Property, Plant and EquipmentProperty, Plant and Equipment

Tangible assets Used in the normal business operations

a. production or supply of goods and services

b. for rental to others

c. for administrative purposes Expected to be used for more than one period

RECOGNITIONRECOGNITION

AsAs statedstated in PAS 16 paragraphin PAS 16 paragraph 77 The cost of an item of Property, Plant and Equipment

shall be recognized as an asset if & only if:a. it is probable that future economic benefits

associated with the item will flow to the entityb. the cost of the item can be measured reliably

Spare parts and servicing equipment are considered as inventory and are recognized as profit or loss when consumed. They are recognized as PPE if:

1. they are expected to be used for more than one period

2. they are used only in connection with PPE item

Initial Costs Some PPE item are acquired for safety and

environmental reasons

Subsequent Costs Day to day servicing of PPE are not recognized in its

carrying amount

Parts of some items of Property, Plant and Equipment may require replacement at regular interval. They are recognized as PPE if they met the recognition criteria stated in paragraph 7.

If major inspection is a condition of continuing to operate an i\tem of PPE, such inspection is recognized in the carrying amount if the recognition criteria is met.

MEASUREMENTMEASUREMENT

I. At RecognitionI. At Recognition PPE shall be measured at cost

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction.

The cost of PPE includes not only the purchase price but also other expenditures incurred in acquiring and preparing the PPE for its intended use.

Recognition of the carrying amount of the asset ceases when the asset has been brought to location and condition necessary for it to operate as intended by the management.

There are some incidental operations that may occur before or during an item is being constructed. These incidental operations should be recognized as profit or loss or included in their classification as income or expenses.

The cost of PPE item may vary due to The cost of PPE item may vary due to the mode of acquisition:the mode of acquisition:

1. Cash- cash price equivalent

2. On Account/ with credit terms- net of discount

3. Deferred Payment (Installment)

- the difference between the total payment and cash price equivalent is the interest

4. Exchange of Non-Monetary Assets- the cost of the asset is measured at its fair vale

unless: (a) the transaction lacks commercial substance

(b) the fair value of neither the asset received nor the asset given up is reliably measurable

An exchange transaction has commercial substance if:1. the cash flow of the asset received differs from

the cash flows of the asset transferred2. the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange3. the difference between the first two is significantly relative to the fair value of the assets exchanged

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

5. Construction - measured at cost including all

expenses incurred to build the asset and prepare it for its intended use.

- any internal profits are eliminated in arriving at such costs

- the cost of abnormal amounts of wasted material, labor or other resources incurred in self-constructing an asset is not

included in the cost of the asset

II. After RecognitionA. Cost Model

Cost less Accumulated Depreciation & Accumulated Impairment Loss

B. Revaluation Model

Fair Value Less Subsequent Accumulated Depreciation & Impairment Loss

Fair Value (Market Value) is determined by appraisal

If there is no market-based evidence of fair value, it should be estimated using an income or a depreciated replacement cost

Changes in fair value determines the frequency of revaluation. Revaluation of PPE must be done annually. If the fair value of the revalued amount differs significantly from its fair value, further revaluation is required. If the carrying amount does not differ significantly from the fair value, it may be necessary to revalue the item only every three to five years

The accumulated depreciation of a PPE item that is revalued should be treated any of these ways:

1. restated proportionately with the change in the gross carrying amount

2. eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset

If an item of PPE is revalued, all the member of its class should be revalued

If the carrying amount increases due to revaluation, the increase must be credited directly in equity under the heading Revaluation Surplus

If the carrying amount of the asset decreases due to revaluation:

a. decrease shall be debited directly to Revaluation Surplus if there is an existing credit balance in respect of that asset

b. if there is no existing credit balance, decrease shall be recognized as loss

Revaluation surplus may be transferred to retained earnings when:

1. asset is disposed

2. or when the asset is being used by the entity; the amount of revaluation surplus transferred would be the difference

between depreciation based on revalued carrying amount and depreciation based on original cost

Depreciation Parts of an item of PPE is to be depreciated if they

have significant cost that are related to the total cost of PPE

Significant parts of the same item with the same useful life and depreciation method may be grouped together when determining the depreciation charge

The remaining parts should be depreciated using approximation techniques in a manner that faithfully represents the consumption pattern and/or useful life of its part. But an entity may depreciate the remaining part separately.

Depreciation charge shall be recognized in profit or loss unless it is a part of the cost of other asset

Ex. Depreciation of manufacturing plant & equipment is included in the cost of conversion of inventories

Depreciable amount is allocated on a systematic basis over the useful life

Residual value and useful life should be reviewed at least each financial year-end, if estimates differs from expectation, changes are accounted for as a Change in Accounting Estimate (IAS 8)

Residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount

Depreciation starts when PPE is already available for use, it ceases when PPE is classified as held for sale

Idle PPE are still depreciated

In determining the useful life, the following factors must be considered

a. expected usage of the asset

b. expected physical wear and tear

c. technical or commercial obsolescence

d. legal or similar limits in the use of the asset

Estimation of the useful life of PPE may be based from the company’s experience with similar asset

Land and Building are separable assets

Depreciation method reflects the pattern in which the assets’ future economic benefits are expected to be consumed by the entity

Any changes in the pattern of consumption of the future economic benefit may be accounted for as a Change in Accounting Estimate (IAS 8)

Depreciation Methods:

1. Straight Line Method - depreciation change is constant over the useful life of the asset if there is no significant change in the residual value and useful life of the asset

2. Diminishing Balance Method - decreasing charge over the useful life of the asset

3. Unit of Production Method – based on expected use or output

Derecognition – assets are removed in the accounts

1. On disposal (sale, by entering into finance lease or by donation)

2. when no future economic benefits are expected from its use or disposal

Gain or Loss on disposal shall be recognized in profit or loss.

Gains are not recognized as revenue but as other income

Replaced part of an item PPE shall be derecognized regardless whether they are depreciated separately or not

Gain or loss on disposal is the difference between net disposal proceeds and carrying value

PRESENTATIONPRESENTATION

PPE are long-term assets and therefore they are included in the Non-Current Assets section of the Balance Sheet as a separate line item. Only the net carrying amount is reflected in the face of the Balance Sheet. The items with their corresponding PPE are to be found in the Notes to the Financial Statement

DISCLOSUREDISCLOSURE

1. The measurement basis used for determining the gross carrying amount

2. The depreciation method used

3. The useful lives or the depreciation rate used

4. The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and at the end of the period

5. A reconciliation of the carrying amount at the beginning and end of the period

END….END….

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