IAS 16, IAS 40

PROPERTY, PLANT &

EQUIPMENT AND INVESTMENT
PROPERTY
Presented By: Mr. Feysel Takele (ACCA) and Mr. Tilahun Girma(ACCA)
1
 RELEVANT STANDARDS
Topic List Standards
Property, plant and equipment IAS 16
Investment property IAS 40
Fair Value IFRS 13
Impairment IAS 36
Borrowing Costs IAS 23

2
 LEARNING OBJECTIVES
Up on completion of the chapter, trainers are supposed to
  Define the initial cost of a non-current asset and apply this to
various examples of expenditure
 Describe, and be able to identify, subsequent expenditures
that should be capitalized

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 LEARNING OBJECTIVES…
 Calculate depreciation on:
 revalued assets, and

 assets that have two or more major items or significant

parts
 Discuss the way in which the treatment of investment
properties differs from other properties

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 Scope
Property, Plant and Equipment
 Are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes
 Are expected to be used during more than one period.

 This Standard does not apply to:

 Property, plant and equipment classified as held for sale.
 Biological assets.
 Mineral Resources and Mineral rights
 Applies to PPE used to develop or maintain the assets
described above

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 BASIC CONCEPTS AND
TERMINOLOGIES…
 Cost:
 Residual value:
 Entity specific value (Value in Use):
 Fair value (FV):
 Carrying amount(CA):
 An impairment loss:
 Depreciation:

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 BASIC CONCEPTS AND
TERMINOLOGIES…
Useful life
 The period over which a depreciable asset is expected to be
used by the entity, or
 The number of production or similar units expected to be
obtained from the asset by the entity.
Depreciable Amount:
 The historical cost or other amount substituted for cost in the
financial statements, less the estimated residual value.

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 BASIC CONCEPTS AND
TERMINOLOGIES…
Investment Property
 Property (land or a building – or part of a building – or both)
held (by the owner or by the lessee under a finance lease) to
earn rentals or for capital appreciation or both.
Owner-Occupied Property
 Property held by the owner (or by the lessee under a finance
lease) for use in the production or supply of goods or services
or for administrative purposes.

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 Initial Recognition and Measurement
of Item of PPE
Recognition and Measurement
Recognition
 Incorporation of the item in the business's accounts, in this
case as a non-current asset.
Criteria to be fulfilled
 It is probable that future economic benefits associated with the asset
will flow to the entity.
 The cost of the asset to the entity can be measured reliably
 These criteria apply to subsequent expenditure as well as
costs incurred initially.

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 Initial Recognition and
Measurement…
Environmental and safety equipment
 The standard acknowledges that there may be expenditures
forced upon an entity by legislation that
 requires it to buy ‘assets’ that do not meet the recognition
criteria (environmental protection equipment).
 These expenditures should be recognized as assets.

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 Initial Recognition and
Measurement…
 An entity may voluntarily invest in environmental equipment
even though it is not required by law
The Expenditure will be capitalized if:
 If the entity can demonstrate that the equipment is likely to increase the
economic life of the related asset,
 The expenditure meets the definition of an asset; or
 There is a constructive (self imposed) obligation to invest in
the equipment.

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 Initial Recognition and
Measurement…
Measurement
 The process of determining monetary amounts at which
elements are recognized
 Financial reports are based on estimates, judgments and
models rather than exact depictions.
These measurements include:
 Historical Cost

 Cost Model

 Revaluation Model

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 Initial Recognition and
Measurement…
Measurement at Time of Acquisition (Initial Measurement)
Historical Cost (HC)
 An item of PPE that qualifies for recognition as an asset shall
be measured at its cost.
 The HC of an asset is the consideration given to acquire or to
develop it and it includes:
 The amount of cash or cash equivalents paid; or

 The fair value of the consideration given to acquire it

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 Initial Recognition and
Measurement…
 Cost of an item of property, plant and equipment comprises:
 Its purchase price

 import duties and

 non-refundable purchase taxes, after deducting trade discounts and

rebates.
 Any 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.
 Costs of employee benefits arising directly from the construction or acquisition
of the item of PPE.
 Costs of site preparation;
 Initial delivery and handling costs;
 Installation and assembly costs;
 Testing Costs
 Professional fees. 14
 Initial Recognition and
Measurement…
Examples of costs that are not costs of an item PPE are:
 Costs of opening a new facility;

 Costs of introducing a new product or service (including costs

of advertising and promotional activities);
 Costs of conducting business in a new location or with a new
class of customer (including costs of staff training); and
 Administration and other general overhead costs.

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 Initial Recognition and
Measurement…
 The initial estimate of the costs of dismantling and removing
the item and restoring the site on which it is located.
Example:
 An Ethanol Refinery is purchased on December 31, 20x1, at a
cost of ETB 50 million cash (allocated ETB10 million to land
and ETB40 million to the refinery itself). The organization has
a legal/constructive obligation to dismantle the site at the
end of its 30-year useful life. The best estimate of this cost is
ETB10 million. Assuming a discount rate of 5%, the present
value of the asset retirement obligation is ETB 2,313,774:

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 Initial Recognition and
Measurement…
Solution
The journal entry to record the purchase of the oil refinery
would be as follows:
Dec 31, 20x1
Land--------------------------- 10,000,000
Ethanol Refinery------------ 42,313,774
Cash -------------------------------------------- 50,000,000
Asset Retirement Obligation --------------- 2,313,774

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 Case Study

Initial Recognition and Measurement

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 Initial Recognition and
Measurement…
Example
On 1 July 2013 Wonji Sugar Factory exchanged Sugar that it
manufactured at a cost of ETB 80,000 for a passenger vehicle
for service to employees which it will receive on 1 July 2013.
Had it paid cash for the vehicle it would have paid ETB
100,000.
What is the historical cost of the passenger vehicle?
Choose 1 of: 1) ETB 80,000; or 2) ETB 100,000.

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 Initial Recognition and
Measurement…
Example
On 1 July 2013 Wonji Suagar Factory exchange a promised to
pay ETB 121,000 on 30 June 2015 for a passenger vehicle which
it will receive on 1 July 2013
On 30 June 2015 it paid ETB 121,000 to settle the claim against
you.
What is the historical cost of the passenger vehicle? (assume
10% as appropriate discount rate)
Choose 1 of: 1) ETB 100,000; or 2) ETB 121,000.

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 Initial Recognition and
Measurement…
Example
On 1 July 2013 Wonji Sugar Factory exchange Sugar it
manufactured at a historical cost of ETB80,000 (with a market
value/fair value = ETB100,000) for a promise to receive a
passenger vehicle on 30 June 2015 (i.e. 2 years later).
On 30 June 2015 it exchanged the promise to receive the
vehicle for the vehicle when the fair value of the vehicle is
ETB150,000.
What is the historical cost of the vehicle? (assume 10% as
appropriate discount rate)
Choose one of: 1) ETB 80,000; 2) ETB 96,800; 3) ETB 100,000; 4)
ETB 121,000; or 5) ETB 150,000.
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 Recognition and Measurement of
Subsequent Expenditure
When assets require replacement at regular intervals:
 This cost is recognized in full when it is incurred and added to
the carrying amount of the asset
 It will be depreciated over its life which may be d/t from the
expected life of the other components of the asset
 The CA of the item being replaced, is derecognized.

 A similar approach is also applied when a separate

component of an item of PPE is identified :
 in respect of a major inspection to enable the continued use of the
item.

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 Straight Line Method
 Double Declining Balance Method
 Units of Production Method

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 Commencement of Depreciation
When will Plant Assets start depreciation ?
A. When acquired or purchased

B. When physically received

C. When it starts providing services

D. When available for use

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 Depreciation of Land
When is land depreciated?
A. never—its service potential does not reduce with time/use
B. always—its service potential always reduces with time/use
C. when its Rec. Amt declines below its unmodified historical
cost (e.g., when market prices decline)
D. when its service potential is consumed through use (for
example, when used as a landfill site)
E. when its service potential is consumed with time (for
example, a 99 year right to use the land)
F. both D and E above

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RECOGNITION AND MEASUREMENT…
Exchanges of Assets
 Are measured at FV,

 unless the exchange transaction lacks commercial substance

or
 the FV of neither of the assets exchanged can be measured
reliably.
 If the acquired item is not measured at FV, its cost is
measured at the carrying amount of the asset given up.

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 SUBSEQUENT MEASUREMENT …
Subsequent Measurement (Measurement after Recognition)
 After initial measurement the historical cost of an asset may
be modified to reflect, when relevant:
 The consumption of its service potential(depreciation)

 That part of the historical cost of the asset is no longer

recoverable because of impairment due to, for example
— Deterioration of the asset quality; or

— A decline in its economic value.

 An entity shall choose either the cost model or the revaluation model.
 The revaluation model is available only for items whose fair value can be
measured reliably
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 SUBSEQUENT MEASUREMENT …
Cost Model (CM)
 PPE shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
Revaluation Model (RV)
 PPE whose FV can be measured reliably shall be carried at a
revalued amount,
Revalued amount
 its FV at the date of the revaluation less any subsequent acc.
Dep. & subsequent accumulated impairment losses.

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 SUBSEQUENT MEASUREMENT …
 Revaluations shall be made with sufficient regularity to:
 ensure that CA doesn’t differ materially from that which
would be determined using FV at end of the reporting period.
 The frequency of revaluations depends upon the changes in
fair values of PPE.
 When FV of a revalued asset differs materially from its CA, a
further revaluation is required.
 Some PPE experience significant and volatile changes in fair
value, thus necessitating annual revaluation.

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 SUBSEQUENT MEASUREMENT …
 For PPE only with insignificant changes in fair value, it is
necessary to revalue the item only every three or five years.
 If PPE is revalued, the entire class of PPE to which that asset
belongs shall be revalued.
 If an asset’s CA is increased as a result of a revaluation the
increase,
 shall be recognized OCI & accumulated in equity under the
heading of revaluation surplus (RS).
 shall be recognized in (PL) to the extent that it reverses a
rev. decrease of the same asset previously recognized in
profit or loss.
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 SUBSEQUENT MEASUREMENT …
 If an asset’s CA is decreased as a result of a revaluation,
 the decrease shall be recognized in profit or loss.

 the decrease shall be recognized in OCI to the extent of

any credit balance existing in the revaluation surplus in
respect of that asset.
 The decrease recognized in OCI reduces the amount
accumulated in equity under the heading of RS.

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 SUBSEQUENT MEASUREMENT …
Depreciation Accounting
 All assets with exception of land held on freehold or very long
leasehold depreciate.
 Depreciation of an asset begins when it is available for use.

 Depreciation of an asset ceases at the earlier of the date that

 the asset is classified as held for sale or

 Included in a disposal group that is classified as held for sale

and
 The date that the asset is derecognized.

 An entity does not stop depreciating an asset merely because

 it has become idle or

 has been retired from active use (unless the asset is fully 32

depreciated).
 SUBSEQUENT MEASUREMENT …
 However, if the entity is using a usage method of depreciation
the charge can be zero while there is no production.
Allocating depreciation requires judgement to
 estimate the useful life of an item

 measure the residual value of an item

 determine the appropriate depreciation method

 identify components of an item that must be depreciated

separately
 Depreciation judgments apply equally to the cost model and
the revaluation model.
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 SUBSEQUENT MEASUREMENT …
Useful Life
 The standard requires asset useful lives to be

 estimated on a realistic basis and

 reviewed at the end of each reporting period.

 The effects of changes in useful life are to be recognized

prospectively, over the remaining useful life of the asset.
 It is quite possible for an asset’s useful life to be shorter than
its economic life.
 Many entities have a policy of disposing of assets when they
still have a residual value,(others can benefit from the asset).
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 SUBSEQUENT MEASUREMENT …
Factors to be considered when estimating the useful life of an
asset:
 Expected usage of the asset (the asset’s expected capacity or
physical output).
 Expected physical wear and tear

 Technical or commercial obsolescence

 Legal or similar limits on the use of the asset, such as the

expiry dates of related Leases.’

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 SUBSEQUENT MEASUREMENT …
Residual Value
 The amount that the entity would currently obtain from
disposal of the asset.
Depreciation Methods
 Depreciation method should reflect the pattern in which the
asset’s future economic benefits are expected, and
 Similar assets may have different depreciation methods(see
executive cars below)

 Appropriateness of the method should be reviewed at least

annually

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RECOGNITION AND MEASUREMENT…
 The standard leaves the choice of method to the entity, even
though it does cite
 straight-line,

 diminishing balance, and

 units of production as possible depreciation methods.

Component Depreciation
 Significant parts (called components) of a depreciable item
must be depreciated separately for items:
 with materially different consumption patterns

 Different useful lives and

 the amount is insignificant compared with the total cost

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 ILLUSTRATIONS
A Sugar Corporation purchased a heavy duty equipment with a
total cost of ETB 100 million allocated as follows:
 ETB 60 million for the ‘permanent’ basic structure

 ETB 20 million for the electronics (replace after 6 years)

 ETB 19.8 million for the protective lining (replace every 3

years)
 ETB 0.2 million health and safety certification (required
every 2 years)
 Management expect to continuously use the equipment
for its entire 12-year economic life.

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 ILLUSTRATIONS…
Must any components of the equipment be depreciated
separately?
A. No, depreciate the furnace as a whole evenly over 12
years
B. Yes, 4 components—(i) basic structure; (ii) electronics; (iii)
lining; and (iv) health and safety inspection
C. Yes, 3 components—(i) basic structure; (ii) electronics;
and (iii) lining (i.e. health and safety inspection
component need not be depreciated separately)
D. Yes, 2 components—(i) basic structure; and (ii) combined
electronics and lining component (i.e. health and safety
inspection component need not be depreciated39
separately)
 ILLUSTRATIONS…
Your corporation bought 2 identical executive cars:
Car1 is used to provide executive travel services to discerning
clients. Management expect to sell Car 1 after it has travelled
2,000,000 miles.
Car2 is for the exclusive use of the Corporation’s Directors and
Executive Management. As part of their remuneration package
they each have the exclusive use of the car for 30 days per year.
The corporation expects to:
 replace car2 three years after acquiring it (irrespective of the
distance car2 has travelled)
 donate car2 to an international disaster relief programme
when it is three years old.
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 ILLUSTRATIONS…
Which depreciation method must be used for the cars?
A. straight-line method for both cars

B. units of production method (based on miles travelled) for

both cars
C. revenue-based depreciation for both cars

D. straight-line for car1 and units of production (based on

miles travelled) for car2
E. straight-line for car2 and units of production (based on
miles travelled) for car1
F. management is free to choose a depreciation method

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 ILLUSTRATIONS…
The useful life of each car is?
A. Car1 and Car2 = three years

B. Car1 and car2 = 2,000,000 miles

C. Car1 2,000,000 miles and Car2 three years

D. Car1 three years and Car2 2,000,000 miles

The residual value of Car2 is?

A. nil

B. the amount that the airline could sell car2 for today (the
measurement date) if car2 was already three years old
and in the condition that the corporation expects it to be
in after using it for three years.
C. another amount 42
 ILLUSTRATIONS…
Cost Model
 A Sugar Corporation bought a heavy duty machinery on
January 1, 2011 on cash. The machinery has a cost of Br
1,000,000.00, useful life of 10 years and nil residual value. In
addition, the machinery has recoverable amount of Br
300,000.00 and Br 800,000.00 on December 31, 2014 and
2016 respectively. Assume that the company uses straight line
method for estimating periodic depreciation.
Required
A. Record the acquisition of the asset on January 1, 2011

B. Record depreciation for the first four years of operation

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 ILLUSTRATIONS…
C. Record the impairment of the asset and determine the
carrying amount of the asset on December 31,2014
D. Record depreciation on December 31,2015 and 2016
E. Record the recovery of the impairment loss on December 31,
2016
F. Record depreciation on December 31, 2017 through 2020

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 ILLUSTRATIONS…
Solutions
A. Record the acquisition of the asset on January 1, 2011

Asset---------------1,000,000.00
Cash ---------------------------1,000,000.00
B. Record depreciation for the first four years of operation
Annual Depreciation= 1,000,000.00-0 = 100,000.00
10 Years
December 31, 2011 through December 31, 2014
Depreciation-Expense---------------100,000.00
Accumulated Depreciation--------------------100,000.00
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 ILLUSTRATIONS…
C. Record the impairment of the asset and determine the
carrying amount of the asset on December 31,2014
 Carrying Amount= 1,000,000.00-400, 000.00= 600,000.00

 Recoverable amount=300,000.00

 Impairment loss=600,000.00-300,000.00=300,000.00

Impairment loss----------------------------300,000.00
Accumulated dep. -----------------------300,000.00 Allowance, Asset, imp..
D. Record depreciation on December 31,2015 and 2016
Annual Depreciation= 300,000.00/6=50,000.00
December 31, 2015 and December 31, 2016
Depreciation Expense------------------50,000.00
46

Accumulated Depreciation-----------------50,000.00
 ILLUSTRATIONS…
E. Record the recovery of the impairment loss on December 31, 2016
 Recoverable amount= 800,000.00
 CA (based on cost)= 400,000.00
 Value of the impaired asset=200,000.00(300,000.00-100,000.00 (dep
for 2015 and 2016)
 Rev of Imp. =200,000.00(from 200,000.00 to 400,000.00)
Accumulated Imp. Loss--------------200,000.00
Impairment Reversal(P/L)-------------------------200,000.00
F. Record depreciation on December 31, 2017 through 2020
Annual Depreciation=400,000.00/4=100,000.00
December 31, 2017 through December 31, 2020
Depreciation Expense--------------100,000.00
Accumulated Depreciation-----------------100,000.00 47
 ILLUSTRATIONS…
Revaluation Model
 A Sugar Corporation bought a heavy duty machinery on
January 1, 2011 on cash. The machinery has a cost of Br
1,000,000.00, useful life of 10 years and nil residual value. In
addition, the machinery is revalued at an amount of Br
1,200,000.00 on December 31, 2012, has a recoverable
amount (fair value less cost to sell) of Br 300,000.00 on
December 31, 2014 and finally the machinery is revalued (fair
value) at an amount of Br 800,000.00 on December 31, 2016.
Assume that the company uses straight line method for
estimating periodic depreciation.

48
 ILLUSTRATIONS…
Required
A. Record Depreciation on December 31, 2011 and December
31, 2012
B. Record the revaluation of the asset on December 31,2012
C. Record Depreciation on December 31, 2013 and December
31, 2014
D. Record transactions related to impairment of the asset on
December 31, 2014
E. Record depreciation on December 31,2015 and December 31,2016
F. Record transactions related to the revaluation of the asset on
December 31, 2016
G. Record depreciation for the remaining life of the asset 49
 ILLUSTRATIONS…
Solutions
A. Record Depreciation on December 31, 2011 and December 31, 2012
Annual depreciation=1,000,000.00/10=100,000.00
December 31, 2011 and December 31, 2012
Depreciation Expense-------------------100,000.00
Accumulated Depreciation-----------------100,000.00
B. Record the revaluation of the asset on December 31,2012
 CA =1,000,000.00-200,000.00=800,000.00

 Revalued amount=1,200,000.00

 Revaluation surplus=1,200,000.00-800,000.00=400,000.00

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 ILLUSTRATIONS…
Accumulated Depreciation---------------200,000.00
Asset Value-----------------------------------200,000.00
Revaluation Surplus--------------------------400,000.00
C. Record Depreciation on December 31, 2013 and December 31, 2014
Annual Depreciation=1,200,000.00/8=150,000.00
December 31, 2013 and December 31, 2014
Depreciation Expense-------------------150,000.00
Accumulated Depreciation--------------------150,000.00
*Revaluation surplus-------50,000.00(400,000.00/8)
R/E-----------------------------------50,000.00
*The balance in the revaluation surplus is realized when the
asset is de recognized or used 51
 ILLUSTRATIONS…
D. Record transactions related to impairment of the asset on December
31, 2014
Value of the asset=900,000.00(1,200,000.00-300,000.00 Acc.dep)
Recoverable amount=300,000.00
CA (based on cost) =1,000,000.00-400,000.00=600,000.00
Impairment Loss---------------300,000.00
Revaluation Surplus----------300,000.00
Asset---------------------------600,000.00
E. Record depreciation on December 31,2015 and December 31,2016
Annual Depreciation=300,000.00/6=50,000.00
December 31, 2015 and December 31, 2016
Depreciation Expense------------------50,000.00 52

Accumulated Depreciation--------------------- 50,000.00

 ILLUSTRATIONS…
F. Record transactions related to the revaluation December 31, 2016
Carrying amount(based on Revalued amount)=300,000.00-
100,000.00=200,000.00
Fair value=800,000.00
CA (based on cost) =400,000.00(1,000,000.00-600,000.00
Accumulated Depreciation---------400,000.00
Asset --------------------------------------200,000.00
Impairment Rev----------------------------200,000.00
Revaluation Surplus-----------------------400,000.00
G. Record depreciation for the remaining life of the asset
Annual Depreciation=800,000.00/4=200,000.00
December 31, 2017 through December 31, 2020
Depreciation Expense-------------------200,000.00 53

Accumulated Depreciation---------------------200,000.00
 ILLUSTRATIONS…
Reporting Performance

Reporting Performance
Cost model Revaluation model
2011 to 2020
Profit or loss (1,000,000) (1,500,000)
- depreciation (900,000) (1,400,000)
- impairment (300,000) (300,000)
- impairment reversal 200,000 200,000
Other comprehensive income 500,000
- revaluation 800,000
- revaluation decease (300,000) 54

Comprehensive income (1,000,000) (1,000,000)

 ILLUSTRATIONS…
Reporting Performance
 Assume the entity sold the machine on 31/12/2013 for Br
1,050,000

2011 to 2013 Cost model Revaluation model

Profit or loss 50,000 (350,000)
- depreciation 2011 to 2013 (300,000) (350,000)
- profit on sale of PPE in 2013 350,000
Other comprehensive income 400,000
- revaluation in 2012 400,000
Comprehensive income 50,000 50,000

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 ILLUSTRATIONS…
 Note: The above figures are computed as follows:
Cost Model
 In 2013, BV= 1, 000, 00.00-300,000.00=700,000.00

 Proceeds= 1,050,000.00

 Profit on sale=1,050,000.00-700,000.00=350,000.00

Revaluation Model
 In 2013, BV= 1, 200,000.00-150,000.00=1,050,000.00

 Proceeds= 1,050,000.00

 Profit on sale=1,050,000.00-1,050,000.00=0

56
 ILLUSTRATIONS…
 Which model gives management more flexibility in reporting
profit or loss for the period?
A. cost model; or

B. revaluation model

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 ILLUSTRATIONS…
Component Accounting – Vehicle
 On Jan 01, 01, your corporation acquires a vehicle for Br 108
that is available for use on the same day. Payment is effected
in cash on the same day. It is planned to use the engine for 24
years. After every six years a major inspection of the engine is
necessary. On Jan 01, 01, the cost of this inspection would be
Br 24. The engine consists of the following components:

58
 ILLUSTRATIONS…
Costs of purchase
 Pivot mounting with wheel sets--------16

 Engine box-----------------------------------19

 Transformer---------------------------------24

 Electric power converter-----------------13

 Control units---------------------------------18

 Auxiliary converter-------------------------18

 Total------------------------------------------108

 The transformer is replaced after 12 years and is not serviced

during the major inspection. The other parts each have a useful
life of 24 years and are serviced during each major inspection.
59
 ILLUSTRATIONS…
Required
 Prepare any necessary entries in Corporations financial statements as on
Dec 31, 01.
Solution
Jan 01, 01 Engine------------108
Cash-------------- 108
Components Cost (as on Jan 01, 01) UL (in years) Depreciation
Transformer 24.0 12 2.0
Major inspection 24.0 6 4.0
Other components 60.0 24 2.5
Total 108.0 8.5
Dec 31, 01 Depreciation expense---------8.5
Acc. Dep.- Engine----------------------8.5
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 ILLUSTRATIONS…
Revaluation Surplus
 A Sugar Corporation has an item of equipment carried in its
books at Br13,000. Two years ago a slump in equipment
values led the corporation to reduce the carrying value from
Br15,000. This was taken as an expense in profit or loss. There
has been a surge in equipment prices in the current year,
however, and the equipment is now worth Br20,000.
Required
Account for the revaluation in the current year.

61
 ILLUSTRATIONS…
Solution
Asset value (statement FP.) -------------------7,000
Reversal of Impairment(P&L)----------------------
2,000 Revaluation surplus
(OCI)---------------------------5,000

62
 ILLUSTRATIONS…
Revaluation Decrease
 The original cost of an equipment is Br 26,000, revalued
upwards to Br30,000 3 years ago. The value has now fallen to
Br20,000.
Required
Account for the decrease in value.

63
 ILLUSTRATIONS…
Solution
Revaluation surplus------------------------------4,000
Profit or loss----------------------------------------6,000
Asset value (statement of financial position) ---------10,000

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 ILLUSTRATIONS…
Revaluation and Depreciation
 A Sugar Corporation bought an equipment for Br10,000 at the
beginning of 20X6. It had a useful life of five years. On 1
January 20X8 the equipment was revalued to Br12,000. The
expected useful life has remained unchanged (i.e. three years
remain).
Required
 Account for the revaluation and state the treatment for
depreciation from 20X8 onwards.

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 ILLUSTRATIONS…
Solution
 On 1 January 20X8 the carrying value of the asset is Br10,000 –
(2 × ETB10,000/5) = Br6,000. For the Revaluation:
Accumulated depreciation----------------4,000
Asset value------------------------------2,000
Revaluation surplus----------------------6,000
 The depreciation for the next three years will be Br12,000/3 =
Br4,000, compared to depreciation on cost of Br10,000/ =
Br2,000 or 6000/3. So each year, the extra Br2,000 can be
treated as part of the surplus which has become realized:
Revaluation surplus---------------2,000
Retained earnings---------------------2,000 66
 IAS 40: Investment Property
Investment Property
 is property (land or a building—or part of a building—or both) held
by the owner or by the lessee under a finance lease to earn rentals
or for capital appreciation or both.
The following are examples of investment property:
 Land held for long-term capital appreciation rather than for short-
term sale in the ordinary course of business.
 Land held for a currently undetermined future use.

 If an entity has not determined that

― it will use the land as owner-occupied property or

― for short-term sale the land is regarded as held for capital

appreciation.
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 Scope of Investment Property
 A building owned by the entity (or held by the entity under a
finance lease) &leased out under one or more operating
leases.
 A building that is vacant but is held to be leased out under
one or more operating leases.
 Property that is being constructed or developed for future
use as investment property.
 A building held by a parent and leased to a subsidiary.

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 Scope of Investment Property….
 Some properties comprise a portion that is held to earn
rentals or for capital appreciation and another portion that is
held for use.
 If these portions could be sold separately an entity accounts
for the portions separately.
 If the portions could not be sold separately, the property is
investment property only
 if an insignificant portion is held for use in the production or
supply of goods or services or for administrative purposes.

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 Initial Recognition and Measurement
of Investment Property
Recognition
 Investment property should be recognized as an asset when
two conditions are met.
 It is probable that the future economic benefits that are
associated with the will flow to the entity.
 The cost of the investment property can be measured reliably.

 Initial measurement

 An investment property should be measured initially at its

cost, including transaction costs.
 Leased investment property is measured according to IFRS 16
Leases
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 Measurement subsequent to initial
Recognition of Investment Property
 After initial recognition, an entity has a choice of methods to
account for investment property:
 Fair value model (FVM), or
 Cost model (CM)
 Must apply one model to all of its investment property
 It should not change from one model to the other unless the
change will result in a more appropriate presentation.
 It is highly unlikely that a change from the FV model to the
CM will result in a more appropriate presentation.

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 IAS 40 – Measurement after
Recognition
Fair value model (FVM):

- Assets are measured at fair value

- Changes in fair value are recognized in profit
or loss in period of change
- No depreciation is recorded
- Fair values continue to be used even if
difficult to measure reliably
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 IAS 40 – Measurement after
Recognition
FVM example:
Investment property is acquired August 11,
2008, at a cost of $200.
Fair values:
December 31, 2008 - $190
December 31, 2009 - $198
December 31, 2010 - $205

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IAS 40 – Initial and Subsequent
Measurement and Recognition: FVM
example
Aug.11/08 Investment property $ 200
Cash $ 200
Dec.31/08 Loss in value $10
Investment property $10
Dec.31/09 Investment property $8
Gain in value $8
Dec.31/10 Investment property $7
Gain in value $7
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 ILLUSTRATIONS…
Investment Property
 A Corporation owns a building which it has been using as a head
office. In order to reduce costs, on 30 June 20X9 it moved its head
office functions to one of its production centers and is now letting
out its head office. Company policy is to use the fair value model for
investment property. The building had an original cost on 1 January
20X0 of ETB 250,000 and was being depreciated over 50 years. At
31 December 20X9 its fair value was judged to be ETB350,000.
Required
How will this appear in the financial statements at 31 December 20X9?
The building will be depreciated up to 30 June 20X9.

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 ILLUSTRATIONS…
 Original cost----------------------------------------------------250,000
 Depreciation 1.1.X0 – 1.1.X9 (250/50 × 9) --------------(45,000)
 Depreciation to 30.6.X9 (250/50 × 6/12) ----------------(2,500)
 Carrying amount at 30.6.X9--------------------------------202,500
 Revaluation surplus------------------------------------------147,500
 Fair value at 30.6.X9-----------------------------------------350,000
 The difference between the carrying amount and fair value is taken
to a revaluation surplus in accordance with IAS 16. However the
building will be subjected to a fair value exercise at each year end
and these gains or losses will go to profit or loss. If at the end of the
following year the fair value of the building is found to be Br380,000,
Br 30,000 will be credited to profit or loss.
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IAS 40 - Transfers

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IAS 40 - Derecognition
Derecognize investment property
 On disposal – when sold or transferred under
a finance lease, or
 On retirement – when permanently removed
from use and no benefits are expected from
its disposal
 Gains and losses on disposal generally
recognized in profit or loss

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IAS 40 - Disclosures
General disclosures:

 whether the FVM or the CM is applied

 if FVM, whether and when any operating leases are classified as
investment property
 criteria used to distinguish between owner-occupied investment
property and property held for sale where judgment is needed
 methods and assumptions underlying fair value measurements,
including extent to which market-related evidence is used
 extent to which the fair values were determined by an experienced,
professional, and independent appraiser
 existence of restrictions and contractual obligations related to the
properties
 amounts and specific types of income and expense recognized in
profit or loss

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IAS 40 - Disclosures

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