IAS 16/IFRS 5/IAS40/

Property, Plant and Equipment

Assets held for sale
Investment Property
(Tangible non current assets)
 DEFINITION OF PPE

 Tangible assets that are:

(a) Held for use in the production or supply of
goods and services, for rental to others, or for
administrative purposes;
(b) Expected to be used during more than one
accounting period.
 CHARACTERISTICS OF AN ASSET

 It is being used in operations

 It has a long useful life
 It possesses physical substance
 RECOGNITION OF PPE

 Fixed asset should be recognised if:

(a) It is probable that future economic benefits
associated with the item will flow to the
entity
(b) The cost of the item can be measured
reliably.
 ACCOUNTING ISSUES IN FIXED
ASSETS

Decl
ine in
over asse
its u t valu
sefu e
l life

Use
Acquisition 2. Allocate cost to periods Disposal
1. Compute cost. benefited----Depreciation 4. Record disposal.
3. Account for subsequent
expenditures.
 MEASUREMENT BASES
Two Models:
(1) Cost Model
 Cost – Accumulated depreciation-accumulated
impairment losses (if any)
(2) Revaluation Model
 Fair value at the revaluation date – subsequent
accumulated depreciation - accumulated
impairment losses (if any)
 COST MODEL

Components of cost of an asset:

Initial cost
Subsequent cost
 COST DETERMINATION: PURCHASED ASSETS
Initial costs of a fixed assets:
(i) Purchased price
(ii) Any cost directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management
(iii) The initial estimate of the costs of dismantlement and removing the item
and restoring the site on which it is located, the obligation of which an
entity has incurred.
Examples for:
(i) invoice price, sales tax, customs duties
(ii) Delivery & handling costs, installation costs, professional fees, site
preparation, installment and set up costs, testing fees, consultancy fees or
commission paid to an agent hired specifically to assist in acquisition of
fixed assets
(iii) Dismantling cost of partition, decorations
(involves estimation and PV factor)
COST DETERMINATION: PURCHASED
ASSETS (CONT.)

 If cash discount is given, it should be deducted

from the purchase price
 If assets are paid for by issuance of the entity’s
shares, the fair value of the shares are treated as
the cost of the assets
 If a fixed asset is acquired in exchange for
another asset, the asset acquired should be
measured based on the fair value of the asset
 EXAMPLE 1: PURCHASED PROPERTY
On 1 January 2019 your company acquired a machine under the following terms

List price of machine £ 82,000

Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a five-year maintenance contract £ 7,000

In addition to the above information your company was granted a trade discount of
10% on the initial list price of the asset and a settlement discount of 5% if payment
for the machine was received within one month of purchase. Your company paid for
the plant on 25 January 2019.

How should the above information be accounted for in the financial statements?
 LAND
Title insurance premiums
Purchase
price
Surveying
fees
Real estate
commissions

Title search and transfer fees

Freehold Land is not depreciable.

 BUILDINGS

Cost of purchase or Title fees

construction

Brokerage Legal fees

fees

Taxes
 MACHINERY AND EQUIPMENT

Purchase
price Taxes

Transportation
charges

Installing,
assembling, and Insurance while
testing in transit
 LUMP-SUM ASSET PURCHASE
The total cost of a combined
purchase of land and building
is separated on the basis of
their relative market values.

On January 1, ABC Plc. purchased land and building for

£200,000 cash. The appraised values are building,
£162,500, and land, £87,500.
How much of the £200,000 purchase price will be
charged to the building and land accounts?
 LUMP-SUM ASSET
PURCHASE
Asset Appraised Proportion Cost Notes
value
Land 87,500 35% (87500/250,000) 70,000 200,000*0.35

Building 162,500 65% 130,000 200,000*0.65

(162,500/250,000)
Total value 250,000 200,000
 COST DETERMINATION: SELF-
CONSTRUCTED ASSET

Initial costs comprises all costs directly attributable to

bringing the asset to the location and condition
necessary for it to be capable of operating in the
manner intended by management
E.g: cost of raw material, direct labour, factory
overhead and interest expenses
(** Interest expense should not be capitalised anymore
when the fixed assets are ready for its intended use)
 BORROWING COSTS

Under IAS 23, Borrowing Costs certain borrowing costs form part
of the cost of a qualifying asset.

• Only the borrowing costs directly attributable to the

acquisition/construction/production of the asset should be
capitalised.

• If the funds used for the acquisition etc, are the general funds of
the business, a weighted average borrowing cost should be
calculated.

• IAS 23 lays down requirements for the commencement and

cessation of capitalisation of borrowing costs.
 KEY CONCEPTS TO REMEMBER

• Qualifying asset: An asset that necessarily takes a substantial

period of time to get ready for its intended use or sale. (both
tangible and intangible)
• Borrowing costs: Interest and other costs that an entity incurs
in connection with the borrowing of funds.
• Weighted average: Applied when funds are used from
general borrowings: interest rates are attached as weights to
principal
 WEIGHTED AVERAGE:
TEST YOUR KNOWLEDGE
• An entity has the following loan finance in place during the
year: £1 million of 6% pa loan finance £2 million of 8% pa
loan finance It constructed a new factory which cost
£600,000 and this was funded out of the existing loan finance.
The factory took eight months to complete. What borrowing
costs should be capitalised?

Solution
 WHEN CAN YOU COMMENCE CAPITALISATION

Capitalisation should commence when the entity first meets all

three of the following conditions:
 It incurs expenditures for the asset.
 It incurs borrowing costs.
 It undertakes activities that are necessary to prepare the asset for
its intended use or sale.
Activities necessary to prepare the asset for use or sale include:
Construction; Drawing up plans; Obtaining planning permissions;
Obtaining permissions from utility providers; Obtaining other
consents required
Simply holding an asset for development without any associated
activities is not enough to qualify for capitalisation.
 WHEN CAN YOU CEASE CAPITALISATION
• All the activities necessary to get the asset ready for its intended use or
sale are complete.
• Point to note: It is the availability for use or sale which is important,
not the actual use or sale. An asset is normally ready for use or sale
when its physical construction is complete.
• Where an asset is completed in parts:
• Where each part is capable of being used/sold separately while other
parts continue to be constructed, the cessation of capitalisation of
borrowing costs should be assessed on the completion of each part.
• Where no part is capable of being used/sold separately until all the
other parts have been completed, cessation should take place when the
last part is completed.
 EXAMPLE 2: SELF CONSTRUCTED PROPERTY
Construction of a new store began on 1 April 2018. The following costs
were incurred on the construction:
£000
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940

The store was completed on 1 January 2019 and brought into use following its
grand opening on the 1April 2019. Company issued a £25m unsecured loan on 1
April 2018 to aid construction of the new store. The loan carried an interest rate of
8% per annum and is repayable on 1 April 2024.
 DEPRECIATION

Depreciation is the process of allocating the

cost of a plant asset to expense in the
accounting periods benefiting from its use.

Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
 DEPRECIATION ACCOUNTING

 All assets (except for freehold land) are subject to deprecation

accounting
 Each part of an item of assets should be depreciated separately if:
(i) The cost of that part is significant in relation to the total cost
(ii) It has a different useful life
E.g.: A building with 50 years useful life and a escalator with 10 years useful life
have to be depreciated separately
 Depreciation should begin when the asset is ready for use
 It should cease when it is classified as ‘held for sale”.
 Depreciation DOES NOT CEASE when an asset becomes idle or
is retired from active use (unless it is fully depreciated).
 DEPRECIATION ACCOUNTING

3 Factors to determine depreciation charge:

(i) Depreciable amount (Cost and residual
value)
(ii) Estimated useful life
(iii) Allocation method
 DEPRECIATION ACCOUNTING: DEPRECIABLE
AMOUNT

 Depreciable Amount=Cost- estimated residual value

 Residual amount=net amount that an entity would
currently obtained from disposal of the asset, if the
asset were already of the age and condition expected
at the end of its useful life.
 Review the residual at each balance sheet date
 If residual amount> carrying amount---No
depreciation charge for the year.
 DEPRECIATION ACCOUNTING: ESTIMATED
USEFUL LIFE
Estimated Useful life
 Time period an asset is expected to be used by the entity; or
 The number of production units expected to be obtained from
the asset by the entity
 Subject to annual review

Factors that may limit the useful life of a fixed asset:

 Physical wear and tear
 Technological advancement
 Economic factors
 Legal factors
 DEPRECIATION ACCOUNTING:
DEPRECIATION METHOD

Depreciation (Allocation)
Methods

Straight-line Accelerated
Method method

Declining balance Sum-of-digit

method method
 STRAIGHT-LINE METHOD

Depreciation Cost - Salvage Value

=
Expense for Period Useful life

On January 1, 2015, equipment was purchased for £50,000

cash. The equipment has an estimated useful life of five
years and an estimated residual value of £5,000.
 STRAIGHT-LINE METHOD

Depreciation Cost - Salvage Value

=
Expense for Period Useful life

Depreciation £50,000 - 5,000

= = £9,000
Expense per Year 5 years
 STRAIGHT-LINE METHOD
Years Depreciation Accumulated Net Book Value
Depreciation

2015

2016

2017

2018

2019
DECLINING BALANCE METHOD

Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High

Early years’ total expense approximates

later years’ total expense.
 DOUBLE-DECLINING-BALANCE
METHOD
Step 1:
Straight-line
= 100 % ÷ Useful life = 100% ÷ 5 = 20%
rate
Step 2:
Double-declining-
balance rate = 2 × Straight-line rate = 2 × 20% =
40%

Step 3:
Depreciation Double-declining- Beginning period
expense = balance rate × carrying value

40% × £50,000 = £20,000 for 2015

 DOUBLE-DECLINING-BALANCE
METHOD

2015
Depreciation:
40% × £50,000 = £20,000

2016
Depreciation:
40% × (£50,000 - £20,000) = £12,000
 DOUBLE-DECLINING-BALANCE
METHOD
Years Depreciation Accumulated Net Book Value
Depreciation

2015

2016

2017

2018

2019
 SUM-OF-DIGIT METHOD

 Depreciation expense = (Cost-Salvage value) x weighted

factor/sum-of-the digits
Whereby:
 Sum-of- digits is determined by adding the years in the asset’s
useful life
 In this example, the sum-of-digit=5+4+3+2+1=15
 Formula=n(n+1)/2 whereby n=useful life
 Weighted factor--- changes each year, are the years remaining in
the asset’s life at the beginning of the period.
 In this example, the weighted factor for first year=5, second
year=4 and so on.
 SUM-OF-DIGIT METHOD
Year Weighted WF/15 x Yearly
Factor (WF) 45,000 depreciation

2015 5

2016 4

2017 3

2018 2

2019 1
 SUM OF-DIGIT METHOD
Years Depreciation Accumulated Net Book Value
Depreciation

2015

2016

2017

2018

2019
 COMPARING DEPRECIATION METHODS
Methods Formulas Effect on Annual
Depreciation

Straight-line (Cost-Salvage value)/ Useful Consistent amount

life in periods

Double- Double-declining balance rate Decreasing amount

declining x Beginning-period carrying
balance value

Sum-of-digit (Cost-Salvage value) x Decreasing amount

weighted factor/sum-of-the
digits
 DEPRECIATION ACCOUNTING:
DEPRECIATION METHOD

Which method should be used?

 IAS 16: The method used should reflect the expected
usage pattern of the underlying asset
 It should be consistent
 Subject to annual review

If assets are fully depreciated but still in active use,

record the nominal amount of £1
PARTIAL-YEAR DEPRECIATION

When
When aa plant
plant asset
asset is
is acquired
acquired during
during thethe year,
year,
depreciation
depreciation is is calculated
calculated for
for the
the fraction
fraction ofof the
the
year
year the
the asset
asset is
is owned.
owned.
**
** However,
However, ifif the
the company’s
company’s policy
policy is
is to
to compute
compute
full
full year
year of
of depreciation
depreciation at at acquisition
acquisition year
year and
and
nil
nil at
at disposal
disposal year,
year, then,
then, follow
follow the
the accounting
accounting
policy.
policy. NoNo need
need to
to apportion
apportion thethe depreciation
depreciation
charge.
charge.

June
30
 PARTIAL-YEAR DEPRECIATION

Calculate the straight-line depreciation on December 31,

2019, for equipment purchased on June 30, 2019. The
equipment cost £75,000, has a useful life of 10 years, and
an estimated salvage value of £5,000.

Depreciation
Depreciation == (£75,000
(£75,000 -- £5,000)
£5,000) ÷÷ 10
10
== £7,000
£7,000 per
per annum
annum
6
Depreciation
Depreciation == £7,000
£7,000 ×× 6//12 = £3,500
12 = £3,500
 CHANGE IN ESTIMATES FOR
DEPRECIATION

Predicted Predicted
salvage value useful life

So depreciation
is an estimate.

Over
Over the
the life
life of
of an
an asset,
asset, new
new information
information may
may come
come to
to light
light that
that indicates
indicates
the
the original
original estimates
estimates were
were inaccurate.
inaccurate.
 CHANGE IN ESTIMATES FOR
DEPRECIATION
On January 1, 2016, equipment was purchased that cost £30,000,
has a useful life of 10 years, and no salvage value. During 2019,
the useful life was revised to eight years total (five years
remaining).
Calculate depreciation expense for the year ended December 31,
2019, using the
straight-line method.

Book value at Salvage value at

date of change
– date of change
Remaining useful life at date of change
CHANGE IN ESTIMATES FOR
DEPRECIATION
 SUBSEQUENT EXPENDITURES: REVENUE AND
CAPITAL EXPENDITURES

Type of Capital or
Expenditure Revenue Identifying Characteristics
Ordinary Revenue 1. Maintains normal operating condition.
Repairs 2. Does not increase productivity.
3. Does not extend life beyond original
estimate.
Betterments Capital 1. Major overhauls or partial
and replacements.
Extraordinary 2. Extends life beyond original estimate.
Repairs
 SUBSEQUENT EXPENDITURES: REVENUE
AND CAPITAL EXPENDITURES
Financial Statement Effect
Current Current
Treatment Statement Expense Income Taxes

Capital Balance sheet

Expenditure account debited Deferred Higher Higher
Revenue Income statement Currently
Expenditure account debited recognized Lower Lower

If
If the
the amounts
amounts involved
involved are
are not
not material,
material, most
most
companies
companies expense
expense the
the item.
item.
ALTERNATIVE VALUATION
 REVALUATION OF PPE

 An entity is allowed to choose revaluation model as its

accounting policy for a class of fixed asset
 E.g if the company decides to opt for revaluation for
land, it would apply to all the lands that the company
owns (not selective)
 Under this model, fixed assets are stated at revalued
amount
 Revalued amount= fair value-subsequent
accumulated depreciation –accumulated impairment
losses (if any)
 REVALUATION MODEL
How to determine fair value?
 Determined by “market value for its existing use”
 E.g Fair value of land and buildings is determined
from market based evidence by appraisal undertaken
by professional valuers.
 Subject to regular revaluation (subjective)
 If asset has volatile movements in FV, revalued
annually
 If movement in FV is insignificant, may revalue every
three or five years
 ACCOUNTING FOR REVALUATION

Subsequent revaluation
IAS 16: If there is a deficit on revaluation, it
should be charged against the revaluation
reserve to the extent that the deficit does
not exceed the amount held in the
revaluation reserve in respect of that same
asset.
 ACCOUNTING FOR REVALUATION
(EXAMPLE)

ABC Plc revalued its land from cost of £10,000,000 to

market value of £15,000,000 in 2013, and revalued it
downwards to £12,000,000 in 2017. In 2019, the land was
further revalued down to £9,000,000.
ACCOUNTING FOR REVALUATION

Subsequent revaluation
IAS 16: A revaluation surplus should be
credited directly to the income statement
to the extent that it reverses a revaluation
decrease in respect of the same asset
previously recorded as a charge to the
income statement
 ACCOUNTING FOR REVALUATION
(EXAMPLE)

XYZ Plc revalued its land from cost of £20,000,000 to

market value of £15,000,000 in 2014, and revalued it
upwards to £18,000,000 in 2017. In 2019, the land was
further revalued upwards to £21,000,000.
ACCOUNTING FOR REVALUATION

How to record the effect of revaluation?

 Eliminate the accumulated depreciation
 The net revalued amount is treated as the new gross
carrying amount

Eg: ABC Plc carries in its books a building with a cost

of £10m and an accumulated depreciation of £2m.
The building is to be revalued to £12m
DEPRECIATION OF REVALUED
ASSET
 Recompute the depreciable amount (based on
the revalued amt and newly estimated residual
value)
 The difference of depreciation charge between
the revalued amt and original cost needs to be
transferred to RE from revaluation reserve
(b’cos it is realised as a result of the usage of the
asset)
 DEPRECIATION OF REVALUED ASSET (EXAMPLE)

ABC Plc acquired a building at a cost of £50m. The

building was expected to have a useful life of 50 years
with no residual value. It is the company’s
accounting policy to use the straight-line method.
After 10 years, when the building carried in the books
at £40m, it was revalued to its fair market value of
£60m.
Assuming also that at the date of revaluation, the
building was estimated to have another 40 years of
useful life and no salvage value.
 DERECOGNITION

Fixed assets should be derecognised

when:
They are disposed
No future economic benefits are
expected from its use (Scrap)
 DERECOGNITION: DISPOSALS OF PLANT
ASSETS

Update depreciation
to the date of disposal.

Journalise disposal by:

Recording cash Recording a

received (debit) gain (credit)
or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
 DERECOGNITION: DISPOSALS OF PLANT
ASSETS

Update
If Cash > carrying depreciation
amount, record a gain (credit).
to theamount,
If Cash < carrying date of disposal.
record a loss (debit).
If Cash = carrying amount, no gain or loss.
Journalize disposal by:

Recording cash Recording a

received (debit) gain (credit)
or loss (debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).
 DERECOGNITION:
ACCOUNTING
TREATMENT
Accounting Treatment:
(1) Cost Model
 Recognised the gain or loss as income or
expense in the income statement
 Should not classified as “Revenue”
 DERECOGNITION:
ACCOUNTING
TREATMENT

(2)Revaluation Model
Recognise the gain or loss on disposal
Transfer Revaluation Reserves account
to Retained Earnings
 IFRS 5 NON-CURRENT ASSETS HELD FOR
SALE

• Asset must be available for immediate

sale in its present condition.
• The sale must be highly probable.
 IFRS 5 NON-CURRENT ASSETS HELD FOR
SALE
• Points to remember:
 Provide proportionate depreciation until the date
the asset is decided to be held for sale.
 Asset to be valued at fair value as at that date
 Impairment to be recorded in accordance with IAS
36
 Remove the asset from the original title and group
it under separate title “Non Current Assets held for
sale” under the broader title PPE
 IFRS 5 CRITERIA FOR SALE TO BE HIGHLY
PROBABLE
• Appropriate level of management committed to
the plan to sell.
• Active programme to locate a buyer initiated.
• Asset must be actively marketed for sale at a
price that is reasonable in relation to current
fair value.
• Sale expected to be completed within 1 year
unless circumstances beyond seller’s control.
• Unlikely to be significant changes to the plan
to sell.
IAS 40 INVESTMENT PROPERTY – DEFINITION

 Held as assets

 Not employed in normal activities

 To earn rentals

 For capital appreciation.

IAS 40 INVESTMENT PROPERTY – DOES NOT
INCLUDE

 Held for production or for sale in normal course

of business

 Being constructed for future use as investment

property

 Held under an operating lease

 Mineral rights.
 IAS 40 – REPORTING

 Recognise changes in FV in income statement.

 Do not give rise to Revaluation reserve
 Do not adjust the other comprehensive income
 Balance sheet value of asset will the Fair
Market Value
 No annual depreciation is provided on this
asset
 DISCLOSURE REQUIREMENTS:

 Beginning and ending balances of the gross carrying

amount for each class of fixed assets
 The bases used for determining the gross carrying
amount.
 Depreciation:
 Depreciation methods used
 Useful life or the depreciation rates used
 The accumulated depreciation balances at the
beginning and end of the period
 DISCLOSURE REQUIREMENTS:

For assets carried at revalued amounts:

 The effective date of the revaluation

 Whether an independent valuer was involved

The bases of determining the fair value

The carrying amount of each class of fixed asset had
the assets been carried at cost
The movement schedule of the revaluation reserves
 DISCLOSURE REQUIREMENTS:

 Carrying amount of temporarily idle fixed assets

 The gross carrying amount of fully depreciated fixed
assets that are still in use
 The carrying amount of fixed assets retired from active
use and held for disposal
 When cost model is used, the fair value of fixed assets
when it is materially different from the carrying
amount.