THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND
FINANCE - 2014/2015
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
[Link] Special (Col), ACA, MBA Fin
( Col)
IAS 16/ LKAS 16
Property, Plant & Equipment
Objective:
The objective of LKAS 16 is to prescribe the
accounting treatment for property, plant, and
equipment. The principal issues are:
- the timing of recognition of asset;
- the determination of their carrying amounts; and
- the depreciation charges to be recognized.
Non Current Assets
CONSIDERATIONS
Recognition Asset Non-current
criteria definition definition
Intangible Tangible
Investment
Prop. LKAS 40
LKAS 38 LKAS 16
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Definition
Property, plant and equipment (PPE) are
tangible items that are
Held for use in the production or supply
of goods or services, for rental to others,
or for administration purposes; and
Are expected to be used during more
than one period.
Cost. The amount paid or fair value of
other consideration given to acquire or
construct an asset.
Depreciation - Systematic allocation of the
depreciable amount of an asset over its useful
life.
Carrying amount: Carrying amount is the
amount which an asset is included in the
Statement of financial Position after deducting
any accumulated depreciation
Residual Value: is the net amount which the
enterprise expects to obtain for an asset and
the end of its useful life after deducting the
expected costs of disposal
Useful life:
The period of time over which an asset is expected to be
used by the enterprise or
The no of production or similar units expected to be
obtained from the asset by the enterprise
Following are relevant for determining the life time of asset.
Expected usage of asset
Expected Physical wear & tare
Technical obsolescence
Legal Limits
Land usually has an indefinite useful life and consequently
land is not usually depreciated.
RECOGNITION OF AN ASSET
An item of property, plant, and equipment
should be recognized as an asset
if and only if it is probable that future
economic benefits associated with the asset
will flow to the entity
and the cost of the item can be measured
reliably
Initial Recognition - Cost
Purchase price :
including import duties, nonrefundable purchase
taxes, less trade discounts and rebates
Costs directly attributable to bringing the asset to the
location and condition necessary for it to be used in a
manner intended by the entity
Examples of Directly Attributable Costs:
- Cost of employee benefits.
- Cost of site preparation.
- Initial delivery and handling cost.
- Installation and assembly cost.
- Cost of testing after deducting the net proceeds
from selling any items produced.
- Professional fees.
- Examples of costs that are not directly attributable costs and
therefore must be expensed in the income statement include
Costs of opening a new facility (often referred to as
preoperative expenses)
Costs of introducing a new product or service
Advertising and promotional costs
Costs of conducting business in a new location or with a new
class of customer
Training costs
Administration and other general overheads
Costs incurred while an asset, capable of being used as
intended, is yet to be brought into use, is left idle, or is
operating at below full capacity
Initial operating losses
Costs of relocating or reorganizing part or all of an entitys
operations
Initial estimates of dismantling, removing, and site
restoration if the entity has an obligation that it
incurs on acquisition of the asset or as a result of
using the asset other than to produce inventories
i.e
Asian Capital Ltd installing a new plant at its production facility. It has
incurred these costs:
Cost of the plant (cost per supplier invoice plus taxes) 2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants used for advice on the acquisition of the plant 700,000
Interest charges paid to supplier of plant for deferred credit 200,000
Estimated dismantling costs to be incurred after 7 years 300,000
Operating losses before commercial production 400,000
Measurement of cost – Repairs and Maintenance
Routine repairs and maintenance and
servicing costs should normally be
recognised in the Statement of
comprehensive income when the costs are
incurred.
However, when the subsequent
expenditure enhances the value of the
asset to the extent that additional
economic benefits will flow to the entity,
that additional expenditure should be
recognised as part of the assets costs.
DEPRECIATION
Methods:
Straight line
Units of production
Diminishing balance (Reducing balance)
Approach:
Depreciation charge for each period is recognized directly in
Statement of comprehensive Income
Methods should be reviewed annually
Charges start when asset ready for use and stop when asset
derecognized
Straight line method
Straight line method depreciates cost evenly
through out the useful life of the asset. Straight
line depreciation is calculated as follows:
Depreciation per annum = (Cost - Residual Value)
/ Useful Life
Accounting for Depreciation
◦ Depreciation Dr ( Expense
Account)
◦ Accumulated Deprecation Cr
i.e: Cost of the Asset 110,000
Residual Value 10,000
Expected Life time period : 10 years
Determine the annual depreciation amount
Subsequent measurement
An entity may choose between:
◦ Cost model (i.e. cost less accumulated
depreciation and accumulated impairment
losses, if any)
◦ Revaluation model (i.e. fair value at the date of
revaluation less subsequent accumulated
depreciation/impairment losses)
However, the same policy must be applied to
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each entire class of property, plant and
Disclosure requirements
For each class of PPE
• Measurement bases used for determining the
gross carrying amount
• The depreciation methods used
• The gross carrying amount and the
accumulated depreciation at the beginning
and end of the period
• A reconciliation of the carrying amount at the
beginning and end of the period
• Depreciation policy and rates
• Details on revaluation (if any)
• The number of ancillary items which involve
PPE
