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Chapter 8 HKAS 16 Property, Plant and Equipment

1.1 1.2 1.3 1.$ 1.% 1."

Define property, plant and equipment (不動產,厰房和設備). Explain all the cost elements and initial measurement of property, plant and equipment. Discuss the requirements of HK ! 1" in respect of the reco#nition criteria for property, plant and equipment. ccount for the exchan#e of assets. Discuss the accountin# treatment of re&aluation, diminution in carryin# &alue and depreciation of property, plant and equipment. Descri'e the disclosure requirements under HK ! 1".
!cope + D e fi n i ti o n

( e c o # n i ti o n

,n i ti a l ) easurem ent

! u'sequent E x p e n d i tu r e

E xchan#e o f s s e ts

! u'sequent ) easurem ent

D e p r e c i a ti o n

( e ti r e m e n t + D isp o sa ls

( e & a l u a ti o n s

* a rryin# m ount


Scope and Definition
HK ! 1" addresses the follo-in# issues. (i) reco#nition criteria for property, plant and equipment/ (ii) costs -hich can 'e included in the &alue of a non0current asset/ (iii) exchan#e of assets/ (i&) transfer 'et-een different types of assets, e.#. 'et-een non0current assets and in&entories/ (&) re&aluation/



(&i) accepta'le depreciation methods/ and (&ii) the accountin# treatment of diminution in &alue of assets. 3he !tandard does not apply to. (i) 'iolo#ical assets related to a#ricultural acti&ity (HK ! $1 4 #riculture5)/ or (ii) mineral ri#hts and mineral reser&es such as oil, natural #as and similar non0 re#enerati&e resources/ and Ho-e&er, the !tandard applies to property, plant and equipment used to de&elop or maintain the assets descri'ed a'o&e. DEFINI I!NS (a) Property, plant and equipment are tan#i'le assets that. (i) are held 'y an enterprise for u"e in the produ#tion or "upply o$ %ood" or "er&i#e", $or rental to other", or $or admini"trati&e purpo"e"/ and (ii) are expected to 'e u"ed durin# more than one period. Depre#iation is the systematic allocation of the deprecia'le amount of an asset o&er its estimated useful life. Depre#ia'le amount is the cost of an asset, or other amount su'stituted for cost in the financial statements, less its estimated residual &alue. (e"idual &alue is the net amount -hich the enterprise expects to o'tain for an asset at the end of its useful life after deductin# the expected costs of disposal. Fair &alue is the amount for -hich an asset could 'e exchan#ed 'et-een 6no-led#ea'le, -illin# parties in an arm7s len#th transaction. Carryin% amount is the amount at -hich an asset is included in the 'alance sheet after deductin# any accumulated depreciation and accumulated impairment losses. (e#o&era'le amount ( 可 收 回 價 產 ) is the hi#her of an asset7s net sellin# price and its &alue in use.


(') (c) (d) (e) (f)



Recognition of Property, Plant and Eq ip!ent
(EC!)NI I!N C(I E(IA HK ! 1" states that an item of property, plant and equipment should 'e re#o%ni*ed as an asset in the 'alance sheet -hen. (i) it is pro'a'le that $uture e#onomi# 'ene$it" associated -ith the asset -ill $lo+ to the enterpri"e (satisfied -hen ris6s and re-ards ha&e passed to enterprise)/ and

1 #o!ponent of #ost C!-P!NEN !F C!S .2 the #o"t of the asset to the enterprise can 'e mea"ured relia'ly.n most cases. ".2 $. $. 4cash price equi&alent5 of the purchase price -ould 'e rele&ant. 9here items of property.t is "ati"$ied #enerally +hen the ri". the purchase price is easily determina'le. includin# import duties and non0refunda'le purchase taxes. (i) its pur#ha"e pri#e.(ii) 3. Ho-e&er. plant and equipment." and re+ard" in#ident to the o+ner"hip o$ the a""et ha&e pa""ed to the entity.3 . plant and equipment a#quired $rom the mar. 3./ P0(CHASE 3he cost of an item of property. -here the purchase price is not quoted or paya'le in cash. the o'li#ation for -hich an entity incurs either -hen the item is acquired or as a consequence of ha&in# used the item durin# a particular period for purposes other than to produce in&entories durin# that 'ecause of the existence of an external transaction. #i&en that there is a purchase transaction. $. a relia'le mea"urement of the costs in#urred in the #on"tru#tion is also often readily a&aila'le. the concept of 4#a"h pri#e equi&alent5 should a#ain 'e used. 8or internally #on"tru#ted items of property. 3he "e#ond #riterion is easily "ati"$ied for items of property. plant and equipment comprises. 3he di$$eren#e 'et+een the #a"h pri#e equi&alent and the total payment is reco#nised a" intere"t co&er the period of credit unless such interest is reco#nised in the carryin# amount of the item in accordance -ith the allo-ed alternati&e treatment 1203 . 3he cash price equi&alent -ill 'e equal to the pre"ent &alue o$ the #a"h payment".of future economic 'enefits at the time of the initial reco#nition. after deductin# trade discounts and re'ates/ (ii) any #o"t" dire#tly attri'uta'le to 'rin%in% the a""et to the lo#ation and #ondition necessary for it to 'e capa'le of operatin# in the manner intended 'y mana#ement/ and (iii) the initial e"timated o$ the #o"t" o$ di"mantlin% and remo&in% the item and re"torin% the "ite on +hi#h it i" lo#ated . .3 3he $ir"t #riterion is satisfied -hen there is a hi#h de#ree of certainty attached to the flo. plant and equipments are purchased and to 'e paid for 'eyond normal #redit term".

3he cost of the demolition should 'e char#ed to the land as these costs are necessary to #et the asset into the desired condition. E1A-P2E 1 *ost of land may comprise.> 120$ .n this case the entire cost should 'e char#ed to the land account and the 'uildin#s are to 'e demolished.% $.$.location or -ith a ne.$ $.product or ser&ice/ (iii) costs of conductin# 'usiness in a ne. @urchase price of land and 'uildin#s (emo&al cost of existin# 'uildin#s ttorney7s fee :ro6er7s commission !tamp duty ? AA AA AA AA AA AA $. architects and en#ineers/ and (&) costs of testin# -hether the asset is functionin# properly. plant and equipment. !ometimes land and 'uildin#s are acquired to#ether -hen the purchaser7s real purpose is =ust to acquire the land. 3he !tandard specifically pro&ides that the $ollo+in% are not the #o"t" o$ an item of property. . 4Employee :enefits5) arisin# from the construction or acquisition of the item of property. (i) costs of employee 'enefits (as defined in HK ! 1. Dire#tly attri'uta'le #o"t". after deductin# the net proceeds from sellin# any items produced -hile 'rin#in# the asset to that location and condition (such as samples produced -hen testin# equipment). are." in HK ! 23 4:orro-in# *osts5.class of customer/ and (i&) administration and other #eneral o&erhead costs. <and and 'uildin#s are usually purchased to#ether and the total cost must 'e apportioned 'et-een the land account and the 'uildin# account. for example. plant and equipment/ (i) the cost of site preparation for land/ (ii) initial deli&ery and handlin# costs for plant/ (iii) installation costs of plant/ (i&) professional fees such as for la-yers.facility/ (ii) costs of introducin# a ne. (i) costs of openin# a ne.

nsurance premium 2 9arranty 2 )aintenance 3 3he company recei&ed a 1CD trade discount on the list price and then a further 3D discount for payment on deli&ery. cash discount .nstallation costs 2C @re0production testin# 1C . 3he related costs -ere as follo-s. Bross in&oice price <ess. 3he maintenance occurred after the start of production and -as required 'y the 120% .nsurance char#es ? AA AA ? $. any discount or re'ate should 'e deducted from the acquired cost. 3he supplier offers three months7 credit.2 9hen machinery or equipment is purchased. 3he testin# cost should also 'e included in the purchase cost if the equipment needs to 'e tested 'efore proper operation.nstallation char#es 3estin# of installed equipment . )oreo&er. ?CCC <ist price 1CC . frei#ht char#es and installation costs. AA AA AA AA AA AA AA $. 'ut :* <td chose to ta6e the settlement discount.$.machine durin# the year..1C E1E(CISE 1 :* <td purchased a ne. E1A-P2E 3 *ost of equipment may comprise.CCC on installin# the -ron# machine supports at first. the cost normally includes the purchase price.ncidental expenditures 8rei#ht char#es . tax. 3he installation should ha&e cost of ?12.CCC 'ut :* <td -asted ?2.

E1E(CISE 3 n entity started construction on a 'uildin# for its o-n use on 1 incurred the follo-in# costs.12 . 120" $.11 . @urchase price of land !tamp duty <e#al fees !ite preparation and clearance )aterials <a'our (period 1 pril 2CC> to 1 Fuly 2CC2) rchitect7s fees Beneral o&erheads pril 2CC> and ?CCC 2%C. :oth the -arranty and the insurance -ere for one year only.CCC 3C. *onstruction cost in#lude" the #o"t o$ ra+ material".n addition.CCC %23. #on"uma'le" and other dire#t #o"t" o$ produ#tion (such as la'our).CCC 2C. .CCC 3he follo-in# information is also rele&ant.CCC 1CC.CCC 12.n the case of a self0constructed asset.CCC %.-arranty. a reasona'le proportion of indirect production costs and the intere"t on 'orro+ed #apital to $inan#e the produ#tion of that asset may 'e added. Solution4 $. 'ut only in so far as they relate to the period o$ produ#tion. *alculate the initial cost at -hich :* <td should reco#niEe the machine.CCC 1%C.CCC 1C. a relia'le measurement of the cost should 'e made.

3he 'uildin# -as completed on 1 Fuly 2CC2 and occupied on 1 !eptem'er 2CC. -or6 on the 'uildin# ceased for a fortni#ht durin# Gcto'er 2CC> and it is estimated that approximately ?. s a result of these pro'lems. Solution4 120> . Gn in&esti#ation..(a) (') (c) )aterials costs -ere #reater than anticipated. million of the la'our costs relate to this period. it -as found that materials costin# ?1C million had 'een spoiled and therefore -asted and a further ?1% million -as incurred as a result of faulty desi#n -or6. (equired4 Hou are required to calculate the cost of the 'uildin# that -ill 'e included in tan#i'le non0current asset additions.

plant and equipment should 'e measured.% . (1) 3he addition to plan is made up of the follo-in#.the initial cost of property.nstallation costs @re0production testin# 1202 ho.. dditions at cost (note 1) Depreciation for the year Disposal (note 2) :alance at 31 Decem'er 2CC.2$ 1.$.".. (i) (ii) (') the meanin# of property."2$ $"C (1CC) 1.C$".2 1. @lant and Equipment5.% $. plant and equipment as an asset/ and ($ mar6s) ($ mar6s) 3he follo-in# schedule of the mo&ement of plant has 'een drafted for Hanford <td the year to 31 Decem'er 2CC. (a) Explain. ?7CCC :asic list price of plant <ess. 1otes. !hippin# and handlin# costs .% 1C 12. plant and equipment and the criteria for reco#nition of property.13 E1E(CISE 5 ns-er the follo-in# questions -ith reference to HK ! 1" 4@roperty. 3rade discount Early settlement discount (efunda'le sales tax ncillary costs. *ost ?7CCC :alance at 1 Fanuary 2CC.2 ?7CCC $2C ("3) (>) 3%C 1C. Depreciation ?7CCC "%C 3.

plant. .CCC is the proceeds from the sale of an item of plant durin# the year. t the end of this period compulsory costs of ?2C.% $"C Hanford had incorrectly specified the po-er loadin# of the ori#inal electrical ca'le to 'e installed 'y the contractor. 3he plant had cost ?3CC. (2) 3he disposal fi#ure of ?1CC.CCC -ill 'e incurred to dismantle the plant and ?%.CCC on 1 Fanuary 2CC" and had 'een correctly depreciated prior to disposal.CCC.%CC to correct this error/ this is included in the a'o&e fi#ure of ?21. ( dapted HK (1C mar6s) (1 mar6) (" mar6s) (3otal 2% mar6s) 3 @aper > d&anced ccountin# Decem'er 2CC2 *2) (iii) @repare a corrected schedule of the mo&ements on the cost and depreciation of Solution4 120.2% 11. 3he company incurred ?.. (3) Hanford char#es depreciation of 1CD per annum on the cost of plant held at the year end. 3he plant is expected to last for 1C years. *alculate the accumulated depreciation on the plant disposed of.3hree0year maintenance contract !ite preparation cost Electrical ca'le installation *oncrete reinforcement G-n la'our costs 21 ". (equired4 (i) (ii) *alculate the amount at -hich the initial cost of the addition to the plant should 'e measured.2% 3$ 32.CCC to restore the site to its ori#inal condition.

1201C .

1$ Su'"equent #o"t" fter the date of acquisitionIexchan#eIconstruction. these costs are re#o%ni"ed in pro$it or lo"" as incurred.1> (b) $.6A7 $.1% $. after a motor &ehicle is acquired.n accordance -ith HK ! 1". installation of air0conditionin# system. (ather. 8or example. 8or example. plant and equipment may also 'e acquired to ma6e a less frequently recurrin# replacement. plant and equipment -ill normally ha&e to 'e incurred. (iii) n impro&ement of the existin# production process -hich results in cost sa&in#s.12 . (&) ma=or o&erhaul of an asset that restores its pre&ious life/ therefore. (i) modification to the asset enhances the production capacity of an asset. plant and equipment may require replacement at re#ular inter&als. Major components requiring regular replacements @arts of some items of property. or aircraft interiors such as seats and #alleys may require replacement se&eral times durin# the life of the airframe. . (i&) ma=or component of an asset that has 'een treated separately is replaced or restored/ for example. cost on the replacement of motor oil and tyre. and ma=or o&erhaul mi#ht ha&e to 'e incurred. circumstances in -hich "u'"equent e8penditure on those assets 'ein# #apitali*ed should depend on -hether the expenditure incurred -ill result in a pro'a'le $uture e#onomi# 'ene$it in e8#e"" o$ the amount ori%inally a""e""ed for the asset. (ii) 3he up#radin# of an asset that -ill impro&e the quality of production or output. the consumption of the pre&ious economic 'enefits has 'een reflected 'y past depreciation char#es. plant and equipment the #o"t" o$ the day9to9day "er&i#in% (often referred as 4repair and maintenance5) of the item. additional (su'sequent) cost relatin# to property. ll other su'sequent expenditure should 'e reco#niEed in the income statement as it is incurred. 3he 'asic question arises is -hether such cost should 'e reco#nised in the carryin# amount of the asset.en#ines for a machine.tems of property. ne. Examples of circumstances -here su'sequent expenditure should 'e capitaliEed are. or in profit or loss as an expense -hen incurred.1" (a) $. . a furnace ( 火爐 ) may require relinin# after a specified num'er of hours of use. Day-to-day servicing costs 3he !tandard pro&ides that an entity should not re#o%ni*e in the carryin# amount of an item of property. such 12011 $.

the cost of the existin# inspection component. Major inspections or overhauls (大修) condition of continuin# to operate an item of property. -hich is then depreciated o&er the period of fi&e years to the next o&erhaul. -as HK?$ million. or to ma6e a non0recurrin# replacement. Jnder the #eneral reco#nition principle.1.$. 3his occurs re#ardless of -hether the cost of the pre&ious inspection -as identified in the transaction in -hich the item -as acquired or constructed. its cost is reco#nised in the carryin# amount of the item of property. 3herefore. .ship. -ill 'e depreciated o&er the -hole estimated useful life of the ship. . ny remainin# carryin# amount of the cost of the pre&ious inspection (as distinct from physical parts) is dereco#nised. excludin# the o&erhaul cost of HK?$ million. .2C $. the estimated cost of a future similar inspection may 'e used as an indication of -hat the cost of the existin# inspection component -as -hen the item -as acquired or constructed. for example 3C years. 3his ship -ill 'e required to under#o a dry doc6 o&erhaul e&ery fi&e years to restore its ser&ice potential. the cost of HK?3" million.21 $. estimated 'y the cost of an inspection if it had 'een performed at the time of the purchase of the ship. 3he carryin# amount of those parts that are replaced is dereco#nised in accordance -ith the dereco#nition pro&isions.2 million.f Entity is not a'le to estimate relia'ly the cost an existin# inspection -hen it acquired the ne. the -hole of HK?$C million should 'e depreciated o&er 3C years. E1A-P2E 5 Entity purchases a ne.22 $.23 . 9hen each ma=or inspection is performed. t the time of purchase. plant and equipment (for example. plant and equipment the #o"t o$ repla#in% part of such an item -hen that cost is incurred i$ the re#o%nition #riteria are met. 3he cost on o&erhaul of HK?$ million -ill 'e depreciated o&er % years. 12012 (c) $. as replacin# the interior -alls of a 'uildin#. resultin# in an annual depreciation of HK?C. an entity reco#nises in the carryin# amount of an item of property.f necessary. plant and equipment as a replacement if the reco#nition criteria are satisfied. an aircraft) may 'e performin# re#ular ma=or inspections for faults re#ardless of -hether parts of the item are replaced. the inspection expenditure is capitalised (assumin# that the reco#nition criteria are satisfied).ship for HK?$C million.2 million.n year " -hen a dry0doc6in# is carried out. resultin# in an annual depreciation char#e of HK?1.

plant and equipment is acquired in exchan#e for a non0 monetary asset. (') (eplacement of rottin# -indo-s in the head office. %.CCC units a year to 1$C.$.1 E%c&ange of 'ssets 9hen an item of property. then the $air &alue o$ the a""et %i&en up is u"ed to mea"ure the #o"t o$ the a""et re#ei&ed unless the fair &alue of the asset recei&ed is more 12013 %. plant and equipment.n each of the follo-in# cases =ustify -hether or not the expenditure should 'e capitaliEed and 'e included in the carryin# amount of an item of property.en#ine is fitted to a machine -hich -ill increase its production capacity from 1CC. (a) ne. Solution4 $. (c) (eplacement of an aircraft en#ine e&ery fi&e years. the cost of the asset acquired should 'e mea"ured 'a"ed on the $air &alue unless (a) the exchan#e transaction lac6s commercial su'stance or (') the fair &alue of neither the asset recei&ed nor the asset #i&en up is relia'ly measura'le. .2$ E1E(CISE : .f an entity is a'le to determine relia'ly the $air &alue o$ either the a""et re#ei&ed or the a""et %i&en up.2 .CCC units a year.

$ 3he trade0in &alue constitutes part of the sale price of the ne. 1201$ .CCC ? *ost of ne. E1A-P2E : ssume that *ity <td trades in the truc6 for an office equipment (a dissimilar item).office equipment and #enerates a #ain of ?%CC (?%.f an exchan#e la#.%CC %. the truc6 has a 'oo6 &alue of ?%. Dr.%CC K ?%.%. 3he fair &alue may refer to the cost of ne. .office equipment in this case and the accountin# entries to record such an exchan#e -ould 'e. (?) Gffice equipment ccumulated depreciation K truc6 *ash Bain on disposal of fixed assets 3ruc6 .CCC (.CCC ccumulated depreciation %. the acquired item in the exchan#e is not measured at fair &alue and is mea"ured at the #arryin% amount o$ the a""et %i&en up.3 clearly e&ident..CCC *r.%CC %CC equipment 3rade0in allo-ance for old truc6 *ash payment 1%.CCC %.CCC %. plant and equipment. "." #ommer#ial "u'"tan#e or $air &alue #annot 'e mea"ured relia'ly. t the time of the exchan#e.CCC). (?) 1%. ? *ost of truc6 1C.CCC as follo-s.. an entity should choose either the cost model or the re&aluation model as its accountin# policy and should apply that policy to an entire class of property.1 )eas re!ent after Recognition fter reco#nition as an asset.%CC .CCC %.

Item" +ithin a #la"" of property. plant and equipment that experience si#nificant and &olatile mo&ements in fair &alues -ould ha&e to 'e re&alued annually. and the fair &alue of other items of property. (a) ". 3he fair &alue of land and 'uildin#s is usually determined from mar. an item of property. items of property. Accounting for revaluation (e&aluation surpluses or deficits are measured as the difference 'et-een the re&alued amounts and the carryin# amounts at the date of the &aluation.n compliance -ith the !tandard. plant and equipment -ith only insi#nificant mo&ements in fair &alues. .7 ". pro&ided that the re&aluation of the class of assets is completed -ithin a short period of time and that the indi&idual re&aluations are 6ept up to date.$ Basis and frequency of valuation . 6. plant and equipment -hose fair &alue can 'e mea"ured relia'ly should 'e carried at a re&alued amount. lternati&ely.f re&aluation is adopted.3 (e&aluation model 6重估價模式 7 (e&aluation -odel fter reco#nition as an asset.2 Co"t model 6成本模式 7 Co"t -odel fter reco#nition as an asset. the asset should 'e &alued at its fair &alue. plant and equipment is usually their mar6et &alue determined 'y appraisal. annual re&aluations -ould 'e unnecessary. an item of property.nstead a re&aluation e&ery three or fi&e years may 'e sufficient. plant and equipment should 'e re&alued "imultaneou"ly. 1201% ". Ho-e&er. a class of assets may 'e re&alued on a rollin# 'asis.et9'a"ed e&iden#e 'y appraisal that is normally underta6en 'y professionally qualified &aluers.% ". for property.> . plant and equipment should 'e carried at its #o"t le"" any a##umulated depre#iation and any a##umulated impairment lo""e". ." (b) ". 'ein# its fair &alue at the date of the re&aluation le"" any "u'"equent a##umulated depre#iation and "u'"equent a##umulated impairment lo""e".6A7 ".

a deficit on re&aluation should 'e de'ited directly to the re&aluation reser&e to the extent that of any credit 'alance existin# in the re&aluation reser&e in respect of that (same) asset.. *ost of machine at 1.t is important to note that the term 4that same asset5 refers to an indi&idual item of property. plant and equipment. 4 re&aluation "urplu" 6or re"er&e75. portfolio approach to re&aluation is therefore precluded.13 ". (i) 'oth the #ross carryin# amount and the accumulated depreciation are restated proportionately in order to #i&e a net carryin# amount equal to the net re&alued amount.1C ". an increase in net carryin# amount (re&aluation surplus) should 'e credited directly to equity under a separate headin#. Gn the other hand. ".2 ".. 3o record the effects of the re&aluation.CCC *r.12 Jpon an initial re&aluation.CCC ". (?) $C. 31. a re&aluation surplus should 'e reco#nised in profit or loss to the extent that it re&erses a re&aluation decrease in respect of the same asset pre&iously reco#nised in profit or loss.1$ 3he accountin# entries to record the re&aluation -ould 'e.CCC 2C.". Ho-e&er. 3he #eneral accepted practice in Hon# Kon# is to use the second method.2CC3 )achine ccumulated depreciation (?2C. and a decrease in net carryin# amount (deficit on re&aluation) should 'e reco#nised in profit or loss. the !tandard pro&ides for t-o methods. ssume the follo-in#s.12. (?) .1. E1A-P2E . the asset is deemed to 'e a 4ne-5 asset.1.2CC3 ?2C.$ Depreciation method (e&alued amount in 31.CCCI$C x 1C) 1201" Dr. . 3his method is often used -hen an asset is re&alued 'y means of applyin# an index to its depreciated replacement/ and (ii) the a##umulated depre#iation i" eliminated and the net re&alued amount is treated a" the ne+ %ro"" #arryin% amount. upon a su'sequent re&aluation.12. 3he rationale for this method is that after re&aluation.CCC !trai#ht line $C years ?12C.11 ".

(?m) 1ote that ?1Cm pre&iously 'een reco#niEed as an -ill $orm the 'a"i" $or #al#ulatin% the depre#ia'le amount. (c) ". instead of its cost. plant and equipment for the purposes of depreciation is defined as its cost.CCC ".sset re&aluation reser&e "C. less its residual &alue. is no.1% E1A-P2E 6 3he cost and fair &alue of land is #i&en as follo-s. or other amount su'stituted for cost. *ost of land 8air &alue of land t 2CC2 t 2CC3 t 2CC$ Dr. the re&alued amount. 3hus. +hen an a""et ha" 'een re&alued.1" Depreciation of revalued assets Depre#iation o$ (e&alued A""et" 3he deprecia'le amount of an item of property. (?m) 2CC2 <and (e&aluation reser&e 2CC3 @rofit and loss account (e&aluation reser&e <and 2CC$ <and (e&aluation reser&e @rofit and loss account 1CC 1CC 1C 1CC 11C "C %C 1C ?m 1CC 2CC .C 1%C *r. n annual re"er&e" tran"$er may 'e made (re&aluation reser&e to retained earnin#s) 1201> .

the depreciation char#e for the 'uildin# for each of the next $C years -ould 'e ?2CC. 3he ne.n this case.CCC.CCC. the annual depreciation char#e for the 'uildin# for each of the first ten years had 'een ?1CC.CCCI%C). . .CCC (?2. -hen the 'uildin# -as carried in the 'oo6s at ?$. it -as re&alued to its fair mar6et &alue of ?2.2C Disposals of revalued assets 3he re&aluation reser&e included in equity may 'e transferred directly to retained 12012 .t depends on the company policy.CCC.deprecia'le amount thus calculated is then allocated o&er the remainin# useful life of the asset. the depre#ia'le amount ha" to 'e re#al#ulated.CCC. 3herefore. and -as depreciated usin# the strai#ht0line method.CCCI$C). -hen an a""et is re&alued. 3he 'uildin# -as expected to ha&e a useful life of %C years -ith no residual &alue.CCC. (d) ". depends on company policy) Dr (e&aluation reser&e *r (etained earnin#s ? A ? A A A ".1.CCC. E1A-P2E < : <td 'ou#ht a 'uildin# at a cost of ?%.CCC.$or e8tra depre#iation on the re&alued amount compared to cost (measured as the difference 'et-een depreciation char#e 'ased on re&alued amount and the char#e 'ased on historic cost). fter ten years.CCC (?%. Fournals Dr Depreciation char#e K @+< *r ccumulated depreciation (3he follo-in# is optional entries. ".1> ". the re"idual &alue of the asset should 'e re&ie+ed at lea"t at ea#h $inan#ial year9end. t the date of re&aluation. 'ased on the re&alued amount and the ne-ly estimated residual &alue.12 lso.CCC. the 'uildin# -as estimated to ha&e another $C years of useful life and no residual &alue. 1ote that 'efore the re&aluation.

CCC (?"C.CCC *r.CCC 1ote that additional ?2. the amount of the reser&e is the difference 'et-een depreciation 'ased on the re&alued carryin# amount of the asset and depreciation 'ased on the asset7s ori#inal cost.CCCI3C) Dr.12. (?) 2. part of the reser&e may 'e realiEed as the asset is used 'y the enterprise/ in such a case.2CC$ 3he accountin# entries -ould 'e.1.CCCI$C x 1C) ssets re&aluation reser&e Hear 2CC$ Depreciation ccumulated depreciation (?12C.21 E1A-P2E 8 ssume the follo-in#s. 31.12.2CC3 Disposed in 31.CCC $.CCC $.CCC 2C. 3he accountin# entries on disposal -ould 'e.12.$ Depreciation method (e&alued amount in 31.1.CCC ?13C.2CC$ ssets re&aluation reser&e (etained profits :an6 1201.CCC 13C. ". 3he re&aluation reser&e included in equity may 'e transferred directly to retained earnin#s (and is distri'uta'le) -hen the reser&e is realiEed.CCC 2..CCC .CCCI3C) depreciation is char#ed to profit and loss account due to re&aluation. *ost of machine at 1. (?) $C. Ho-e&er. 3he reser&e may 'e realiEed on the retirement or disposal of the asset.2CC3 )achine ccumulated depreciation (?2C. Dr. 3he transfer from re&aluation reser&e to retained profits is not made throu#h the profit and loss account.CCC "C.profits -hen the reser&e is realiEed. (?) 31. *r. (?) ?2C.CCC !trai#ht line $C years ?12C.12.

CCC 1ote that the total #ain on disposal of assets 'ased on the historical cost &alue should 'e ?>2. Gther methods include the sum of the years di#its method and the sin6in# fund and annuity methods.CC 12C. 1202C >.CCC miles. under -hich periodic depreciation is computed 'y reference to the use or output of the asset period 'y period. 3he purchase cost of the &ehicle is ?"C. >. under -hich periodic depreciation is computed as a constant proportion of the asset7s historical cost or su'stituted amount.2 >. (i) 3he strai#ht line method.CCC 1$. -ith a nil residual &alue at the end of this milea#e. under -hich periodic depreciation is computed 'y di&idin# the deprecia'le amount of the asset 'y the expected num'er of accountin# periods durin# its useful life/ (ii) 3he reducin# 'alance method.CCC L ?1$.1 Depreciation HK ! 1" does not "pe#i$y the u"e o$ any method in particular.ccumulated depreciation )achine Bain on disposal of assets (e&aluation reser&e (etained profits $C.CCC. Deprecia'le amounts are allocated to accountin# periods usin# &arious systematic methods of allocation. 'ut states that the methods used should reflect the pattern in -hich the asset7s economic 'enefits are consumed 'y the entity.CCC (?%2.3 6A7 >. E8ample" o$ depre#iation method" E1A-P2E = > -a#hine hour" method 6or output method7 3he useful life of a motor &ehicle is estimated to 'e 1CC. 3he depreciation char#es are as follo-s. *. of -hich the three most commonly used methods are.CCC %2. -hich include the imputed interest in the computations.CCC) and the assets re&aluation reser&e is realiEed on disposal of the asset.$ .CCC %2. less accumulated depreciation/ and (iii) 3he production or ser&ice output method.

>.2 . Not to depre#iate frequently as6ed question is -hether there is a need to pro&ide for depreciation if the fair &alue of the asset concerned is #reater than its cost.Hear 1 2 )ilea#e 3%. year 1 M $I1C  (?1C. .CCC ?1C. the method should 'e chan#ed to reflect the chan#ed pattern.CCC and so on in later years.CCC Depreciation (?) M 21.CCC 1C. 3his question arises 'ecause depreciation is often misconstrued as a &aluation process. 12021 6.%CC K ?%CC) Depreciation." 3he depre#iation method applied to an asset "hould 'e re&ie+ed at lea"t at ea#h $inan#ial year9end.CCC (3C. 3he !tandard pro&ides that a chan#e in depreciation method should 'e accounted for as a chan#e in an accountin# estimate in accordance -ith the pro&isions of HK ! 2.CCC 3.CCC (3%.CCC)  ?"C.% E1A-P2E 1? > Sum o$ the year di%it" method *ost of assets (esidual &alue Estimated useful life !um of year di#its.f there has 'een a si#nificant chan#e in the expected pattern of consumption of the future economic 'enefits em'odied in the asset.t is not a process of accountin# for the chan#e in the &alue of assets.CCC 3C.CCC)  ?"C. year 2 M 3I1C  ?1C.CCC ÷ 1CC.7 >.CCC 2.%CC ?%CC $ years $ L 3 L 2 L 1 M 1C $.CCC 1. .CCC M 12. year 3 M 2I1C  ?1C.> >.CCC Depreciation. Depreciation. year $ M 1I1C  ?1C. .t should 'e noted that depre#iation i" de$ined a" "imply a pro#e"" o$ allo#atin% the depre#ia'le amount o$ the a""et to the &ariou" a##ountin% period" durin% +hi#h the a""et i" u"ed to earn re&enue.CCC >.CCC Depreciation.CCC ÷ 1CC.

12 . such that the deprecia'le amount is Eero or ne#ati&e and therefore no depreciation is required. fter the re&aluation exercise. nother ar#ument commonly used to support not to depreciate an asset is that if an entity has an effecti&e repair and maintenance policy. >.>. +.1 .ildings Freehold land .1C >. in most cases. 2and and 'uildin%" in the #our"e o$ de&elopment or re9de&elopment Held for re-sale 12022 6.11 >.. 3he residual &alue of an asset may increase to an amount equal to or #reater than the asset7s carryin# amount. it retains its &alue indefinitely/ it is accordin#ly not re#arded as a deprecia'le asset.f the &alue of an asset is #reater than its cost (or net carryin# amount) and it is decided that the &alue of the asset 'e ta6en into account. the asset7s depreciation char#e is Eero unless and until its residual &alue su'sequently decreases to an amount 'elo. it is possi'le that. 6A7 2. :uildin#s ha&e limited useful li&es and therefore are deprecia'le assets. 3hus. the residual &alue of the deprecia'le asset may 'e lar#er than its carryin# amount. at a certain point in time. depreciation should 'e continued. . 2ea"ehold land and 'uildin%" <easehold land is to 'e depreciated. not-ithstandin# an effecti&e repair and maintenance policy.7 2. land is normally freehold land and has indefinite useful life and. 3he !tandard specifically pro&ides that repair and maintenance of an asset do not ne#ate the need to depreciate it.the asset7s carryin# amount.f it does. 3he a'o&e ar#ument is ta6en into account in the !tandard. depreciation -ould still ha&e to 'e accounted for to allocate the re&alued amount o&er the remainin# life of the re&alued asset.and and . then -hat needs to 'e done is a separate re&aluation exercise.2 6C7 (a) . the useful life of the asset may 'e extended indefinitely andIor the residual &alue -ill increase.n countries other than HK. Ho-e&er.

should 'e accounted for in accordance -ith HK ! 2 4.2.. they should 'e included in the financial statements as property. the #ross carryin# amount for that 'asis in each cate#ory should 'e disclosed/ (ii) the depreciation methods used/ (iii) the useful li&es or the depreciation rates used/ (i&) the #ross carryin# amount and the accumulated depreciation at the 'e#innin# and end of the period/ (&) a reconciliation of the #ross carryin# amount and the accumulated depreciation at the 'e#innin# and end of the period sho-in#.$ . (a) additions/ (') disposals/ (c) acquisitions throu#h 'usiness com'inations/ (d) increases or decreases resultin# from the re&aluations and from impairment losses reco#niEed or re&ersed directly in equity under HK ! 3"/ (e) impairment losses reco#niEedIre&ersed in the profit and loss account under HK ! 3"/ (f) depreciation char#e/ (#) the net exchan#e differences arisin# on the translation of the financial statements of a forei#n entity/ (h) the net exchan#e differences arisin# on the translation of the financial statements of a forei#n entity/ (i) transfers 'et-een different types of assets/ (=) transfers 'et-een different classes of property. Held for other purposes 9here land and 'uildin#s in the course of de&elopment or re0de&elopment are held for production.1 Disclos re Req ire!ents 3he financial statements should disclose.n&entories5. in respect of each class of property. pro&ided that the reco#nition criteria for an asset are satisfied. (i) the measurement 'ases used for determinin# the #ross carryin# amount. plant and equipment.. (b) 2. rental or administrati&e purposes or -here no decision has yet 'een ta6en to re0sell the land and 'uildin#s. . 9hen more than one 'asis has 'een used. plant and equipment/ and 12023 .3 9here land and 'uildin#s in the course of de&elopment or re0de&elopment are held for re0sale. they should 'e re#arded as in&entories of an enterprise and as such.

indicatin# the mo&ement for the period and any restriction on the distri'ution of the 'alance to shareholders. (i) the 'asis used to re&alue the assets/ (ii) the effecti&e date of the re&aluation/ (iii) the names and qualifications of persons ma6in# the re&aluation/ (i&) -hether the &aluer -as independent of or connected to the enterprise concerned/ (&) the nature of any indices used to determine replacement costs/ (&i) the carryin# amount of each class of property. plant and equipment/ and (&) the #ains or losses arisin# from the retirement or disposal of property. plant and equipment. plant and equipment that -ould ha&e 'een included in the financial statements had the assets 'een carried under the treatment in para#raph 22/ and (&ii) the re&aluation reser&e. and ho. plant and equipment pled#ed as security for lia'ilities/ (ii) the accountin# policy for costs of restorin# the site of items of property. (i) the existence and amounts of restrictions on title. 9hen items of property. and property. plant or equipment/ (iii) the amount of expenditures on account of and the amount of 'orro-in# costs capitaliEed on property. plant and equipment are stated at re&alued amounts. plant and equipment in the course of construction/ (i&) the amount of commitments for the acquisition of property.the amounts are arri&ed at. the follo-in# should 'e disclosed.3 (6) other mo&ements... 1202$ .2 . 3he financial statements should also disclose..

:roadoa6 had incorrectly specified the po-er loadin# of the ori#inal electrical 1202% . (2 mar6s) (i) :roadoa6 has recently purchased an item of plant from @lantco.%CC 2$. ($ mar6s) (ii) 3he circumstances in -hich su'sequent expenditure on those assets should 'e capitaliEed. (3 mar6s) Explain HK ! 1"Ns requirements re#ardin# the re&aluation of non0current assets and the accountin# treatment of surpluses and deficits on re&aluation and #ains and losses on disposal. determinin# ho.%CC ? (') (c) :asic list price of plant 3rade discount applica'le to :raodoa6 ncillary costs.>%C 12. ? 2$C.%D on list price 2. HK ! 1" @roperty. (equired4 (a) Explain (i) Ho.CCC $. plant and equipment should 'e measured.CCC 12. the details of this are.they should 'e depreciated and dealin# -ith the pro'lems of su'sequent measurement and su'sequent expenditure.E8amination Style @ue"tion" @ue"tion 1 3he 'road principles of accountin# for property. plant and equipment has the intention of impro&in# consistency in these areas. plant and equipment in&ol&e distin#uishin# 'et-een capital and re&enue expenditure.CCC 1$.CCC :roadoa6 paid for the plant (excludin# the ancillary costs) -ithin four -ee6s of order.the initial cost of property. !hippin# and handlin# costs Estimated pre0production testin# )aintenance contract for three years !ite preparation costs Electrical ca'le installation *oncrete reinforcement G-n la'our costs 2". measurin# the cost of assets. there'y o'tainin# an early settlement discount of 3D.%CC >.

t the end of this period there -ill 'e compulsory costs of ?1%.#nore discountin#. (.".CCC is included in the a'o&e fi#ure of ?1$. 3he mar6et &alues of the property on 3C !eptem'er 2CA1 and 2CA2 -ere ?'le to 'e installed 'y the contractor..CCC to restore the site to its ori#inal use condition.CCC and ?1>%. 3his related to some non0deprecia'le land -hose &alue had not chan#ed si#nificantly since 1 Gcto'er 2CAC.) (% mar6s) (ii) :roadoa6 acquired a 12 year lease on a property on 1 Gcto'er 2CAC at a cost of ?2$C. (equired4 *alculate the amount at -hich the plant -ill 'e measured at reco#nition.CCC to dismantle the plant and ?3. 1202" . (equired4 @repare extracts of the financial statements of :roadoa6 (includin# the mo&ement on the re&aluation reser&e) for the years to 3C !eptem'er 2CA1 and 2CA2 in respect of the leasehold property. 3he ship -as acquired on 1 Gcto'er 1. ccumulated amortisation is eliminated and the property is restated to the re&alued amount. Details of the cost of the ship7s components and their estimated useful li&es are.CCC respecti&ely. 3he plant is expected to last for 1C years. 3he company policy is to re&alue its properties to their mar6et &alues at the end of each year. 3he existin# 'alance on the re&aluation surplus at 1 Gcto'er 2CAC -as ?%C.CCC. 3he cost of correctin# this error of ?". nnual amortisation is calculated on the carryin# &alues at the 'e#innin# of the year.CCC.%(HKB) 8inancial (eportin# Decem'er 2CC1) @ue"tion 3 Elite <eisure is a pri&ate limited lia'ility company that operates a sin#le cruise ship. (% mar6s) (3otal 2% mar6s) ( ** 2.

t 3C !eptem'er 2CC$ no further capital expenditure had 'een incurred on the ship. Due to the unrelia'ility of the en#ines.%(HKB) 8inancial (eportin# Decem'er 2CC% O%(a)) @ue"tion 5 Gn 1 Gcto'er 2CC% Dearin# acquired a machine under the follo-in# terms. 3he expected life of the ne.CCC hours. ll residual &alues can 'e ta6en as nil.n the year ended 3C !eptem'er 2CC$ the ship had experienced a hi#h le&el of en#ine trou'le -hich had cost the company considera'le lost re&enue and compensation costs.CCC hours. all the -or6 on the ship can 'e assumed to ha&e 'een completed on 1 Gcto'er 2CC$. a decision -as ta6en in early Gcto'er 2CC$ to replace the -hole of the propulsion system at a cost of ?1$C million.propulsion system -as %C. 3he measured expired life of the propulsion system at 3C !eptem'er 2CC$ -as 3C. . t the same time as the propulsion system replacement.CCC hours and in the year ended 3C !eptem'er 2CC% the ship had used its en#ines for %. (equired4 *alculate the carryin# amount of Elite <eisure7s cruise ship at 3C !eptem'er 2CC% and its related expenditure in the income statement for the year ended 3C !eptem'er 2CC%. 1202> . fter the up#rade of the ca'in and entertainment area fittin#s it -as estimated that their remainin# life -as fi&e years (from the date of the up#rade). the company too6 the opportunity to do a limited up#rade to the ca'in and entertainment facilities at a cost of ?"C million and repaint the ship7s fa'ric at a cost of ?2C million. 8or the purpose of calculatin# depreciation. (12 mar6s) ( ** 2. Hour ans-er should explain the treatment of each item.

n the year ended 31 )arch 2CC. 1o residual &alues are attri'uted to any of the component parts. . t 1 pril 2CC2 the aircraft lo# sho-ed it had flo-n 1C.for 1.. (equired4 @repare extracts from the income statement and statement of financial position for the a'o&e machine for each of the three years to 3C !eptem'er 2CC2.2CC hours since 1 pril 2CC%.CCC. 3he up#rade also increased the estimated remainin# life of the machine at 1 Gcto'er 2CC> to $.CCC. (1C mar6s) ( ** 8> (HKB) 8inancial (eportin# Decem'er 2CC2 O%) @ue"tion : 8li#htline is an airline -hich treats its aircraft as complex non0current assets. 3he cost and other details of one of its aircraft are. the aircraft fle.components at a cost of ?2CC. 3his up#rade led to a reduction in the production time per unit of the #oods 'ein# manufactured usin# the machine.%CC machine hours and its estimated residual &alue -as re&ised to ?$C..Gn 1 Gcto'er 2CC> Dearin# decided to up#rade the machine 'y addin# ne.CCC hours in the six months to 31 )arch 2CC.2CC hours for the six months to 3C !eptem'er 2CC2 and a further 1. Gn 1 Gcto'er 2CC2 the aircraft suffered a P'ird stri6e7 accident -hich dama#ed one of the 12022 .

3he other en#ine -as also dama#ed.CCC hours at cost of ?1CQ2 million. (1C mar6s) ( ** 8>(HKB) 8inancial (eportin# Fune 2CC. (equired4 *alculate the char#es to the income statement in respect of the aircraft for the year ended 31 )arch 2CC. the post accident chan#es are deemed effecti&e from 1 Gcto'er 2CC2. O%) 1202. 8li#htline too6 the opportunity to up#rade its ca'in facilities at a cost of ?$Q% million. . 3his did not increase the estimated remainin# life of the ca'in fittin#s.CCC hours. 3his -as replaced 'y a ne.en#ines 'eyond repair.en#ine -ith a life of 3". 'ut -as repaired at a cost of ?3 million/ ho-e&er. 'ut the impro&ed facilities ena'led 8li#htline to su'stantially increase the air fares on this aircraft. and its carryin# amount in the statement of financial position as at that date. 1ote. 3he accident also caused cosmetic dama#e to the exterior of the aircraft -hich required repaintin# at a cost of ?2 million. its remainin# estimated life -as shortened to 1%. s the aircraft -as out of ser&ice for some -ee6s due to the accident.