IFRS – Property, Plant & Equipment

IFRS – Property, Plant & EquipmentBY: LISA MLADENOVIC, CA

IFRS – Property, Plant & Equipment

Overview


Overview - agendaFirst time adoption of IFRS – things to consider

Optional IFRS 1 exemption – fair value or cost?

Canadian GAAP vs. IFRS – highlights of key differences

Recognition & Measurement

Initial acquisition,

Componentization,

Spare parts,

Major inspection & overhaul costs vs. repairs and maintenance,

Cost measurement

Non-monetary transactions

Subsequent measurement – available choices:

Cost model or

Revaluation model


Overview – agenda cont.Depreciation – things to consider

Derecognition considerations

Other considerations:

Interest capitalization (IAS 23),

Asset retirement obligations (IAS 37),

Investment property (IAS 40),

Assets held for sale (IFRS 5),

Impairment of property, plant and equipment (IAS 36)

Financial statement presentation and disclosure – what’s required?


PP&E – Critical Points


First Time Adoption – IFRS 1


IFRS 1 – PP&E - Exemptions & Exceptions



Optional exemption – fair value or revaluation as deemed cost:

One of the following amounts may be used as deemed cost:

Fair value at the transition date (January 1, 2010);

Revaluation under Canadian GAAP at or before the transition date. Allowed if at the date of the revaluation it was broadly comparable (i.e. already available and a reasonable starting point) to either:

Fair value or;

Cost or depreciated cost under IFRS adjusted to reflect market fluctuations (eg: price index);

Fair value at the date of an event such as a privatization or IPO.




So what is fair value?

Fair value is considered to be the items’ appraised market value or an estimate of market value based on an income or depreciated replacement cost approach.

Note that the determination of fair values for both physical and intangible assets could be a costly exercise.




What is the impact of the valuation results?

If fair value is less than book value – there would be a decrease in value of assets with corresponding decrease in equity. Future depreciation charges would decrease and there would be potentially lower impairment charges. In this scenario, there may also be an impairment loss under Canadian GAAP to consider.

If fair value exceeds book value – there would be an increase in value of assets with corresponding increase in equity. Future depreciation charges would increase and potential impairment charges would be calculated on a higher asset base.

What are other companies doing?


IFRS 1 – PP&E - Exemptions & ExceptionsOptional exemption – fair value or revaluation as deemed cost:Air Canada – from IFRS Transition summary document:

Property & equipment• The Corporation has elected to fair value owned and capital leased aircraft as of January 1, 2010.• The adjustment includes:

the impact of the fair value adjustment to aircraft and spare engines as at January 1, 2010; and

the impact of componentizing the aircraft and adjusting the fair values based upon the estimated remaining life of each component, including capitalized engine and airframe overhaul costs.

• The net adjustment is an expected decrease to Property and equipment of $301 million, offset by a charge to the Deficit.


IFRS 1 – PP&E - Exemptions & ExceptionsOptional exemption – fair value or revaluation as deemed cost:WestJet– from IFRS Transition summary document:

IFRS 1 – First Time Adoption of IFRSIFRS 1 contains mandatory and optional exemptions required by publicly accountable enterprises adopting IFRS for the first time. The Corporation assessed each of the mandatory and optional exemptions in detail andconcluded there was no impact to the recognition, measurement, presentation or disclosure of past transactions related to these exemptions.

In other words – they are not revaluing their PP&E

What about other companies???


IFRS 1 – PP&E - Exemptions & ExceptionsOptional exemption – fair value or revaluation as deemed cost:Chartwell Seniors Housing REIT– March 10, 2011 Press Release

IFRSChartwell elected, under IFRS 1, to record property, plant and equipment ("PP&E") at fair value as a deemed cost on transition and to subsequently apply the cost model.

Chartwell's opening balance sheet as at January 1, 2010 will reflect a one-time revaluation of substantially all PP&E. This revaluation is expected to result in a carrying value of total assets of $73 million higher than the net book value reported under Canadian GAAP ("CGAAP"). This amount represents the sum of individual property fair values and excludes any portfolio premium and the value of the management platform. As a result of this revaluation, the Adjusted Gross Book Value ("GBV") of total assets is expected to decrease by approximately $394 million to $2.675 billion


IFRS 1 – PP&E - Exemptions & ExceptionsOptional exemption – fair value or revaluation as deemed cost:Chartwell Seniors Housing REIT– March 10, 2011 Press Release

IFRSChartwell elected, under IFRS 1, to record property, plant and equipment ("PP&E") at fair value as a deemed cost on transition and to subsequently apply the cost model.

Chartwell's opening balance sheet as at January 1, 2010 will reflect a one-time revaluation of substantially all PP&E. This revaluation is expected to result in a carrying value of total assets of $73 million higher than the net book value reported under Canadian GAAP ("CGAAP"). This amount represents the sum of individual property fair values and excludes any portfolio premium and the value of the management platform. As a result of this revaluation, the Adjusted Gross Book Value ("GBV") of total assets is expected to decrease by approximately $394 million to $2.675 billion




First Time Adoption – IAS 16 – At transition

Regardless of whether or not you take the exemptions available under IFRS 1 to ease the impact of retrospective restatement, there are differences between IFRS and Canadian GAAP that must be retrospectively applied and adjusted at the transition date.

Key areas to be reviewed:

Recognition & Measurement

Initial acquisition,

Componentization,

Spare parts,

Major inspection & overhaul costs vs. repairs and maintenance,

Cost measurement

Non-monetary transactions


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Initial AcquisitionIAS 16 states that an item of PP&E is to be recognized if it is probable that future economic benefits associated with the asset will flow to the entity and it can be measured reliably. Within this standard PP&E items include:major spare parts and stand-by equipment if an entity expects to use them more than one period or if they can only be used with a specific item;costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it;replacement parts that qualify as PP&E if they provide incremental future benefits to the entity, however, the original part is derecognized;major inspection or overhaul costs , however, any previous carrying amount is derecognized;


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Initial Acquisition cont.

land and building are separable assets and they shall be accounted for separately even if acquired together;professional judgement must be used in applying the recognition criteria to an entity’s specific circumstances as it may be appropriate to aggregate individually insignificant items, such as tools and to apply the recognition criteria to the total;items of PP&E that are acquired for safety or environmental reasons that may not meet the IAS 16 recognition criteria as individual items but they may be necessary for an entity to obtain the future economic benefits from its other assets and, therefore, can be treated as PP&E


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Componentization

This is one of the IFRS transition areas that has had a lot of hype – let’s see what’s involved:

Under IFRS, if the major components of an item of PP&E have significantly different patterns of consumption or economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. This concept also exists in Canadian GAAP when practicable, however, as IFRS is more detailed a full assessment is required on transition.

The best way to illustrate this is using some examples…..




First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Componentization – Ex. 1 - Building

Canadian GAAP IFRS

Cost –

roof N/A $10,000,000

Cost –

remainder of building $40,000,000 $30,000,000

Useful life ‐

roof N/A 10 years

Useful life –

remainder of building 40 years 40 years

Annual depreciation:

Roof $0 $1,000,000

Remainder of building $1,000,000 $750,000

Total per year $1,000,000 $1,750,000

NBV after year 10/transition date $30,000,000 $22,500,000

$7.5M Diff




First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Componentization – Ex. 1 - Aircraft

Canadian GAAP IFRS

Cost – engine – 20 yr useful life N/A $5,000,000

Cost – interior – 10 yr useful life N/A $5,000,000

Cost –

remainder of aircraft – 20 yr

useful life

$20,000,000 $10,000,000

Annual depreciation:

Engine N/A $250,000

Interior N/A $500,000

Remainder of aircraft $1,000,000 $500,000

Total per year $1,000,000 $1,250,000

NBV after year 10/transition date $10,000,000 $7,500,000

$2.5M Diff


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Spare PartsUnder Canadian GAAP a company generally capitalizes assets that replace an entire existing capital asset and derecognizes the asset being replaced. In cases where parts of an existing capital asset are replaced, but not the whole asset, the replacement parts are expensed as maintenance costs if they are consumable parts and capitalized if not. Under IFRS, replacement parts are recognized as PP&E if they provide incremental future benefits to the entity and can be reliably measured.Per IAS16.8, major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment. The original part is derecognized whether or not the original part was recognized as a separate component in PP&E.


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Spare Parts cont.Where is it not practicable to determine the carrying amount of the replaced part, the cost of the replacement (net of depreciation) may be used as a guide for determining the depreciated cost of the replaced part. All other subsequent costs should be recognized as an expense in the period in which they are incurred.

The standard explains that the costs of the day-to-day servicing of an item of property, plant and equipment are not recognized as an asset. Instead such costs are recognized in profit or loss as incurred. Day-to-day servicing costs would include costs of labour and consumables and may include the cost of small replacement parts. The purpose of this type of expenditure is often known as ‘repairs and maintenance’. The reason why such costs are expensed rather than capitalized is that they do not add to the future economic benefits of the item of property, plant and equipment. Rather they maintain the asset's potential to deliver the level of future economic benefits that it was expected to provide when it was originally acquired. These subsequent repair and maintenance costs do not, therefore, qualify for recognition as an asset in their own right.


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Major Inspections & Overhauls

Under Canadian GAAP, only costs meeting the criteria of a betterment are capitalized, therefore, overhaul and betterment costs are typically expensed.

This is different than IFRS as it requires all major inspections or overhaul costs to be capitalized after derecognizing any previously capitalized inspection or overhaul costs.

What are considered to be major inspections and overhauls?

Examples:•Requirement for a ship to be dry docked, inspected and a major overhaul performed to repair and maintain the hull every 3 years; or•Aircraft must be inspected for faults regardless of whether parts of the item are replaced after a certain number of flying hours.


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Major Inspections & Overhauls

Consider an example


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Major Inspections & Overhauls cont.PP&E Impact Canadian GAAP IFRS

Aircraft cost – 20 year life $20,000,000 $20,000,000

Portion related to estimated overhaul

costs – 3 year life

N/A – expensed

as incurred

$2,000,000

NBV at end of year 2 –

transition date $18,000,000 $16,866,667

P&L Impact Canadian GAAP IFRS

Depreciation

Expense

Repairs &

Maintenance

Depreciation

Expense

Repairs &

Maintenance

Year 1 $1,000,000 $0 $1,566,667 $0

Year 2 $1,000,000 $0 $1,566,667 $0

Year 3 $1,000,000 $2,000,000 $1,566,667 $0

Year 4 $1,000,000 $0 $1,566,667 $0


First Time Adoption – IAS 16 – At transitionRecognition & Measurement – Cost measurementUnder IAS 16, PP&E items are measured at cost. Cost comprises all of:•purchase price including non-refundable purchase taxes, after deducting trade discounts and rebates•any costs directly attributable to bringing the asset to the location and to the necessary condition (eg: site preparation, delivery, installation, etc...)•initial estimates of costs of dismantling and removing the item and restoring the site if required•cost is measured as the cash price equivalent at the recognition date or the present value of all future payments if payment is deferred. •borrowing costs incurred during the period of production will be included in the cost of the asset, if the asset meets the definition of a qualifying asset. A qualifying asset is one that necessarily takes a substantial period of time to be made ready for its intended use or sale. Qualifying assets generally are those that are subject to major development or construction projects. Under Canadian GAAP the concepts of salvage value and economic life are introduced and are not included under IFRS. Depreciation is the greater of: (a) the cost less salvage value over the life of the asset and (b) the cost less residual value over the useful life of the asset.


First Time Adoption – IAS 16 – At transitionNon-monetary transactionsThe cost of such an item of PP&E is measured at fair value unless (a)the exchange transaction lacks commercial substance; or (b)the fair value of neither the asset received nor the asset given up is reliably

measurable. The acquired item is measured in this way even if an entity cannot immediately

derecognize the asset given up. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Commercial substance – use professional judgement - consider the extent to which its future cash flows are expected to change as a result of the transaction.


First Time Adoption – IAS 16 – At transitionDepreciation – things to consider:

Under IFRS, depreciation of an asset commences when it is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. This is the same point in time at which the entity is required to cease capitalizing costs within the carrying amount of the asset. Depreciation of an asset does not cease when an asset becomes idle unless it is fully depreciated. Canadian GAAP is silent on the subject.

IAS 16 requires that the estimate of useful life, residual value and depreciation method of an item of PP&E be reviewed at least each financial year end for reasonableness. This differs from the current Canadian GAAP requirement to review useful life and depreciation method “on a regular basis.”


First Time Adoption – IAS 16 – At transitionDerecognitionUnder IFRS, an entity shall derecognize an item of PP&E on disposal, or when no future economic benefits are expected from its use or disposal. This is consistent with Canadian GAAP.

Assets held for sale (IFRS 5)Under IFRS an item of PP&E is depreciated even if it is idle. Note that if it is held for sale (either individually or as part of a disposal group), then it is not depreciated. This is consistent with Canadian GAAP.

Impairment of property, plant and equipment (IAS 36)IFRS requires an assessment of indications of asset impairment at the end of each reporting

period for all assets and where such indication exists, an impairment test must be conducted. This differs from Canadian GAAP as it only requires an assessment of indicators of impairment “regularly” or if circumstances have changed significantly during the period and this is not necessarily annually.

IFRS permits the reversal or reduction of previously recognized impairment loss for assets other than goodwill if there has been a change in the estimates used to determine the assets’ recoverable amount since the impairment was recorded. The reversal is limited to the lower of the recoverable amount of the asset and the carrying amount that would have been determined, net of amortization, had the impairment loss not been recognized in a prior year. Canadian GAAP prohibits the reversal or reduction of any recognized impairment loss.


First Time Adoption – IAS 16 – At transitionAsset retirement obligations (IAS 37)Under IFRS, decommissioning provisions are recognized as an adjustment to the cost

of the related asset, except when the obligation arises from the production of inventories. The measurement amount is based on management's best estimate of the expenditures. Discount rates used should reflect the risks specific to the decommissioning provision. Adjustments to decommissioning provisions are made for changes in the timing or amount of cash flows, changes in the discount rate and the unwinding of the discount. Changes to an existing decommissioning or restoration obligation generally are added to or deducted from the cost of the related asset and depreciated prospectively over the asset's remaining useful life.

Under Canadian GAAP, the specific requirements for asset retirement obligations differ from IFRS as they are measured at fair value, incorporating market assumptions and discount rates are based on the entity's credit-adjusted risk-free rate. Additionally, unlike IFRS, changes in discount rates alone do not result in a re-measurement of the provision.


First Time Adoption – IAS 16 – At transitionFinancial statement presentation and disclosure – what’s required?

Before IFRSAfter IFRS


First Time Adoption – IAS 16 – At transitionFinancial statement presentation and disclosure – what’s required?IFRS Required Disclosures An entity shall disclose the following for each class of PP&E: the measurement bases (i.e. cost or valuation) used for determining the gross carrying amount; the depreciation methods used; the useful lives or the depreciation rates used;

the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and a reconciliation of the carrying amount at the beginning and end of the period showing:

additions and disposals;

acquisitions through business combinations;

transfers to investment property if a reliable measure of fair value becomes available;

impairment losses recognized or reversed in profit or loss during the period;

depreciation;

assets classified as held for sale in accordance with IFRS 5 and other disposals;

increases or decreases resulting from revaluations and impairment losses recognized/reversed directly in other comprehensive income;

the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity;

other changesNote – this reconciliation need not be presented for prior periods

http://www.cchonline.ca/NXT/gateway.dll/CCHAcct/IFRS/IFRS1/STANDARDS/523/567/570?fn=document-frameset.htm$f=templates$3.0#ifrs%5F5%5Fstandard


First Time Adoption – IAS 16 – At transitionFinancial statement presentation and disclosure – what’s required?IFRS Required Disclosures cont.

The existence and carrying amounts of PP&E to which the entity has restricted title or that is pledged as security for liabilities

The amount of contractual commitments for the acquisition of PP&E

1) The amount of expenditures recognized in the carrying amount of an item of PP&E in the course of its construction (Note : it appears this requires disclosure of the cost of assets that are still in the course of construction at the statement of financial position date (i.e., rather than those that were in the course of construction when the costs were incurred), and the total cumulative costs incurred on such assets));

2) If not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of PP&E that were impaired, lost or given up that is included in profit or loss.

Additional Recommended Disclosures

IAS 16(79) also encourages but does not require the disclosure of the following information: • the carrying amount of temporarily idle PP&E;• the gross carrying amount of any fully depreciated PP&E still in use;• the carrying amount of PP&E retired from active use and not classified as held for sale in accordance

with IFRS 5; and• when the cost model is used, the fair value of PP&E when this is materially different from the

carrying amount.

http://www.cchonline.ca/NXT/gateway.dll/CCHAcct/IFRS/IFRS1/STANDARDS/610/661/664?fn=document-frameset.htm$f=templates$3.0#ias%5F16%5Fstandard%2079

http://www.cchonline.ca/NXT/gateway.dll/CCHAcct/IFRS/IFRS1/STANDARDS/523/567/570?fn=document-frameset.htm$f=templates$3.0#ifrs%5F5%5Fstandard


First Time Adoption – IFRS - OngoingSubsequent Measurement

IAS 16 allows either the revaluation model or the cost model to value PP&E. Under the revaluation model all items in the same class are revalued at the same time and the revaluations must be kept up to date. This can only be chosen if it can be measured reliably. Subsequent revaluations are made with sufficient regularity such that the carrying amounts of items of PP&E do not differ materially from their fair value at the end of a reporting period.

Canadian GAAP only allows the cost model with consideration of potential impairment.

Note – you could opt to revalue under IFRS 1 at the transition date and continue on with the cost basis OR the revaluation basis under IAS 16


First Time Adoption – IFRS - OngoingSubsequent Measurement – Revaluation Model – more details


First Time Adoption – IFRS - OngoingSubsequent Measurement – Revaluation Model – more details

What if there is no market-based evidence to support fair value?

• this can happen for items of a specialized nature that are rarely sold• an entity may need to estimate fair value using an income or a depreciated replacement cost approach.

What if there are frequent valuation swings?• the frequency of revaluations depends upon the changes in fair values of the items of PP&E being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. • some items of PP&E experience significant and volatile changes in fair value, therefore, annual revaluation is required. Other items that are less volatile may require revaluation only every three to five years.


First Time Adoption – IFRS - OngoingAre companies choosing to revalue? Depends on industry: Consider real estate companies – using IAS 40 for rental properties – revaluation option availableExample 1: Dundee REIT – from 2010 Annual Report

Rental propertiesThe Trust considers its rental properties to be investment properties under IAS 40, “Investment Property” (“IAS 40”). Investment property includes land and buildings held primarily to earn rental income or for capital appreciation, or both, rather than for use in the production or supply of goods or for sale in the ordinary course of business. Similar to GAAP, investment property is initially recorded at cost under IAS 40. However, subsequent to initial recognition, IFRS requires that an entity choose either the cost or fair value model to account for its investment property. The Trust has elected to use the fair value model when preparing its financial statements under IFRS.


First Time Adoption – IFRS - OngoingDundee REIT – from 2010 Annual Report cont.As at January 1, 2010, the Trust expects the fair value of its rental propertyportfolio, including joint venture properties previously proportionately consolidated, to be approximately $176 million greater than their carrying value under GAAP, inclusive of corresponding intangible assets andliabilities recorded under GAAP. The offsetting adjustment is recorded directly to opening equity. As at January 1, 2011, the Trust expects the fair value of its rental property portfolio, including joint venture properties previously proportionately consolidated, to be approximately $412 million greater than their carryingvalue under GAAP, inclusive of corresponding intangible assets and liabilities recorded under GAAP. The offsetting adjustment comprises the opening valuation adjustment of $176 million, which is recorded directlyto opening equity at January 1, 2010, and the balance of $236 million will be disclosed as a fair value adjustment, increasing net income for the year ended December 31, 2010.


First Time Adoption – IFRS - OngoingExample 2: RioCan REIT – from 2010 Annual Report


Helpful Linkshttp://www.iasb.org/IFRSs/IFRS.htm

http://www.cica.ca/ifrs//index.aspx

iGAAP – IFRS for Canada, A comprehensive reference by Deloitte, 3rd Edition:http://www.cch.ca/product.aspx?WebID=100713

CCH’s IFRS for Canada – online research tool: Details: http://www.cch.ca/product.aspx?WebID=2830Trial: http://www.cch.ca/tax/FreeTrials.aspx?acct=1

http://www.iasb.org/IFRSs/IFRS.htm

http://www.cica.ca/ifrs/index.aspx

http://www.cch.ca/product.aspx?WebID=100713

http://www.cch.ca/product.aspx?WebID=2830

http://www.cch.ca/tax/FreeTrials.aspx?acct=1


Contact Information

Thank you!!! Contact information:Lisa [email protected]

mailto:[email protected]


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IFRS – Property, Plant & Equipment