Group Finance PPE Policy

Group Finance
Date of Approval: November 2015
Approved by: Kevin Dangerfield
Policy Owner: Group Accounting Manager
Next review date: December 2016
Version No. 2015 V1
Property, Plant & Equipment
Purpose
To recognise, manage and account for those business expenses which, due to their nature,
can be capitalised and their cost to the Group spread over an extended period of time.
1 Definitions
1.1 The term Business Unit Controller refers to the senior financial employee at an individual
business unit. The term Managed Business Controller (MBU Controller) is the senior
financial employee at a managed business level.
2 Recognition of cost
2.1 Costs which may be capitalised can occur through purchase, lease (finance lease), transfer
or creation of an asset. Those costs which are directly attributable to bringing the asset into
working condition for its intended use should be included. Examples of this include:
• Purchase cost;
• Associated acquisition costs e.g. stamp duty;
• Site preparation costs;
• Initial delivery, handling and installation costs;
• Professional costs;
• Estimated future costs of removing the asset and restoring the site (discounted to
present value).
www.morganadvancedmaterials.com
Morgan Advanced Materials plc. Registered in England & Wales at Quadrant, 55-57 High Street, Windsor, Berkshire SL4 1LP UK Company No. 286773
3 Pre-operating capitalisable costs
3.1 The capitalisation of pre-operating costs must be guided by “prudence”. A firm date must
be established as to when the project was completed and, therefore, began operating.
After that date no running costs will be capitalised.
3.2 It is the Group’s policy to avoid excessive capitalisation of pre-operating costs, and any
costs that are capitalised must be REASONABLE (i.e. start-up trial production runs should
not be capitalised).
3.3 All pre-operating capitalised costs must be agreed with the Director of Finance.
4 Capitalisable value
4.1 To be capitalisable, the original cost of the item must exceed £1,000.
5 Capitalisation of interest
5.1 In general it is NOT the Group’s policy to capitalise interest. However, when interest is
incurred on raising specific funds to finance a major capital project, which will be a
significant productive asset, then the interest paid, if it exceeds £25,000, shall be
capitalised.
5.2 Before any interest is capitalised, approval from the Director of Finance must be obtained.
The following paragraphs are only relevant to projects for which such approval has been
obtained.
5.3 The interest capitalised must be an actually incurred cost payable to a third party lender,
and NOT merely a notional or imputed amount.
5.4 Capitalisation will only commence when:

• Expenditures are being incurred;
• Borrowing costs are being incurred;
• Activities that are necessary to prepare the asset for its intended use or sale are in
progress.
5.5 Capitalisation will be suspended if there are extended periods when active development is
interrupted.
5.6 Capitalisation will cease when substantially all the activities necessary to prepare an asset
for its intended use or sale have been completed.
5.7 If the asset is constructed in parts, each of which is capable of use while construction
continues on the remaining parts, capitalisation must cease for each part when substantially
all the activities necessary to prepare that part of the asset for its intended use or sale have
been completed.
6 Depreciation
6.1 Depreciation is based on gross values, without regard to grants for capital expenditure or
customer contributions.
6.2 On the purchase of any fixed asset, its useful economic life should be estimated, giving due
regard to wear as a result of use, passage of time, and also obsolescence through
technological or market changes.
6.3 In estimating asset lives, management must use their best judgement as to the period over
which the business will derive economic benefits from that asset, in the light of past
experience and industry knowledge. The over-riding principle is prudence, and in any
event the asset lives must not exceed the periods listed in paragraph 6.8 below.
6.4 Depreciation is applied on a component basis. That is to say, each part of an item of
property, plant and equipment with a cost that is significant in relation to the total cost of the
item is depreciated separately. Where assets (particularly those with lives estimated at
more than 10 years) contain parts that will likely need replacement before that period, these
parts should be viewed as separate assets and depreciated accordingly. When one of the
components requires replacement, it is removed from fixed assets and its replacement
capitalised and depreciated. Specific examples might include:-
• electronic/computerised control unit on plant. e.g. a new press is purchased whose
estimated life is 15 years, but it has a computerised controller which will be replaced
in 5 years;
• components of property such as roofing, heating or ventilation systems or furnace
linings which will require replacement through the life of the main asset.
6.5 If a significant component, which was not initially identified separately, requires
replacement then its cost and net book value must be estimated and separated from the
main asset. It is then removed from fixed assets and its replacement capitalised
separately.
6.6 All fixed assets must be depreciated from the month following the date of
purchase/commission. It is not acceptable to delay the date of the commission (i.e. its use)
just to defer the date from which an asset is depreciated. If an asset is ready to be used
and you wish to delay its use then you must agree any deferment of depreciation with the
Director of Finance.
6.7 Examples of the application of this manual are:
• If a computer is purchased on 15th January, depreciation will start in February with
a full month’s depreciation;
• If a furnace is commissioned on the 22nd March, depreciation will start in April with
a full month’s depreciation.
6.8 The categories of fixed assets, and their respective useful lives and depreciation rates are:
Category Maximum life Dep’n rate pa

Years %
Buildings 50 2
Special purpose buildings (see definition) 20-30 3.33-5
Kilns, presses and furnaces 20 5
Transformers and switchgear 20 5
Silos, tanks, pipework and steel structures 20 5
Other plant and equipment 10 10
Fixtures 10 10
Tools and dies 2-5 20-50
Computer hardware:
- Global EDP systems * 10 10
- Servers, mainframes 5-8 12.5-20
- PCs and peripherals 3 33.33
Motor vehicles 3 33.33
* Software is included in intangible assets unless it is integral to a piece of equipment i.e.

the equipment cannot operate without the software.
6.9 A special purpose building is defined as one which, due to its specialised nature, is rarely (if
ever) sold on the open market except as part of the business in occupation. Its specialised
nature may arise from the construction, arrangement or size of the property, or a
combination of these factors, or may be due to the nature of the equipment it is designed to
house. Most buildings are not so specialised that they could not be converted for other use
– if in doubt you must contact the Director of Finance who will decide whether a building
should be classified as special purpose.
7 Repairs and maintenance
7.1 Routine repairs and maintenance costs (which includes annual shutdown maintenance)
MUST NOT BE capitalised without the prior permission of the Director of Finance.
8 Special circumstances
8.1 There are special circumstances where specific guidance is provided as to valuation and
depreciation. These have been listed in the following paragraphs.
9 Newly acquired companies/businesses
9.1 For Morgan’s purposes, acquired companies or businesses are required to restate the
carrying value of their fixed assets at the time of acquisition to “fair value”. They should
also make a new estimate of the remaining useful life of their assets at the time of the
acquisition.
9.2 Fixed assets should not be written-up in a ‘fair value’ exercise without the prior approval of
the relevant MBU Controller and the Director of Finance.
9.3 The fair value of the fixed assets should be depreciated over the new estimates of the
remaining useful lives and, as per the manual, this starts in the month following acquisition.
10 Equipment specific to certain projects/markets
10.1 Where equipment is purchased specifically for a single project or product which has a
limited life, such equipment must be depreciated over the period of the project. As an
example, if a machine is tailored for the production of a component which will only be
manufactured for 6 years; the machine must be depreciated over 6 years and no more. If
the machinery can be adapted for use in other production, then it is not specific to the
project.
11 Over-estimated asset lives
11.1 Where assets require replacement before the full term of their estimated life, the remaining
net book value must be written off in the income statement. For example, a press costing
£200,000 is originally estimated as having a life of 20 years, but after 13 full years of use, it
has become worn beyond repair. A charge of £70,000 must be made against operating
profit (i.e. depreciation) on scrapping of the asset.
11.2 Unless an asset is considered to be impaired, any changes to the estimated life of an asset
during its life are regarded as a change in accounting estimate. The remaining net book
value is depreciated over the remaining useful life of the asset.
12 Customer funding of capex
12.1 The manual on “Tooling” describes the treatment of customer contributions to tooling costs.
This treatment must also be adopted for any other customer funding of capital expenditure.
13 Assets under finance leases
13.1 Depreciation lives of assets held under finance leases should be determined:
• by reference to the lease term if this is a close approximation of the life of the
assets;
• by reference to Morgan policy if there is an intention to continue to use the asset
after the end of the lease, either by purchase of the asset or by extension of the
lease.
14 Impairment of fixed assets
14.1 Impairment is defined as a reduction in the value of a fixed asset to the business down to a
level below its carrying value.
14.2 Impairment should be measured on individual fixed assets that are capable of generating
individual income streams, or on groups of assets that together generate independent
income streams, e.g. an assembly line.
14.3 Impairment may have occurred if events have taken place which may have lowered the
value of the fixed assets to the business. Examples of such events are given below:
• there has been a significant decline in a fixed asset's market value;
• there has been physical damage to the asset;
• the fixed asset has become obsolete;
• the market or business environment has changed, calling into question the viability
of the asset;
• a loss making business unit.
However these are merely indicators of a possible impairment, since the value of an asset
relates to its market value and its value to the business as a future income-generator.
14.4 The Group policy is to recognise impairments in the value of fixed assets. If a subsidiary
experiences any of the above indications of possible impairment, the Director of Finance
must be informed immediately, who may arrange for an impairment review to be carried out
if appropriate. Businesses must not perform impairment reviews without permission from
the Director of Finance.
15 Accounting for software costs
15.1 Computer software costs are dealt with under the manual for “Software and other intangible
assets”.
16 Disposal and transfer of fixed assets
16.1 The key principles of this manual are as follows:

• Capital disposal forms/authorisations must be completed for all disposals and
approved and signed at the appropriate level in accordance with the requirements of
the “Finance Manual” document;
• Transfers between units at other than net book value require approval of Director of
Finance;
• Disposals to a third party of productive assets must be authorised in advance by the
MBU Controller.
16.2 Any decision to dispose of a fixed asset must be submitted and approved in accordance
with the Managed Business unit authority levels. Where authority to dispose of assets had
been delegated to local management, approval must be in accordance with those limits.
16.3 The disposal of motor vehicles (including finance leases) does not require individual
approval wherever full details of the vehicle are recorded on the capex request for a
replacement vehicle.
16.4 Before any significant productive asset is disposed of to a third party, reference must be
made to the MBU Controller will determine whether it can be usefully redeployed within the
Managed Business or rest of the Group, rather than sold. Employees are included as third
party for this purpose.
16.5 Fixed asset transfers between sites should be recorded on the fixed asset register of the
receiving company at the invoiced cost (excluding any transportation or other associated
costs). Fixed asset transfers should, where possible, be transferred at net book value.
Where an asset is transferred at a price different to net book value:
• The MBU Controller, Director of Group Tax and Group Consolidation are to be
informed;
• An arm’s length valuation should be made and this value used on any sales invoice;
• If transferred at BELOW net book value, the asset should be written down in the
transferring Company’s books prior to transfer and invoicing, with the loss being
treated as stated in paragraph 16.6 below;
• If transferred at ABOVE net book value, the transferor will record the profit as stated
in paragraph 16.6 below; the transferee must record the assets at the higher value
(which will be shown on the invoice). This must only be done after approval from
Group Finance (Consolidation).
16.6 Any difference between the net book value of a transferred asset and the invoiced value
should be reported on line A11800 “Exceptional Items (HO Authority Only)”.
17 Sale of land and buildings
17.1 The profit or loss on the disposal of land and buildings should be calculated on the carrying
value of the asset in the balance sheet. If the property sold has been revalued in the past,
the attributable revaluation surplus should be transferred from revaluation reserve to the
profit and loss reserve and should not be credited to the current year’s income statement.
Costs in undertaking the sale, such as professional fees, should be included in the profit or
loss on sale of the asset. If you are unsure of which costs to include then you should agree
these with the Director of Finance.
17.2 Specific rules apply to the sale and leaseback of assets. Reference must be made to the
manual “Accounting for leases” in such situations.
18 Properties held for investment
18.1 Investment property is property (land and/or building) held to earn rentals or for capital
appreciation or both, rather than for use in the production or supply of goods or services or
for administrative purposes; or sale in the ordinary course of business.
18.2 There are specific valuation and disclosure rules for such properties. Since this situation is
unlikely to apply to any of our properties, specific permission must be received from the
Director of Finance before a property can be designated as an investment property.
19 Responsibility
19.1 The Business Unit Controller at each location is responsible for implementation of these
procedures. The Director of Finance is responsible for authorising in advance any fixed
asset transfer that is not at book value.
It is the responsibility of the Business Unit Controller at each location to keep a detailed
record of all capitalised expenditure, including any capitalised costs, and of the charges to
the income statement for depreciation and/or amortisation. This must be reconciled at least
annually to the nominal ledger for cost, accumulated depreciation and net book value. The
Director of Finance is responsible for agreeing the accounting for fixed assets where the
above policy requires his specific agreement.
19.2 Physical Controls. Local units are responsible for ensuring that a register of fixed assets is
maintained up-to date and that a physical verification of the existence of the fixed assets is
conducted, and documented, no less frequently than the timing requirements set out in the
“Internal Financial Controls” Policy. Assets with a value exceeding £10,000 should be
clearly identifiable by way of an asset number tag and individually included in the register.
19.3 It is most important that assets in the hands of employees (e.g. PCs, cameras, telephones,
fax machines etc.) are signed for on issue, recorded and periodically verified. There should
be procedures in place to recover such assets on termination of employment. The
existence and condition of assets in the hands of third parties (e.g. packing or filling
machines with co-packers) must be periodically verified.
References
Accounting for property, plant and equipment is principally covered by IAS 16 Property, Plant and
Equipment, with additional guidance for assets acquired under a finance lease in IAS 17 Leases, in
IFRS 3 Business Combinations for assets acquired in business combinations, in IAS 40 Investment
Property, in IAS 29 Financial Reporting in Hyperinflationary Economies for assets in hyper-
inflationary economies and in IAS 23 Borrowing Costs. This policy is designed to be consistent with
these standards and all other Group policies issued. Any apparent conflict, or any cases where the
company exercises significant judgement concerning the accounting treatment for material
transactions, must be referred to the Director of Finance for clarification.

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Group Finance

Date of Approval: November 2015

Approved by: Kevin Dangerfield

Policy Owner: Group Accounting Manager

Next review date: December 2016

Version No. 2015 V1

Property, Plant & Equipment

5.4 Capitalisation will only commence when:

Category Maximum life Dep’n rate pa

* Software is included in intangible assets unless it is integral to a piece of equipment i.e.

7 Repairs and maintenance

9 Newly acquired companies/businesses

10 Equipment specific to certain projects/markets

11 Over-estimated asset lives

12 Customer funding of capex

14 Impairment of fixed assets

15 Accounting for software costs

16.1 The key principles of this manual are as follows:

18 Properties held for investment

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