to obtain the

economic benefits or to increase the

economic benefits from other assets

Cost of pollution reduction equipment =

PP&E asset cost

Same criteria apply to major repairs and

overhauls

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Subsequent Costs Replacement Costs

Day to day expenses is charged to Profit and Loss Accountas repair and maintenance.

Major replacement cost qualify as PPE if recognition

criteria is met.

The carrying amount of those parts that are replaced isderecognised.

Inspection Cost

Where major regulation inspection is required to operate

the item of PPE, the cost of such item will qualify as PPE ifrecognition criteria is met.

Any remaining carrying amount of the cost of previous

inspection is derecognised.


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Works in combination with acomponentsapproach

- Recognize major components as separatePP&E assets and depreciate separately

- When major overhaul or replacementtakes place, remove old componentsremaining un-depreciated cost

- Recognize new component as PP&E asset- Gain/loss to income statement

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Example

- ABC & Co., has acquired a heavy road transporter

at a cost of Rs. 100,000 (with no breakdown ofcomponent parts).

- The estimated useful life is 10 years.

- At the end of the sixth year, the power trainrequires replacement, as further maintenance isuneconomical due to the off-road time required.The remainder of the vehicle is perfectly roadworthy and is expected to last for the next fouryears.

- The cost of the new power train is Rs. 45,000.- Can the cost of new power train can be recognized

as the asset, and if so, what treatment should beused?


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Measurement

An item of PPE is measured at COST

Cost Price Comprises of

Purchase Price

Costs directlyAttributable to bringingthe asset to location and

condition intended bymanagement

Initial estimate ofdismantling the assets

and restoring the site to

its original condition


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IAS 16 - Measurement at Recognition

Need to know:

1. What elements of cost are included2. How to measure cost

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Measurement cont. Only costs that are directly attributable may be capitalised.

The standard lists type that are not directly attributable Costs of opening new facility

Costs of introducing a new product or service

Costs of conducting business in a new location or with a

new class of customer Administration and other general overhead costs

Self Constructed assets is determined using the same

principles as for an acquired asset.

Exchange of Assets If fair value can be measuredcost will be measured at

fair value.

If fair value can not be measuredcost will be recognised

at carrying amount of asset given up.


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If self-constructed:

1. Apply same principles

2. Charge abnormal costs to P or L3. Interest costs during construction: IAS

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4. Government assistance: IAS 20

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How to measure cost?Costis defined (IAS 16.6) as:

Cash or cash equivalents paid or the FV

of other consideration given to acquireasset when acquired or constructed

Other IFRS such as IFRS 2: Share-basedpayment may have other specific

requirements

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If non-monetary transaction, exception

to FV principle if:

1. FV cannot be reliably determined, or

2. Transaction lacks commercial substance

i.e., transaction has no economic

effect on the entity

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Commercial substanceexists if:

1. Cash flows (amount, timing, risk) of

new asset differ from those of old

asset(s) transferred; or

2. After-tax cash flows of part of business

taking on new asset (entity specific

value) have changed; and

3. Difference in 1 or 2 is significant

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Measurement after recognition

An entity may chooseeither the cost model or the

revaluation model as its accounting policy

Cost Model

Carrying amount =Cost(Accumulated

Depreciation + AccumulatedImpairment Loss)

Revaluation Model

Carrying amount =Revalued amount

(Accumulated Depreciation +Accumulated Impairment

Loss)


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IAS 16 - Measurement after Recognition

Cost Model(CM):

PP&E are carried after acquisition at cost, less

accumulated depreciation and accumulated

impairment losses

Revaluation Model(RM):

PP&E are carried after acquisition at fair value at

date of revaluation, less any accumulateddepreciation and impairment losses afterrevaluation

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IAS 16 - Measurement after Recognition: Cost

Model (CM)Depreciation:

Each major component may have adifferent depreciation policy

Depreciable amount: carrying amount lessresidual value

Residual value defined:

- estimate of net amount entity wouldreceive now from assetsdisposal, if assetwas as old and in same condition asexpected at end of its useful life

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Model (CM)

Depreciation (continued):

Depreciation period begins when PP&Eis in place and ready to use, continues

even if not used or is retired from activeuse

Depreciation period ends when PP&E is

derecognized or classified as held forsale (IFRS 5)

Depreciate over useful life to entity

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Model (CM)Depreciation (continued):

Useful life consider capacity, wear and tear,

technology changes, changes in product demand,

contractual or legal limits Choose method based on pattern that assets

economic benefits are expected to be received:

SL, DB, or activity-based

If change in pattern, change method

prospectively (change in estimate)

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IAS 16 - Measurement after Recognition:

Revaluation Model (RM)

Revaluation will be made at sufficient regularity toensure that the carrying amount does not differ

materially from that which would be determined

using fair value at the end of the reporting period.

If an item of PPE is revalued, the entire class of PPE to

which that asset belongs will be revalued.

Apply only to assets whose FV can be reliably

measured Revalue often enough that carrying amount is close

to FV

Depreciate revalued amount using same principles as

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RM accounting - what happens if an

increase in assets carrying amount?

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Revaluation Model (RM)RM accounting - what happens if a decrease

in assets carrying amount?

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Situation:

On January 1, Year 1, ABC Co. acquires a building

at a cost of $1,000. The building is expected tohave a 25-year life and no residual value. Theasset is accounted for under the revaluationmodel and revaluations are carried out every

three years.On December 31, Year 3, the fair value of thebuilding is appraised at $900. Prepare the entriesrequired on December 31, Year 3

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New depreciation rate is needed as of

January 1, Year 4:

$900 carrying amount = $41 per year

253 years

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Revaluation Surplus account?

As asset is used, transfer differencebetween depreciation taken using RM

and amount if CM had been used -directly to Retained Earnings, OR

Transfer directly to Retained Earnings

when asset derecognized

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Depreciation Method

The standard does not prescribe any depreciation method.

An entity may choose any method as per the nature of

business. However method adopted by the entity should

reflect the following principles:

The depreciation method will reflect the pattern in whichthe assetsfuture economic benefits are expected to be

consumed by the entity.

The depreciation method applied will be reviewed at

each financial year end. Any change from the previousyear will be treated as change in accounting estimates.


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IAS 16 - Derecognition

When disposed of, or when no futureeconomic benefits to be received from useor disposal

Remove carrying amount from statement offinancial position

Gain or loss = difference between carryingamount of asset (or part of asset if areplacement) and net proceeds on disposal

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IAS 16 - Disclosure

If RM used:

Date of revaluation

Independent valuation?

Methods, techniques used

Assumptions made in determining FV

Amounts if CM had been used Details of changes in Revaluation Surplus

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THANK YOU !!

ias 16 non current assets

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