Objective ; The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and . hbbd``b` M@H2c)$8Aj 8HRADk$#,#i] e % The plant has two parts namely Part A with a cost of $9 million and useful life of 100,000 hours, while other Part B costing $6 million has a useful life of 5 years. (h)The entity will depreciate the asset even if the asset is idle, until the asset is fully depreciated. For example, abnormal amounts of wasted materials, labour or other production costs should be recognized as expenses when incurred. The objective of this paper is to describe the accounting treatment for property, plant and equipment, in according with the IAS 16, including: timing of the recognition of assets, determination . IAS-16: Property, Plant and Equipment with Practical Examples in Bangla: For each class of property, plant, and equipment, disclose: [IAS 16.73]: - basis fo. You can log in if you are registered at one of these services: This website uses cookies. The entity will apply the initial recognition rule to the following items as follows: - Normally these are treated as inventory and their cost will be charged to the statement of profit or loss as expense when these are consumed by the entity. However, if an entity holds properties for sale in the short term in the ordinary course of business and thus obtains a profit, we would not be talking about an investment property but the sale of inventory. (See 'Related links' for the solution to Example 8.). This movement in reserves should also be disclosed in the statement of changes in equity, as should any revaluation gains and losses which impact the revaluation surplus. Costs such as these should be charged to the statement of profit or loss in the period that they are incurred. Required * to others, or use in administration and IAS 16 Topic wise Selected Opinions The Institute of Chartered Accountants of Pakistan 1 IAS 16 'PROPERTY, PLANT AND EQUIPMENT' . endstream Any expected change in the demand of the product related to the asset due to commercial or technical changes in the market. A company purchased a building on 1 April 20X1 for $100,000. On the other hand, in the parents separate financial statements, the building is classified as an investment property. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle. 2. - The cost of the asset is reliably measurable. Any additions and disposals during the year, Any assets acquired as part of a business combination, Any impairment loss recognized in the current year, Assets classified as held for sale under IFRS 5. learn at your own pace and on your own schedule. (200 0 / 40,000 hrs) 30,000 hrs, Charge to profit or loss on replacement, Current yr Dep. Required It is the period of time or number of production units for which asset will be used by the management. 1124 0 obj However, if any costs do meet the recognition criteria noted above, then they should be capitalised as part of PPE. Suppose an entity considers that the fair value is unavailable, or it is impossible to make a reliable measurement of this value. Demonstrate how the machine should be accounted for in the years ended 31 March 20X1, 20X2 and 20X3 and prepare extracts of the statement of profit or loss and statement of financial position for each year. This standard deals with the four main aspects of financial reporting of property, plant and equipment (PPE) that are likely to be of major relevance in the FR exam, namely: initial measurement. All residual values can be taken as nil. Construction of Ham Cos new store began on 1 April 20X1. Any expected physical wear and tear due to its operational use including its expected repair and maintenance plan. Any gain or loss on the exchange transaction will be charged to the statement of profit or loss. These words serve as exceptions. Testing costs to assess whether the asset is function properly (net of any sales proceeds of items produced during the testing phase). Say Lease expense is 25,000 per month or 3lacs a year . Summary. The course is designed to be interactive, with quizzes, case studies, and practical examples to help you retain the information and apply it in the real world. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. In January of the year, entity A acquires a building for 30,000. Revalued assets are depreciated in the same way as under the cost model (see below). Let us remember that IFRS 16 practically does not present changes from the point of view of the lessor. In June of this year, 170 computers were sold for $1,500 per unit. (a) That are held for use in the production, supply of goods or services, rental IAS 16 Examples and questions This is relating to FRK 201 content University University of Pretoria Course Financial accounting 201 (FRK 201) 224 Documents Academic year:2020/2021 Helpful? IAS 40 provides examples of investment property which are in the scope and outside the scope of the standard. Find out more. Any other cost which is necessary to bring the asset into its operating use or intended use by the management. These costs include 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. Thus, the building is not classified as an investment property item in the parent companys consolidated financial statements. (See 'Related links' for the solution to Example 1.). [IAS 16.23], If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the 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. Calculate the revaluation gain and prepare the journal entry to account for the revaluation. The entity should consider the following points in revaluation: (a) Normally the revalued amount is taken as fair value of asset which is determined in accordance with IFRS 13. Accounting for a revaluation However first, it will offset any revaluation surplus related to the asset up to the extent it is recognized in the previous years. Any legal restriction on the asset in terms of its use. AB Ltd. paid for the plant within four weeks of the order, therefore, obtained an early settlement discount of 3%. In that case, it must use the cost model of IAS 16. This is the first of three articles which consider the main features of IAS 16, Property, Plant and Equipment. The asset must continue to be depreciated following the revaluation. AB Ltd. had wrongly specified the power loading of the original electrical cable to be installed by the contractor. An item of property, plant, or equipment shall not be carried at more than recoverable amount. The upgrade work took a total of two days where new components were added to the machine. ?}^wrmTJck Explain how the above information should be accounted for in the financial statements of Yucca Co for the year ended 28 February 20X1. B/VK9\9[gZ.7g;(+,-6VIaQq9S&(*l9kZA ^ZX;URf2sriGVbs6J}&'y(x0YI,IB+pll_6AOMRi:K,uNPo2::=@d3(E@Wc`q( Cost of testing after deducting the net proceeds from selling any items produced. Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS13 Fair Value Measurement. Plant, Property and Equipment (PPE) are assets which are held for use in the production of goods, rendering of services, administrative uses, or rental purposes and are expected to be used in more than one period. The subsidiary uses the building to sell inventory. 1120 0 obj The initial revaluation O"*"P+$gy^rm7Yln>%QHiL+JOI=`OpGea5JgE7}:CzIG^tJo-sHtY/ !..iH#BtE*BSQI+PKtC;}Z[C? The entity is uncertain whether it will use the asset to build a luxury housing project or whether it will use the asset to generate capital gains. An entity in January of year 1 acquires land. However, this transfer is optional and if opted by the entity then it will be applicable annually till the disposal of related asset. Acc. However, if the asset is being used in the construction of another asset, then the depreciation charge will be added to the cost of such asset under construction or being produced, such as the depreciation of the manufacturing plant is added in the cost of inventory. endobj An entity (parent) owns a building that it leases to its subsidiary under an operating lease in exchange for annual payments of 2,000. The following example, which is reproduced from the illustrative examples accompanying IFRS 16, illustrates the application of IFRS 16:13 and 14. Required Another practical example is in the case of Clicks group where a clear treatment of PPE is illustrated with conformance to the IAS 16. Notes and summary about Psychopathology (third year level). A further situation may arise if the examiner states that the revaluation takes place mid-way through the year. (See 'Related links' for the solution to Example 4.). Theequity methodis used in international financial reporting standards to recognize an investment when a company hassignificant influenceover another entity. In this article, I outline the common practice in South Africa, what IAS 16 (AC 123) requires and the implication for preparers. Subsequent costs related to an item of PPE can only be recognised if they meet the normal recognition criteria: (a) it is probable that future economic benefits associated with the item will flow to the entity; and. For example, if rather than a Rs. Paragraph 17 of IAS 16 specifies examples of directly attributable costs. Manufacturers or distributors list price. In simple terms the revalued amount should be depreciated over the assets remaining useful life. (600 0 / 25yrs) 8 yrs (192), Acc. This is the final article in the series of three which consider the accounting for property, plant and equipment by applying IAS 16, Property, Plant and Equipment. Practical example 6 IAS 40: Investment properties according to IAS 16 In January of year 1, an entity acquires a building to earn rentals under operating leases. [IAS 16.79], If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]. [IAS 16.43], IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. If you are looking for a practical overview of IFRS 16, or just a refresher, you've come to the right place. The following post shows a series of illustrative examples related to IFRS 16. This standard determines that the assets can be, Today we will talk about investment properties and carry out a series of, The example mentioned above meets the definition of, It is essential to clarify that if the type of lease were not operating but financial, it would not be an, Let us remember that IFRS 16 practically does not present changes, Are you looking to stay ahead in the ever-changing business world and enhance your understanding of International, The course is designed to be interactive, with. [IAS 16.24], Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. Required the cost of the asset can be measured reliably. Required Under the old IAS 17 Leases, entities were able to classify a significant number of liabilities as operating leases and as a result keep both the assets and liability off balance sheet . (c) For the accounting treatment of exploration and evaluation assets and mineral rights and reserves such as oil and gas and other non-regenerative resources which are covered under IFRS 6. 900 but endobj DrNon-current asset cost [difference between valuation and original cost/valuation] (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 11.). Any remaining surplus on the revaluation surplus should be transferred to retained earnings as: Summary Following elements of cost will not become the part of the cost of asset and will be charged to statement of profit or loss as expense: 2. The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. As both parts of the plant have different useful lives therefore, each part will be recognized as a separate non-current asset and will be depreciated over the respective useful lives. IFRS 16 offers a range of transition options. Yucca Co paid for the machine on 25 March 20X0. The companys policy is to make a transfer to retained earnings in respect of excess depreciation. endobj If you want to know more, see our detailed publications on lease accounting available at home.kpmg/ifrs16. However, the entity uses the cost model for the subsequent measurement of this asset and uses IAS 16 instead of IAS 40. Practical Aspects In India- Series . Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. The risk, timing and amount of cash flows related to the asset acquired are different from the asset transferred; The exchange has resulted in the change in the entity specific value of that operational portion of the entity. Title: IAS-16 Property, Plant 1 IAS-16 Property, Plant Equipment. LsTMe)ZaK@@@QcB$967] A$OSHTM8\Vv+ !ki,0FuFe!`=P}+qUb`fCpn/ What is the carrying amount of the right-of-use asset and the lease liability at the end of year 4? At the end of this period there will be compulsory costs of $30,000 to dismantle the plant and $6,000 to restore the site to the original condition. V;O_G%VL6cf[{6l1j-wx?7ZE;Mrf:muP7z,-hU;szqiTPj6 The cost of day to day or ongoing repair and maintenance will be charged to the statement of profit or loss as expense. endstream The original useful life of 40 years for the buildings is unchanged. 2.2 Reporting date (IAS 21.23 - .26) Refer to the following definitions in IAS 21.8: Monetary items If an item does not meet the definition of a monetary item, it is a non-monetary item Refer to IAS 21.16 for a further explanation and . Disposal of previously revalued assets [IAS 16.55]. Dep. (See 'Related links' for the solution to Example2.). If an asset is purchased on extended credit period or on deferred installment basis, then the cost of such asset will be its Cash Price Equivalent any excess paid over the cash price will be treated as Interest expense which will be recognized over the period of credit. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees and estimated cost of dismantling and removing the asset and restoring the site it the payment for an item of Property, Plant and Equipment is deferred, interest at a market rate must be recognized or imputed. After the upgrade to the cabin fittings its estimated remaining useful life was increased to five years (from the date of the upgrade). IAS-16 Property, Plant & Equipment Examples of Directly Attributable Costs: Cost of employee benefits. Items of property, plant and equipment should be recognized as assets when: Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at cost. At the same time the engine was replaced, the company took the opportunity to upgrade the cabin facilities at a cost of $120 million and the exterior structure was repainted at a cost of $40 million. IAS-16 Property, Plant & Equipment endobj The example of those fixed assets include: Land Office Building Machinery Cars Computers Table Chair and others related. Statement of profit or loss and other comprehensive income. EXAMPLE 10 In January of year 1, an entity gives the right to use a building to independent third parties under in 15-year operating lease with annual payments of $2,000: The example mentioned above meets the definition of investment property because the entity uses the asset to obtain income, not for its use or the production of goods or services. 4. Paragraph 16 of IAS 2 requires certain costs be excluded from the cost of inventories. All the work on the aircraft can be assumed to have been completed on 1 January 2009. If this is not the case, then a reserves transfer is not necessary. If the carrying value of asset exceeds its recoverable value, the excess is known as impairment loss. The remaining useful life was reassessed at the time of valuation and is considered to be 40 years at this date. The transfer to retained earnings should not be made through profit or loss.

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