Property, Plant and Equipment_examples

Tangible fixed (non-current) assetsIAS 16 Property, plant and equipmentProperty, plant and equipment are tangible items that:(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and(b) are expected to be used during more than one period.Regarding property (land or building), IAS 16 Property, plant and equipment applies for so called owner-occupied property.Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.

IAS 40 Investment property Investment property is property (land or a buildingor part of a buildingor both) held (by the owner or by the lessee under a finance lease) to earn rentals or for Share Capital appreciation or both, rather than for:(a) use in the production or supply of goods or services or for administrative purposes; or(b) sale in the ordinary course of business.

The following are examples of investment property:(a) land held for long-term Share Capital appreciation rather than for short-term sale in the ordinary course of business.(b) land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for Share Capital appreciation.)(c) a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases.(d) a building that is vacant but is held to be leased out under one or more operating leases.(e) property that is being constructed or developed for future use as investment property.

IFRS 5 Non-current assets held for sale and discontinued operations According to IFRS 5, an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.The sale should be expected to be recognised within one year from the date of classification as held for sale.

IAS 16 Property, plant and equipmentNote: Explanations of possible differences are in shaded fields: Depreciation component approach. According to IAS 16, each part of an item of property, plant and equipment with a useful life that is different from other parts of the same item and a cost that is significant in relation to the total cost of the item shall be depreciated separately. In many countries, the asset is depreciated in its entirety (i.e. component approach is not applied).Example depreciation component approachAn entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. At 1st January of the year 1 the entity has acquired an aircraft for 1,000 in cash. The useful life of the airframe is 20 years, engines have useful lives of 5 years and the seats have useful lives of 2 years. The cost of airframe is 500, the cost of engines is 400 and the cost of seats is 100.According to the accounting rules in Country X, entire aircraft is depreciated for 20 years (i.e. Country X does not apply the component approach for depreciation).In both accounting systems, the method of depreciation used by the entity is straight-line, no residual value. In the Income statement, the entity recognises depreciation as a part of Cost of services sold.The date of IFRS Opening Balance sheet is 1st January of the year 2.For simplicity, the tax impact is ignored.

Accounting entries year 1 (T accounts) Country X

CashShare CapitalProperty, plant and equipment

OB 1,000(1) 1,000OB 1,000(1) 1,000

Accumulated depreciation (PPE)Cost of services sold

(2) 50(2) 50

(1) Purchase of the aircraft(2) Depreciation of the aircraft

Depreciation in Country X, year 1 = 1,000 20 = 50; the net book value is 1,000 50 = 950Depreciation IFRS:Airframe500 20 = 25

Engines400 5 = 80

Seats100 2 = 50

Total IFRS depreciation155

IFRS net book value is 1,000 155 = 845

Translation 1st January, year 2 Opening Balance sheetCountry XAdjustment depreciation IFRS

Aircraft950(105)845

Total assets950845

Share Capital1,0001,000

Retained earnings(50)(105)(155)

Total liabilities and equity950845


CashShare CapitalProperty, plant and equipment

OB 0OB 1,000OB 1,000

Accumulated depreciation (PPE)Cost of services soldRetained earnings

OB 50(1) 50OB 50

(1) 50

(1) Depreciation of the aircraft.

IFRSIFRS net book value is cost 1,000 (2 depreciation 155) = 690

Translation 31st December, year 2 Balance sheetCountry XAdjustment depreciation IFRS

Aircraft900(210)690

Total assets900690



Loss for year 2(50)(105)(155)


Income statement for the year 2Country XAdjustment depreciation IFRS

Cost of services sold(50)(105)(155)

Loss for the period(50)(155)

Measurement in IAS 16 Cost model or Revaluation model. After an initial recognition in the Balance sheet, an item of property, plant and equipment can be measured at cost less accumulated depreciation and accumulated impairment losses (Cost model) or at fair value less accumulated depreciation and subsequent accumulated impairment losses (Revaluation model). If measured at fair value, the revaluation surplus is a part of equity (revaluation reserve) in the Balance sheet, not a part of Profit or loss for the period. The change in Revaluation reserve for the period is explained in the Statement of Comprehensive Income as a part of Other comprehensive income. If the revaluation model is applied, the revalued asset is depreciated from the revalued amount (except for the land which is not depreciated).Note: revaluation surplus in the Balance sheet is NEVER negative. According to paragraphs 39 and 40 of IAS 16 the Revaluation model works like this:39 If an assets carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.40 If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

Note: Paragraph 41 states the accounting treatment for Revaluation surplus that is included in the equity:The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the assets original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

Example revaluation of the landAn entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. During year 1, the entity acquired a piece of land that it planed to use in its agricultural activities. The cost of land was 1,000 and the amount was paid in cash. During year 1, no revaluation was performed (according to IAS 16, there is no need to perform the revaluation each year). At the end of year 2, the revaluation of the land was performed. At the date of revaluation, fair value of the land was 1,200.In Country X, the revaluation of the land is not permitted.The date of IFRS Opening balance sheet is 1st January of the year 2.


CashShare CapitalProperty, plant and equipment Land

OB 1,000(1) 1,000OB 1,000(1) 1,000

(1) Purchase of the land

Translation 1st January, year 2 Balance sheetCountry XAdjustment no adjustment necessaryIFRS

Land1,0001,000

Total assets1,0001,000


Retained earnings00

Total liabilities and equity1,0001,000


CashShare CapitalProperty, plant and equipment Land

OB 0OB 1,000OB 1,000

No accounting entry in year 2 in Country XTranslation 31st December, year 2 Balance sheetCountry XAdjustment revaluation of the landIFRS

Land1,0002001,200

Total assets1,0001,200


Revaluation reserve200200

Retained earnings00

Profit or loss for the period00

Total liabilities and equity1,0001,200

There is no adjustment in the Income statement in the year 2, however the change in the IFRS Revaluation reserve (Revaluation surplus) must be explained in the Statement of Comprehensive income as a part of Other comprehensive income.

IFRS Statement of Comprehensive Income for the year 2 Revenue0

Expenses0

Profit or loss for the period0

Other comprehensive income

Changes in Revaluation reserve200

Total comprehensive income200

Example revaluation of the building; revaluation surplus is transferred to the retained earnings as the asset is used by the entityAn entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. On 1st January, year 1 the entity acquired a building that it planed to use for administration purposes. The cost of building was 1,000 and the amount was paid in cash. At the end of year 1 (31st December), the revaluation of the building was performed. Fair value of the building was 1,500 at the date of revaluation.In Country X, revaluation of property, plant and equipment is not permitted.Management of the entity has estimated the useful life of the building for 20 years; method of the depreciation is straight-line; no residual value. Entitys accounting policy is to transfer revaluation surplus to the retained earnings as the asset is used by an entity. The amount of the surplus transferred is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the assets original cost. (see Paragraph 41 of IAS 16).In both accounting systems, depreciation of the building is a part of Administrative expenses in the Income statement.The date of IFRS Opening balance sheet is 1st January of the year 2.


CashShare CapitalProperty, plant and equipment Building

OB 1,000(1) 1,000OB 1,000(1) 1,000

Accumulated depreciationAdministrative expenses

(2) 50(2) 50

Country XDepreciation: Cost 1,000 useful life 20 years = 50Translation 1st January, year 2 Balance sheetCountry XAdjustment revaluationIFRS

Property, plant and equipment9505501,500

Total assets9501,500


Retained earnings(50)(50)

Revaluation surplus550550

Total liabilities and equity9501,500

In year 2, the entity continues in depreciation according to the rules in Country X (i.e. depreciation is based on the cost of the building).Accounting entries year 2 (T accounts) Country X

CashShare CapitalProperty, plant and equipment Building

OB 0OB 1,000OB 1,000

Accumulated depreciationAdministrative expensesRetained earnings

OB 50(1) 50(1) 50OB 50

(1) Depreciation of the buildingIFRSDepreciation: Revalued amount 1,500 19 (residual useful life) = 79 (rounded)Net book value: Revalued amount 1,500 minus accumulated depreciation 79 = 1,421Difference in depreciation: depreciation based on the revalued carrying amount of the asset 79 and depreciation based on the assets original cost 50 = 29. This difference is transferred from Revaluation surplus to the Retained earnings.

Translation 31st December, year 2 Balance sheetCountry XAdjustment revaluationIFRS

Property, plant and equipment9005211,421

Total assets9001,421


Retained earnings(50)29(21)

Loss for the period(50)(29)(79)

Revaluation surplus521521

Total liabilities and equity9001,421

IFRS Statement of Comprehensive Income for the year 2 Revenue0

Expenses administration (79)

Loss for the period(79)

Other comprehensive income

Changes in revaluation reserve(29)

Total comprehensive income(108)

The cost of property, plant and equipment the initial estimate of dismantling and removing the item and restoring the site on which it is located. If the entity has an obligation to restore the site on which the asset is located, it must increase the initial cost of the asset by the estimated amount of the obligation. The same requirement applies when material costs relating to disposal of an asset exist.The accounting entry is: Dr Asset, Cr Provision (liability).ExampleAn entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. The entity operates a landfill. When the landfill is full of rubbish (normally after 3 years), the entity must restore the site (i.e. to cover the landfill by earth, grass and trees). At 1st January, year 1 the entity acquired the land on which it planed to operate the landfill. The cost of land was 1,000 and it was paid in cash. The entity estimates that it will operate the landfill for 3 years and at the end of year 3 it will pay 500 for restoring the site on which the landfill is situated.Depreciation of the landfill is included in the Cost of services sold in the Income statement.The useful life of the landfill is 3 years. In both accounting systems, the method of depreciation is straight-line, no residual value. (Note: Normally the land is NOT depreciated; however because by operating a landfill the entity completely destroys the land, a landfill is an exemption in this case and is depreciated.)The date of IFRS Opening Balance sheet is 1st January of the year 2.Scenario 1: In Country X, no provision for the restoration is accounted for. Scenario 2: In Country X, the provision for the restoration is accounted for; however it is accounted against the profit or loss (i.e. the amount of the provision is NOT a part of the cost of the landfill). In this scenario, Country X requires to measure the provision at undiscounted nominal amount of the estimated provision. Each year, the proportional part of the provision is accounted for as an expense in the Income statement.

Scenario 1 In Country X, no provision for the restoration is accounted for.


CashShare CapitalProperty, plant and equipment Landfill

OB 1,000(1) 1,000OB 1,000(1) 1,000

Accumulated depreciation (landfill)Cost of Services sold

(2) 333(2) 333

(1) Purchase of the land(2) Depreciation of the landfillCountry XIn Country X, the cost of the landfill is 1,000.Depreciation in Country X: 1,000 3 = 333 (rounded).The net book value of the landfill at the end of year 1 in Country X is 1,000 depreciation of 333 = 667.

IFRSThe amount of the provision and a part of cost of the landfill in IFRS is the PRESENT VALUE of the estimated amount of restoring the site according to the formula:

Where n is number of years and Interest rate is the estimated market interest rate for the next three years.Assume that the estimated interest rate is 10%. The calculation of the Present value of the obligation would be:

The result is 376 (rounded).According to IFRS, the cost of the landfill is 1,376, i.e. amount paid in cash plus the amount of the provision.IFRS depreciation: 1,376 3 = 459 (rounded).The IFRS net book value of the landfill at the end of year 1 is 1,376 depreciation of 459 = 917

Table of the movements in provision (IFRS)YearLiability at the start of the yearInterest*)Liability at the end of the year

137638414

241441455

345545500

*) The interest column was calculated using the effective interest rate method that multiplies the opening balance of the liability by the interest rate (10%).

Translation 1st January, year 2 Opening IFRS Balance sheetCountry XAdjustment cost of the landfill and the provisionIFRS

Landfill667250917

Total assets667917



Provision414414




OB 0OB 1,000OB 1,000

Accumulated depreciation (landfill)Cost of Services soldRetained earnings

OB 333(1) 333OB 333

(1) 333

(1) Purchase of the land

At the end of year 2:The net book value of the landfill in Country X is 1,000 (2 depreciation of 333) = 334The net book value of the landfill in IFRS is 1,376 (2 depreciation of 459) = 458Provision: see the table of movements in provision above

Translation 31st December, year 2 Balance sheetCountry XAdjustment cost of the landfill and the provisionIFRS

Landfill334124458

Total assets334458



Loss for the period(333)(167)(500)

Provision455455


Income statement for year 2Country XAdjustment cost of the landfill and the provisionIFRS

Revenue00

Cost of services sold(333)(126)(459)

Financial expenses(41)(41)


Note: In the Income statement (adjustment column), 126 is the difference in depreciation and 41 is the interest on the provision (see Table of movements in provision).

Scenario 2 In Country X, the provision for the restoration is accounted for; however it is accounted against the profit or loss (i.e. the amount of the provision is NOT a part of the cost of the landfill). In this scenario, Country X requires to measure the provision at undiscounted nominal amount of the estimated provision. Each year, the proportional part of the provision is accounted for as an expense in the Income statement. The amount is recognised under Cost of services sold in the Income statement.



OB 1,000(1) 1,000OB 1,000(1) 1,000

Accumulated depreciation (landfill)Cost of Services soldProvision for restoration

(2) 333(2) 333(3) 167

(3) 167

(1) Purchase of the land(2) Depreciation of the landfill(3) Creation of the provision

Country XIn Country X, the cost of the landfill is 1,000.Depreciation in Country X: 1,000 3 = 333 (rounded).The net book value of the landfill at the end of year 1 in Country X is 1,000 depreciation of 333 = 667.Provision in year 1 = 500 3 = 167 (rounded)IFRSAll workings for IFRS are explained in Scenario 1, including the Table of movements in the provision.

Translation 1st January, year 2 Opening IFRS Balance sheetCountry XAdjustment cost of the landfill and the provisionIFRS

Landfill667250917

Total assets667917



Provision167247414




OB 0OB 1,000OB 1,000

Accumulated depreciation (landfill)Cost of Services soldProvision for restoration

OB 333(1) 333OB 167

(1) 333(2) 167(2) 167

Retained earnings

OB 500

(1) Depreciation of the landfill(2) Creation of the provision

End of year 2Provision at the end of the year 2 is 167 2 = 334. The expense of 167 was debited in the expenses during the year 2.Translation 31st December, year 2 Balance sheetCountry XAdjustment cost of the landfill and the provisionIFRS

Landfill334124458

Total assets334458



Loss for the period(500)--(500)

Provision334121455


Income statement for year 2Country XAdjustment cost of the landfill and the provisionIFRS

Revenue00

Cost of services sold(500)41(459)

Financial expenses(41)(41)


Property, Plant and Equipment_examples

Documents

Transcript of Property, Plant and Equipment_examples