Property, Plant and Equipmentdocenti.luiss.it/.../1049/2017/04/20170414110031-PPE-IAS-16_Magnanelli.pdf · 3 IAS 16 PPE – IAS 16 Barbara Sveva Magnanelli Accounting OBJECTIVE: the

Barbara Sveva Magnanelli

Property, Plant and Equipment

Accounting

2016/2017

2

FIXED ASSETS -DEFINITION

PPE – IAS 16

AccountingBarbara Sveva Magnanelli

Are long term or relatively permanent assets such as equipment,machinery, building and land. Fixed assets have the followingcharacteristics:1. They exist physically and, thus, are tangible assets;2. They are owned and used by the company in its normal

operations;3. They are not offered for sale as part of normal operations.

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IAS 16

PPE – IAS 16


OBJECTIVE: the objective of this Standard is to describe theaccounting treatment for property, plant and equipment so thatusers of the financial statements can discern information about anentity’s investment in its property, plan and equipment and thechanges in such investment. The principal issues in accounting forproperty, plan and equipment are the recognition of the assets, thedetermination of the carrying amounts and the depreciationcharges and impairment losses to be recognised in relation tothem.

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RECOGNITION

PPE – IAS 16


The cost of an item of property, plant and equipment shall berecognised as an asset if, and only if:

a) It is probable that future economics benefits associated withthe item will flow to the entity;

a) The cost of the item can be measured reliably.

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MEASUREMENT AT THE MOMENT OF RECOGNITION

PPE – IAS 16


The cost of an item of property, plant and equipment is the cashprice equivalent at the recognition date.All property, plant and equipment that satisfy the requirements ofthe IAS 16 shall be recorded as an asset at their initial costs, thatincludes:1. The cost paid to buy or to build the items;2. All the other costs paid after the recognition of the item that

increase the value of the item (i.e. extraordinarymaintenance).

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MEASUREMENT AT INITIAL RECOGNITION

PPE – IAS 16


1. The cost paid to buy or to build the items:- Purchase price (including duties, purchase taxes, assembling

and unpacking costs, less cash discount);- Any costs directly attributable to bringing the asset to the

location and condition necessary for it to perform as intended.

2. All the other costs paid after the recognition of the item thatincrease the value of the item (i.e. extraordinary maintenance)

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COMPONENT APPROACH

PPE – IAS 16


If it is possible to distinguish different component with differentuseful life and with different benefits for the companies, each partof an item of property, plant and equipment with a cost that issignificant in relation to the total cost of the item shall beaccounted for separately.

Example: Land and building are separable assets and areaccounted for separately

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MEASUREMENT AFTER INITIAL RECOGNITION

PPE – IAS 16


IAS 16 sets out two alternative methods for the measurement afterthe recognition of property, plant and equipment. They are:

1.Cost model;

1.Revaluation model (or “fair value”).

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COST MODEL

PPE – IAS 16


After recognition as an asset, an item of property, plant andequipment shall be carried at its cost less any accumulateddepreciation and any accumulated impairment losses.So, to apply cost model we have to sum the following elements:1. Initial cost;2. All the other costs paid after the recognition (subsequent

costs);3. Less: accumulated depreciation (determined with 3 different

methods);4. Less: accumulated impairment losses (determined according

to IAS 36).

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COST MODEL

PPE – IAS 16


To summarize we have:

Initial cost XXSubsequent costs XXAccumulated depreciation (XX)Accumulated impairment losses (XX)Carrying amount XX

Carrying amount is the amount at which an asset is recognised after deducting accumulated depreciation and accumulated impairment losses (=BOOK VALUE)

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REVALUATION MODEL

PPE – IAS 16


After recognition as an asset, an item of property, plant andequipment whose fair value** can be measured reliably shall becarried at a re-valued amount, being its fair value at the date ofthe revaluation less any subsequent accumulated depreciation andsubsequent accumulated impairment losses.Revaluation shall be made with sufficient regularity to ensure thatthe carrying amount does not differ materially from that whichwould be determined using fair value at the end of the reportingperiod.

** amount for which an asset could be exchanged between knowledgeable, willing parties inarm’s- length transaction

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REVALUATION MODEL

PPE – IAS 16


If an asset’s carrying amount is increased as a result of arevaluation, the increase shall be recognised in othercomprehensive income and accumulated in equity under theheading of revaluation surplus.

If an asset’s carrying amount is decreased as a result of arevaluation, the decrease shall be recognised in profit or loss.

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REVALUATION MODEL

PPE – IAS 16


THE REVALUATION MODEL IS APPLIED ACCORDING TOIAS 36. THAT STANDARD EXPLAINS HOW AN ENTITYREVIEWS THE CARRYING AMOUNT OF ITS ASSETS,HOW TO DETERMINE THE RECOVERABLE AMOUNT OFAN ASSET, AND WHEN IT RECOGNISES, OR REVERSETHE RECOGNITION OF IMPAIRMENT LOSSES.

14Barbara Sveva Magnanelli

REVALUATION: EXAMPLE

Land Buildings Machinery

Cost 100.000 500.000 200.000

Fair Value December 31 Year 1 120.000 450.000 210.000

Fair Value December 31 Year 2 150.000 460.000 185.000

Accounting

PPE – IAS 16

15Barbara Sveva Magnanelli

REVALUATION: EXAMPLEDecember 31 Year 1Land Revaluation (OCI) Dr 20.000Revaluation surplus – Land (EQUITY) Cr 20.000

Loss on revaluation-Buildings (IS) Dr 50.000Buildings (ASSETS) Cr 50.000

Machinery Revaluation (OCI) Dr 10.000Revaluation surplus – Machinery (EQUITY) Cr 10.000

December 31 Year 2Land Revaluation (OCI) Dr 30.000Revaluation surplus – Land (EQUITY) Cr 30.000

Buildings (ASSETS) Dr 10.000Recovery of Loss on revaluation-Buildings (EQUITY) Cr 10.000

Machinery (ASSETS) Cr 15.000Loss on revaluation – Machinery (IS) Dr 15.000Revaluation surplus – machinery (EQUITY) Dr 10.000Loss on revaluation surplus (OCI) Cr 10.000

Accounting

PPE – IAS 16

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DISCLOSURE

PPE – IAS 16


The IAS 16 set out that the financial statements shall disclose, foreach class of property, plant and equipment the followinginformation:a) The measurement bases used for determining the gross

carrying amount;b) The depreciation methods used;c) The useful lives;d) The gross carrying amount and the accumulated depreciation

(aggregated with accumulated impairment losses) at thebeginning and the end of the period;

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DISCLOSURE

PPE – IAS 16


e) Impairment losses recognised in profit or loss in accordancewith IAS 36

f) Impairment losses reversed in profit or loss in accordance withIAS 36;

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GROSS CARRYING AMOUNT

PPE – IAS 16


Carrying amount is the amount at which an asset is recognisedafter deducting any accumulated depreciation and accumulatedimpairment losses.

Gross Carrying amount at initial recognition

costs paid to buy or to build the items + all the other costs paid afterthe recognition of the item that increase the value of the item

Gross Carrying amount after initial recognition

costs model revaluation model (or “fair value”)

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THE DEPRECIATION METHODS

PPE – IAS 16


The IAS 16 sets out that each part of an item of property, plant andequipment shall be depreciated. A variety of depreciation methodscan be used to allocate the depreciable amount of an asset on asystematic basis over its useful life. These methods include:

1.Straight-line method;2.Double-declining balance method;3.Units of production method.

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STRAIGHT-LINE METHOD

PPE – IAS 16


The straight-line method provides for the same amount ofdepreciation expense for each year of the asset’s useful life. Thismethod is the most widely used depreciation method. The annualstraight-line depreciation is computed as below:

Annual depreciation = Cost – Residual ValueUseful life

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PPE – IAS 16


where:• Cost is the amount of cash or cash equivalent paid or the fair

value to acquire an asset at the time of its acquisition orconstruction;

• Residual value of an asset is the estimated amount that theentity would currently obtain from disposal of the asset, afterdeducting the estimated cost of disposal, if the assets werealready of the age and in the condition expected at the end ofuseful life;

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PPE – IAS 16


§ Useful life is defined as:

a) The period over which an asset is expected to beavailable for use by an entity;

b) The number of production or similar units expected tobe obtained from the asset by an entity.

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DOUBLE-DECLINING-BALANCE METHOD

PPE – IAS 16


The double-declining-balance method provides for a decliningperiodic expense over the expected useful life of the asset. Thismethod is applied in three steps:1. Determine the straight-line percentage, using the expected

useful life;2. Determine the double-declining-balance rate by multiplying

the straight-line rate from step 1 (times 2, 1.75 or 1.5 - mostcommonly used);

3. Compute the depreciation expense by multiplying the double-declining-balance rate times the book value of the asset.

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DOUBLE-DECLINING-BALANCE METHOD

PPE – IAS 16


The double-declining-balance method provides a higherdepreciation in the first year of the asset’s use, followed bydeclining depreciation amounts. For this reason, the double-declining-balance method is called an accelerated depreciationmethod.An asset’s revenues are often greater in the early years of its usethan in later years. In such cases, the double-declining-balancemethod provides a good matching of depreciation expense withthe asset’s revenues.

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UNITS OF PRODUCTION METHOD

PPE – IAS 16


The unit of production method provides the same amount ofdepreciation expense for each unit of output of the asset. Dependingon the asset, the units of output can be expressed in terms of hours,miles driven, or quantity produced. This method is applied in twosteps:1. Determine the depreciation per unit as:

Depreciation per Unit = Cost – Residual ValueTotal units of output

2. Compute the depreciation expense as:Dep. Expenses = Depreciation per unit x total units ofoutput used

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PPE – IAS 16


This method is often used when a fixed asset’s in service time (oruse) varies from year to year. In such cases, the units of productionmethod matches depreciation expense with the asset’s revenues.

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PPE – IAS 16


EXAMPLE – Aircraft Depreciation

Depr. Per unit =

Initial cost = 62.500 $Residual value = 2.500 $Estimated total production = 100.000 milesProduction of the year = 30.000 miles

(62.500 – 2.500) / 100.000 = 0.60 $ per mile

Depr. Expense = 0.60 x 30.000 = 18.000 $

1.

2.

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Property, Plant and Equipmentdocenti.luiss.it/.../1049/2017/04/20170414110031-PPE-IAS-16_Magnanelli.pdf · 3 IAS 16 PPE – IAS 16 Barbara Sveva Magnanelli Accounting OBJECTIVE: the