Fixed_Assets_IAS_16[1] (1).ppt

8/9/2019 Fixed_Assets_IAS_16[1] (1).ppt

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IAS-16 Property, Plant & Equipment

Objective :The objective of IAS 16 is to prescribe the accounting treatment forproperty, 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 recogni#ed

Scope IAS!16 applied to all $roperty, $lant % &quipment until and unless any otherstandard requires or permits a different accounting treatment


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'&(I)ITI*)S *( +& T&-.S


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Definition :$roperty, $lant % &quipment are tangible items that:

! are held for use in the production or supply of goods or services"! for rental to others"! for administrative purposes" and! are e/pected to be used during more than one period

Recognition:The cost of an item or $roperty, $lant % &quipment shall be recogni#ed asan asset if, and only if:

a0 it is probable that future economic benefits associated ith the itemill flo to the entity" and

b0 The cost of the item can be measured reliably

Measurement at Recognition An item of $roperty, $lant % &quipment that qualifies for recognition as anasset shall be measured at its cost


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Elements of Cost :! $urchase price 2 3Import duties 2 )on refundable ta/es0 ! 3Trade

'iscounts 2 -ebates0! 'irectly attributable costs! Initial estimate of the cost of dismantling and removing the item and

restoring the site in hich it is located

Costs that are not Costs of Property, Plant E!uipment:! 4osts of opening ne facility"! 4osts of introducing ne product or service"! 4osts of conducting business in ne location or ith ne class of

customer"! Administration and other general overhead costs"! 4osts incurred in using or redeploying an item"! Amounts related to certain incidental operations


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E"amples of Directly #ttributable Costs:! 4ost of employee benefits! 4ost of site preparation! Initial delivery and handling cost! Installation and assembly cost! 4ost of testing after deducting the net proceeds from selling any items

produced! $rofessional fees


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$ractical &/ample ! 5

A 4 % 4o , is installing a ne plant at its production facility It hasincurred these costs:

! 4ost of the plant -s 578,888! Initial delivery and handling cost -s 58,888

! 4ost of site preparation -s 68,888! 4onsultants used to advice on the acquisition -s 98,888! Interest charges paid to supplier for deferred credit -s 58,888! &stimated dismantling cost to be incurred after 9 years -s 8,888! *perating losses before commercial production -s ;8,888

(ind out the costs to be capitali#ed as per IAS!16<


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$ractical &/ample Solution

! 4ost to be capitali#ed include:

! 4ost of the plant -s 578,888! Initial delivery and handling cost -s 58,888! 4ost of site preparation -s 68,888! 4onsultants used to advice on the acquisition -s 98,888! &stimated dismantling cost to be incurred after 9 years -s 8,888! Total 4ost = 3578,888 2 58,888 2 68,888 2 98,888 2 8,8880 =

; 8,888

! Interest charges can be capitali#ed as per allo ed alternativetreatment of IAS!5 orro ing 4ost


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4ost .odel

> In cost model the fi/ed assets are carriedat their historical cost less accumulateddepreciation and accumulated impairmentlosses There is no up ard adjustment tovalue due to changing circumstances


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&?A.$@&

> A/e @td purchased a building orth588,888 on Banuary 1, 588C Thebuilding has a useful life of 58 years ithno salvage value

> It records the building using the follo ing journal entry

&quipment 588,888

4ash 588,888


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> early depreciation is hence, D 588,888E58 or 18,888

> Accumulated depreciation as at 'ec 1,5818 is D 18,888F or 8,888

>The carrying amount is D 588,888 D 8,888 hich equals 198,888


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-evaluation model

! In revaluation model an asset is initially recorded at costbut subsequently its carrying amount is increased toaccount for any appreciation in value

! The difference bet een cost model and revaluationmodel is that revaluation model allo s both do n ardand up ard adjustment in value of an asset hile costmodel allo s only do n ard adjustment due toimpairment loss


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&?A.$@&

> 4onsider the e/ample of A/e @td asquoted in case of cost model Assume on'ecember 1, 5818 the company intendsto s itch to revaluation model and carriesout a revaluation e/ercise hich estimatesthe fair value of the building to be

1G8,888 as at 'ecember 1, 5818


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> The carrying amount on that the date is198,888

> -evalued amount is 1G8,888> Hp ard adjustment of 58,888 is required

to building account


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> Bournal &ntry:uilding 58,888

-evaluation Surplus 58,888


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-evaluation Surplus

> Hp ard revaluation is not considered a normalgain

> It is not recorded in income statement rather it isdirectly credited to an equity account calledrevaluation surplus

> Revaluation surplus holds all the up ardrevaluations of a company s assets until thoseassets are disposed of


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'epreciation After -evaluation

> The depreciation in periods afterrevaluation is based on the revaluedamount

> In case of A/e @td depreciation for 5811shall be the ne carrying amount dividedby the remaining useful life or D 1G8,888E19 = 11,196


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-eversal of -evaluation

> If a revalued asset is subsequently valueddo n due to impairment, the loss is firstritten off against any balance available inthe revaluation surplus and if the losse/ceeds the revaluation surplus balanceof the same asset the difference is

charged to income statement asimpairment loss


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&?A.$@&

> Suppose on 'ecember 1, 5815 A/e @tdrevalues the building again to find out that thefair value should be 168,888 4arrying amount

as at 'ecember 1, 5815 is 1G8,888 minus 5years depreciation of 55, 75 hich amounts to169,6;C

> 4arrying amount J fair value by 9,6;C


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> Impairment of a fi/ed asset is an abruptdecrease of its fair value due to damage,obsolescence etc Khen impairment of afi/ed asset occurs, the business has todecrease its value in the balancesheet and recogni#e a loss in the income

statement


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Lad the fair value been 1;8,888 the e/cess of carryingamount over fair value ould have been 59,6;C In thatsituation the follo ing journal entry ould have beenrequired

-evaluation Surplus 58,888

Impairment @osses 9,6;C

uilding 58,888

Accumulated Impairment @osses 9,6;C


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'epreciation

! Systematic allocation of cost to profit or loss over usefullife

! 'epreciable amount determined after deducting residualvalue

! -evie ed at least at each balance sheet date: D -esidual value D Hseful life D 'epreciation method

> 4hanges are changes in estimate, so adjust current andfuture periods only


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> .ind 4hanging Inc o ns an asset ith an original cost of588,888 *n acquisition, management determined that theuseful life as ten years and the residual value ould be58,888

> The asset is no eight years old, and during this time there

have been no revisions to the assessed residual value> At the end of year C, management has revie ed the useful

life and residual value and has determined that the usefullife can be e/tended to 15 years in vie of the maintenanceprogram adopted by the company

> As a result, the residual value ill reduce to 18,888 Thesechanges in estimates ould be effected in this ay


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> The asset has a carrying amount of76,888 at the end of year C: D 588,888 3cost0 D 1;;,888 3accumulated

depreciation0> Accumulated depreciation is calculated as

D 'epreciable amount equals cost less residual

value = 588,888 D 58,888 = 1C8,888> Annual depreciation

D 1C8,888E18 = 1C,888


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> Accumulated depreciation = D 1C,888 M no of years 3C0 = 1;;,888

> -evision of the useful life to 15 years results in a

remaining useful life of ; years 315 D C0> The revised depreciable amount is ;6,888:

D carrying amount of 76,888 D the revised residualamount of 18,888

> Thus depreciation should be charged in future at11,788 per annum 3 ;6,888 E ; years0


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Impairment

! Assess at each balance sheet date indicators ofimpairment

! If indication, assess recoverable amount 3higher of fairvalue less costs to sell and value in use0

! If recoverable amount N carrying amount O impairmentloss! -ecognise impairment loss as e/pense immediately

D Hnless carried at revalued amount 3revaluationdecrease0

D Hse Pne Q carrying amount to calculate futuredepreciation

! -efer to IAS 6 for impairment loss calculation


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'erecognition

! 'erecognition: D *n disposal, or D Khen no future benefits e/pected from use or

disposal! 'ifference bet een carrying amount and net disposal

proceeds recognised as gainEloss in profit or loss! Rains not classified as revenue! Apply IAS 1C Revenue in determining date of disposal! 4onsideration receivable measured at fair value


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Subsequent costs

! 'o not recogni#e day!to!day servicing costs of the assetin the carrying amount 3-ecurring costs0

! -ecogni#e in the carrying amount of $$& the cost ofreplacing part of such an item hen the cost is incurred ifthe recognition criteria met

! -ecogni#e in the carrying amount of $$& cost of majorinspection if the recognition criteria met Any remainingcarrying amount of previous inspection is de!recogni#ed

! 'erecognise replaced parts 3physical or other ise0 ifidentified separately


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$ractical &/ample ! 1

! A 4 % 4o , has acquired a heavy road transporter at acost of -s 188,888 3 ith no brea do n of componentparts0 The estimated useful life is 18 years At the end ofthe si/th year, the po er train requires replacement, asfurther maintenance is uneconomical due to the off!road

time required The remainder of the vehicle is perfectlyroad orthy and is e/pected to last for the ne/t fouryears The cost of the ne po er train is -s ;7,888

! 4an the cost of ne po er train can be recogni#ed asthe asset, and if so, hat treatment should be used


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Asset &/change Transactions

! Acquired asset ill be measured at fair value if:! &/change has commercial substance! (air value of the asset acquired can be measured

reliably

! Acquired asset ill be measured at carrying amount ofthe asset given up if:! &/change lac s commercial substance! (air value of the asset acquired can not be measured

reliably


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Documents

Fixed_Assets_IAS_16[1] (1).ppt