Chapter 5:

Property, Plant, and Equipment (IAS 16)

• Acquisition and Disposition of Property, Plant, and

Equipment
 Characteristics of property, plant, and equipment
 Acquisition & valuation of property, plant and
equipment
 Costs subsequent to acquisition
 Disposition of property, plant and equipment
• Depreciation, Impairments, and Revaluations

1
RELEVANT STANDARDS

Topic List Standards

Property, plant and equipment IAS 16
Fair Value IFRS 13
Impairment IAS 36

2
1. Objective
The objective of IAS 16 is to prescribe the
accounting treatment for property, plant,
and equipment.
The principal issues are the recognition of
assets, the determination of their carrying
amounts, and the depreciation charges and
impairment losses to be recognized in
relation to them.

3
Definition & Scope
Property, Plant and Equipment are tangible
items that :
 Are held for use in the production or
supply of goods or services, for rental to
others, or for administrative purposes
 Are expected to be used during more than
one period.

4
Scope
• This Standard does not apply to:
 Property, plant and equipment classified as held
for sale in accordance with IFRS 5.
 Biological assets related to agricultural activity
(covered by IAS 41 –Agriculture) other than
bearer plants.
 Mineral rights and mineral reserves such as oil,
gas, and similar ‘non-regenerative’ resources

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Recognition

General
•Property, Plant and Equipment shall be recognized
as an asset if, and only if:
a)It is probable that future economic benefits
associated with the item will flow to the entity;
this can be judged with reference to the fact
whether the entity ability to restrict the access
of others to those benefits
b)The cost of the item can be measured reliably

6
 Different Aspects of PP&E Recognition

An item of inventory is accounted for as an item of PP&E

a) Items such as spare parts, stand-by equipment and
servicing equipment are inventory unless they meet the
definition of PP&E
b) In general, an item of inventory is accounted for as an item of
PP&E if it:
 Is not held for sale or consumed in a production process
or during the process of rendering services;
 Is necessary to operate or benefit from an asset during
more than one operating cycle

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 Examples for items of PPE not consumed and consumed in the
production process

a) For Items of PP&E not consumed in the production process

An entity operates an oil refining plant. In order for the refining process to take
place, the plant must contain a certain minimum quantity of oil. This can only be
taken out once the plant is abandoned and would then be polluted to such an
extent that the oil’s value is significantly reduced
In this example the part of the crude that is necessary to operate (in technical
terms) the plant and cannot be recouped (or can be recouped but would then be
significantly impaired), even when the plant is abandoned, should be considered
as an item of PP&E and amortized over the life of the plant
b) For Items of inventory consumed in the production process
An entity sells gas and has at any one time a certain quantity of gas in its gas
distribution network. In this example the gas in the pipeline is not necessary to
operate the pipeline. It is held for sale or to be consumed in the production
process or process of rendering services. Therefore this gas is accounted for as
inventory
8
Environmental and safety equipment

Cost incurred for Environmental protection and

safety equipment can be capitalised when there
is a constructive (self imposed) obligation to
invest in the equipment. For example when the
entity by legislation or voluntarily invest on
environmental & protection equipment

9
Transfers of assets from customers
• Our entity receives from a customer, or another party, an
item of PP&E (or cash for the acquisition or construction of
such items) and then use either to connect the customer to
a network or to provide the customer with ongoing access
to a supply electricity services. While we do this we should
recognize such type PP&E items in our books of records,
since it full fills the following PP&E recognition criteria
 Future economic benefits associated with the PP&E item
will flow to the entity; our entity ability to restrict the access
of others to those benefits
The cost of the item can be measured reliably

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Bearer Plants

• Bearer plants (for example the root part of

Eucalyptus trees) that are used in the production or
supply of agricultural produce (wood pole trees used
to install our electric line), are expected to bear
produce for more than one period and have a
remote likelihood of being sold as a plant or
harvested as agricultural produce are classified
under PPE within the scope of IAS 16.

11
Minor items Of PP&E

• A very large number of minor items of PP&E such

as spare parts, tools, staplers, clip meters and …
etc., which nevertheless are used in more than
one accounting period. There are practical
problems in recording them on an asset-by-asset
basis in an asset register; they are difficult to
control and frequently lost. The main
consequence is that it becomes very difficult to
depreciate them. In General we will write off
such immaterial assets as expenses in the period
of addition

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The right to use of Land

•As per our country land policy, all Lands are

owned by the government, but currently in
so many places our entity uses lands free of
any charge and this should be recognized
initially in our books as asset as long as they
fulfil the asset recognition criteria

13
Measurement Of PPE

General
•Measurement is the process of determining
monetary amounts at which elements are
recognized, this refers to PPE:
 Initial recognition
 Cost incurred Subsequent to Acquisition
Subsequent recognition

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Initial recognition of PPE

General
• Initial recognition for PPE refers to its Historical cost that is
whenever an entity initially incurs expense to acquire asset
through purchase or construction or production or through
exchange or if the payment for PPE deferred (postponed))

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Elements of cost
The cost of an item of property, plant and equipment comprises
a) Its purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and
rebates.
b) Any costs 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.
c) The initial estimate of the costs of dismantling and removing
the item

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Cost of PP&E Includes continued
d) Construction cost of material, labor & over head incurred
during the PPE construction period plus:
e) Cost of employee benefits arising directly from the
construction or acquisition of PPE
f) Cost of site preparation
g) Installation and assembly cost
h) Testing cost (by deducting any net proceed from sell any
items produced while bringing the asset to its location)
i) Cost of professional fees
j) Borrowing cost

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Cost that are not an item PPE will includes

• Cost incurred for the project research activity

• Training costs
• When an item of PPE is constructed by an entity abnormal
amounts of waste of material, labor and other resources
• Start up and pre-operating costs unless those costs are
necessary to bring the asset to its working condition
• Loss incurred before the asset reaches its planned
performance level
• Administrative and other General over head costs

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Other Issues of Recognition
Asset acquired through production
Include Costs directly related to the units of production,
e.g. direct materials, direct labor and Fixed and variable
production overheads that are incurred in converting
materials into finished goods
Assets acquired through exchange
If the PPE asset acquired through exchange
should be measured at its fair value, but if the
acquired item can’t be measured due to various
reason at its fair value, its cost will be measured at
carrying amount of the asset given

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Payment for PPE deferred for latter period

• If the payment for an item of PPE deferred (postponed) for a later

period (i.e., for over 2 years period) , the value for PPE should be
discounted by a difference between present value of future
payment
Example No. 1:
• If for example our entity purchase a machine, that will going to be
paid on the following Instalment base
• Total cost of the Machine Birr 800,000.00
• Additional cost incurred during transit Birr 60,000.00 (already
paid)
• Advance payment to be Birr 200,000.00
• The remaining to be paid in 5 years Birr 600,000.00
• Yearly payment made beginning of year Birr 120,000.00
• Incremental borrowing rate is 5%
• PVOA of 1 for 5 installment at 5%=4.32948

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Payment differed continued
• The present value of the remaining five future liability payments
of 120,000 ETB, discounted at 5% will be equal to ETB 519,538
(120,000 X 4.32948)
• The Initial total cost of the machine will be 779,538.00= 519538
+ 200,000 + 60,000

• We will recognize the machine Initially:

Dr Cr
PP&E 779,538.00
Local purchase payable 519,538.00

Cash at bank (advance) 200,000.00

Cash at bank/material/labor etc., 60,000.00

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A B C D E F G H I

E=D X 5% F=D + E G=I H=G1/5 I=G - H

Begin periodic payt. Principal Beg. Liability Interest Bal. with Beg. Bal. Depreciation End Bal.
ning at the payment balance after expense(5%) accrued
of beginning principal interest
year payment

1 - 519,538 25,976.90 545,514.90 779,538.00 (155,907.60) 623,630.40

2 120,000 98,724.25 425,514.90 21,275.75 446,790.65 623,630.40 (155,907.60) 467,722.80

3 120,000 103,660.47 326,790.65 16,339.53 343,130.18 467,722.80 (155,907.60) 311,815.20

4 120,000 108,843.49 223,130.18 11,156.51 234,286.69 311,815.20 (155,907.60) 155,907.60

5 120,000 103,000.00 114,286.69 5,714.35 120,000.00 155,907.60 (155,907.60) 0.00

10 120,000 0 0 0 0 0.00 (779,538.00 0

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 Subsequent accounting action that should be taken at
the end of each fiscal period
End of first year/Beginning of 2nd year: End of 3rd year/Beginning of 4th year:
Dr Cr Dr Cr
Local purchase Pay. 94,023.10 Local purchase Pay. 103,660.47
Fin. charge (interest)… 25,976.90 Fin. charge (interest) 16,339.53
Cash at bank 120,000.00 Cash at bank 120,000.00
Dr Cr
Depreciation expense 155,907.60 End of 4th year/Beginning of 5th year:
Accumulated depreciation 155,907.60 Dr Cr
Local purchase Pay. 108,843.49
Remark: Depreciation expense will have similar Fin. charge (interest) 11,156.51
amount for 5 years Cash at bank 120,000.00

End of 2nd year/Beginning of 3rd year: End of 5th year/Beginning of 6th year:
Dr Cr Dr Cr
Local purchase Pay. 98,724.25 Local purchase Pay. 114,286.00
Fin. charge (interest) 21,275.75 Fin. charge (interest) 5,714.00
Cash at bank 120,000.00 Cash at bank 120,000.0

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Subsequent Expenditures

a) Capitalized If The additional Expenditure incurred

 The expenditure meets the definition of an asset
 If the entity can demonstrate that the equipment is likely to
increase the economic life or efficiency of the related asset
b) Exclude:
• Additional cost paid on a fully depreciated asset, even if it is major,
is not capitalized. It is considered as expense in the year in which
the amount is paid
• Ordinary repairs (Replacement of minor parts, lubrication,
adjustments, cleaning and painting) are expenditures made to
maintain assets in operating condition; these maintenance costs
are not capitalized
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De-recognition of PP&E

 In general, the carrying amount of PPE shall be derecognized

 Whenever we dispose the asset (that is either on sale of the
asset or transfer it by donation) Or
 When an asset has no future economic benefit from its use
due to the asset removal or disposal, it should be de-
recognized
 Whenever it is not practical to determine the carrying
amount of the replaced part, the standard allows we can use
the cost of the replacement as an indication of what the cost
of the replaced part was at the time it was acquired or
constructed

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Example 2: Recognition and De-recognition of parts

• Our entity had constructed a 66 KV substation with an estimated useful

life 20 years for Birr 30 million due to the damage reached on the part of
the substation a decision made to replace the badly damaged power
transformer by a new one at a cost of 5 million birr.
• Our entity couldn’t know the original cost of the replaced transformer
therefore it uses the cost of the replacement part to estimate the carrying
value of the original transformer. With the help of the supplier, it
estimates that the cost would have been approximately 3 million Birr and
that this would have a remaining carrying value after 12 year’s
depreciation will be 1.2 million=(3million X8/20)

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De-recognition example cont..

• Assuming that the damaged transformer returned to our store, the

accounting action for Recognition and De-recognition the replaced
transformer will be as follows
Dr CR
PPE new S/S P/Transformer 5,000,000.00
Accumulated depreciation 1,800,000.00
Stock Account Transformer 1,200,000.00
Cash at Bank/ Payables 5,000,000.00
PPE old S/S P/Transformer 3,000,000.00

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Accounting action for gain/loss on disposal

For any Gain on disposal of PPE For any loss on disposal of PPE
Dr CR
Dr CR
Accumulated depreciation xxx Accumulated depreciation xxx
Cash at Bank/ Receivable xxx Gain/loss on sale of PPE xxx
PP&E xxx PP&E xxx
Gain/loss on sale of PPE
xxx

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PPE Subsequent Measurement
General
IAS 16 allows one of two alternatives to be
chosen as the accounting policy for
measurement of PP&E after initial recognition.
These are:
 Cost model
 Revaluation model

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• The choice made must be applied to an entire class of PP&E, which
means that not all classes are required to have the same policy.
[IAS 16.29].
Under cost model carrying value of the asset will be determined as
follows
Carrying value = Cost of PPE – accumulated depreciation –
Accumulated impairment loss
On the other hand, under Revaluation model carrying value of the
asset will be determined as follows
Carrying value = Fair value of PPE – accumulated depreciation –
Accumulated impairment loss
• The difference between the two model is, when we use the cost
model we get the carrying value of PPE by deducting from the initial
cost of PPE
• While when we use revaluation model we will reach to the carrying
value of PPE by deducting from fair value of the asset

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Fair value
Fair Value:- is the price that would be received to sell an asset or paid to transfer liability in
an ordinary transaction between market participant at a measurement date.
• IFRSs permit or require entities to measure or disclose the fair value of assets,
liabilities or equity instruments, to measure fair value the IASB or the Board
issued IFRS 13
• Fair value is an exit price in the principal market, i.e. the market with the highest
volume and level of activity for the asset or liabilty.
• Active market: is a market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide pricing information on an
ongoing basis
• In the absence of a principal market, it is assumed that the transaction to sell
the asset or transfer the liability would occur in the most advantageous market.
• The most advantageous market is the market that would maximize the amount
that would be received to sell an asset or minimize the amount that would be
paid to transfer a liability, taking into account transport and transaction costs. In
either case, the entity must have access to the market on the measurement
date.
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The fair value hierarchy
The fair value
The fair value hierarchy classifies the inputs used to measure fair value into three
levels,
Level 1 Level 2 Level 3
Definition Is there a Quoted Inputs other than Unobservable
prices quoted prices included inputs
(unadjusted) in active within level 1 that are for the asset
markets for identical observable for the or liability
assets or liabilities asset or liability, either
that the entity can directly or indirectly
access at the
measurement date
Examples The price for a Interest rates and yield Projected
financial asset or curves observable at cash flows
financial liability commonly quoted used in a
for the identical asset intervals, implied discounted
is traded on an active volatilities, and credit cash flow
market (e.g. Tokyo spreads calculation 32
Stock Exchange
 Fair value valuation technique(s)
• The fair value hierarchy focuses on prioritising the inputs used in valuation techniques,
not the techniques themselves. [IFRS 13.74].
a) Valuation adjustments
•In certain instances, adjustments to the output from a valuation technique may be
required to appropriately determine a fair value measurement in accordance with IFRS
13. An entity makes valuation adjustments if market participants would make those
adjustments
b) Market Approach
•The market approach uses prices that market participants would pay or receive for the
transaction, for example, a quoted market price. The market price may be adjusted to
reflect the characteristics of the item being measured, such as its current condition and
location, and could result in a range of possible fair values .
c) Cost approach(current Replacement cost approach
•The cost approach reflects the amount that would be required currently to replace the
service capacity of an asset’

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Fair value continued
• The measurement of amounts (whether recognized or only disclosed) that are
based on fair value will include the following:
 A non-current asset (or disposal group) held for sale measured at fair value less
costs to sell in accordance with IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – where the fair value less costs to sell is lower than
its carrying amount;
 Inventories are measured at lower of cost or Net realizable value (fair value less
costs to sell), as per IAS 2;
 PP&E, Intangible asset and Investment property measured by using cost or
revaluation model
 Biological assets, agricultural produce and produce growing on a bearer plant
measured at fair value less costs to sell in accordance with IAS 41 – Agriculture.

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Depreciation & useful life

Depreciation
Deprecation:- is the result of systematic allocation of the
depreciable amount of an asset over estimated life. The deprecation
method will include Straight line, Diminishing Balance, Number of
units of production
Components of a depreciable item must be depreciate separately if
the items have :
Materially different consumption patterns
Different useful life
The item amount is significant compared with the total cost (for
Example engine of an air craft)

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Depreciation continued
• Deprecation of PPE start when the asset is ready for use
• Depreciation of an asset ceases at earlier of the date that
 The asset classified as held for sale or
 Included in a disposal
 The date the asset derecognized
• An entity does not stop depreciating an asset merely because
 It has become idle
 Has been retired from active use (unless the asset is fully depreciated)
• We don’t depreciate the land because land has an indefinite life. But, in
relation to leased lands since its service potential is consumed with time it
will depreciate during the lease term period (for example, if we have a 99
year lease right to use the land

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Useful Life

 Useful life: is
a) The period over which an asset is expected to be available for
use by an entity; or
b) The number of production or similar units expected to be
obtained from the asset by an entity
 Useful life, depreciable amount and deprecation method
should be reviewed at least at the end of each financial year, if
there is any change it should be accounted as a change in
estimate, the effect of the changes to be recognized
prospectively over the remaining life of the asset, without
restatement of previous period.

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Example :
•We will try to look by the following example,
how to take accounting action whenever the
change in PPE life years estimate occurs:
At the beginning of 2008 the Equipment was
purchased by birr 600,000.00.
Estimated life of the equipment initially was 6
years,
But, at the end of 2010 when we review the life
year of this asset it was found to be 5 years

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 2008 E.C. 2009 E.C. 2010 E.C.
Initial Cost of PPE 600,000.00 600,000.00 600,000.00
Initial life year estimate 6 years 6 years

Initial Deprecation 100,000.00 100,000.00

Reviewed life year 5 years
Cost of the asset …………….. ………………………… …………………………. 600,000.00
Less Accumulated ……........................ ……………………….. 200,000.00
Deprecation Net Carrying ………………………….. ……………………….. 400,000.00
value
Calculating new deprecation
value using the new Yearly deprecation for remaining 3
remaining useful life will be years 400,000/3= 133,333.33
………………..
Depreciation expense adjustment amount to be made for
the next remaining years will be as follows:

Dr Cr
Depreciation Expense 133,333.33
Accumulated depreciation 133,333.33

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Impairment of PPE
General
In principle an asset is impaired when an entity will not be
able to recover that asset’s carrying value, either through using
it or selling it.
If circumstances arise which indicate assets might be
impaired, a review should be undertaken of their cash
generating abilities either through use or sale.
The purpose of the impairment review is to ensure that
tangible assets are not carried at a figure (i.e., carrying value)
greater than their recoverable amount (RA). This recoverable
amount is compared with the carrying value (CV) of the asset to
determine if the asset is impaired

40
Carrying Recoverable
Compared with
Value Amount

Higher Of

Fair value less cost Value In

of Disposal use

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Two sources of information for impairment
Internal sources
 Obsolescence or physically
damaged goods
 Significant changes in extent or
manner in which an asset is used
(such as Idle asset, plans to dispose
& discontinued operation of an
asset sooner than expected )
 Internal reporting, indicates that
the economic performance of an
asset is or will be worse than
expected
External sources
 The fall in the asset market value
that is more significant than would
normally expected from the passage
of time or normal use
 A significant change in technological,
market, legal or economic
environment of the business
 An increase in market interest or
market rate of return on investment
likely to affect the discount rate
 the carrying amount of the net assets
of the entity exceeds its market
capitalisation
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Cost Model

 How to determine the carrying value of PPE at year end

 Cost model assumes that at the end of an entity accounting
period PPE should be carried at its carrying value less
Accumulated depreciation and accumulated impairment loss.
 In order to investigate if there are any indicators for the
Impairment on our asset :
 First, we will estimate the recoverable amount and compare it
with asset carrying amount
 To get the recoverable amount, we should first compare Fair
value less cost of sale with Value in use and take the higher
from these two amounts
.

43
Cost model continued
 Then, to find the carrying value of the PP&E asset, we will
deduct from the cost of PPE accumulated depreciation and
Accumulated impairment loss.
 Then, if the carrying value is higher than the recoverable
amount, we will conclude that there is asset impairment and
then this difference will be written off as impairment loss in
the statement of profit or loss.
 Finally, in order to determine carrying value of the PPE that
should be shown on our balance sheet at the end of the
accounting period, we will deduct from the previous period
carrying value of the PPE asset the amount we find as
accumulated depreciation and Accumulated impairment loss
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 Example of subsequent measurement of using cost
model
 Assume that, at the end of year one, we have the following information to
check whether there is an asset impairment :
 Initial cost of the PPE: Birr 600,000.00
 PPE total Life years : 5
 Discount rate : 5%
 Deprecation Per year: Birr 120,000.00
 Accumulated depreciation for year 1 was Birr 120,000.00
 Fair value less costs to sell is assessed as Birr 450,000.00
 Value in use: is an estimate of cash flow the entity expects to drive from the
asset:
 Based on the information we get, the PPE is expected to generate cash flow in
each year birr 125,000 and for 4 years at a discount rate of 5% (see the
present value of annuity table)
 The present value for the asset will be 125,000 x3.5460=443,250

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Answer
Based on the information given above, at the end of year
one we would we check If there are any indicators for the
Impairment of our asset, to do this first we will find the
recoverable amount in the following way:
The Recoverable amount = will be the higher of the two
amounts shown below: i.e., 450,000.00

Fair value less cost of sale = 450,000.00

Value in use = 443,250.00
Then, we will compare recoverable amount (the higher
amount we found in the above) with the carrying amount
of the asset
The Carrying Amount (CA) = Net value of the asset
Carrying Value =Initial Cost –accumulated Depreciation -
accumulated Impairment
480,000.00 = 600,000 - 120,000 – 0.00 (no
accumulated impairment)
Based on this example, the carrying value of the asset of
Birr 480,000 is greater than the recoverable amount of Birr
450,000.00, therefore we can conclude that there is asset
impairment loss of birr 30,000.
46
Example continued
• Based on this example, the carrying value of the asset of
Birr 480,000 is greater than the recoverable amount of
Birr 450,000.00, therefore we can conclude that there is
asset impairment loss of birr 30,000.
• Based on this information, to recognize this impairment
loss we will take the following accounting action at the
end of year one:
Dr CR
Impairment loss 30,000.00
Accumulated impairment 30,000.00

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Impairment Reversal
 The impairment reversal will take place, only when the condition that leads to
their original impairment lifted
 In the previous section, we have said that if the recoverable amount (RA) less than
the carrying amount (CA) of the asset, we say there is impairment due to a fall in
the value of the asset and therefore value of the asset should be written down to
its recoverable amount and should be charged as an expense in the profit and loss
statement.
 On the other hand, if the recoverable amount greater than the carrying value the
impairment reversal will take place. But, this happen up to ceiling (if there no any
previous impairment loss balance on the impairment loss account do nothing)
 The principle applied in here is that the asset should not be carried above their
recoverable amount
 In general, when the Recoverable Amount greater than the Carrying amount, the
impairment reversal will take place. But, this happen up to ceiling through
profit/loss statement.

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 Example for Impairment Reversal
• Initial information: Similar On the 2nd year the condition for Impairment
• Asset Value: 600,000.00 lifted:
• Life years : 5 years • Recoverable Amount 500,000
• Residual value: 0 Carrying value:
• • Accumulated Impairment balance (30,000)
• At the end of year 1 Accumulated Depreciation:
• The asset impaired: • For the 1st year 120,000
• Cost of asset 600,000 • For the 2 year 600,000-
nd

120,000-30,000= 450,000/4 = 112,500

• Accumulated Depreciation 120,000 • Accumulated depreciation = (232,500)
• Carrying value 480,000
• Vs • CV=600,000-30,000-232,500= 337,500
• Recoverable value 450,000 Since RA > CA , impairment have been lifted,
• Asset Impairment 30,000 because the recoverable amount (500,000)
greater than the carrying value 337,500 but
• Impairment Adjustment the adjustment should not exceed the ceiling
• Dr Cr
• Loss on Impairment 30,000
• Accumulated Impairment 30,000

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Example continued
•Ceiling at the end of each year will be • The ceiling at the end of year 2 is 360,000
calculated by deducting the initial • The carrying value 337,500
deprecation amount 120,000 • Impairment to be lifted will be 22,500
Year Ceiling
Adjustment for impairment recovery
600,000
Dr Cr
• End of year 1 480,000
Accumulated impairment 22,500
• End of year 2 360,000 ceiling
Impairment Loss 22,500
• End of year 3 240,000
• End of year 4 120,000
• End of year 5 0

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Revaluation model
General
If we choose to use this model, revaluation are to occur with sufficient regularity
that will be at the end of each accounting period.
The frequency of revaluations depends upon the changes in fair values of PPE
For PPE only with insignificant changes in fair value, it is necessary to revalue the
item only every three or five year
Once an item of PPE is revalued all items of the same class to be revalued.
The carrying value of PPE will be revalued to its fair value (usually it will be the
current market value of PPE).
PPE whose fair value can be measured reliably shall be carried at a revalued
amount
The revalued amount is fair value of the asset at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated Impairment
losses

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Rules of revaluation

 During Initial Revaluation

 Gains – goes to other comprehensive income – revaluation surplus (OCI)
 Loss – goes to profit & loss (P&L)

 During subsequent revaluation

 Gains – goes to P&L to the extent of reversing previous losses; the remainder goes
to OCI
 Losses – goes to OCI to the extent of reversing gains in OCI; the remainder goes to
P&L

 The decrease recognized in OCI reduces the amount accumulated in equity under
the heading of Revaluation Surplus

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Example for Revaluation

PPE start at a cost of Birr 100,000.00

T1 Revalued to Birr 120,000.00 For an upward revaluation T3
T2 Revalued to Birr 90,000.00 Dr CR
T3 Revalued to Birr 110,000.00 PP&E 20,000.00
T4 Revalued to Birr 140,000.00 Revaluation surplus 10,000.00
For an upward revaluation T1 Loss on Revaluation 10,000.00
Dr CR
PP&E 20,000.00
Revaluation surplus 20,000.00
For an upward revaluation T4
For dawn ward revaluation T2 Dr CR
Dr CR PP&E 30,000.00
Revaluation surplus 20,000.00 Revaluation surplus 30,000.00
Loss on revaluation 10,000.00
PPE 30,000.00

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Advantages and disadvantages of using the revaluation
method
Advantages
• Higher asset value =
stronger balance sheet
• Better debt to equity
• Better comprehensive
income if asset increase in
value
Disadvantages
• Higher deprecation = lower
net income
• Losses go through P&L
• No benefit on ultimate sale
since asset already valued
at FV; little or no gain on
sale of asset on P&L
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Terms definitions
Term Definition
PP&E’s are Property, Plant & Equipment assets held for use in the production or
supply of goods or services, for rental to others, or for administrative
purposes
Asset An asset is a resource: [IAS 38.8]
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity

Control The power to obtain the future economic benefits flowing from the
underlying resource and to restrict the access of others to those benefits

Capitalization shall mean the process of recording of the cost of acquisition, construction,
major rehabilitation & maintenance and other subsequent costs as PP&E or
intangible assets in the book of our accounts

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 Terms definitions
Term Definition
Deprecation Is the result of systematic allocation of the depreciable amount of
an asset over estimated life.

Impairment loss The amount by which the carrying amount of the asset exceeds its
recoverable amount

Carrying amount The amount at which the asset is recognized in the statement of
financial position after deducting any accumulated amortization
and accumulated impairment losses thereon

Value in use Is an estimate of cash flow the entity expects to drive from the
asset

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 Definition continued

Fair value The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at
the measurement date

Active market A market in which transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing
information on an ongoing basis

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The end -5

Thank you

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