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Notes On Accounting For PPE - IAS 16

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Slides cover accounting for PPE under IAS 16

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  1. ADVANCED ACCOUNTING 2017 Week 10 PROPERTY, PLANT AND EQUIPMENT IAS 16; IFRIC 1 & 5
  2. PROPERTY, PLANT AND EQUIPMENT STUDY OBJECTIVES: 2. 3. 4. 5. 6. 7. IDENTIFICATION OF PP&E RECOGNITION OF PP&E ELEMENTS OF COST MEASUREMENT OF INITIAL COST FOREIGN CURRENCY AND HEDGING ASSET REVALUATIONS DEPRECIATION ISSUES 2
  3. PROPERTY, PLANT AND EQUIPMENT STUDY OBJECTIVES: continued 8. 9. 10. 11. 12. 13. IMPAIRMENT OF PP&E COMPENSATION FOR IMPAIRMENTS DERECOGNITION CHANGES IN DECOMMISIONING /RESTORATION PROVISIONS - IFRIC 1 RIGHTS TO INTERESTS ARISING FROM DECOMISSIONING FUNDS - IFRIC 5 DISCLOSURE 3
  4. 1.1 1.2 IDENTIFICATION OF PP&E PPE are tangible assets held for use in production/supply of goods/services for rental to others, or for administration purposes expected to be used > one period Distinguish amongst ????: investment property NCA held-for-sale inventories intangible assets financial assets monetary assets 4
  5. IDENTIFICATION OF PP&E EXAMPLE 1 Do the following qualify as PP&E? goods purchased for resale trademarks purchased with a useful life of 10 years plant acquired under a finance lease own-use factory building under construction office building held for rental income 3-year old truck fleet held-for-sale replaced a major part in a machine investment property under construction 5
  6. 2. RECOGNITION OF PP&E 2.1 2.2 2.3 2.4 2.5 Recognition of PPE 'borrows' conceptual framework principle for both initial and subsequent costs probable inflow of FEB associated with item cost of item can be measured reliably Very NB: concept of 'component accounting' for PPE Major spare parts/ servicing equipment =PP&E if definition met safety and environmental equipment? Replacement parts capitalised eg. relining of furnaces; seats and galleys in aircraft day-to day servicing costs? Major inspection costs — recognise as cost of PP&E 6
  7. ELEMENTS OF COST 3.1 3. PURCHASE COSTS 1 - include..?? - deduct.. DIRECTLY ATTRIBUTABLE COSTS ...means? - incl. costs of testing DISMANTLING, REMOVAL AND RESTORATION 1 - when acquired - other than to produce inventories - estimated per IAS 37 3.2 3.3 Examples that are not PP&E costs eg relocating costs; opening new facility, launch costs Self-constructed assets — excl internal profit/abnormal wastage ILLUSTRATIVE EXAMPLE 15.2; Chapter 15, page 4 ILLUSTRATIVE EXAMPLE 15.3; Chapter 15, page 6 7
  8. 4. 4.1 4.2 4.3 4.4 MEASUREMENT OF INITIAL COST Measured at its cost (define?) PV if deferred payment terms If equity instruments is purchase consideration use fair value of asset acquired unless... i.e.. refer to IFRS2 Share based payments (later) Asset exchanges cost of asset acquired is measured at fair value is it the fair value of asset acquired or given up? use carrying amount of asset given up if: • no commercial substance to transaction • fair values not reliably measurable 'Cost' of asset leased under finance lease? 8
  9. 5. 5.1 5.2 5.3 5.4 5.5 FOREIGN CURRENCY AND HEDGING Spot rate used if PP&E acquired in a foreign currency For a hedged import of PPE, cash flow hedge arises from: forecast transaction or firm commitment (latter by choice) Effective portion of cash flow hedge gains/losses taken to "cash flow hedge reserve" via OCI Subsequently removed from cash flow hedge reserve included directly (not via OCI) in initial cost of PP&E ie. basis adjustment approach (no reclassification allowed) Firm commitment liability/asset in a FV hedge also affects PPE 9
  10. 6. ASSET REVALUATIONS 6.1 6.2 6.3 6.4 6.5 Choose cost model or revaluation model as accounting policy apply policy to entire class (meaning of 'class'??) Applies if fair value of PP&E can be measured reliably Carry at 'revalued amount' which means: FV at date of revaluation less acc depr and acc impairment Revaluation to be made with sufficient regularity. Why? annually or less frequently!!! Use IFRS 13 Fair Value Measurementto determine 'fair value'. fair value hierarchy Market-based valuation techniques 10
  11. 6. ASSET REVALUATIONS 6.6 6.7 Revaluation principle - CA adjusted to revalued amount Methods to record revaluation Two methods to record revaluation Adjust gross CA and Acc Depr (2 approaches) use observa le market data or GCA Eliminate Acc Depr against gross CA OR restate GCA proportionately
  12. 6. ASSET REVALUATIONS 6.8 Cost Note that in the "Adjust gross CA" approach: accumulated depreciation is adjusted to equal difference between GCA and CA Exam le of "AdUst ross CA" vs restate GCA ro ortionatel Assume fair value/revalued amount is RIO 000 Acc depr Before revaluation 5 000 2 000 3 000 Adjust GCA 19 000* 9 000 10 000 where GCA determinable/observable Restate GCA ro ortionatel 16 667 6 667 10 000 12
  13. 6. ASSET REVALUATIONS 6.9 Revaluation increase gain recognised in 'other comprehensive income -OCI' accumulated in equity under 'revaluation surplus' unless it reverses a prior devaluation /impairment • in this case take revaluation up to DHC to P/L NB. recognise deferred tax on revaluation ILLUSTRATIVE EXAMPLE 15.11; Chapter 15, page 20 ILLUSTRATIVE EXAMPLE 15.12; Chapter 15, page 21 EXAMPLE 2 - attached 13
  14. 6. ASSET REVALUATIONS 6.10 6.10 6.11 Revaluation decrease recognise in P/L unless it reverses a previous revaluation in this case recognise decrease in OCI to the extent of any pre-existing surplus for that asset May transfer revaluation surplus to retained earnings. When? Note: this transfer must NOT go through P/L or OCI Change of intention for a revalued asset and deferred tax ILLUSTRA TIVE EXAMPLE 15.13; Chapter 15, page 24 14
  15. 7. DEPRECIATION ISSUES 7.1 7.2 7.3 7.4 Allocate cost to significant parts (components) and depreciate components separately (eg. aircraft engine and aircraft frame) Depreciation to P/L but can also be capitalised eg. inventories; intangible assets (R&D costs) Residual values and useful life reviewed at each reporting date if changed, treat as change in accounting estimate meaning of 'residual value' ????? If residual value = or > CA: depreciation charge is zero may resume in future though ILLUSTRATIVE EXAMPLE 15.10; Chapter 15, page 17 15
  16. 7. DEPRECIATION ISSUES 7.5 7.6 7.7 7.8 Depreciation starts: when asset is available for use and ceases earlier of date that asset is classified as held- for-sale or is derecognised Land not depreciated Buildings always depreciated unless... (list!) Review depreciation method at each reporting date method reflects pattern of FEB expected to be consumed may be significant change in expected pattern of consumption latter is a change in accounting estimate (eg RB 16
  17. 8. IMPAIRMENT OF PP&E 8.1 8.2 8.3 8.4 8.5 At reporting date, if there are indicators of impairment: review carrying amounts for impairment Impairment occurs if recoverable amount is less than carrying amount Recoverable amount is the higher of fair value less cost to sell or value in use Prior year impairment losses may be reversed Details of impairment dealt with in IAS 36 Impairment of assets (refer later week) 17
  18. 9. 9.1 9.2 9.3 COMPENSATION FOR IMPAIRMENTS Such compensation included in P/L when becomes receivable Identify the separate economic events separately and account for separately Separate economic events are: the impairment the derecognition (if applicable) compensation from third party (eg. insurance company) the cost of items restored/ purchased as replacements ILLUSTRATIVE EXAMPLE 15.14; Chapter 15, page 25 18
  19. 10.1 10.2 10.3 10. DERECOGNITION Besides disposal, asset also derecognised if no future economic benefits are expected from use or disposal Gains/losses on derecognition: recognised in P/L not classified as revenue is the difference between net disposal proceeds and carrying amount may be treated differently on sale and leaseback Date of disposal of PPE is date is when recipient obtains control per satisfaction of performance obligations i.t.o IFRS 15 19
  20. 10.4 10.5 10. DERECOGNITION Entities that routinely sells PPE that was previously held for rental purposes - P68A of IAS 16 eg Avis Car Rentals such assets are transferred to inventories when cease to be rented and become held for sale and are transferred at their carrying amounts proceeds from sale recognised as revenue per IAS 18 IFRS 5 Non-current Assets Held for Sale does not apply Derecognise the carrying amount of the replaced part whether or not depreciated separately may use the cost of replacement as indication of cost EXAMPLE 3 - attached 20
  21. CHANGES IN DECOMMISSIONING 11. [RESTORATION PROVISIONS Initial cost includes estimate of dismantling/restoration — IAS 16 11.1 note link with IAS 37 re provision what if changes in existing provision? IFRIC 1 applies eg due to changes in expected CFS or discount rate If cost model used: 11.2 change in liability added to /deducted from cost of asset if deducted — cannot exceed carrying amount — if so, excess recognised in P/L if added — may be an 'impairment indicator', if so test for impairment ILLUSTRA TIVE EXAMPLE 15.15; Chapter 15, page 27 21
  22. CHANGES IN DECOMMISSIONING 11. [RESTORATION PROVISIONS If revaluation model used: 11.3 change in liability alters previous revaluation surplus/deficit decrease in liability • recognised in OCI to increase revaluation reserve • or in P/L to extent that it reverses a previous revaluation deficit • but if decrease in liability exceeds DHC, excess recognised in P/L increase in liability • recognised in P/L • or recognise in OCI to extent of any credit balance existing in revaluation reserve change in liability may require revaluation ILLUSTRATIVE EXAMPLE 15.16; Chapter 15, page 28 22
  23. 12.1 12.2 12.3 12. RIGHTS TO INTERESTS ARISING FROM DECOMISSIONING FUNDS IFRIC 5 - applies to accounting in the FS of a contributor for interests arising from decommissioning funds where the assets are administered separately and contributor's right to access the assets are restricted Accountinq for interests in a "fund" (meaning??) recognition of obligation to pay decommissioning costs and recognition of its interests in the fund separately contributor to determine if it has control, joint control or significant influence and account for fund accordingly if no control, joint control or significant influence, recognise right to receive reimbursement from the fund ito IAS 37 Accounting for obligations to make additional contribution eg bankruptcy of another party, use IAS 37 accounting.. 23
  24. 13. For each class: DISCLOSURE 13.1 13.2 13.3 13.4 measurement bases used depreciation methods useful lives / depreciation rates Gross carrying amounts and accumulated deprecation accumulated depreciation aggregated with accumulated impairment losses Reconciliation of the carrying amount 'note' to AFS from beginning of year to end of year typical test/exam disclosure question Other??? 24

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