Property Plant and Equipment Lecture 2

Lecture 2:
Property, Plant and Equipment
IAS 16/ MFRS 116

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ACC2014 Financial Accounting
Property Plant and Equipment Lecture 2

AGENDA
• Definition of property, plant and equipment
• Recognition
• Measurement at recognition
• Measurement after recognition
• Depreciation and Impairment
• Derecognition
• Disclosure
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Property Plant and Equipment Lecture 2

DEFINITION PROPERTY, PLANT & EQUIPMENT

Non-Current Assets (Tangible Assets)

Expected to be used
Purpose
for > 1 period

Use in production or
supply of goods or Rental to others Administrative
services
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ACC2014 Financial Accounting
Property Plant and Equipment Lecture 2

RECOGNITION PROPERTY, PLANT & EQUIPMENT

Assets

It is probable that future

economic benefits associated The cost of the item can be
with the item will flow to the measured reliably
entity

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RECOGNITION EXPENDITURE

NOT FULFILLING

Definition Criteria Recognition Criteria

STATEMENT OF PROFIT OR LOSS

Eg. Inventory, repairs and maintenance

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RECOGNITION PROPERTY, PLANT & EQUIPMENT

It is probable that
Spare parts future economic benefits
associated with the item
will flow to the entity
Servicing

Inspection

The cost of the item can

Replacement
be measured reliably

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ACC2014 Financial Accounting
Property Plant and Equipment Lecture 2

MEASUREMEMT PROPERTY, PLANT & EQUIPMENT

Measurement

Initial Measurement Subsequent Measurement

Cost
Revaluation
Cost Model
Model

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ACC2014 Financial Accounting
Property Plant and Equipment Lecture 2

MEASUREMEMT PROPERTY, PLANT & EQUIPMENT

Initial Measurement

Cost

Estimated
Directly dismantling
Purchase price attributable cost, removing
cost and restoring

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Property Plant and Equipment Lecture 2

MEASUREMEMT
PROPERTY, PLANT & EQUIPMENT

Subsequent Measurement

Revaluation
Cost Model
Model

Revalued amount xxx

Cost xxx
Less: Subsequent acc. depr. (xxx)
Less: Acc. depreciation (xxx)
Less: Subsequent acc. impair’nt
Less: Acc. impairment losses (xxx)
losses (xxx)
Carrying value xxx_
Carrying value xxx_
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MEASUREMEMT PROPERTY, PLANT & EQUIPMENT IS REVALUED

Revaluation Model

Accounting treatment of accumulated depreciation

The accumulated depreciation at the date The accumulated depreciation is

of the revaluation is adjusted to equal the eliminated against the gross
difference between the gross carrying carrying amount of the asset.
amount and the carrying amount of the
asset after taking into account
accumulated impairment losses

• gross carrying amount may be restated by reference to observable market data OR

• gross carrying amount may be restated proportionately to the change in the
carrying amount
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Property Plant and Equipment Lecture 2

MEASUREMEMT PROPERTY, PLANT & EQUIPMENT EXAMPLE 3.4

At year end, a class of motor vehicles has:

Cost of $100,000 and accumulated depreciation of $40,000
Revalued amount of that class of motor vehicles is $90,000
Show the revaluation effect and how the cost and accumulated depreciation will be affected.

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Property Plant and Equipment Lecture 2

MEASUREMEMT PROPERTY, PLANT & EQUIPMENT EXAMPLE 3.4

• The gross carrying amount restated proportionately to the change in the carrying amount:
– Cost restated ($100,000 x 90,000 / 60,000) = $ 150,000
– Accumulated depreciation restated ($40,000 x 90,000 / 60,000) = ($ 60,000)
• The accumulated depreciation eliminated against the gross carrying amount of the asset
and the net amount restated to the revalued amount
– Cost = $ 100,000
– Accumulated depreciation eliminated ($40,000 - $30,000) = ($10,000)

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ACC2014 Financial Accounting
Property Plant and Equipment Lecture 2

REVALUATION PROPERTY, PLANT & EQUIPMENT

MODEL

Revaluation Model

Revaluation Surplus Revaluation Deficit

Fair Value > Carrying Value Fair Value < Carrying Value

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REVALUATION PROPERTY, PLANT & EQUIPMENT

MODEL

Accounting Revaluation Surplus

Treatment

Asset’s carrying amount is INCREASED

Asset’s carrying amount is
INCREASED as a result of revaluation
Dr Property, plant & equipment XXX
Cr Revaluation reserve XXX
ACC2014 Financial Accounting
as a result of revaluation. If there is a
revaluation DECREASE of the same asset
already recognised in profit or loss
previously
Dr Property, plant & equipment XXX
Cr Profit or loss XXX
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Property Plant and Equipment Lecture 2

REVALUATION PROPERTY, PLANT & EQUIPMENT

MODEL

Accounting Revaluation Deficit

Treatment

Asset’s carrying amount is DECREASED

Asset’s carrying amount is
DECREASED as a result of revaluation
Dr Profit or loss XXX
Cr Property, plant & equipment XXX
ACC2014 Financial Accounting
as a result of revaluation. If there is a
revaluation SURPLUS of the same asset
already recognised in revaluation reserve
previously
Dr Revaluation reserve XXX
Cr Property, plant & equipment XXX
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Property Plant and Equipment Lecture 2

REVALUATION PROPERTY, PLANT & EQUIPMENT EXAMPLE 3.5

MODEL
In 2015, an entity buys a PPE at $1,000 and adopts revaluation model.
Dr PPE $1,000
Cr Cash $1,000
At year end of 2015, PPE’s fair value rises to $1,500.
Dr PPE (1,500 – 1,000) $500
Cr Revaluation reserves $500
At year end of 2016, PPE’s fair value decreased to $800.
Dr Revaluation reserves $500
Profit and loss $200
Cr PPE (1,500 – 800) $700
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REVALUATION TRANSFER OF REVALUATION SURPLUS

MODEL
Revaluation Surplus (Revaluation Reserve)

Transferred to Retained Earnings

Asset is derecognised (retired/ disposed ) The asset is used by an entity.

Amount transfer = full amount Depreciation based on revalued

carrying amount of the asset XXX
Less: Depreciation based on the
original cost of the asset (XXX)
Amount transfer XXX_

Dr Revaluation reserve XXX

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ACC2014 Financial Accounting Cr Retained earnings XXX
Property Plant and Equipment Lecture 2

REVALUATION PROPERTY, PLANT & EQUIPMENT EXAMPLE 3.6

MODEL

CJS Limited bought a car with a cost of $50,000 on 1 Jan. 2015 and adopted the
revaluation model. The estimated useful life of the car is 5 years. On 1 Jul. 2015, the car
was revalued with a fair value of $49,500 at that date.
Prepare the journal entries for the year ended 31 December 2015.

Dr PPE $50,000
1 Jan 15
Cr Cash/ Bank $50,000

Dr P/L (W1) $5,000

30 Jun 15
Cr Accumulated depreciation $5,000

Dr Accumulated depreciation (W2) $4,500

1 Jul 15
Cr Other comprehensive income - Revaluation reserves $4,500
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REVALUATION PROPERTY, PLANT & EQUIPMENT EXAMPLE 3.6

MODEL
Dr Profit or Loss (W3) $5,500
31 Dec 15
Cr Accumulated depreciation $5,500

Dr Other comprehensive income - Revaluation reserves $500

31 Dec 15
Cr Retained earnings (W4) $500

Workings:
(1) Depreciation (1/1/15-30/6/15)=($50,000 ÷ 5 years ÷ 2)=$5,000
(2) Increase in FV of MV (1/7/15-31/12/15)= ($49,500 – ($50,000 – $5,000))=$4,500
(3) Depreciation (1/7/15-31/12/15)=($49,500 ÷ 4.5 years ÷ 2)=$5,500
(4) Amount of surplus transfer to retained earnings = (3) – (1) = $5,500 - $5,000=$500

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PROPERTY, PLANT & EQUIPMENT: DEPRECIATION

Depreciation Method

Straight-line Diminishing balance Units of production

Results in a constant Results in a decreasing Results in a charge

charge over the useful charge over the useful based on the expected
life if the asset’s life use or output
residual value does not
change

Method of depreciation is applied consistently

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PROPERTY, PLANT & EQUIPMENT: IMPAIRMENT

To determine whether an item of property, plant and equipment is impaired, an entity

applies IAS 36/ MFRS136 Impairment of Assets. IAS 36/ MFRS136 explains:
1. how an entity reviews the carrying amount of its assets,
2. how it determines the recoverable amount of an asset, and
3. when it recognises, or reverses the recognition of, an impairment loss.
Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up should be included in profit or loss when the compensation
becomes receivable.

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PROPERTY, PLANT & EQUIPMENT: DERECOGNITION

No future economic benefits are expected

Disposal
from its use or disposal.

X
Revenue GAIN LOSS

Profit or loss: Other income Profit or loss: Expenses

Dr Bank XXX Dr Bank XXX

Cr Property, plant & equipment XXX Dr Profit or loss XXX
Cr Profit or loss XXX Cr Property, plant & equipment XXX
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PROPERTY, PLANT & EQUIPMENT: DERECOGNITION

OLD ENGINE NEW ENGINE

Derecognise an OLD parts Recognise a NEW parts

Dr Profit or loss – PPE written off XXX Dr Property, plant & equipment XXX
Cr Property, plant & equipment XXX Cr Bank XXX

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PROPERTY, PLANT & EQUIPMENT: EXAMPLE 3.7, 3.8, 3.9, 3.11

Date of purchase: 1 Jan. 2015

Cost of laser head: $10 million
Cost of laser printing machine: $50 million
Laser printing machine useful life: 5 years
Laser head useful life: 500 hours
Residual value of laser printing machine and laser head: zero value
At 31 Dec. 2016, replacement of the laser head is needed after 400 hours of operation. The
cost of a new laser head is $ 8 million.
Required:
Discuss the accounting treatment of the above transaction.

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PROPERTY, PLANT & EQUIPMENT: EXAMPLE 3.7, 3.8, 3.9, 3.11

The laser printing machine and laser head are depreciated separately as the cost of the laser
head is significant in relation to the total cost of the machine.
Celia has not changed its usage plan and the residual value after the estimated useful live
would still be zero .
The useful life of the laser printing machine and the laser head can be determined separately
as follows:
• The laser printing machine is depreciated over 5 years
• The laser head is depreciated over 500 hours

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PROPERTY, PLANT & EQUIPMENT: EXAMPLE 3.7, 3.8, 3.9, 3.11

• At 31 Dec. 2016, The carrying amount of the laser head alone would be
$ 2 million at that date.
Depreciation
Working:
Carrying amount of laser head=[$10M – (($10M x 400hrs)÷ 500hrs)] = $2 million
• When the laser head is replaced
 Replaced laser head with $ 2 million shall be derecognised
Dr Laser head written off (SOPL) $2 million
Cr Laser head (SOFP) $2 million
 New laser head of $ 8 million shall be recognised
Dr Laser head $8 million
Cr Bank $8 million
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PROPERTY, PLANT & EQUIPMENT: DISCLOSURE

TEXT BOOK: PAGE 72-73

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