IAS 16, Property, Plant and Equipment
Examples & Questions
RRP 200
________________________________________________
EXAMPLE 1 – Recognition
Tesla, Inc., a leader in electric vehicle manufacturing, is planning to expand its
production capabilities to meet the growing demand for electric vehicles. The
management has identified the need for new, advanced manufacturing equipment for
its Gigafactory to increase production efficiency and output. The equipment in question
includes a state-of-the-art assembly line robot system, which promises to enhance the
production speed and quality of Tesla's electric vehicles.
The cost of this new assembly line robot system is estimated to be $10 million.
Additionally, installation costs amount to $500,000, including necessary modifications
to the factory floor and training for the operational staff. Quotes have been obtained
from suppliers and contractors, and a detailed budget has been prepared for these
costs.
Before making the investment, Tesla's management conducts a thorough analysis to
determine whether this expenditure meets the criteria outlined in IAS 16 for
recognizing the cost as an asset.
In terms of IAS 16.7 the cost of an item of property, plant and equipment shall
be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow
to the entity; and
(b) the cost of the item can be measured reliably.
(a) Future Economic Benefits:
Tesla forecasts that the new assembly line robot system will allow the company to
double its production capacity for its most popular electric vehicle model, leading to
significant sales growth over the next ten years. The increased efficiency and reduced
production time are expected to lower manufacturing costs per vehicle, improving
overall profitability. Management concludes that it is probable that future economic
benefits associated with the new equipment will flow to Tesla, as the investment will
directly contribute to increased production capabilities and higher sales revenue.
(b) Cost Measurement:
The purchase price of the assembly line robot system is clearly defined at $10 million.
Additionally, installation costs amount to $500,000, can be reliably measured as
quotes have been obtained from suppliers and contractors, and a detailed budget has
been prepared. Therefore, the total cost of the new manufacturing equipment can be
reliably measured at $10.5 million.
Conclusion
The cost of the new assembly line robot system can therefore be recognized as an
asset on Tesla's balance sheet under property, plant, and equipment, as it meets
both criteria outlined in IAS 16.7.
_________________________________________________________________________________
Telephone: (012) 420 6495
Email: rrp200@up.ac.za
EXAMPLE 2 – Dismantling costs & Inventories
EcoEnergy Ltd. has recently installed a wind farm in a rural area to generate electricity.
EcoEnergy Ltd. invested in the wind farm to enhance its production of clean energy,
intending to sell this electricity to the national grid. The installation of wind turbines and
related infrastructure required significant modification to the landscape, including the
construction of access roads and foundations for the turbines.
As part of the environmental permit granted to EcoEnergy Ltd., the company is
obligated to dismantle the wind turbines and restore the site to its original condition
once the wind farm reaches the end of its useful life or if it ceases operations earlier.
This obligation includes the removal of all infrastructure and the rehabilitation of the
landscape.
Accounting Considerations
In terms of IAS 16.18 an entity applies IAS 2 Inventories to the costs of
obligations for dismantling, removing and restoring the site on which an item is
located that are incurred during a particular period as a consequence of having
used the item to produce inventories during that period. The obligations for
costs accounted for in accordance with IAS 2 or IAS 16 are recognised and
measured in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
● IAS 16 (Property, Plant, and Equipment): The initial cost of the wind farm,
including the turbines and infrastructure, is capitalized as property, plant, and
equipment in EcoEnergy Ltd.'s balance sheet. This includes the purchase price,
transportation, installation costs, and any other directly attributable costs to bring
the asset to its working condition for its intended use.
● IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets):
EcoEnergy Ltd. recognizes a provision for the dismantling and restoration costs
as a liability. This is because there is a present obligation as a result of a past
event (the construction and operation of the wind farm), it is probable that an
outflow of resources will be required to settle the obligation, and the amount can
be reliably estimated. The provision is measured at the present value of the
expected future cash flows required for the dismantlement and restoration.
● IAS 2 (Inventories): Over the operational period, EcoEnergy Ltd. may incur
additional obligations directly associated with the production of electricity
(inventory) during particular periods. For example, if certain maintenance activities
on the wind farm lead to additional environmental restoration requirements
(beyond the initial provision recognized under IAS 37), the costs associated with
these activities are accounted for as part of the cost of producing the inventory
under IAS 2, to the extent that they are incurred in bringing the inventories to their
present location and condition.
Conclusion
2
In this case, EcoEnergy Ltd. demonstrates the application of IAS 16 in capitalizing the
cost of the wind farm, IAS 37 in recognizing and measuring the provision for
dismantling and restoration costs, and IAS 2 for handling any additional costs directly
related to the production of electricity.
EXAMPLE 3 – Not costs of PPE
GourmetDelight is well-established in its current markets but aims to capture a
significant share of the emerging smart kitchen appliance segment. The company
plans significant investments in research and development, production facilities,
marketing, and workforce training to ensure the successful launch and sustained
market presence of its new product line.
As GourmetDelight embarks on this ambitious project, it incurs various types of
expenses, which must be accounted for according to the relevant accounting
standards. These include:
1. Costs of opening a new facility: The company constructs a new manufacturing
plant specifically for the production of its smart kitchen gadgets. This includes
purchasing land, construction costs, and the purchase of new manufacturing
equipment.
2. Costs of introducing a new product or service: GourmetDelight launches an
extensive marketing campaign to promote its new smart oven, including
television and online advertisements, promotional events, and free product
samples for key influencers in the culinary industry.
3. Costs of conducting business in a new location or with a new class of
customer: The company enters a new geographical market in Asia, where it has
previously had no presence. This involves costs related to market research,
establishing a local office, training sales and support staff about local consumer
preferences and regulations, and adapting marketing materials for the local
market.
4. Administration and other general overhead costs: These are ongoing
expenses related to the company's general operations, including salaries of
executive staff, rent for corporate offices, and utilities.
Accounting Considerations
In terms of IAS 16.19 examples of costs that are not costs of an item of property,
plant and equipment are:
(a) costs of opening a new facility;
(b) costs of introducing a new product or service (including costs of
advertising and promotional activities);
(c) costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
(d) administration and other general overhead costs.
According to accounting principles, particularly those related to the recognition of
property, plant, and equipment costs:
3
● Costs directly associated with manufacturing equipment and the
construction of the new facility (Item 1) can be capitalized as part of the cost of
the property, plant, and equipment. These are considered asset costs because
they are 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 associated with introducing a new product or service (Item 2),
conducting business in a new location or with a new class of customer (Item
3), and administration and other general overhead costs (Item 4), however,
cannot be capitalized as part of the cost of property, plant, and equipment. These
costs are expensed as incurred because they do not directly bring an asset to its
working condition but rather are considered to be part of the company's
operational expenses.
Conclusion
In this case, GourmetDelight must carefully distinguish between the costs that can be
capitalized as part of the property, plant, and equipment, such as the construction of
the new manufacturing facility, and those that must be expensed in the period they are
incurred, such as marketing, staff training, and administrative expenses.
EXAMPLE 4 – Subsequent costs
GreenTech Innovations specializes in the production of electric vehicle (EV) batteries.
GreenTech Innovations recently completed the construction of a new, state-of-the-art
battery manufacturing facility designed to double its production capacity and meet the
growing demand for EV batteries.
Background
The new facility is equipped with the latest technology in battery manufacturing and is
a significant investment for GreenTech Innovations, aimed at positioning the company
as a leader in the sustainable energy sector. As the facility becomes operational,
GreenTech encounters various post-construction costs and operational challenges.
Scenario
After the completion of the construction phase, GreenTech Innovations incurs several
types of expenses:
1. Costs incurred while the new facility is yet to be brought into use: Even
though the construction of the facility is complete, there are delays in full-scale
production due to final testing of equipment and the gradual ramp-up of
manufacturing processes.
2. Initial operating losses: In the first few months of operation, the facility operates
at a loss. The demand for GreenTech's new EV battery models is growing but has
not yet reached the levels required to achieve profitability. These losses are partly
due to the need for market penetration and the time it takes for large-scale orders
to be placed and fulfilled.
3. Costs of relocating operations: To maximize the efficiency of the new facility,
GreenTech decides to relocate certain aspects of its operations from older
facilities. This includes the cost of moving equipment, retraining staff to operate
4
new machinery, and severance payments for positions that are not retained post-
relocation.
Accounting Considerations
In terms of IAS 16.20 recognition of costs in the carrying amount of an item of
property, plant and equipment ceases when the item is in the location and
condition necessary for it to be capable of operating in the manner intended by
management. Therefore, costs incurred in using or redeploying an item are not
included in the carrying amount of that item. For example, the following costs
are not included in the carrying amount of an item of property, plant and
equipment:
(a) costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full
capacity;
(b) initial operating losses, such as those incurred while demand for the item’s
output builds up; and
(c) costs of relocating or reorganising part or all of an entity’s operations.
According to the relevant accounting standards, particularly the principles governing
the recognition of property, plant, and equipment costs:
● Costs incurred post-construction (Items 1, 2, and 3) are not capitalized as part
of the cost of the property, plant, and equipment. Once the facility is in the location
and condition necessary for it to operate as intended by management, further costs
related to bringing the facility into use, initial operating losses, or relocating
operations are recognized as expenses in the period they are incurred.
● The rationale behind this accounting treatment is that such costs do not enhance
the future economic benefits of the asset beyond its originally assessed standard
of performance. Instead, they are considered part of the day-to-day operational
costs of running the business and should be treated as such in the financial
statements.
Conclusion
In this case, GreenTech Innovations must carefully account for the costs associated
with the ramp-up and operational adjustments of its new facility. While the
capitalization of costs ceases once the asset is ready for its intended use, subsequent
expenses related to the start-up phase, initial inefficiencies, and reorganization efforts
are expensed, reflecting the operational nature of these costs.
EXAMPLE 5 – Fair value vs Residual value
Scharrighuisen Classic Cars rents out luxury and vintage cars on a short-term basis
(e.g. for weddings and other functions). At 30 June 2018 it owned the following
vehicles:
5
Car Purchase Carrying Years Fair Residual
price (R) amount (R) held value (R) value (R)
1962 Jaguar E 11 000 10 000 30 120 000 120 000
TYPE series 1
1965 Jaguar E 15 000 12 000 25 99 000 99 000
TYPE series 1
1967 Jaguar E 30 000 30 000 22 150 000 150 000
TYPE series 1
2017 Rolls 740 000 682 000 1 685 000 450 000
Royce
Phantom
2016 Rolls 690 000 666 000 2 675 000 400 000
Royce Ghost
In all cases, the fair value is greater than the carrying amount, so it may be argued
that no depreciation is required. However, ‘fair value’ is the amount we would receive
if we sell these cars in their current condition, but ‘residual value’ is the amount we
would receive if we sold these assets and they were already of the age and condition
when we intend to sell.
No depreciation is required for the E TYPE Jaguars because the residual values for
all three exceed the carrying amount. This is due to the increasing residual values for
vintage cars. However, even though the fair values for the two Rolls Royce models
exceeds the carrying amount, the residual value is expected to be less than carrying
amount if Luxury Car Company intends to hold them for a number of years, and so
depreciation is required over the expected useful life.
(Source: BDO Australia, July 2018)
EXAMPLE 6 – Components
Flying Doctors purchases a helicopter for R400 000, which includes the:
● Engine (R50 000 if purchased separately on acquisition date)
● Seats (R1 000 if purchased separately on acquisition date)
● Bespoke medical treatment equipment (R75 000 if purchased separately on
acquisition date).
Flying Doctors considers the useful life of the helicopter to be 20 years, but the engine
and seats will need to be replaced after 10 years and the medical equipment after 5
years.
6
A common error occurs if Flying Doctor depreciates the R400 000 cost of the helicopter
over 20 years, or R20 000 a year. Paragraph 43 tells us to split the cost down into
significant component parts with different useful lives, and to depreciate each one
separately.
In this scenario, if they have different useful lives, the engine and the bespoke medical
equipment should be treated as separate significant components to the helicopter
body (seats probably not) and depreciation is calculated as follows:
Component R Useful Annual depreciation
life (R)
Engine 50 000 10 5 000
Medical equipment 75 000 5 15 000
Rest 275 000 20 13 750
Total 400 000 33 750
Depreciation – no components (20 000)
Understatement of depreciation 13 750
Failure to separately identify components would result in the depreciation charge being
understated by 40%.
(Source: BDO Australia, July 2018)
EXAMPLE 7 – Residual value
On 1 January 2018, Sonja Limited acquires a brand new Volkswagen Polo for
R300 000. It intends to use the car for three years. The second hand value of a 2018
Volkswagen Polo is R250 000. The second hand value of a 2015 Volkswagen Polo is
R180 000. It would be incorrect for Sonja Limited to use R250 000 as residual value
because this reflects the condition of the vehicle ‘as new’.
If the outlook for new and used car prices is not expected to change significantly over
the next three years, it may be appropriate for Sonja Limited to use the R180 000
three-year second hand car price for a 2015 vehicle as the residual value. This is
because the price for a 2015 (three-year old) vehicle could be an indicator of the
amount Sonja Limited would be able to sell the car for in 2021, when it has been used
for three years.
7
EXAMPLE 8 – VAT
Purchased a motor vehicle cash for R114 000 (inclusive of VAT @ 14%).
What is the cost of the asset if:
1) VAT input may be claimed (VAT-vendor)?
2) VAT input may not be claimed (not a VAT-vendor)?
Scenario 1: Input may be claimed.
Motor vehicles at cost
Bank 100 000
[114 000 x 100/114]
VAT control account
Bank 14 000
[114 000 x 14/114]
Bank
Vehicles & VAT 114 000
Depreciation @ 20 % per year on R100 000 = R20 000
Scenario 2: Input may not be claimed.
Motor vehicles at cost
Bank 114 000
Depreciation @ 20 % per year on R114 000 = R22 800
EXAMPLE 9 – Depreciation Written Off (Indirectly)
Assume a company uses Machine A, which has a total cost of R100,000 and
accumulated depreciation of R10,000 at the beginning of the year, to build Machine B.
The construction of Machine B takes place during the first three months of the year,
after which Machine A is used for normal business purposes for the remaining nine
months.
Depreciation is written off on all machinery at 20% per annum on the straight-line
method.
The construction of Machine B is completed at the end of the first three month period
of the year at a cost of R80 000, excluding the depreciation of Machine A, and was
available for use as intended by management.
Depreciation calculations:
i. Total depreciation of Machine A:
R100 000 x 20% = R20 000 p/y
ii. Cost of Machine B:
8
R
Cost as given (excludes the depreciation of machine A) 80 000
Depreciation of Machine A capitalised 5 000
(20 000 x 3/12)
Cost of Machine B 85 000
iii. Depreciation of Machine B:
R85 000 x 20 % = R17 000 per year.
Therefore, current year is 9/12 x R17 000 = R12 750.
Disclosure:
2. Specified expenses by nature
Depreciation R
Cost of sales (20 000 – 5 000 + 12 750) 27 750
Capitalised to another assets’ cost and expensed in Cost of 5 000
Sales as part of that assets depreciation in the current and
future years
32 750
3. Profit before income taxes
Profit before income taxes is stated after the following item was taken into account:
Expenses R
Depreciation (20 000 – 5000 + 12 750) 27 750
4. Property plant and equipment
R
Cost 100 000
Accumulated depreciation (10 000)
Carrying amount beginning of the year 90 000
Movements
Additions (80 000 + 5 000) 85 000
Depreciation (20 000 + 12 750) (32 750)
Carrying amount end of the year 142 250
Cost 185 000
9
Accumulated depreciation (10 000 + 32 750) 42 750
The following conclusions can be drawn from the above:
Depreciation which is written off (directly) against profit in respect of Machine A
amounts to R15 000 (R20 000 – R5 000 capitalised to Machine B).
The other R5 000 depreciation in respect of Machine A will be written off (indirectly)
from the commencement of the last nine months of the current financial year when
Machine B is depreciated.
Consequently, an amount of R750 in respect of the R5 000 depreciation of Machine A
capitalised to Machine B, is written off against profit (indirectly) in the current year.
R5 000 x 20% x 9/12 = R750.
Journal entries that would be processed in the above scenario by the company.
Dr Cr
R R
Depreciation (A) (P or L) 15 000
Cost of plant (B) (SFP) 5 000
Accumulated depreciation (A) (SFP) 20 000
Depreciation (B) (P or L) 12 750
Accumulated depreciation (B) (SFP) 12 750
EXAMPLE 10 - depreciable amount determination
a) Purchased a plant for R50 000. The estimated current residual value at the end
of its useful life of 5 years is R5 000.
Calculate depreciable amount:
R(50 000 – 5 000) = R45 000
b) Assume same information as for a) above. Dismantling costs of R1 500 (current
value (PV)) will be incurred.
1. Calculate depreciable amount if the dismantling costs can be recognised
as a provision in terms of IAS 37:
R(50 000 + 1 500) – R5 000 = R46 500
2. Calculate depreciable amount if the dismantling costs cannot be
recognised as a provision in terms of IAS 37:
R(50 000 – [5 000 – 1 500]) = R46 500
c) Assume same information as in a) above. At end of year 2, the residual value
was estimated to be R6 000. The entity applies the cost model of IAS 16.
The residual value will be adjusted to R6 000 which will influence the depreciation over
its remaining useful life.
10
Depreciable amount – beginning of year 1: R45 000
Year 1: Depreciation: R45 000 / 5 = R9 000
Year 2: R50 000 – R9 000 = R41 000 (remaining CA beginning of year 2)
R41 000 – R6 000 (new residual value) = R35 000
Remaining years = 4
New depr. p/y = R35 000 / 4 = R8 750
Revision of useful life:
The useful life of an asset is estimated at the date of purchase based on information
available and circumstances prevailing at that time. Consequently, changes to these
factors could occur which may influence the determination of the useful life of an asset,
thus requiring that the estimation of useful life be reconsidered and revised.
Corrections of estimations form part of the normal business activities of an entity. It is
not errors.
From the time that a change in the estimation of the useful life of the affected asset is
made, the depreciation for the current year and future years (prospectively) will be
influenced.
Method for revision of useful life
• Determine new estimated useful life at the beginning of the year.
• Determine the unexpired portion of the carrying amount at the beginning of the
year.
• Write off the unexpired portion of the carrying amount over the unexpired portion
of useful life as now estimated.
11
QUESTIONS
QUESTION 1
(Source: Class test 3, 2009)
I-LOVE-CUPCAKES LIMITED manufactures cupcakes for children’s birthday parties.
The business started out as a small ‘boutique’ shop in Pretoria, and due to massive
demand, has now become a country wide manufacturing business.
The company is owned by Mrs Vanilla, who has up to now been responsible for the
accounting records. Due to the fact that the company has been recently experiencing
some problems, Mrs Vanilla decided to contract you, a professional accountant, to get
her accounting records up to date.
Mrs Vanilla provided you with the following information with regard to the company’s
property, plant and equipment:
Extract from the trial balance at 1 January 2024:
R
Machinery – carrying amount 105 000
Land and buildings – carrying amount 1 020 800
On 1 January 2019, I-Love-Cupcakes Limited purchased machinery which was
immediately ready for use as intended by management. The useful life and current
residual value were estimated on 1 January 2019 to be 10 years and R5 000
respectively.
New machinery was purchased on 1 April 2024 for R130 000. Transport and
installation costs of R17 000 were incurred and paid on 1 April 2024. The machinery
was ready for use as intended by management on 1 April 2024. The useful life of this
new machinery is 7 years and the estimated current residual value is Rnil.
I-Love-Cupcakes Limited depreciates machinery using the straight-line method, and
has a reporting date of 31 December.
Land and buildings were purchased on 1 January 2012. Land comprised 70% of the
purchase price. Buildings were immediately ready for use as intended by management
and are depreciated using the straight-line method, and have an expected useful life
of 50 years and an estimated insignificant current residual value. Land is not
depreciated.
On 2 January 2024, land was revalued for the first time by an independent, expert
valuator. Land was valued at R1 000 000. This represents the fair value and net
replacement cost respectively.
The estimated useful lives, depreciation methods and residual values of all items of
property, plant and equipment were reviewed annually and no changes were deemed
12
necessary in any year.
REQUIRED:
Disclose the abovementioned information in the Property, plant and equipment note
to accompany the annual financial statements of I-Love-Cupcakes Limited, for the year
ended 31 December 2024, in accordance with International Financial Reporting
Standards.
Note: - Show all calculations and make use of cross references.
- Round calculated amounts to the nearest R1.
- Assume all amounts are material.
- The accounting policy notes are not required.
- Comparative amounts are not required.
- Total columns are not required.
QUESTION 2
(Source: Class test 3, 2010)
The following information, with regard to the property, plant and equipment of
SIXTEEN LIMITED, has been provided to you:
Extract from the trial balance at 1 January 2024:
R
Land and Buildings – carrying amount 2 552 000
Equipment – carrying amount 262 800
Vehicles – carrying amount 100 000
Sixteen Limited has a reporting date of 31 December.
Land and buildings were purchased on 1 January 2015. Land comprised 60% of the
purchase price. Buildings were immediately ready for use as intended by management
and are depreciated using the straight-line method, and have an expected useful life
of 50 years and an insignificant estimated current residual value. Land is not
depreciated.
On 2 January 2024, land was revalued for the first time by an independent, expert
valuator. Land was valued at R1 800 000. This value represents the fair value and net
replacement cost respectively.
On 1 January 2023, Sixteen Limited purchased equipment which was immediately
ready for use as intended by management. The current residual value was estimated
on 1 January 2023 to be an insignificant amount.
New equipment was purchased on 1 April 2024 for R325 000 and the equipment was
immediately ready for use as intended by management. Transport and installation
costs of R42 600 in total were incurred and paid on 1 April 2024. The current residual
value of this new equipment was estimated to be an insignificant amount.
Sixteen Limited depreciates equipment using the diminishing balance method at 10%
13
per annum.
The vehicles of Sixteen Limited were acquired and ready for use on 1 July 2021 and
had an estimated useful life of five years and an estimated current residual value of
R15 000.
Vehicles are depreciated on the straight-line method over their estimated useful lives.
On 31 October 2024, all the vehicles were sold by Sixteen Limited for R90 000 in total.
The estimated useful lives, depreciation methods and residual values of all items of
property, plant and equipment were reviewed annually and no changes were deemed
necessary in any year.
REQUIRED:
a)Disclose the above mentioned information in the “Property, plant and equipment”
note to accompany the annual financial statements of Sixteen Limited, for the year
ended 31 December 2024, in accordance with International Financial Reporting
Standards. (23,5)
Note: - Show all calculations and make use of cross references.
- Round calculated amounts to the nearest R1.
- Assume all amounts are material.
- The accounting policy notes are not required.
- Comparative amounts are not required.
- Total columns are not required.
b) The following terms are defined in IAS 16, Property, Plant and Equipment:
● Depreciable amount; and
● Carrying amount.
Briefly discuss how the one term differs from the other term. (2,5)
14
QUESTION 3
(Source: Question 1 and 2 from Class test 4, 2010)
Question 3a (21 marks)
FLIGHTLINE LIMITED is an airline company listed on the JSE Limited. The cost and
other details of one of the company’s aircraft are:
R - cost Estimated life
Exterior structure – purchase date 1 April 2010 120 000 000 20 years
Engines - 1 April 2010
(2 at R9 000 000 each) 18 000 000 36 000 flying hours
The aircraft is measured in terms of the cost model per IAS 16, Property, Plant and
Equipment, and is depreciated on the straight-line method, with an estimated
insignificant current residual value applicable to all of the component parts. The
purchase date is the date from which the component was ready for use as intended
by management.
On 1 April 2023, the aircraft log showed it had flown 10 800 flying hours since
1 April 2010. During the year ended 31 March 2024, the aircraft flew for 1 200 flying
hours during the six months up to 30 September 2023 and a further 1 000 flying hours
during the next six months up to 31 March 2024.
REQUIRED:
Calculate the amounts that will be recognised in the profit or loss section of the
statement of profit or loss and other comprehensive income of Flightline Limited in
respect of the aircraft for the year ended 31 March 2024 as well as the aircraft’s
carrying amount in the statement of financial position of Flightline Limited at 31 March
2024, in accordance with International Financial Reporting Standards.
QUESTION 3b (includes IAS 2)
The following terms are defined in IAS 16, Property, Plant and Equipment:
● Fair value; and
● Entity specific value.
REQUIRED:
a) Briefly discuss how the one term differs from the other term. (3,5)
b) IAS 2, Inventories, contains the term ‘net realisable value’. Discuss whether this
term is a fair value or an entity specific value. (2,5)
15
QUESTION 4
(Source: Class test 2, 2014)
SERIOUS BUSINESS LIMITED is a manufacturing company with a 30 September
reporting date. The company has a complex asset structure and approached you, a
B Com (Accounting Sciences) student, to assist with the correct accounting treatment
of some of these assets.
The following information is applicable:
Accounting policies as at 30 September 2024
Owner occupied land is accounted for in accordance with the revaluation model of IAS
16, Property, Plant and Equipment. Land is not depreciated. Revaluations are
performed annually, at the beginning of each year, by an independent valuator who
holds a recognised and relevant professional qualification.
Land and buildings
Serious Business Limited acquired a piece of land during November 2019 for purposes
of erecting a factory building on the land. The purchase price, excluding VAT, was
R2 850 000. The piece of land was overgrown with bushes and trees and Serious
Business Limited incurred R10 100 to prepare the land for purposes of erecting the
factory building on it. The land was only ready for its intended use by management
after these costs were incurred.
The construction of the factory building commenced on 1 January 2020, and was
completed on 30 April 2021 at a total cost of R7 350 000. On this date, the total
estimated useful life of the factory building was 20 years and the estimated current
residual value was R120 000. The factory building was ready for use as intended by
management on 1 June 2021. During the 2023 financial year, management estimated
that the total useful life of the factory building has changed to 15 years. All other
estimates remained the same.
The first revaluation was done on 1 October 2023.
The following fair values and net replacement costs were obtained from this
independent valuator:
Land
(Fair value)
R
1 October 2023 3 000 000
1 October 2024 3 340 000
Additional information:
1. Serious Business Limited is a registered VAT vendor. All amounts mentioned
above exclude VAT, unless specifically otherwise stated.
2. None of Serious Business Limited’s assets are encumbered by any liabilities.
16
3. Unless specifically stated otherwise, there were no indications of impairment on
any items.
4. Unless specifically otherwise stated, the residual values, useful lives and
depreciation methods of all items were reviewed annually, and no changes were
deemed necessary.
5. There were no purchases or disposals of any assets during the financial year
ended 30 September 2024, other than those evident from the given information.
REQUIRED:
Disclose the “Property, plant and equipment” note in the annual financial statements
of Serious Business Limited for the year ended 30 September 2024, in accordance
with International Financial Reporting Standards.
Note: - The accounting policy notes are not required.
- Comparative amounts are not required.
- Round all calculated amounts to the nearest R1, and periods to 2 decimal
places.
- Total columns are not required.
- Narrative information relating to changes in an accounting estimate is
disclosed as part of a "Profit before tax" note of the company.
- The cost / gross carrying amount component of the carrying amount on
30 September 2024 must be calculated and cannot be a balancing amount.
The accumulated depreciation component can be a balancing amount.
17
