CPA P2 Advanced Corporate Reporting
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4.INTERNATIONAL FINANCIAL REPORTING
TOPIC 1 - IAS 16 PROPERTY, PLANT & EQUIPMENT
Objective of IAS 16 – to prescribe the accounting treatment for property, plant and
equipment in the financial statements
Recognition
Property, plant & equipment can only be recognised as an asset in the financial statements if;-
It is probable that future economic benefits associated with the item will flow to the
entity
and
The cost of the item can be measured reliably
Any item of property, plant & equipment that satisfies the definition of an asset should
initially be measured at cost.
What is cost?
Cost comprises;-
(a) The purchase price, including import duties and non-refundable taxes (Vat is
reclaimable by business and is therefore excluded from Purchase Price) and after
deducting trade discounts and rebates.
(b) Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management
(c) Initial estimate of costs of dismantling and removing the asset and restoring the site
on which it is located. Ask yourself if the conditions for a provision
exist (PO-PO-RE!) – If conditions exist, then create provision and capitalise the
discounted cost of the provision
Note: Entity should not recognise in the carrying amount of an asset the cost of its day-to-
day servicing. (revenue expenditure)
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Initial cost =
Purchase cost (minus any purchase discount and excluding recoverable tax)
Directly attributable costs
– professional fees
– delivery costs (carriage inwards)
– site preparation costs
– costs of testing whether the asset is functioning properly (i.e. pre production
testing) , after deducting the net proceeds from selling any items produced
while bringing the asset to that location and condition (such as samples
produced when testing equipment)
– Labour Costs on a normal basis
– Borrowing Costs incurred with the item – See IAS 23
Initial estimate of dismantling costs and site cleaning/restoration costs at the end
of the asset’s life -
Excluded from cost are items of revenue expenditure such as
Cost of Training staff to use the plant & equipment (Cr Bank, Dr Staff Training
Expense)
Early settlement discounts (Dr Liability, Cr Statement of Profit or Loss)
Purchase of maintenance contracts in respect of the plant & equipment (Cr Bank, Dr
Prepayments/Statement of Profit or Loss)
Administration or Other General Overheads
All of the above items are accounted for through the Statement of Profit or Loss
the cost of abnormal amounts of wasted material, labour, or other resources is not
included in the cost of the asset. (e.g. the increased labiur cost due to an industrial dispute
– the increase is not capitalised)
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Subsequent Measurement of Property, Plant & Equipment
Entity can choose either
Cost Model
OR
Revaluation Model
Whichever model is chosen, will be the company’s accounting policy with respect to
property, plant and equipment and must be applied consistently to an entire class of property,
plant & equipment..i.e no “cherry picking” of just the assets which have gone up in value
Cost Model
Property, plant & equipment should be carried at;-
COST
Less
Accumulated depreciation and impairment losses
Revaluation Model
Property, plant & equipment should be carried at ;-
Fair value at date of revaluation
less
Any subsequent accumulated depreciation and impairment losses.
(Therefore if an asset is revalued at the year end date, subsequent depreciation will
not occur until the next year. So carrying amount of asset will be its fair value at reporting
date)
Note: Revaluations should be sufficiently regular to ensure that carrying amount doesn't
differ materially from fair value. Fair Value is usually the market value.
In the case of specialised assets where no open market operates, depreciated replacement
cost will be used, when adopting the revaluation model
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Gains on Revaluation (Revalued Amt – Carrying Amount)
Where an asset is revalued upwards from its carrying amount
1. Dr Asset; Cr Revaluation Reserve
2. The gain on revaluation is disclosed as other comprehensive income in the
statement of comprehensive income and is not included in profit or loss for the
period. The amount of the unrealised gain reported will be the gross gain (i.e.
before any adjustments in respect of deferred tax if applicable in the question)
3. There is an exception to the rule in No 2 – if the gain on revaluation reverses a
previous loss on revaluation , where the loss was recognised in profit or loss
(i.e. Statement of Profit or Loss) the revaluation gain should be recognised in
profit or loss not “other comprehensive income” (Dr Asset; Cr Statement of
Profit or Loss)
Loss on Revaluation (Revalued Amt – Carrying Amount)
Where an asset is revalued down from its carrying value
1. Cr Asset; Dr Revaluation Reserve
2. Decrease on Revaluation is disclosed in “Other Comprehensive Income”
assuming that the loss on revaluation reverses a previous gain on revaluation,
where the gain was recognised in “other comprehensive income” the decrease
should be reported in other comprehensive income
3. If the conditions in number 2 do not apply, then the loss is recognised through
profit or loss (Cr Asset; Dr Statement of Profit or Loss) – e.g. For a decrease
on revaluation where there was no previous revaluation gain
Note that when a revaluation takes place, the depreciation for the period up to the date
of revaluation should be deducted from the carrying value before calculating the
revaluation surplus. This is a common mistake made by students
Note: Under the Revaluation Model, increases in the value of assets should be
accounted for in the statement of financial position under Revaluation Reserves as
follows;-
Dr. Asset Cost x
Dr. Acc Depr x
Cr. Revaluation Reserve x
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BUT
If there is a revaluation decrease in an asset – this decrease should be included as an expense
in the Statement of Profit or Loss (unless the decrease reverses a previous gain as
described above) as follows;-
Dr. Expenses x
Cr. Asset Cost x
Cr. Acc Depr x
Depreciation
Depreciation begins when the asset is available for use !!! (Think of a newly built
hospital unit that it not being used) (Per IAS 16, consumption of future economic
benefits occurs not only through use but also through obsolescence and wear and tear)
– This contrasts with IAS 38 - Amortisation of Capitalised Development Expenditure
where amortisation does not commence until commercial production commences
Should be allocated on a systematic basis over assets useful life
Charge for each year is recognised in Statement of Profit or Loss
Method of depreciation used should reflect the pattern in which the asset’s future
economic benefits are expected to be consumed.
Land is not depreciated because it has an indefinite useful life (unless the land is used
in mining or similar industries)
2 depreciation methods – (a) Straight Line and (b) Reducing Balance
Depreciation (cont’d)
IAS 16 allows for a change in the method of depreciation where this results in a fairer
presentation of the entity’s results
Change in depreciation method = Change in Accounting Estimate not accounting
policy (IAS 8)
Change in depreciation method is not applied retrospectively
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Review of Useful Economic Life
Should be reviewed at the year-end and revised if necessary.
If useful life is revised – carrying amount at date of revision should be depreciated
over revised useful life.
Change in useful life is a change in accounting estimate
De-recognition
Asset should be de-recognised on;-
(a) Disposal
(b) When no more future economic benefits are expected from asset
Any gain or loss should be included in the Statement of Profit or Loss as gain/loss on
disposal (not included in Sales Revenue!!)
Also Disposal proceeds should not be included in Sales Revenue
Gain/Loss calculated as follows;-
Disposal Proceeds less Carrying Amount
Any revaluation reserve standing to the credit of a disposed asset should be
transferred directly to retained earnings as a reserve movement.
Depreciation and the Revaluation Reserve
If an asset is revalued upwards, then its carrying value increases and a revaluation reserve is
created. 2 points should be noted as a result of this:
1. As the depreciation charge is based on a higher revalued amount,
then the charge to the SOPL will typically be higher, then if the
cost model was applied
2. As the asset is depreciated, its carrying value declines but the
revaluation reserve remains the same
Consequently, IAS 16 gives companies the option of transferring some of the gain from the
revaluation reserve to offset the additional depreciation. The amount of the surplus
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transferred is the difference between the depreciation based on the revalued carrying amount
of the asset, and depreciation based on the asset’s original cost (or transfer from the
revaluation reserve to retained earnings in line with the depreciation policy being adopted for
the revalued asset)
N.B. Subsequent Expenditure
Subsequent expenditure on non current assets should be capitalised where
– The subsequent expenditure improves the asset ( for example by enhancing its
performance or extending its useful life) i.e. Adds value to the asset above and
beyond its original condition – provides enhanced future economic benefits –
matching concept!!!
– The subsequent expenditure is for a replacement part (provided that the part it
replaces is treated as an item that has been disposed of)
– Examples of Subsequent expenditure on a building
– Constructing an extension to the building
– Replacing the Elevators or the heating/air conditioning system
N.B. Subsequent Expenditure
Subsequent Expenditure which does not meet the criteria for capitalisation is instead
expensed to the Statement of Profit or Loss as incurred
Other Issues
Separate Components: Some items of property, plant and equipment comprise separate
components with different useful lives. For example, an airplane might have a useful life of
30 years, while the seats and fabric in the interior only have a life of 5 years. In such a
situation, the separate components should be capitalised as separate assets and each
depreciated over its useful life
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Key Disclosures - IAS 16
For each class of depreciable asset, these include
- Depreciation method used
- UEL’s or depreciation rates used
- Total depreciation charged for the period, and
- Gross amount of depreciable assets and related accumulated
depreciation
- If material, the reason for any change in depreciation method
For revalued assets these include
- Name and qualification of valuer
- Basis of valuation
- Date and amount of valuations
Illustration
Property, Plant &
Equipment
Land& Building
€m
Plant
€m
Total
€m
Cost or Valuation:
At 1 October 2013 280 150 430
Additions 50 50
Revaluation (15) nil (15)
At 30 Sept 2014 265 200 465
Accumulated
Depreciation
At 1 October 2013 40 105 145
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Charge for Year 9 35 44
Revaluation (40) nil (40)
At 30 Sept 2014 9 140 149
Carrying Value 30
September 2014
256 60 316
The Land and buildings were revalued by an appropriately qualified valuer on an existing use
basis on 1 October 2013. They are being depreciated on a straight line basis over a 25 Year
Life. Plant is depreciated at 20% per annum on cost
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REVALUATIONS OF PROPERTY, PLANT & EQUIPMENT
IAS 16
OVERVIEW
1. Increase/Gain on Revaluation
Increase/Gain in
value which is not
reversing a
previous
loss/decrease
Dr Asset
Cr Revaluation Reserve
Note: Disclose in OCI!
Where the Gain is
reversing a previous
decrease which was
recognised as an expense
i.e. through profit or loss
Dr Asset
Cr Statement of Profit or Loss
Cr Revaluation Reserve (if the
gain is greater than the original
loss/decrease on revaluation)
Note: Only the excess carried to
Revaluation Reserve (if
applicable) will be disclosed in
OCI
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2. Decrease/Loss on Revaluation
Decrease/Loss in
value which is not
reversing a
previous
gain/increase
Cr Asset
Dr Statement of Profit or
Loss
Note: No Disclosure in
OCI because the loss is
accounted for through
profit or loss!
Where the Loss is
reversing a previous
increase which was
recognised as an increase
in the revaluation reserve
Cr Asset
Dr Revaluation Reserve
(*OCI*)
Dr Statement of Profit or Loss
(if applicable!)
Dr Revaluation Reserve with the
amount of the loss which is
reversing the previous gain
taken to revaluation reserve –
Disclose in OCI)
Dr Statement of Profit or Loss
with the excess of the loss on
revaluation over the previous
gain on revaluation if this
applies – No Impact on OCI
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IAS 16 VS IAS 40
IAS 16 – Property, Plant and Equipment
IAS 40 – Investment Property
“Property held to earn rentals or for capital appreciation or both”
Subsequent Measurement
Revaluation Model
Fair Value at Date of Revaluation less subsequent depreciation and impairment
Cost Model
Cost less ACC Depr & Impairment
Subsequent Measurement
Cost Model
Property valued at cost with Subsequent Depreciation
Land is not depreciated
Fair Value Model
Value at “Fair Value”
Through Profit or Loss
No depreciation
Consistent with IFRS 9
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Deferred Tax and Non Current Asset Revaluations
IAS 12 – Income Taxes
IAS 16 – Property, Plant and Equipment
Per IAS 12, when an asset is revalued to fair value, a difference then arises between
(a) The Carrying Amount of the Asset (i.e. its fair value)
AND
(b) The TWDV of the asset
It is this difference that gives rise to a deferred tax liability/asset on revaluation.
When an asset is revalued upwards, depreciation increases and consequently accounting
profit decreases leading to a deferred tax liability.
The Unrealised gain taken to Revaluation Reserve should be net of deferred tax (wherever
such information is provided).
The amount of the unrealised gain reported in Other Comprehensive Income will be the gross
gain (i.e. before any adjustments in respect of deferred tax if applicable in the question)
Exam Note: The examiner will usually instruct as to whether or not the gain/loss taken to
revaluation reserve should be net of deferred tax.
Exam Note: Where an entity makes a transfer to retained earnings in respect of revaluation
reserve realised through depreciation , then the Unrealised Gain reported in OCI is before any
movement between Revaluation Reserve and Retained Earnings
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Questions to practice
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CPA P2 Advanced Corporate Reporting
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Past Exam
Questions – P1 –
IAS 16
Past Exam
Questions – P2 –
IAS 16
Q5 April 2015 Q1 August 2014
Q2 Aug 13 ; Q3 (7)
Aug 13
Q (A) April 2014
Q3 (6) April 13 Q1 Aug 2011
Q2, Q4 April 2011