LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT · IAS 16 PROPERTY, PLANT AND EQUIPMENT...
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LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT Disclaimer The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam. RECOGNITION INITIAL COST SUBSEQUENT COST Elements of cost: Purchase price, import duties and non- refundable purchase taxes etc Costs directly attributable to bringing the asset to location and condition to be capable to operate in manner intended by management Initial estimated costs of dismantling and removing item and restoring the site on which it is located. Servicing costs: Normal day-to-day servicing (maintenance) costs are not recognised in the CA of the item. Replacement at regular intervals Recognise in CA of PPE item the cost of the replacing part when the cost is incurred if the recognition criteria are met. The remaining CA of the replaced part is derecognised. MEASUREMENT AT RECOGNITION ABNORMAL CREDIT TERMS EXCHANGE OF PPE ITEMS Cost of PPE is cash price equivalent at recognition date. If payment is deferred beyond normal credit terms. Difference between cash price and total payment is recognised as interest over the period of credit. PPE items may be acquired in exchange for monetary or non-monetary assets or both: The cost of acquired item is measured at FV unless: Exchange transaction lacks commercial substance, OR FV of neither asset received or given up is reliably measured Else asset acquired is measured at carrying value of asset given up. Determine commercial substance by considering the extent to which its future cash flows (CF) (after tax) are expected to change as a result of the transaction. Exchange transaction has commercial substance if:
Transcript of LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT · IAS 16 PROPERTY, PLANT AND EQUIPMENT...
LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT
Disclaimer
The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam.
RECOGNITION
INITIAL COST SUBSEQUENT COST Elements of cost: Purchase price, import duties and non-refundable purchase taxes etc Costs directly attributable to bringing the asset to location and condition to be capable to operate in manner intended by management Initial estimated costs of dismantling and removing item and restoring the site on which it is located.
Servicing costs: Normal day-to-day servicing (maintenance) costs are not recognised in the CA of the item. Replacement at regular intervals Recognise in CA of PPE item the cost of the replacing part when the cost is incurred if the recognition criteria are met. The remaining CA of the replaced part is derecognised.
MEASUREMENT AT RECOGNITION
ABNORMAL CREDIT TERMS EXCHANGE OF PPE ITEMS Cost of PPE is cash price equivalent at recognition date. If payment is deferred beyond normal credit terms. Difference between cash price and total payment is recognised as interest over the period of credit.
PPE items may be acquired in exchange for monetary or non-monetary assets or both: The cost of acquired item is measured at FV unless: Exchange transaction lacks commercial substance, OR FV of neither asset received or given up is reliably measured Else asset acquired is measured at carrying value of asset given up.
Determine commercial substance by considering the extent to which its future cash flows (CF) (after tax) are expected to change as a result of the transaction.
Exchange transaction has commercial substance if:
Configuration of the CF of asset received differs from the configuration of CF of asset transferred, OR Entity-specific value of the portion of entity’s operations affected by the transaction changes as result of exchange, AND Difference in the 2 above is significant relative to the FV of the assets exchanged.
When FV of both acquired asset and asset given up can be measured reliably, then FV of asset given up is used to measure cost of the asset received, UNLESS FV of asset received is more evident.
MEASUREMENT AFTER RECOGNITION
COST MODEL REVALUATION MODEL Calculation of CA: Cost price Less accumulated depreciation Less accumulated impairment losses
Calculation of CA: FV on date of revaluation Less accumulated depreciation Less accumulated impairment losses
Gross replacement value: The replacement cost (market value/cost price) of a similar new asset You have to determine the CA at the beginning of the current year in order to compare it to your existing CA on the same date and calculate the revaluation surplus/deficit
Net replacement value Regarded as the cost to replace the asset currently with a similar asset of the same age and condition The value given (normally at the end of the financial year) is the CA of that asset AFTER revaluation and depreciation for the period You need to calculate the NRV at the BEGINNING of the period Only then can you calculate the revaluation surplus and depreciation for the year
Revaluation surplus/deficit: INCREASE in asset’s CA: Recognised in other comprehensive income (OCI) in equity BUT, increase recognised in profit or loss to the extent it reverses a revaluation decrease of the same asset DECREASE in asset’s CA: Recognised in profit or loss BUT, recognised in OCI to the extent it reverses a revaluation surplus of the same asset
Remember:
Revaluations should
always take place at
the BEGINNING of
the financial year
Formula to restate NRV from end of the year to
beginning of the year:
[(NRV at beginning – Residual value)/remaining
useful life at end of the year x remaining useful life
at beginning of the year] + Residual value
Transfer of revaluation surplus: Transferred annually to retained earnings (accounting policy is to realise the RS through use of the asset) Transferred when the asset is fully depreciated Transferred upon disposal of the asset
DEPRECIATION
Each part of PPE-item with a cost that is significant in relation to total cost of the item must be depreciated separately. Entity allocates amount initially recognised in respect of a PPE-item to its significant parts and depreciates separately each part Significant part of PPE-item with same useful life and depreciation methods may be grouped together in order to determine depreciation Depreciation of an asset begins when it is available for use as intended by management. Depreciation ceases at the earlier of the date that asset is classified as held for sale and the date the asset is derecognised. Depreciation method: Depreciation method used must reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Depreciation method applied shall be reviewed at least at each financial year end 3 depreciation methods: Straight-line method – adopted where income produced by the asset is a function of time, rather than usage. Diminishing balance method – method is usually used where there is unvertainty as to the amount of income that will be derived from the asset Units of production method (or sum of units method) – depreciation is charged over the expected use or output of the asset Depreciation charge is accounted for in profit and loss, unless it is capitalised as part of the cost of another asset.
IMPAIRMENT
Impairment loss is the amount by which CA of an asset EXCEEDS its recoverable amount Refer to learning unit 3 for information on impairment of assets
Transfers from RS to retained earnings are
not made through profit or loss, but
directly on the face of the statement of
changes in equity.
DISCLOSURE
Below are illustrations of what the disclosure for Property, plant and equipment MUST look like. Land and buildings must be shown separately. Even if you have more than one property, you can ONLY disclose ONE column for Land and ONE column for building. You are NOT allowed to disclose a column for land and a column for buildings for each of the properties. You will be penalised in the exam and we will deduct marks.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED
(DAY) (MONTH) (YEAR)
Property plant and Equipment
Land Buildings Vehicles Total Carrying amount at the beginning of the year
Cost Accumulated depreciation
Additions Depreciation Revaluation/(Devaluation) Impairment Derecognition Carrying amount at the beginning of the year
Gross carrying amount/Cost Accumulated depreciation
Valuations were performed on [DATE] by an independent sworn appraiser. The carrying amount of land and buildings if it was carried at cost minus accumulated depreciation would have amounted to R[TOTAL] (Land: [Rvalue]; Buildings [Rvalue]).
Deferred tax note
R Revaluation surplus (deficit): Land Rvalue Revaluation surplus (deficit): Building Rvalue Accelerated tax allowance: Building Rvalue Accelerated tax allowance: Machine Rvalue Accelerated tax allowance: Vehicle Rvalue
Deferred tax asset/liability Rtotal
These are the movements for the CURRENT
financial year. Only include if it is applicable.
This narrative disclosure MUST be included in the note for PPE. A lot of
students forget to include this note and miss out on important marks.
Must
have a
separate
column
for each
class of
asset,
eg.
Vehicles,
machine,
land,
buildings
Remember that you have to
indicate if it is a deferred tax
asset or liability.
DEFERRED TAX
Capital Gains tax (CGT) – general rules CGT is applicable to assets acquired after 1 October 2001. Summary of CGT implications – page 38 of study guide.
Proceeds
Proceeds above cost is taxed at
66.6% x 28% (CGT rate)
Base cost
Proceeds below cost = recoupment
of tax allowance at 28%
Tax base
Non - depreciable assets
Eg land
Scenario: Assume land was purchased at a cost of R100 000.
Cost model
No tax implications - IAS 12.15 Exempt
CA TB TD DT
dr/(cr)
Cost 100 000 100 000 0 Exempt
Revaluation model
Tax implications of a revaluation surplus are as follows:
CA
difference CA above cost is taxed at
66.6% x 28% (CGT rate)
Base cost
difference
no tax implications = IAS 12.15 Exempt
TB
Scenario: Assume land was purchased at a cost of R100 000. The NRV of the land was R120 000.
R120 000
R20 000 CA above cost is taxed
at 66.6% x 28% (CGT rate)
R100 000
R 0
no tax implications = IAS 12.15 Exempt
R100 000
CA RS TB TD DT
dr/(cr)
Cost 100 000 0 100 000 0 Exempt
Revaluation 20 000 20 000 0 20 000 (3 730)
120 000 20 000 100 000 20 000 (3 730)
20 000 x 66.6% x 28% = 3 730
FAC3702 Learning unit 1
Property, Plant and Equipment
Deferred tax principles
Depreciable assets and SARS grants an allowance
Eg Manufacturing buildings, Machinery, vehicles, etc
The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale.
Recovery through use
Cost model
Revaluation model
Deferred tax at 28%
Deferred tax at 28% even for the revaluation surplus
Scenario: Year 1: Assume a machine was purchased at a cost of R100 000. The machine is depreciated over 20 years. Beginning of
year 2 NRV = R120 000. Tax allowance = 10% not apportioned
CA RS TB TD DT
CA RS TB TD DT
dr/(cr)
dr/(cr)
Cost 100 000 0 100 000 0 0
Cost 100 000 0 100 000 0 0
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
95 000 0 90 000 5 000 (1 400)
95 000 0 90 000 5 000 (1 400)
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
RS 25 000 25 000 0 25 000 (7 000)
95 000 0 80 000 10 000 (2 800)
120 000 25 000 90 000 30 000 (8 400)
Dep/T all (6 316) (1 316) (10 000) 3 684 (1 032)
113 684 23 684 80 000 32 000 (9 432)
FAC3702 Learning unit 1
Recovery through sale
Tax implications of a sale are as follows:
carrying amount
difference CA above cost is taxed
at 66.6% x 28% (CGT rate)
Base cost
difference
Recoupment of previous wear and tear
Tax base
Cost model
Revaluation model
Assume now management sold the machine at its carrying value
CA RS TB TD DT
CA RS TB TD DT
dr/(cr)
dr/(cr)
Cost 100 000 0 100 000 0 0
Cost 100 000 0 100 000 0 0
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
95 000 0 90 000 5 000 (1 400)
95 000 0 90 000 5 000 (1 400)
Dep/T all (5 000) 0 (10 000) 5 000 (1 400)
RS 25 000 25 000 0 25 000 (7 000)
90 000 0 80 000 10 000 (2 800)
120 000 25 000 90 000 30 000 (8 400)
sale (90 000) 0 (80 000) (10 000) 2 800
Dep/T all (6 316) (1 316) (10 000) 3 684 (1 032)
0 0 0 0 0
113 684 23 684 80 000 33 684 (9 432)
adjustment
1 280
Any excess of the CA above the TB is a recoupment of previous wear and tear. CA < Cost
sale
(113 684)
(23 684) (80 000) (33 684) 8 152
FAC3702 Learning unit 1
Cost model
Revaluation model
cost
CA
0 0
13 684 13 684 x 66.6% x 28% = 2 552
CA
cost
10 000 10 000 x 28% = 2 800
20 000 20 000 x 28% = 5 600
TB
TB
total tax implication = R2 797 + R5 600 = R8 152
deferred tax currently = R9 432
therefore adjustment = R1 280
FAC3702 Learning unit 1
Depreciable assets and SARS does not grant an allowance
Eg Office/Admin building
The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale.
Recovery through use
Cost model
Revaluation model
Deferred tax at 28%
Deferred tax at 28% even for the revaluation surplus
Year 1: ABC purchased an office block for R1200 000 (land - R180 000, buildings R1 020 000). Buildings are depreciated over 20 years.
SARS does not allow a tax allowance on the building.
Year 2: Assume the revaluation surplus for the year for the land is R20 000 and for buildings it is R100 000.
CA RS TB TD DT
CA RS TB TD DT
dr/(cr)
dr/(cr)
Cost 1 020 000 0
1 020 000 0 0
Cost 1 020 000 0 1 020 000 0 0
Dep/T all (51 000) 0 0 (51 000) exempt
Dep/T all (51 000) 0 0 (51 000) exempt
969 000 0 1 020 000 (51 000) 0
969 000 0 1 020 000 (51 000) 0
Dep/T all (51 000) 0 0 (51 000) exempt
RS 100 000 100 000 0 100 000 (28 000)
918 000 0 1 020 000 (102 000) 0
1 069 000
100 000 1 020 000 49 000 (28 000)
Dep/T all (56 263) (5 263) 0 (56 263) 0
1012 737 94 737 1 020 000 (7 263) (28 000)
FAC3702 Learning unit 1
Recovery through sale
Tax implications of a sale are as follows:
carrying amount
difference CA above cost is taxed
at 66.6% x 28% (CGT rate)
Base cost
difference
Recoupment of previous wear and tear
Tax base
FAC3702 Learning unit 1
Cost model
Revaluation model
Assume now management sold the machine at its carrying value
CA RS TB TD DT
CA RS TB TD DT
dr/(cr)
dr/(cr)
Cost 1 020 000 0
1 020 000 0 0
Cost 1 020 000 0 1 020 000 0 0
Dep/T all (51 000) 0 0 (51 000) exempt
Dep/T all (51 000) 0 0 (51 000) exempt
969 000 0 1 020 000 (51 000) 0
969 000 0 1 020 000 (51 000) 0
Dep/T all (51 000) 0 0 (51 000) exempt
RS 100 000 100 000 0 100 000 (28 000)
969 000 0 1 020 000 (102 000) 0
1 069 000 100 000 1 020 000 49 000
(28 000)
sale (969 000) 0 1 020 000 (102 000) 0
Dep/T all (56 263) (5 263) 0 (56 263) 0
0 0 0 0 0
1 012 737 94 737 1 020 000 (7 263) (28 000)
Any excess of the CA above the TB is a recoupment of previous
adjustment
26 646
wear and tear. CA < Cost
sale
(1 012 737) (94 737)
(1 020 000) 7 263 1 354
FAC3702 Learning unit 1
Cost model
Revaluation model
cost
CA
0 0
7263 7 263 x 66.6% x 28% = 1 354
CA
cost
0 0
0 0
TB
TB
total tax implication = R1 354 + R0 = R1 354
deferred tax currently = R28 000
therefore adjustment = R26 646
FAC3702 Learning unit 1
HINTS AND TIPS
Remember that all revaluations have to take place at the beginning of the financial year.
o If the NRV is given at the end of the financial year – you need to work it back to the NRV at the beginning of the financial year.
Depreciation for the current year must be calculated using the NRV at the beginning of the year and the remaining useful life at the beginning of the year.
Remember the narrative information underneath the PPE note (this information counts a lot of marks).
Read through the question carefully, make sure you do not miss any information.
Draw a timeline of events and clearly mark the events occurring. This will assist you in determining when and how the events occur and assist in presenting a logical solution.
Tax allowances must not be calculated proportionately for a part of the year.
