chapter 5

Property, plant and

equipment
Contents

Introduction
Examination context
Topic List
1 Property, plant and equipment
2 Recognition of PPE
3 Measurement at recognition
4 Measurement of PPE after initial recognition
5 Accounting for revaluations
6 Depreciation
7 Impairment of assets
8 Derecognition of PPE
9 Disclosures
Summary and Self-test
Technical reference
Answers to Self-test
Answers to Interactive questions

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Introduction

Learning objectives Tick off

 Relate the treatment of property, plant and equipment to the principles in BFRS Framework
 Identify the accounting standards which apply to the treatment of property, plant and
equipment
 Apply the accounting requirements for property, plant and equipment, including the effects of
the following:
– Property, plant and equipment measured under the cost model

– Property, plant and equipment measured under the revaluation model

– Depreciation of property, plant and equipment

– Impairment

– Derecognition

– Disclosure
Specific syllabus references for this chapter are: 1b, 2b, c.

Practical significance
Businesses operating in certain industries, for example manufacturing, typically have the use of substantial
items of property, plant and equipment in their balance sheets. These are tangible assets (i.e. assets which
have physical substance) such as freehold and leasehold land and buildings, plant and machinery and office
equipment. They are used in the production or supply of goods and services or for administrative purposes.
The management of these resources underpins the continued viability of a business and therefore
represents a key feature of business prosperity.
Depending on the nature of the business, property, plant and equipment can have a significant impact on the
financial statements. Many of the associated decisions will involve the use of judgement. This is true, for
example, of the distinction between revenue and capital expenditure. One of the principal manipulations
alleged during the WorldCom scandal was the inappropriate capitalisation of expenses. Overstating of the
value of non-current assets, either intentionally or unintentionally, can lead to the inflation of current
earnings, which in turn can affect key performance indicators. It is important therefore that users of
financial statements understand how the business uses its property, plant and equipment and how such
assets are treated in the financial statements.

Stop and think

Can you think of any other aspects of the accounting treatment of property, plant and equipment where
judgement would be applied?

Working context
If you are involved in audit it is highly likely that you have come across the audit of property, plant and
equipment. The technical detail of auditing this area is covered in the Assurance paper. Typically the auditor
will need to consider the following issues:
 Does the balance sheet include all the assets owned by the business (completeness)?
 Do all of the assets belong to the business (ownership)?
 Do all of the assets exist (existence)?
 Have the assets been valued correctly (depreciation, impairment, revaluation)?

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 Have adequate disclosures been made?

Syllabus links
In the Accounting paper you will have covered the basic double entry for the purchase of property, plant
and equipment. You will have also covered basic depreciation, impairment and disposals.
The main difference in the Financial Accounting paper is that these treatments are placed in the context of
the accounting standards that relate to this topic. These include:
 BAS 16 Property, Plant and Equipment
 BAS 36 Impairment of Assets
 BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
The Financial Accounting syllabus also covers in detail the alternative basis of accounting for property, plant
and equipment referred to as the revaluation model. In the Accounting paper you will have covered the
cost model, and will have been introduced to basic revaluations. BAS 36 and BFRS 5 will be covered in
more detail in Financial & Corporate Reporting at the Advanced Stage.

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Examination context

Examination commentary
Property, plant and equipment is likely to be a popular exam topic in the new syllabus in both the short-
form question and written test sections of the paper. In the written test section this topic could be
examined as part of a trial balance question where adjustments are required before the preparation of the
balance sheet. It could also be examined in a question covering a number of accounting issues with the
requirement to produce extracts from the financial statements. Alternatively it could be examined in its
own right, allowing for a more detailed focus on the relevant accounting standards or a discussion of the
related principles from BFRS Framework.
In the examination, candidates may be required to:
 Explain how BFRS Framework applies to the recognition of property, plant and equipment.
 Prepare and present financial statements or extracts therefrom in accordance with:
– BAS 16 Property, Plant and Equipment
– BAS 36 Impairment of Assets
– BFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 Prepare simple extracts from the financial statements in accordance with Companies Act and BFRS.

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1 Property, plant and equipment

Section overview
 BAS 16 Property, Plant and Equipment provides guidance on the accounting treatment of non-current
tangible assets.

1.1 What are property, plant and equipment?

Definition
Property, plant and equipment: Tangible items that are both:
 Held for use in the production or supply of goods or services, for rental to others or for
administrative purposes.
 Expected to be used during more than one period.

In practice this definition causes few problems. Property, plant and equipment (PPE) includes freehold and
leasehold land and buildings and plant and machinery, and forms the major part of assets of certain
types of business, such as manufacturing and transport businesses.

1.2 Non-current v current

The main issue arising is whether the assets are used on a continuing basis in the company’s activities.
For example, cars held for resale by a motor dealer are inventories (a current asset) whereas cars held for
use by employees on company business are PPE.

1.3 BAS 16 Property, Plant and Equipment

You will be familiar with some of the basic accounting issues affecting PPE from your Accounting syllabus. In
the Financial Accounting syllabus you need to be able to deal with these in the context of BAS 16.
The objective of BAS 16 is to prescribe in relation to PPE the accounting treatment for:
 The recognition of assets
 The determination of their carrying amounts
 The depreciation charges and impairment losses relating to them.
This provides the users of financial statements with information about an entity's investment in its PPE and
changes in such investments.
BAS 16 should be followed when accounting for PPE unless another BAS or BFRS requires a different
treatment, e.g. BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

1.4 Underlying principles

The key elements in financial statements, identified in BFRS Framework, which are relevant to PPE are:

Assets Resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow into the entity.
Gains, which are a Increases in economic benefits through enhancements of assets or decreases
part of income in liabilities other than contributions from equity.
Losses, which are Decreases in economic benefits through depletions of assets or additional
included in expenses liabilities other than distributions to equity participants.
Gains and losses relate to the subsequent depreciation, revaluation, impairment and disposal of PPE.

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2 Recognition of PPE

Section overview
 Items of PPE should be recognised where it is probable that future economic benefits will flow to the
entity and their cost can be measured reliably.
 Subsequent costs:
– Repairs and maintenance expenditure should not be capitalised.
– Replacement parts should be capitalised.
 Items of PPE may be separated into components, each with a separate useful life.

2.1 Recognition
In this context, recognition simply means incorporation of the item in the entity's financial statements, in
this case as a non-current asset. The recognition of PPE depends on two criteria both of which must be
satisfied.
 It is probable that future economic benefits associated with the item will flow to the
entity.
 The item's cost can be measured reliably.
Points to note:
1 The asset is not defined in terms of the tangible piece of PPE (e.g. a building or a piece of production
machinery) but in terms of the economic benefits flowing from it:
 So items acquired for safety or environmental reasons can be classed as PPE because they enable
greater economic benefits to flow from other assets.
 Legal ownership of an item of PPE is not necessary, as long as the economic benefits
flowing from it are enjoyed. An item held under a finance lease (see Chapter 8) is treated as an
asset belonging to the user of the item.
2 There is no definition of what constitutes an 'item of PPE'. It will be for each entity to develop
its own definitions. It will be straightforward to decide that an individual motor vehicle should
constitute an item. But when it comes to a blast furnace, should that be a single item or several items?
3 There is no mention of the 'acquisition' of an item of PPE. The whole of the definition revolves round
the 'cost' of such an item. This means that the definition must be applied at any time over the
life of the item of PPE when expenditure on it is incurred; it is not only applied on the initial
acquisition or construction of the item.

2.2 Subsequent costs

In terms of costs incurred subsequently to add to, replace part of, or service the item, the practical
application is that:
 Repairs and maintenance expenditure should be recognised in profit or loss as incurred,
because it is not probable that there will be future economic benefits flowing from it, over and above
the benefits flowing from the cost originally recognised when the item was first acquired.
 Replacement parts should be capitalised, provided the original cost of the items they
replace is derecognised (i.e. treated as disposed of) at the time of the replacement.
BAS 16 explains this in terms of the relining of a blast furnace at times when the remainder of the
furnace does not need replacing and the replacement of the interior of an aircraft several times over
the life of the airframe itself.

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2.3 Separate components

This leads to the practice of treating the different parts of a bigger asset as separate components, with
separate lives. These are then depreciated separately (see section 6 below), so that they are carried at
their residual value over their useful lives, not the useful life of the overall asset.
This component approach is also applied where regular major inspections of an asset are a condition
of continuing to use it. The cost of each inspection is treated as a separate item of PPE, provided on
original acquisition part of the purchase price was allocated as the cost of inspection and recognised in profit
or loss over the period to the next inspection. If no separate inspection cost was incurred on original
acquisition, this allocation may be made by reference to the estimated cost of the first inspection that is
actually made.

3 Measurement at recognition

Section overview
 PPE should be measured at cost at recognition.
 Elements of cost include:
– Purchase price
– Directly attributable costs
– Estimate of dismantling and site restoration costs
 Cost is measured as:
– Cash or
– Fair value if PPE items are exchanged

3.1 Measurement at recognition

An item of PPE qualifying for recognition is initially measured at its cost.

Definitions
Cost: This 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.
Fair value: This is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction.

3.2 Elements of cost of PPE

The cost of a PPE item comprises:
 Purchase price, including all non-recoverable duties and taxes but net of discounts.
 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 the management.
 The initial estimate of dismantling and site restoration costs.
Directly attributable costs include:
 Employee benefits arising directly from construction or acquisition of the item.
 Site preparation, delivery, installation and assembly costs, costs of testing, and
professional fees (e.g. legal costs and architects' fees).

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But note that certain costs associated with the item cannot be included in its cost:
 Some costs are excluded because they are not directly attributable to the item. Examples
include:
– The costs of opening a new facility
– The cost of introducing new products
– The cost of conducting business in a new location or with a new class of customer
– Administration and general overhead costs
 Capitalisation ceases when the item is capable of operating in the manner intended. Costs
incurred after this date have to be excluded. Examples include:
– Costs incurred when the item is not yet in use or is operated at less than full capacity
– Operating losses while demand for the output builds up (e.g. a new hotel)
– Reorganisation costs
Points to note
1 Costs of testing would include flight testing a new aircraft and testing for the satisfactory output of a
new plant. In this latter case, any proceeds from selling product generated during testing are deducted
from the cost of the plant.
2 Where activities are undertaken that are incidental to the development of the PPE item, any revenue
and expenses are recognised in profit or loss, not taken into account in arriving at the cost of the item.
3 Where as a result of the acquisition of an item of PPE an obligation arises to dismantle it at the end of
its useful life and/or to restore its site then that obligation must be recorded as a liability at the same
time as the asset is recognised (e.g. the decommissioning costs of nuclear power stations). We will
look at this issue again in Chapter 9.
4 In the case of self-constructed assets:
 Internal profits and abnormal costs (e.g. those relating to design errors, wasted resources
or industrial disputes) are excluded from cost.
 Interest costs incurred during the course of construction may be included under BAS 23
Borrowing Costs, but inclusion is not mandatory (BAS 23 is not examinable in Financial
Accounting).

Interactive question 1: Measuring cost [Difficulty level: Intermediate]

A business incurs the following costs in relation to the construction of a new facility and the introduction to
the market of its output:
CU'000
Site preparation 400
Net income while site used as a car park, prior to construction commencing (50)
Materials used, inclusive of CU0.3m recoverable VAT 2,000
Labour costs, inclusive of CU0.5m incurred when a labour dispute meant that no construction
work was carried out 4,000
Testing of facility's processes 300
Sale of by-products produced as part of testing process (60)
Consultancy fees re installation and assembly 500
Professional fees 450
Opening of facility 100
Overheads incurred:
– Construction 800
– General 600
Relocation of staff to new facility 350
The following estimates have been made:
1 The cost of having to dismantle the facility at the end of its useful life 750
2 The costs of each statutory safety inspection – the first due in 3 years 150

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3 While the overall life of the facility is 20 years, 40% of the costs other than those of safety inspections
relate to items that will need replacing in 8 years.
Requirement
Identify the total cost of the facility in accordance with BAS 16 and allocate it over the facility's components.
Fill in the proforma below.

Solution
Cost of facility
CU'000
Site preparation
Net income while site used as a car park
Materials used
Labour costs
Testing of facility's processes
Sale of by-products
Consultancy fees re installation and assembly
Professional fees
Opening of facility
Overheads incurred:
– Construction
– General
Relocation of staff to new facility
Cost of dismantling facility

Allocated to components:

See Answer at the end of this chapter.

3.3 Measurement of cost

Cost is measured as the cash price at the time of recognition, with discounting if payment is
deferred beyond normal credit terms.
Where there is an exchange of items of PPE such that there is no cash price, cost should be measured
at fair value.
The exception to this is where:
 The exchange transaction lacks commercial substance, for example where, the risk, timing and
amount of the cash flows of the asset received differs from the risk, timing and amount of the cash
flows of the asset transferred.
or
 The fair value of neither asset exchanged can be measured reliably
In this case the asset is measured at the carrying amount of the asset given up.

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4 Measurement of PPE after initial recognition

Section overview
 After initial recognition an item of PPE may be carried under:
– The cost model, or
– The revaluation model

4.1 The two models

BAS 16 sets out two models, without expressing a preference for either:
 The cost model. An item of PPE is carried at cost (i.e. initial cost plus subsequent expenditure) less
accumulated depreciation and impairment losses.
 The revaluation model. An item of PPE is carried at the revalued amount, being fair value less
accumulated depreciation and impairment losses.
The choice of model is an accounting policy choice, which must be applied across an entire class of
PPE.

4.2 Fair value

Fair value is normally taken to be market value:

Land and buildings Fair value is determined from market-based evidence by

appraisal by professionally qualified valuers
Plant and equipment Fair value is usually their market value determined by
appraisal
Specialised items of property, plant Fair value is determined by using a depreciated replacement
and equipment (which are rarely sold) cost (as there is no market-based evidence of fair value)

Worked example: Depreciated replacement cost

An asset that originally cost CU30,000 and is halfway through its useful life will have a carrying amount of
50% of cost = CU15,000; if it would cost CU40,000 to buy a replacement asset with the same operating
characteristics, then the depreciated replacement cost would be 50% of the replacement cost = CU20,000.

4.3 Frequency of valuations

Revaluations should be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the balance sheet
date.
So, the frequency of the valuation depends on the volatility of the fair values of individual items of
PPE. The more volatile the fair value, the more frequently revaluations should be carried out.
The maximum interval mentioned is five years, but longer could be justified if movements were very
small and slow.
The requirement for periodic revaluations is designed to prevent companies from revaluing assets
selectively.

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4.4 Classes of assets

Definition
Class of property, plant and equipment: A grouping of assets of a similar nature and use in an entity’s
operations.

Where an item of PPE is revalued, all other assets in the same class should also be revalued.
Again, this is designed to stop companies being selective about which items to revalue and to avoid financial
statements including a mixture of costs and values for like items.
BAS 16 provides examples of separate classes including the following:
 Land
 Land and buildings
 Machinery
 Motor vehicles
 Furniture and fixtures
 Office equipment

5 Accounting for revaluations

Section overview
 Revaluation gains are taken directly to equity as part of the revaluation surplus.
 Revaluation losses are recognised as an expense in profit or loss (i.e. in the income statement) unless
they relate to an earlier revaluation surplus.
 After revaluation, depreciation is based on the revalued amount.
 An annual reserves transfer is allowed amounting to the excess of actual depreciation over the
historical cost depreciation.

5.1 Increases in value

The basic rule is that increases in value on a revaluation are credited directly to equity. The effect of
this is that they:
 Do not appear in the income statement.
 Do appear in the statement of changes in equity.
The exception is that where such an increase reverses an earlier revaluation decrease on the same asset
that was recognised in profit or loss (see section 5.3 below), then the surplus should be recognised in profit
or loss, but only to the extent of the previous decrease. In practice, the surplus is treated so that the
overall effect is the same as if the original downward revaluation recognised in profit or loss had not
occurred.

5.2 Accounting for increases in value

The commonly adopted method of accounting for upward revaluations to fair value is to write the
original cost to fair value and write back the accumulated depreciation to revaluation reserve.

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Worked example: Revaluation increase

An entity acquires an item of PPE for CU50,000, which is depreciated over 20 years. Three years later the
asset is revalued to CU60,000. The useful life has not changed.
The revaluation will be accounted for as follows:
CU CU
DR Asset value (balance sheet) 10,000
DR Accumulated depreciation 7,500
(50,000/20  3)
CR Revaluation reserve 17,500

Interactive question 2: Revaluation [Difficulty level: Exam standard]

On 1 January 20X2, an asset has a carrying amount of CU100 and a remaining useful life of 10 years, with a
nil residual value. The asset is revalued on that date to CU50 and the loss is recognised in profit or loss.
The asset is depreciated straight-line over the next five years, giving a carrying amount of CU25 at 31
December 20X6. Then, on 1 January 20X7 when the remaining useful life is the unexpired 5 years, the asset
is revalued to CU60.
Requirement
State how much of the revaluation gain on 1 January 20X7 is recognised directly in equity and how much is
recognised in profit or loss.
Fill in the proforma below.

Solution
The revaluation gain on 1 January 20X7 is CU........................................
If the previous downward revaluation had not taken place the carrying amount on 31 December 20X6
would have been CU........................................
The 'excess' revaluation gain recognised directly in equity is CU........................................
The amount recognised in profit or loss is CU........................................
See Answer at the end of this chapter.

5.3 Decreases in value

The basic rule is that decreases in value on a revaluation are recognised as an expense and charged to
the income statement.
The exception is where such a decrease reverses an earlier revaluation increase on the same asset
that was recognised directly in equity and is held in the revaluation reserve, then the deficit should be
recognised directly in equity, but only to the extent of the previous increase.

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Worked example: Revaluation decrease

An item of land originally cost CU15,000. Two years ago it was revalued to CU20,000. Now the value has
fallen to CU13,000.
The double entry would be:
CU CU
DR Revaluation reserve 5,000
DR Income statement 2,000
CR Asset value (balance sheet) 7,000

5.4 Depreciation of revalued assets

Where an asset has been revalued, the depreciation charge is based on the revalued amount, less
residual value, from the date of revaluation. The asset’s residual value should also be re-estimated
on revaluation.

Definition
Residual value: The estimated amount that an entity would currently obtain from disposal of the asset,
after deducting the estimated costs of disposal if the asset were already of the age and in the condition
expected at the end of its useful life.

The whole of the depreciation charge is recognised in profit or loss. None is recognised directly in the
revaluation reserve. However, BAS 16 permits, and it is best practice to make, a transfer between
reserves.
The overall effect is that the income statement shows the economic benefit consumed, measured by
reference to the revalued figure for the asset, but distributable profits (i.e. those out of which dividends may
be declared) are not affected by extra depreciation on revalued assets.
The transfer is recorded as follows:
Amount of transfer = actual depreciation charged less equivalent charge based on original historical cost of
asset
Entry to record transfer:
DR Revaluation reserve X
CR Retained earnings X
This transfer is shown in the statement of changes in equity.

Worked example: Reserve transfer

An item of PPE was purchased for CU800,000 on 1 January 20X6. It is estimated to have a useful life of 20
years and is depreciated on a straight-line basis. On 1 January 20X8 the asset is revalued to CU850,000.
The useful life is unchanged. (Ignore residual value.)
CU

Actual depreciation for 20X8 based on revalued amount  850,000  47,222

 18 
Depreciation for 20X8 based on historical cost  800,000  (40,000)
 20 
Difference 7,222

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In the income statement for 20X8 a depreciation expense of CU47,222 will be charged. A reserve transfer
may be performed as follows:
CU CU
DR Revaluation reserve 7,222
CR Retained earnings 7,222
The closing balance on the revaluation reserve will therefore be as follows:
CU
Balance arising on revaluation (850 – 720) 130,000
Transfer of retained earnings (7,222)
122,778

5.5 Disposal of revalued assets

This is dealt with in section 8.4 below.

6 Depreciation
Section overview
 Depreciation is a means of spreading the cost of a non-current asset over its useful life.
 Each significant part of an item of PPE must be depreciated separately.
 Land should be accounted for separately from buildings.
 Residual values and useful lives must be reviewed annually. Any change must be treated as a change in
accounting estimate.
 There are a number of different methods of depreciation:
– Straight-line
– Diminishing balance (= reducing balance)
– Sum of the units

6.1 Objective of depreciation

Depreciation is an application of the accrual concept. Its objective is to charge to operating profit the
cost of using PPE in each period, so that at the end of its useful life the whole of the cost has been written
off. The cost of using an asset is the amount of economic benefits consumed.
Depreciation does not relate to the value of an asset as it is a cost-allocation concept, not a measure of
value changes. An increase in the current value of an asset does not itself justify not depreciating that asset.
The means of recognising an increase in value of an asset is to revalue the asset, which is a separate issue
from depreciation.

Definitions
Depreciation: This is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount: The cost of an asset, or other amount substituted for cost, less its residual value.
Useful life: This is:
 The period over which an asset is expected to be available for use by an entity, or
 The number of production or similar units expected to be obtained from the asset by an entity.

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6.2 Calculation and recognition

Each significant part of an item of PPE must be depreciated separately, although they may be grouped
together for depreciation charge purposes if they have the same useful lives and depreciation methods. So
an aircraft's engines will be depreciated separately from its airframe when they have different useful lives.
This is a natural consequence of the initial process of analysing the cost of an asset over its component
parts (see section 2 above).
Land and buildings are separable assets and accounted for separately, even when acquired
together. Land usually has an infinite life, whereas buildings do not. So buildings are always depreciable
assets, but land is not; the exception is that if the initial cost of land includes a provision for
dismantlement and restoration (see section 3.2 above), then that part of its cost is depreciated over the
period expected to benefit.
The depreciation charge is recognised in profit or loss, unless it can be included in the cost of an
asset. The valuation of inventories under BAS 2 Inventories includes depreciation charges on manufacturing
PPE.

Interactive question 3: Calculating depreciation [Difficulty level: Intermediate]

Requirement
Using the costs from Interactive question 1 and assuming there are no residual values, calculate the annual
depreciation charges for the facility.
Fill in the proforma below.
CU’000

See Answer at the end of this chapter.

6.3 Depreciable amount and depreciation period

The residual value and useful life of an asset must be reviewed at least each year end; any change is a
change in accounting estimate and must be accounted for prospectively under BAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. The accounting policy remains one of taking account of residual
values and useful lives; all that changes are the judgements as to what the values for these are.

Interactive question 4: Depreciation period [Difficulty level: Intermediate]

An asset has a cost of CU1,000, useful life of 10 years and residual value of CU200. At the end of year 2 of
its life, the remaining useful life was revised to 4 years, the residual value being unchanged.
Requirement
Calculate the depreciation charge for each of years 1 to 3 on the straight-line basis.

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Fill in the proforma below.

Solution
Year 1 Year 2 Year 3
(CU) (CU) (CU)
Cost
Accumulated depreciation
Carrying amount
Charge for the year (W)
WORKING

See Answer at the end of this chapter.

Points to note:
1 Depreciation continues to be recognised even if fair value (i.e. the open market price) is greater than
the carrying amount. This is for two reasons: the entity has no intention of selling the asset (so market
price is not relevant) and depreciation is, as has been noted, a cost-allocation concept, not a means of
revaluing an asset;
2 Depreciation ceases if residual value exceeds the carrying amount. The reason is that there is no
longer a depreciable amount.

6.4 Commencement of depreciation

Depreciation should commence when the asset is in the location and condition necessary for it to
be capable of operating in the manner intended. This is the case even if the asset is actually put into
use at a later date. Depreciation continues even if the asset lies idle, for example as a result of a fall in
market demand for its output. Depreciation only ceases when the asset is derecognised; the
treatment of assets held for sale is dealt with in section 8 below.

6.5 Factors affecting useful life

There are many factors affecting the useful life of an asset.
These include:
 Expected usage of the asset measured by reference to the asset's expected capacity or physical
output.
 Expected physical wear and tear.
 Technical or commercial obsolescence arising from changes or improvements in production, or
from a change in market demand.
 Legal or similar limits on the use of the asset, such as expiry dates of related leases.
These factors should be considered by management on the initial assessment of the asset's useful life and on
each subsequent annual review.

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6.6 Depreciation method

BAS 16 requires that a systematic basis should be used to allocate the depreciable amount over the
asset's useful life; the method should reflect the pattern in which the future economic benefits are
consumed. A number of methods are identified, which you should be familiar with from your Accounting
studies:
 Straight-line, whereby there is a constant charge each year, on the assumption that equal amounts of
economic benefit are consumed in each year of the asset's life.
 Diminishing (or reducing) balance, whereby the depreciation rate is applied to the opening
carrying amount. This method, which charges more depreciation in the early years of an asset's life
than in later years, could be appropriate in circumstances where over its life the asset becomes less
capable of producing a high-quality product.
 Sum of the units, whereby the charge is calculated by reference to the output each year as a
proportion of the total expected output over the asset's useful life.
Where the pattern of consumption of an asset's economic benefits is uncertain, a straight-line method
of depreciation is usually adopted. In practice, this method is by far the most widely used.

6.7 Change in method

Depreciation methods must be reviewed at least at each financial year end. A change in the pattern of
consumption of economic benefits may demand a change to the method. Any changes are changes in an
accounting estimate and are accounted for prospectively. The carrying amount of the asset is
depreciated under the new method over the remaining useful life, beginning in the period in which the
change is made in accordance with BAS 8.

Worked example: Change in depreciation method

Bord Ltd has a 31 December year end. On 1 January 20X3 it bought a machine for CU100,000 and
depreciated it at 15% per annum on the reducing balance basis. The residual value is nil.
On 31 December 20X6, the machine will be included in Bord Ltd's accounts at the following amount:
CU
Cost 100,000
Accumulated depreciation (47,800)
Carrying amount 52,200
During 20X7, the company decided to change the basis of depreciation to straight-line over a total life of 10
years, i.e. six years remaining from 1 January 20X7.

52, 200
New annual charge from 20X7 = = CU8,700 per annum.
6

6.8 Impairment
BAS 16 requires the provisions of BAS 36 Impairment of Assets to be applied.
The provisions of BAS 36 are dealt with in the next section. Any compensation received from third parties
for impaired PPE is recognised in profit or loss (where the impairment loss is charged), not set against the
cost of the PPE item.

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7 Impairment of assets

Section overview
 An asset is impaired if its recoverable amount is less than its carrying amount.
 The recoverable amount is the higher of:
– The asset's fair value less costs to sell, and
– Its value in use.
 Internal and external sources provide indications of possible impairment.
 For assets held at historical cost an impairment loss should be charged in profit or loss (i.e. as an
expense in the income statement).
 For assets held at a revalued amount the impairment loss is treated as a revaluation decrease.

7.1 Objective and scope of BAS 36 Impairment of Assets

Whenever an asset's recoverable amount falls to an amount less than its carrying amount, it
is said to be impaired. Its carrying amount in the balance sheet is therefore reduced to this recoverable
amount and, in most cases, an expense is recognised in the income statement. BAS 36 puts in place a
detailed method for carrying out impairment reviews and related accounting treatments and disclosures.
BAS 36 applies to all assets apart from those specifically excluded from the standard. It most commonly
applies to assets such as property, plant and equipment accounted for in accordance with BAS 16 and
intangible assets accounted for in accordance with BAS 38 Intangible Assets (we will look at intangible
assets in Chapter 6). The standard also apples to some financial assets, namely subsidiaries, associates and
joint ventures. Impairments of all other financial assets are accounted for in accordance with BAS 39
Financial Instruments: Recognition and Measurement, the detail of which is outside your syllabus.

7.2 Basic principle

The basic principle underlying BAS 36 is relatively straightforward. If an asset's value in the financial
statements is higher than its realistic value, measured as its 'recoverable amount', the asset is judged to have
been impaired.
The value of the asset should be reduced by the amount of the impairment loss. This loss should be
written off against profit immediately.
The main accounting issues to consider are therefore as follows:
1 How is it possible to identify when an impairment loss may have occurred?
2 How should the recoverable amount of the asset be measured?
3 How should an impairment loss be reported in the financial statements?

7.3 Indications of impairment

An entity should assess at each balance sheet date whether there are any indications of impairment to any
assets. The concept of materiality applies, and only material impairment needs to be identified.
If there are indications of possible impairment, the entity is required to make a formal estimate of the
recoverable amount of the assets concerned.
In assessing such indications of a possible impairment, BAS 36 requires an entity to consider, as a minimum,
the following:
 External sources of information:
– A fall in the asset's market value that is more significant than would normally be expected from
passage of time over normal use.
– A significant change in the technological, market, legal or economic environment of the business
in which the assets are employed.

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 PROPERTY, PLANT AND EQUIPMENT 5

– An increase in market interest rates or market rates of return on investments likely to affect the
discount rate used in calculating value in use.
– The carrying amount of the entity's net assets being more than its market capitalisation.
 Internal sources of information:
– Evidence of obsolescence or physical damage.
– Adverse changes in the use to which the asset is put.
– Indications that the economic performance of an asset is, or will be, worse than expected.
Even if there are no indications of impairment, the following assets must always be tested for impairment
annually:
 An intangible asset with an indefinite useful life
 Goodwill acquired in a business combination
(Intangible assets are covered in Chapter 6).

7.4 Measuring the recoverable amount of the asset

Definition
Recoverable amount of an asset: is the higher of:
 Its fair value less costs to sell, and
 Its value in use

7.4.1 Fair value less costs to sell

Definition
Fair value less costs to sell: the amount obtainable from the sale of an asset in an arm's length
transaction between knowledgeable, willing parties, less costs of disposal.

In other words an asset's fair value less costs to sell is the amount net of selling costs that could be
obtained from the sale of the asset. Selling costs include sales transaction costs, such as legal expenses.
A binding sales agreement is the best evidence of an asset’s fair value less costs to sell. Where there is
no binding sales agreement the following bases will be used:
 If there is an active market in the asset, the net selling price should be based on the market price
less costs to sell, or on the price of recent transactions in similar assets.
 If there is no active market in the asset it might be possible to estimate a net selling price using
best estimates of what 'knowledgeable, willing parties' might pay in an arm's length transaction and
deducting costs of disposal.
Selling costs cannot include any restructuring or reorganisation expenses, or any costs that have
already been recognised in the financial statements as liabilities.

7.4.2 Value in use

An asset's fair value less costs to sell is compared with its value in use in order to determine the
recoverable amount (see section 7.4 above).

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 Financial accounting

Definition
Value in use: the present value of the future cash flows expected to be derived from an asset.

The detailed guidance provided as to how to arrive at this value is not in the Financial Accounting syllabus,
but the following general points should be noted:
 Calculations should be based on reasonable and supportable assumptions.
 Projections should be based on the most recent budgets etc approved by management over a
maximum of five years, unless a longer period can be justified.
 Inflows and outflows should be estimated separately, based upon the asset's current condition
(so ignoring the benefits of restructurings not committed to and future performance enhancements).
 Financing and tax costs should be excluded.
 Account should be taken of net cash flows expected to arise on the asset's ultimate disposal.
Note the practical point that if one of the two elements in the recoverable amount has been
estimated as in excess of the asset’s carrying amount, then the asset is not impaired and there
is no need to estimate the value of the other element. So if fair value less cost to sell exceeds
carrying amount, as it well might in the case of freehold and leasehold properties, then there is no need to
estimate value in use. This is useful in relation to assets for which there is an active market, because fair
values can be estimated quickly and cheaply.

7.5 Accounting treatment of impairments

If the recoverable amount of an asset is less than the carrying amount, the difference is the impairment loss.
It should be described as such in the financial statements but the accounting treatment is similar to
increases and decreases arising on a revaluation (see section 5 above) whereby:
 An impairment loss for assets at a historical cost is treated as a decrease on revaluation and is
recognised as an expense in the income statement.
 If the impairment loss relates to an asset that has previously been revalued, then it is treated as
a revaluation decrease and not as an impairment loss. So in line with section 5.3 above it can first
be set against any balance relating to the same asset standing on the revaluation reserve, with any
excess being recognised in profit or loss.
 Depreciation charges in future accounting periods will be set to write off the revised carrying
amount, less residual value, over its remaining useful life.
In certain circumstances impairment losses incurred in one accounting period may be reversed in a later
period, but the relevant rules are outside the Financial Accounting syllabus.

Worked example: Impairment

The following details relate to a freehold property:
CU
Carrying amount (at date of revaluation) 1,000,000
Revalued to 1,600,000
Amount recognised in the revaluation reserve 600,000
Current carrying amount 1,500,000
Fair value 600,000
Value in use 800,000
The recoverable amount of the asset is CU800,000 (i.e. the higher of fair value and value in use).
An impairment loss of CU700,000 has occurred (1,500,000 – 800,000)

176 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

The impairment will be accounted for as follows:

CU CU
DR Revaluation reserve 600,000
DR Income statement 100,000
CR Property (carrying amount) 700,000

7.6 Disclosure
For all impairments, disclosure must be made for each class of assets of:
 The amount of any impairment loss recognised in profit or loss and the line item where it has been
included.
 The equivalent information about any impairment loss recognised directly in equity.
Note that compliance with the values part of this requirement will come through the BAS 16 reconciliation
of opening and closing balance sheet asset values (see section 9 below).
If an impairment loss for an individual asset is material to the financial statements as a whole, there
must be additional disclosure of:
 The events that led to the recognition of the loss.
 The amount.
 The nature of the asset.
 Whether the recoverable amount is fair value less costs to sell or value in use.
 The basis used to determine fair value less costs to sell (where the recoverable amount is fair value
less costs to sell).
 The discount rate used in the current estimate and any previous estimate of value in use (where the
recoverable amount is value in use).
If impairment losses are material only in aggregate, then a reduced amount of additional information
should be given. The following details must be disclosed:
 The main classes of assets affected by impairment losses.
 The main events and circumstances that led to the recognition of these impairment losses.

8 Derecognition of PPE

Section overview
 When the decision is made to sell a non-current asset it should be classified as 'held for sale'.
 An asset held for sale is valued at the lower of:
– Its carrying amount.
– Its fair value less costs to sell.
 No depreciation is charged on a held for sale asset.

8.1 General rule

An item of PPE shall be removed from the balance sheet (i.e. derecognised) when it is disposed of or
when no future economic benefits are expected from its use or disposal (i.e. it is abandoned).
The gain or loss on the disposal of an item of PPE is included in the income statement of the period
in which the derecognition occurs. The gain or loss is calculated as the difference between the net sale

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 Financial accounting

proceeds and the carrying amount, whether measured under the cost model or the revaluation model.
Gains may not be included in revenue in the income statement.
The process of selling an item of PPE involves the following stages:
 Making the decision to sell the item.
 Putting the item on the market, agreeing the selling price and negotiating the contract for sale.
 Completing the sale.
The issue is at what stage through this process should any gain or loss on the sale be recognised. These
matters are dealt with in BFRS 5 and there are different required treatments depending on whether the
item of PPE is measured under the cost model or the revaluation model.

8.2 Disposal of PPE measured under the cost model

Following the principle that any loss should be recognised immediately but any gain should only be
recognised when it is realised, BFRS 5's requirements in respect of PPE measured under the cost model are
that:
 When the carrying amount of a non-current asset will be recovered principally through sale
(rather than through continuing use), the asset must be classified as held for sale. In most cases, this
classification will be made at the time of the decision to sell.
 A non-current asset held for sale is measured at the lower of:
– Its carrying amount
– Its fair value less costs to sell (i.e. its net selling price)
The effect is that any loss (i.e. where the former value exceeds the latter) is recognised at the time of
classification as held for sale. But any gain (i.e. where the latter value exceeds the former) is not;
instead it is recognised according to the general rule in section 8.1 above.
 A non-current asset held for sale is presented separately from all other assets in the balance
sheet. BFRS 5 does not specify where this 'separate presentation' should be made, but these learning
materials follow the IASB's (non-mandatory) guidance on implementing BFRS 5 by presenting it
immediately below the sub-total for current assets.
 No depreciation is charged on a held for sale asset. The new valuation basis of fair value less costs
to sell approximates to residual value, so there is now no depreciable amount.
 The loss is an impairment loss, dealt with in the same way as other impairment losses under BAS
36.
On ultimate disposal, any difference between carrying amount and disposal proceeds is treated as a loss or
gain under BAS 16, not as a further impairment loss or reversal of the original impairment loss.

Interactive question 5: Asset held for sale I [Difficulty level: Intermediate]

An item of PPE was acquired on 1 January 20X5 at a cost of CU100,000. A residual value of CU10,000 and
a useful life of 10 years was assumed for the purpose of depreciation charges.
On 1 January 20X8 the asset was classified as held for sale. Its fair value was estimated at CU40,000 and the
costs to sell at CU2,000.
The asset was sold on 30 June 20X8 for CU38,000.
Requirements
(a) Show the journal entry to record the classification as held for sale.
(b) Show the entry in the income statement for the year ended 31 December 20X8.
(c) Describe how the answer to (b) would change if the sales proceeds on 30 June 20X8 were CU32,000.
Fill in the proforma below.

178 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

Solution
(a) Journal entry to record the classification as held for sale
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation
DR Non-current assets held for sale
DR Income statement (ß)
CR PPE – cost
(b) Income statement for the year ended 31 December 20X8
CU
Impairment loss on reclassification of non-current assets as held for sale
(c) Income statement for the year ended 31 December 20X8
In the income statement:


See Answer at the end of this chapter.

Interactive question 6: Asset held for sale II [Difficulty level: Intermediate]

These facts are as detailed in Interactive question 5, except that on classification as held for sale, the fair
value was estimated at CU80,000 and the costs to sell at CU3,000.
The asset was sold on 30 June 20X8 for CU77,000.
Requirements
(a) Show the journal entry to record the classification as held for sale.
(b) Show the entry in the income statement for the year ended 31 December 20X8.
Fill in the proforma below.

Solution
(a) Journal entry to record the classification as held for sale
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation
DR Non-current assets held for sale
CR PPE – cost
(b) Income statement for the year ended 31 December 20X8
CU'000
Gain on disposal of non-current assets held for sale

See Answer at the end of this chapter.

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 Financial accounting

8.3 Classification as held for sale

For the classification as held for sale to be made detailed criteria must be met:
 The asset must be available for immediate sale in its present condition.
 Its sale must be highly probable (i.e. significantly more likely than probable).
For the sale to be highly probable:
 Management must be committed to a plan to sell the asset.
 There must be an active programme to locate a buyer.
 The asset must be marketed for sale at a price that is reasonable in relation to its current fair
value.
 The sale should be expected to take place within one year from the date of classification.
 It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Other points to note:
1 An asset can still be classified as held for sale, even if the sale has not actually taken place
within one year. However, the delay must have been caused by events or circumstances beyond the
entity's control and there must be sufficient evidence that the entity is still committed to sell the asset.
2 If a balance sheet date intervenes between the classification as held for sale and the final disposal, fair
value less costs to sell may have fallen below or risen above the figure used on original classification.
Any fall is accounted for as a further impairment loss, while any rise goes to reduce the amount
of the original impairment loss, but cannot write the asset's carrying amount above its original
level.
3 The rules for disposal groups (where an operation comprising assets and liabilities is being sold) fall
outside the Financial Accounting syllabus.

8.4 Disposal of PPE measured under the revaluation model

For an item of PPE measured after recognition under the revaluation model and subsequently classified as
held for sale, there is a different accounting treatment of the difference between carrying amount and fair
value less costs to sell at the time of classification:
 Consistently with the accounting policy chosen, the asset must be revalued at fair value under BAS
16 immediately before the classification.
 'Revaluation' means that either a gain or loss will be recognised (whereas, as explained in section
8.2, for assets measured under the cost method, only a loss is recognised at the time of classification).
If the previous carrying amount is greater than fair value, there will be a loss; if it is less than fair value,
there will be a gain.
 Such a gain or loss is dealt with under BAS 16 (see section 5 above), so a gain is recognised in
revaluation reserve (except to the extent it reverses a loss previously charged to the income
statement) and a loss in the income statement (except to the extent it reverses a gain held in
revaluation reserve).
 Once revalued in this way, the measurement is then adjusted to the normal basis for held for sale
assets, so fair value less costs to sell. The effect is that the costs to sell are immediately
recognised in profit or loss as an impairment loss.

180 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

Interactive question 7: Disposal of revalued PPE [Difficulty level: Exam standard]

Land, which is not depreciated, was acquired on 1 January 20X2 at a cost of CU200,000 and revalued to
CU250,000 on 1 January 20X5. On 1 January 20X8 the asset was classified as held for sale. Its fair value was
estimated at CU235,000 and the costs to sell at CU5,000.
Requirements
(a) Show the journal entry to record the revaluation on 1 January 20X5.
(b) Show the journal entry to record the classification as held for sale on 1 January 20X8.
Fill in the proforma below.

Solution
(a) Journal entry to record the revaluation
CU'000 CU'000
1 January 20X5
DR PPE – at valuation
CR Revaluation reserve

(b) Journal entry to record the classification as held for sale

CU'000 CU'000
1 January 20X8
DR Non-current assets held for sale – fair value less costs to sell
DR Income statement – costs to sell
DR Revaluation reserve
CR PPE – at valuation

See Answer at the end of this chapter.

8.5 Disposal and gains held in revaluation reserve

If there is still a credit balance on the revaluation reserve relating to an asset that has been disposed of, this
balance should be transferred to retained earnings as a reserve transfer (the same treatment and
presentation as for the reserve transfer in respect of extra depreciation). The accounting entry is:
DR Revaluation reserve CUX
CR Retained earnings CUX
Note that some argue that as the income statement is the document in which the profits of an entity are
shown, it should, over time, include all the gains realised by an entity. They argue that the transfer of any
credit balance on the revaluation reserve should therefore be to the income statement, not retained
earnings, so the accounting entry should be:
DR Revaluation reserve CUX
CR Income statement CUX
This technique of taking gains previously recognised in the statement of changes in equity back through the
income statement is known as 'recycling' and is not permitted by BAS 16.

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Interactive question 8: Summary [Difficulty level: Intermediate]

On 1 January 20X1, Tiger Ltd buys for CU120,000 an item of property, plant and equipment which has an
estimated useful life of 20 years with no residual value. Tiger Ltd depreciates its non-current assets on a
straight-line basis. Tiger Ltd's year-end is 31 December.
On 31 December 20X3, the asset will be carried in the balance sheet as follows:
CU
Property, plant and equipment at cost 120,000
Accumulated depreciation (3  (120,000 ÷ 20)) (18,000)
102,000
On 1 January 20X4, the asset is revalued to CU136,000. The total useful life remains unchanged.
On 1 January 20X8 the asset is classified as held for sale, its fair value being CU140,000 and its costs to sell
CU3,000. On 1 May 20X8 the asset is sold for CU137,000.
Requirements
(a) Show the journal to record the revaluation.
(b) Calculate the revised depreciation charge and show how it would be accounted for, including any
permitted reserve transfers.
(c) Show the journal to record the classification as held for sale.
(d) Explain how these events will be recorded in the financial statements for the year ended 31 December
20X8.
Fill in the proforma below.

Solution
(a) Journal to record the revaluation
1 January 20X4 CU CU
DR PPE cost/valuation
DR PPE accumulated depreciation
CR Revaluation reserve
(b) Revised depreciation charge
Annual charge from 20X4 onwards CU CU
DR Income statement depreciation expense
CR PPE accumulated depreciation
Annual reserve transfer
DR Revaluation reserve
CR Retained earnings
Being the difference between the actual depreciation charge and the charge based on historical cost
(........................................).
Shown in the statement of changes in equity as follows:
Revaluation Retained
reserve earnings
CU CU
Brought forward X X
Profit for the year – X
Transfer of realised profits
Carried forward X X

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 PROPERTY, PLANT AND EQUIPMENT 5

(c) Journal to record classification as held for sale

At 1 January 20X8, balances relating to the asset will be as follows:
CU
Property, plant and equipment at valuation
Accumulated depreciation
Carrying amount
Revaluation reserve
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation
DR Non-current assets held for sale – fair value less costs to sell
DR Income statement – costs to sell
CR PPE – cost/valuation
CR Revaluation reserve (ß)

(d) Financial statements for the year ended 31 December 20X8

In the income statement:


Remaining balance on revaluation reserve is transferred to accumulated profits reserve as a reserve

transfer in the statement of changes in equity:
Revaluation Retained
reserve earnings
CU CU
Brought forward X X
Retained profit for the year – X
Transfer of realised profits
Carried forward X X
See Answer at the end of this chapter.

8.6 Abandonment of non-current assets

All these requirements within BFRS 5 which we have looked at so far apply to non-current assets classified
as held for sale because their carrying amounts will be recovered principally through a sale transaction.
They do not apply to non-current assets which are to be abandoned, for example by being
scrapped. Because there will be no sales proceeds, any recovery of the carrying amounts of such assets will
principally be through continued use.
Such assets continue to be measured and presented under BAS 16, with the effect that:
 The assets remain classified within their existing non-current asset category.
 Depreciation charges continue to be recognised.
 Any profit or loss on abandonment is recognised at the time of abandonment rather than at
the (usually earlier) time of the decision to abandon them.
BAS 16, not BFRS 5, also applies to the measurement and presentation of an asset taken out of use but not
scheduled for disposal; this might be the case if demand for its outputs has temporarily fallen away.

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 Financial accounting

9 Disclosures

Section overview
 BAS 16 requires a number of detailed disclosures.

9.1 BAS 16 requirements

As might be expected for items that form such a large part of many entities' balance sheets and where
management has to make so many important judgements (e.g. re residual values and useful lives), the
financial statements disclosure provisions are wide-ranging. All of the following may be shown for each class
of PPE by way of note:
 The measurement basis used (either cost model or revaluation model).
 The depreciation methods.
 The useful lives or depreciation rates.
 Gross carrying amounts and accumulated depreciation at the start and end of the period.
 A reconciliation of the net carrying amounts at the start and end of the period by reference to:
– Additions
– Disposals
– Acquisitions through business combinations
– The effects of revaluations
– Impairment losses
– Exchange differences (these fall outside the Financial Accounting syllabus)
– Other changes, e.g. assets classified as held for sale
 Details of assets pledged as security for loans and of contractual commitments to acquire PPE.
 Changes in accounting estimates in accordance with BAS 8.
 For assets which have been revalued:
– The effective date(s).
– Whether an independent valuer was involved.
– The methods and significant assumptions underlying the fair value estimates.
– The extent to which fair values were determined by reference to prices in active markets or
recent arm's length transactions.
– The carrying amount under the cost model.
– The total revaluation surplus, together with any movements in the period.
There are further, voluntary disclosures. These include:
 The carrying amount of temporarily idle PPE
 The gross carrying amount of any fully depreciated PPE that is still in use
 The carrying amount of PPE retired from active use and not classified as held for sale in accordance
with BFRS 5
 When the cost model is used, the fair value of PPE when this is materially different from the carrying
amount

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 PROPERTY, PLANT AND EQUIPMENT 5

Interactive question 9: Disclosure [Difficulty level: Exam standard]

1 RSBH Ltd’s balance sheet at its year end 31 December 20X6 includes the following property, plant and
equipment amounts:
Cost Accumulated
Depreciation
CU'000 CU'000
Freehold property 1,000 300
Plant and machinery 700 330
Fixtures and fittings 300 180
2 On 1 January 20X7 RSBH Ltd revalued its existing freehold property to its market value of CU1.2m
and bought additional freehold property at a cost of CU100,000. As a result of no depreciation being
charged on the land element, the effective rate of depreciation is 2% per annum on cost/valuation,
assuming no residual value.
3 On 1 April 20X7 RSBH Ltd classified as held for sale plant and machinery with an original cost of
CU360,000 and a carrying amount at 31 December 20X6 of CU100,000. It also bought plant and
machinery at a cost of CU400,000. Depreciation is to be charged at the rate of 10% per annum on
cost, assuming no residual value.
4 On 1 July 20X7 RSBH Ltd scrapped fixtures and fittings with an original cost of CU40,000 and
accumulated depreciation at 31 December 20X6 of CU25,000 and bought new fixtures at a cost of
CU80,000. Depreciation is to be charged at 15% per annum on cost, assuming no residual value.
Requirement
Prepare the reconciliation of the carrying amount of property, plant and equipment at 1 January 20X7 with
that at 31 December 20X7.
Fill out the proforma below.

Solution
RSBH Ltd: Reconciliation of opening and closing property, plant and equipment
Freehold Plant and Fixtures Total
Property Machinery and Fittings
CU'000 CU'000 CU'000 CU'000
Cost/valuation
I January 20X7
Revaluation
Additions
Classified as held for sale
Disposals
At 31 December 20X7

Depreciation
I January 20X7
Revaluation
Charge for the year (W)
Classified as held for sale (W)
Disposals (W)
At 31 December 20X7

Carrying amount
31 December 20X7
1 January 20X7

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 Financial accounting

WORKINGS
Plant and Fixtures
Machinery and Fittings
CU'000 CU'000
Depreciation charge for the year
Items reclassified/disposed of during year
Items owned throughout year
Items acquired during year

Accumulated depreciation on items reclassified/disposed of

Brought forward
Charge for year

See Answer at the end of the chapter Summary and Self-test

186 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

Summary

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 Financial accounting

Self-test
Answer the following questions.
1 Per BAS 16 Property, Plant and Equipment, which of the following should be capitalised as part of the
cost of an asset?
(1) Stamp duty
(2) Employee costs related to site selection activities
(3) Cost of site preparation and clearance
(4) Installation costs
A (1), (2) and (4) only
B (1) and (4) only
C (1), (3) and (4) only
D (2) and (3) only

2 Max Ltd has incurred the following expenditure in 20X0 in respect of its non-current assets.
CU
Servicing of plant and equipment 25,000
Repainting of warehouse 40,000
Modification of an item of plant in order to increase its capacity 12,000
Upgrading of machine parts to improve quality of product 7,500

In 20X0 what will be the charge for repairs and maintenance in the income statement in accordance
with BAS 16 Property, Plant and Equipment?
A CU19,500
B CU25,000
C CU65,000
D CU59,500

Questions 3 and 4
Using the following information, answer questions 3 and 4.
Lakeland purchased freehold land and buildings on 1 July 20W3 for CU380,000 including CU80,000 for the
land. The buildings had been depreciated at the rate of 4% per annum on cost for each of the ten years to
30 June 20X3. On 1 July 20X3 the property was professionally revalued at CU800,000 including CU200,000
for the land, an amount which was reflected in the books. At 1 July 20X3 it was estimated that the building
had a remaining useful life of twenty years and a residual value of CU100,000.
3 In accordance with BAS 16 Property, Plant and Equipment what should the surplus on revaluation be on
1 July 20X3?
A CU420,000
B CU540,000
C CU572,000
D CU620,000
4 In accordance with BAS 16 Property, Plant and Equipment what is the carrying amount of the freehold
land and buildings on 30 June 20X4?
A CU760,000
B CU765,000
C CU770,000
D CU775,000

188 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

5 Baboon Ltd adopts the revaluation model for its property, plant and equipment. It has collected the
following information.
Existing Open
use market
value value
CU CU
Office building 250,000 300,000
Warehouse (1) 175,000 200,000
Warehouse (2) (which is classified as held for sale) 150,000 210,000
None of the above assets are considered to be impaired and costs to sell are immaterial.
In accordance with BAS 16 Property, Plant and Equipment, at what total amount should the three
properties be carried in Baboon Ltd’s balance sheet?
A CU575,000
B CU710,000
C CU660,000
D CU635,000

6 Paris Ltd has a freehold property carried at a revalued amount of CU175,000. Due to a slump in
property prices its recoverable amount is now estimated to be only CU150,000. Its historical cost
carrying amount is CU160,000.
How should the above fall in value be reflected in the financial statements in accordance with BAS 16
Property, Plant and Equipment?
Income Statement
statement of changes
in equity
A DR CU25,000 –
B – DR CU25,000
C DR CU10,000 DR CU15,000
D DR CU15,000 DR CU10,000

7 On 1 June 20X6 Dempster Ltd bought a new factory. The building has an estimated useful life of 50
years, but the roof will require replacing after 25 years. The cost of replacement is currently
CU100,000. The total price of the factory was CU1,000,000.
In accordance with BAS 16 Property, Plant and Equipment what should the depreciation charge be for
the year ended 31 May 20X7?
A CU20,000
B CU22,000
C CU24,000
D CU40,000

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 Financial accounting

8 The following figures relate to an asset with a five-year life purchased on 1 January 20X1.
CU
Cost 100,000
Residual value at acquisition 10,000
Residual value at the end of 20X1 (taking into account current price changes) 15,000
What amount will be recognised in the income statement as depreciation in the year to 31 December
20X1 in accordance with BFRS?
A CU15,000
B CU17,000
C CU18,000
D CU20,000
9 Thames Ltd depreciates plant and equipment at 20% per annum on a diminishing balance basis. All
assets were purchased on 1 April 20X3. The carrying amount on 31 March 20X6 is CU20,000.
In accordance with BAS 16 Property, Plant and Equipment what is the accumulated depreciation to the
nearest thousand pounds as at that date?
A CU15,000
B CU19,000
C CU30,000
D CU39,000
10 On 1 January 20X1 Lydd Ltd purchased production machinery costing CU100,000, having an estimated
useful life of twenty years and a residual value of CU2,000. On 1 January 20X7 the remaining useful life
of the machinery is revised and estimated to be twenty-five years, with an unchanged residual value.
In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors what should the
depreciation charge on the machinery be in the year ended 31 December 20X7?
A CU3,226
B CU3,161
C CU2,824
D CU2,744
11 Upton Ltd makes up its financial statements to 31 December each year. On 1 January 20X0 it bought a
machine with a useful life of ten years for CU200,000 and started to depreciate it at 15% per annum
on the diminishing balance basis. On 31 December 20X3 the accumulated depreciation was CU95,600
and the carrying amount CU104,400. During 20X4 the company changed the basis of depreciation to
straight line.
In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors what is the
correct accounting treatment to be adopted in the financial statements of Upton Ltd for the year
ended 31 December 20X4?
A Depreciation charge CU10,440 Prior period adjustment Nil
B Depreciation charge CU17,400 Prior period adjustment Nil
C Depreciation charge CU20,000 Prior period adjustment CU15,600
D Depreciation charge CU20,000 Exceptional item CU15,600

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 PROPERTY, PLANT AND EQUIPMENT 5

12 During the year ended 31 March 20X3, Quark Ltd revalued its buildings by CU200,000 giving rise to
an increase in the annual depreciation charge of CU5,000.
In accordance with BAS 16 Property, Plant and Equipment which of the following statements about the
disclosure of these items is true?
A The statement of changes in equity will show an increase in the revaluation reserve of
CU200,000 and a reserves transfer of CU5,000
B The revaluation reserve in the statement of changes in equity will only disclose CU200,000 in
respect of the revaluation
C The income statement will only disclose an amount of CU200,000 in respect of the revaluation
D The income statement will disclose an amount of CU200,000 in respect of the revaluation and an
additional depreciation expense of CU5,000
13 Propane Ltd are undertaking an impairment review of assets following BAS 36 Impairment of Assets.
Investigations have uncovered the following:
Asset R has a carrying amount of CU60,000, a value in use of CU65,000 and a fair value less costs to
sell of CU30,000.
Asset Q has a carrying amount of CU100,000, a value in use of CU92,000 and a fair value less costs to
sell of CU95,000.
In accordance with BAS 36 Impairment of Assets what amount should be recognised as an impairment
loss in relation to these two assets?
R Q
CU CU
A 30,000 3,000
B 25,000 8,000
C 5,000 –
D – 5,000
14 Gandalf Ltd has a year end of 31 December. On 30 October 20X4 it classified an item of plant as held
for sale. At that date the plant had a carrying amount of CU13,200 and had been accounted for
according to the cost model. Its fair value was estimated at CU11,100 and the costs to sell at CU500.
On 15 December 20X4 the plant was sold for CU10,500.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts
should be recognised as impairment loss and loss on disposal in the income statement for the year to
31 December 20X4?
Impairment loss Loss on disposal
CU CU
A Nil 2,700
B 2,100 600
C 2,600 100
D 2,700 Nil

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 Financial accounting

15 Merlin Ltd has a year end of 30 June. On 1 October 20X3 it classified one of its leasehold properties
as held for sale. At that date the property had a carrying amount of CU98,500 and had been
accounted for according to the cost model. Its fair value was estimated at CU120,100 and the costs to
sell at CU2,500.
On 15 June 20X4 the property was sold for CU115,500.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts
should be recognised as gain on reclassification and gain on disposal in the income statement for the
year to 30 June 20X4?
Gain on Gain on
reclassification disposal
CU CU
A Nil 17,000
B 9,100 7,900
C 11,600 5,400
D 17,000 Nil
16 Dumbledore Ltd has a year end of 30 June. On 1 June 20X5 it classified one of its freehold properties
as held for sale. At that date the property had a carrying amount of CU567,000 and had been
accounted for according to the revaluation model. Its fair value was estimated at CU725,000 and the
costs to sell at CU3,000.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts
should be recognised in the financial statements for the year to 30 June 20X5?
Income statement Revaluation reserve
Gain on Impairment Revaluation
reclassification loss gain
CU'000 CU'000 CU'000
A Nil 3 158
B Nil Nil 155
C 155 3 Nil
D 158 Nil Nil
Questions 17 and 18
Using the following information, answer questions 17 and 18.
Arnold Ltd bought an asset on 1 October 20X1 for CU200,000. It was being depreciated over 20 years on
the straight-line basis. On 1 October 20X3, the asset was revalued to CU270,000. Subsequently, on 30
September 20X7 the asset was classified as held for sale. Its fair value was estimated at CU190,000 with
costs to sell of CU5,000.
17 In accordance with BAS 16 Property, Plant and Equipment what should the balance on the revaluation
reserve be at the year end of 30 September 20X4?
A CU70,000
B CU85,000
C CU86,500
D CU90,000
18 In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what should the
loss recognised in the income statement for the year ended 30 September 20X7 be on classification as
held for sale?
A CUNil
B CU5,000
C CU20,000
D CU25,000

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 PROPERTY, PLANT AND EQUIPMENT 5

19 The following information was disclosed in the financial statements of Maine Ltd for the year ended 31
December 20X2.
Plant and equipment
20X2 20X1
CU CU
Cost 735,000 576,000
Accumulated depreciation (265,000) (315,000)
Carrying amount 470,000 261,000

During 20X2 CU
Expenditure on plant and equipment 512,000
Impairment loss on reclassification of old plant as held for sale 50,000
Loss on the disposal of old plant 57,000
Depreciation charge on plant and equipment 143,000
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what were the
sales proceeds received on the disposal of the old plant?
A CU53,000
B CU153,000
C CU246,000
D CU267,000
20 The following information relates to the classification as held for sale of two machines by Halwell Ltd.
Machine 1 Machine 2
CU CU
Cost 120,000 100,000
Fair value less costs to sell 90,000 40,000
Anticipated gain/(loss) on sale (based on fair value) 30,000 (20,000)
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what was the
total accumulated depreciation on both machines classified as held for sale?
A CU80,000
B CU100,000
C CU120,000
D CU140,000
21 On 1 January 20X2 Dulson Ltd purchased a freehold office block for CU2.5 million. At the date of
acquisition the useful life was estimated to be 50 years and the residual value CU250,000. The
company policy is to depreciate freehold property on the straight-line basis. On 31 December 20X7
the residual value of the offices was estimated at CU450,000 due to an increase in commercial
property prices. The estimated useful life of the property remained unchanged.
What amount will be recognised in the income statement as depreciation in respect of the freehold
property in the year to 31 December 20X7 in accordance with BFRS?
A CU45,000
B CU40,556
C CU50,000
D CU36,500
22 Lakes Ltd owns an item of plant that has previously been revalued. There is currently a balance of
CU50,000 in the revaluation reserve relating to this asset. At the end of December 20X7 the company
performed an impairment review, which indicated that the item of plant was impaired as a result of the
consumption of economic benefits. The impairment is estimated to be CU35,000.
How will the impairment be recognised in the financial statements of Lakes Ltd for the year ended 31
December 20X7 in accordance with BFRS?
A Charged as an expense in the income statement
B Set off against the balance on the revaluation reserve

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 Financial accounting

23 PORSCHE LTD

Porsche Ltd has the following non-current assets at 1 January 20X7.

Cost Accumulated Carrying
depreciation amount
CU'000 CU'000 CU'000
Freehold factory 1,440 144 1,296
Plant and equipment 1,968 257 1,711
Motor vehicles 449 194 255
Office equipment and fixtures 888 583 305
4,745 1,178 3,567
You are given the following information for the year ended 31 December 20X7.
(1) The factory was acquired on 1 January 20X2 and is being depreciated over 50 years.
(2) Depreciation is provided on cost on a straight-line basis. The rates used are 20% for fixtures and
fittings, 25% for cars and 10% for equipment.
(3) On 1 January 20X7 the factory was revalued to an open market value of CU2.2 million and an
extension costing CU500,000 became available for use.
(4) The directors decided to change the method of depreciating motor vehicles to 30% reducing
balance to give a more relevant presentation of the results and of the financial position.
(5) Two cars costing CU17,500 each were bought on 1 January 20X7. Plant and fittings for the
factory extension cost CU75,000 and CU22,000 respectively.
(6) When reviewing the expected lives of its non-current assets, the directors felt that it was
necessary to reduce the remaining life of a two year old grinding machine to four years when it is
expected to be sold for CU8,000 as scrap. The machine originally cost CU298,000 and at 1
January 20X7 had related accumulated depreciation of CU58,000.
Requirements
(a) Prepare the disclosure notes for property, plant and equipment for the year ended 31 December
20X7 required by the BFRSs. (16 marks)
(b) Briefly explain the qualitative characteristics of financial information contained in BFRS Framework
illustrating your answer with references to the provisions of BAS 16 Property, Plant and Equipment.(8 marks)
(24 marks)
24 PLOVER LTD
Plover Ltd is a car manufacturing group and during the year ended 30 September 20X9 the following
transactions relating to property, plant and equipment took place.
1 New factory premises were finally completed and were ready for occupation on 1 March 20X9.
Production was not transferred to the factory until 31 August 20X9 due to a dispute with the
labour force arising from proposed redundancies.
Capitalised costs relating to the factory were CU1.1 million (including land of CU600,000) at 1
October 20X8 and the following costs have been incurred since then.
CU'000
Further construction costs 125
Additional legal fees 25
Management and supervision costs (allocation) 75
2 On 1 March 20X9, plant and machinery for a new highly computerised production and assembly
line became available for use in the factory. The external costs relating to this were CU800,000
and in addition the company also incurred the following.
 Labour costs of CU80,000 in installing the line (these were 20% higher than budgeted
because of the impact of industrial disputes).

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 PROPERTY, PLANT AND EQUIPMENT 5

 Management and supervision costs (allocation) of CU15,000.

 Start-up costs of CU30,000 incurred in testing the new process. CU20,000 of these were
necessary to ensure the line operated correctly. The remaining CU10,000 was incurred
when the directors held an 'open day' for their bankers to demonstrate the efficiency of the
new system.
3 The company still owns and uses part of the old factory but on 30 September 20X9 it was
classified as held for sale. It is expected to be sold by 31 December 20X9 for CU200,000 (after
spending CU25,000 to generally improve the property). The carrying amount of the factory at 1
October 20X8 is CU310,000 (cost CU500,000).
Depreciation rates are:
Freehold land and buildings – 2% per annum
Plant and machinery – 20% per annum
Requirements
(a) Prepare balance sheet extracts in relation to the above as at 30 September 20X9 and draft the
balance sheet note showing the movements on property, plant and equipment for the year
(working to the nearest CU000). (10 marks)
(b) Calculate the impairment loss arising on classifying the old facility as held for sale. (2 marks)
(12 marks)
Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.

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 Financial accounting

Technical reference

Point to note: The following sets out the examinability of the standards covered in this chapter.
BAS 16 All examinable
BAS 36 Paragraphs 1-64 (excluding paragraph 54), 126-128, and 130-131 are
examinable. The Appendices are not examinable.
BFRS 5 References to disposal groups and implementation guidance (except
paragraphs 11 and 12) are not examinable.
The paragraphs listed below are the key references you should be familiar with.

1 Property, plant and equipment recognition

 Recognise items of PPE, provided future economic benefits and reliable BAS 16 (7)
measurement of cost.

– Initial costs to acquire or construct. BAS 16 (10)

– Subsequent costs to add to, replace part of, or service.

 Separate into components, with different lives, e.g. inspections. BAS 16 (13)

2 Measurement at recognition
 At cost. BAS 16 (15)

– Purchase price. BAS 16 (16)

– Costs directly attributable to bringing asset into location and condition BAS 16 (16-17)
necessary for it to be capable of working as intended, including testing.
– Costs to dismantle/restore. BAS 16 (16)
 Some costs excluded because not directly attributable or after item is BAS 16 (19-22)
capable of working as intended, e.g. abnormal costs, general overheads, initial
losses, internal profits.
 Can include interest, but not compulsory. BAS 16 (22)

3 Measurement after recognition

 Choice of model: cost or revaluation to fair value. BAS 16 (29-31)
 Frequency: to ensure carrying amount not materially different from updated BAS 16 (31)
fair value.

– Maximum interval 5 years? BAS 16 (34)

 All assets in a single class must be treated in the same way. BAS 16 (36)

4 Accounting for revaluations

 Gain direct to equity as part of revaluation reserve, so in statement of BAS 16 (39)
changes in equity, not income statement.
– If reverse previous decrease, take to income statement to extent of that
decrease.
 Loss direct to income statement. BAS 16 (40)
– If reverse previous increase, take to revaluation reserve to extent of
that increase.
 Depreciation charge based on revalued amount.

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 PROPERTY, PLANT AND EQUIPMENT 5

 Annual reserve transfer re excess of actual depreciation over historical cost BAS 16 (41)
depreciation.

5 Depreciation
 Each significant part of PPE item depreciated separately. BAS 16 (43)
 Charge to profit or loss, unless included in inventory, construction contract BAS 16 (48)
or other PPE.
 Depreciate depreciable amount (i.e. cost less residual value (RV)) over BAS 16 (6)
estimated useful life (UL).
– RV is current estimate of disposal proceeds, net of disposal costs, if BAS 16 (6)
item already of the age and in the condition expected at the end of UL.
– UL is period over which asset expected to be available for use, BAS 16 (6 and 55)
commencing with when asset is available for use.
 Method should allocate depreciable amount systematically over useful life, so BAS 16 (60-61)
as to reflect consumption of future economic benefits.
 Annual reviews of RVs, ULs and depreciation methods. BAS 16 (51 and 61)
– Any changes accounted for prospectively. BAS 16 (51 and 61)

6 Derecognition
 Derecognise non-current asset when classified as held for sale or when no BAS 16 (67)
future economic benefits expected.

– Separate procedures where held for sale – see below

 Proceeds less carrying amount (current NBV) taken to income statement. BAS 16 (68)

 Revalued assets:

– Recycling of gains on disposal not permitted. BAS 16 (41)

– Reserve transfer re previously recognised gains now realised.

7 Disclosures BAS 16 (73,74 and 77)

 Measurement bases.
 Depreciation methods.
 Useful lives or depreciation rates.
 Gross, accumulated depreciation and net amounts at start and end of period.
 Additions, disposals, acquisitions through business combinations,
revaluations, impairments, depreciation, classification as held for sale.
 Assets pledged as security for loans and contractual commitments to acquire
PPE.
 For revalued assets, the dates, whether independent valuer used,
assumptions, reference to active markets/recent transactions, carrying
amount under historical cost convention, revaluation surplus.

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8 Impairment
 At each reporting date assess whether indication of impairment: BAS 36 (9)

– If so, estimate recoverable amount (RA).

– RA is higher of fair value less costs to sell and value in use (present BAS 36 (6)
value of future cash flows in use and on disposal).
 Review both external and internal information for evidence of impairment. BAS 36 (12)

 Calculation of value in use to be on reasonable and supportable bases. BAS 36 (33)

 Impairment loss where carrying amount exceeds RA. BAS 36 (59)

 Treat impairment loss as a revaluation loss: BAS 36 (60-61)

– Treat as revaluation gain if impairment loss subsequently reversed.

 Depreciate revised carrying amount over remaining useful life. BAS 36 (63)

 Disclosures:

– All impairments: BAS 36 (126)

 The amount of any impairment loss recognition/reversal in the
income statement (and the line item where included) and in
statement of changes in equity.
 If relevant, the reportable segment(s) to which
recognition/reversal relates.
– For a material impairment on an individual asset: BAS 36 (130)

 The events which led to the recognition/reversal.

 The amount.
 The nature of the asset and, if relevant, the reportable segment to
which it belongs.
 Whether the recoverable amount is the fair value less costs to sell
or its value in use, with information about how it was calculated.

9 Non-current assets held for sale

 Non-current asset classified as held for sale when carrying amount recovered BFRS 5 (6)
principally through sale.
– Must be available for immediate sale and sale (within 12 months of BFRS 5 (7)
classification) must be highly probable.
– If meet criteria after balance sheet date, a non-adjusting event under BFRS 5 (12)
BAS 10.
 Measured at lower of carrying amount and fair value less costs to sell. BFRS 5 (15)
– Any loss accounted for under BAS 36 (any gain is recognised on actual BFRS 5 (20)
disposal).
– Not depreciated. BFRS 5 (25)
 Presented separately from all other assets, immediately below the sub-total BFRS 5 (38)
for current assets.
 Different rules if asset previously revalued: BFRS 5 (18)

– Revalue before classification, with gain/loss accounted for under BAS 16.
– Costs to sell = impairment loss.
 Measurement and presentation of non-current assets to be abandoned per BFRS 5 (13)
BAS 16, not BFRS 5.

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 PROPERTY, PLANT AND EQUIPMENT 5

Answers to Self-test

1 C Per BAS 16 paragraph 16.

2 C
CU
Servicing 25,000
Repainting 40,000
65,000
Plant modification and upgrading creates future economic benefits from the asset and should be
capitalised (BAS 16 paragraph 7).

3 B

4 D
Land Buildings Total
CU'000 CU'000 CU'000
Cost on 1 July 20W3 80 300 380
Ten years' depreciation
(300  4%  10) (120) (120)
80 180 260
Revaluation surplus 120 420 540
200 600 800
Depreciation (600 – 100) / 20 (25) (25)
200 575 775

5 B Per BAS 16, under the revaluation model assets should be carried at fair value, which is usually
open market value (BAS 16, paragraph 32).
CU
Office building 300,000
Warehouse 1 200,000
Warehouse 2* 210,000
710,000
* Since classified as held for sale, this would be presented separately from all other assets.

6 C If an asset has previously been revalued, recognise the revaluation loss down to depreciated
historic cost (175,000 – 160,000 = CU15,000) in the statement of changes in equity, the balance
(160,000 – 150,000 = CU10,000) in the income statement (BAS 16 paragraph 40).

7 B Each significant part of an item of PPE must be depreciated separately (BAS 16 paragraph 43).
CU900,000/50 years = CU18,000
CU100,000/25 years = CU4,000
Total depreciation CU18,000 + CU4,000 = CU22,000

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 Financial accounting

8 B Residual value is the year-end estimate of the disposal value of the asset (BAS 16.51 and BAS
8.36(b)).
(CU100,000 – CU15,000)/5 years = CU17,000

9 B 31 March 20X6 Carrying amount = CU20,000

31 March 20X5 20,000/0.8 = CU25,000
31 March 20X4 25,000/0.8 = CU31,250
31 March 20X3 31,250/0.8 = CU39,062
Accumulated depreciation = (39,062 – 20,000)
= 19,062, i.e. approximately CU19,000

10 D Depreciable amount at 31 December 20X6 = (100,000 – 2,000)  14/20 = 68,600

Depreciation charge in 20X7 = 68,600  1/25 = CU2,744

11 B At 1 January 20X4 the carrying amount was CU104,400 and remaining useful life was six years.
Depreciation charge for 20X4 should be CU104,400/6 = CU17,400

12 A The revaluation gain is taken to the revaluation reserve. The additional depreciation is
transferred from retained earnings to the revaluation reserve.

13 D An asset is impaired when the recoverable amount is lower than the carrying amount of the
asset. To determine whether an asset is impaired, compare the recoverable amount to the
carrying amount. The recoverable amount is the greater of the value in use and the fair value less
costs to sell.
Asset R is not impaired as recoverable amount is greater than carrying amount. Asset Q is
impaired as recoverable amount of CU95,000 is lower than the carrying amount of CU100,000.

14 C An impairment loss should be recognised when the asset is classified as held for sale. This will be
the difference between the carrying amount (CU13,200) and its fair value less costs to sell
(CU11,100 – CU500 = CU10,600). An impairment loss of CU2,600 (13,200 – 10,600) is
therefore recognised at this point.
When the asset is actually sold any further loss or gain is treated as a loss or gain on disposal.
Here there is a further loss of CU100 (10,600 – 10,500).
15 A Although an impairment loss is recognised when a non-current asset measured under BAS 16's
cost model is classified as held for sale, any gain is only recognised when the asset is actually
derecognised (i.e. sold). Hence the only gain recognised is that on sale of CU17,000 (115,500 –
98,500).
16 A Where an asset has been held under the revaluation model and is subsequently classified as held
for sale the asset must be revalued to fair value immediately before the reclassification. Any gain
will be taken to the revaluation reserve and any loss to the income statement (except to the
extent that it reverses a gain held in the revaluation reserve). So here, a revaluation gain is
recognised of CU158,000 (725,000 – 567,000).
Once revalued in this way, the measurement is then adjusted to the normal basis for held for sale
assets, so fair value less costs to sell. The effect is that the costs to sell (here CU3,000) are
recognised in the income statement as an impairment loss.

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 PROPERTY, PLANT AND EQUIPMENT 5

17 B
Revaluation
reserve
CU
Gain on revaluation (W) 90,000
Reserve transfer

New depreciation – old depreciation to 30/9/X4  270,000 200,000  (5,000)

 – 
 18 20 
Balance at 30/9/X4 85,000
WORKING
CU
Cost 200,000
Less Depreciation (200,000  2/20) (20,000)
NBV at revaluation 180,000
Gain on revaluation 90,000
Valuation 270,000
18 B
At 30/9/X7
Revalued amount 270,000
Depreciation (270,000  4/18) (60,000)
Carrying amount at disposal 210,000
Revalue to fair value (190,000)
Loss to revaluation reserve 20,000

Revaluation reserve at 30/9/X4 85,000

Reserve transfer
New depreciation – old depreciation (5,000  3) (15,000)
Revaluation reserve at 30/9/X7 70,000
Impairment loss (20,000)
Balance c/f (transfer to retained earnings on disposal) 50,000
Because there was a sufficient balance on the revaluation reserve in respect of this asset to which
the loss could be charged, the only impairment loss taken to the income statement are the costs
to sell of CU5,000.
19 A
PLANT ACCOUNT (CARRYING AMOUNT)
CU CU
B/f 261,000 Depreciation 143,000
Additions 512,000 Loss on disposal 57,000
Impairment loss 50,000
Disposal proceeds (ß) 53,000
C/f 470,000
773,000 773,000
20 B
Machine 1 Machine 2
CU CU
Fair value less costs to sell 90,000 40,000
Carrying amount (ß) (60,000) (60,000)
Anticipated gain/(loss) on sale 30,000 (20,000)
Cost 120,000 100,000
Carrying amount (60,000) (60,000)
Accumulated depreciation 60,000 40,000
Total accumulated depreciation CU60,000 + CU40,000 = CU100,000

© The Institute of Chartered Accountants in England and Wales, March 2009 201
 Financial accounting

21 B Under BFRS
Depreciation 20X7

2,500,000 – 225,000 – 450,000

= CU40,556
45
22 B
23 PORSCHE LTD
(a) Notes to the financial statements for the year ended 31 December 20X7 (extracts)
1 Accounting policies
Property, plant and equipment
Freehold land and buildings are stated at a valuation. Other tangible non-current assets are
stated at cost, together with any incidental expenses of acquisition.
Depreciation is calculated so as to write off the net cost or valuation of tangible non-
current assets over their expected useful lives. Depreciation charges commence when an
asset becomes available for use. The rates and bases used are as follows.

Asset % pa Basis

Freehold land and buildings 2% Straight-line

Plant and equipment 10% Straight-line
Office equipment and fixtures 20% Straight-line
Motor vehicles 30% Reducing-balance

2 Profit from operations is stated after charging

CU
Depreciation of property, plant and equipment 562,000
3 Property, plant and equipment
Freehold Plant and Motor Office Total
land and equipment vehicles equipment
buildings and
fixtures
Cost or valuation CU000 CU000 CU000 CU000 CU000
At 1 January 20X7 1,440 1,968 449 888 4,745
Additions 500 75 35 22 632
Revaluations (W1) 760 – – – 760
At 31 December 20X7 2,700 2,043 484 910 6,137
Depreciation
At 1 January 20X7 144 257 194 583 1,178
Revaluation
adjustment (W1) ((144) – – – (144)
Charge for year 60 (W2) 233 87 (W3) 182 (W4) 562
(W5)
At 31 December 20X7 60 490 281 765 1,596
Carrying amount
At 31 December 20X7 2,640 1,553 203 145 4,541
At 1 January 20X7 1,296 1,711 255 305 3,567
(i) Freehold land and buildings were valued for the purposes of the 20X7 accounts at
open market value, with subsequent additions at cost. Their historical cost is
CU1,940,000 (W6) and the related accumulated depreciation is CU183,000 (W6).
(ii) The company’s depreciation policy on motor vehicles has been changed from a rate of
25% per annum on cost to a rate of 30% per annum on reducing balance in order to

202 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

give a more relevant presentation of the results and of the financial position. The effect
of this change has been to reduce the depreciation charge for the year by CU34,000
(CU121,000 – CU87,000).
(b) Qualitative characteristics and BAS 16
Understandability
Information must be readily understandable to users so that they can perceive its significance.
This is dependent on how information is presented and how it is categorised.
For example, BAS 16 requires disclosures to be given by each class of property, plant and
equipment so it will be clear what type of assets have been purchased during the year and what
types of assets have been sold. If this information were merged over one class it would be less
understandable.
Relevance
Information is relevant if it influences the economic decisions of users.
The choice of the revaluation model as a measurement model in BAS 16 provides relevant
information by showing up-to-date values. This will help give an indication as to what the entity's
underlying assets are worth.
Reliability
Information is reliable if it is free from error or bias, complete and portrays events in a way that
reflects their reality.
Although the revaluation model gives relevant information this information is generally seen to be
less reliable than the cost model – the other measurement model allowed by BAS 16. The cost
model is based on historic costs, which are not the most relevant costs on which to base future
decisions. However, historic cost is reliable being based on fact.
Comparability
Users must be able to compare information with that of previous periods or with that of another
entity. Comparability is achieved via consistency and disclosure.
BAS 16 allows comparability between the cost and the revaluation model (for example, to
facilitate comparisons between two companies who have adopted different models) by requiring
equivalent cost information to be disclosed under the revaluation model. It also requires
disclosures (in accordance with BAS 8) of the effect of a change in an accounting estimate such as
useful lives or depreciation rates. This facilitates comparison between different periods.
WORKINGS
(1) Freehold land and buildings revaluation
CU'000 CU'000
DR Freehold land and buildings (ß) 760
DR Accumulated depreciation (1,440  5 ÷ 50) 144
Cr Revaluation reserve (2,200 – 1,296) 904
(2) Freehold land and buildings depreciation charge

Valuation/cost at 1 January 20X7

CU2,700,000
Remaining useful life 45 years

 2,700, 000  CU60,000

Annual depreciation charge =  45 years 
 

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 Financial accounting

(3) Motor vehicles depreciation charge

CU'000
Carrying amount at 1 January 20X7 255
Additions 35
290
Depreciation – reducing balance method @ 30% 87
(4) Fixtures and fittings depreciation charge
CU'000
Cost at 31 December 20X7 910
Depreciation – straight-line method @ 20% 182
(5) Plant and equipment depreciation charge
CU'000
Cost at 1 January 20X7 1,968
Less Grinding machine (298)
Add Purchases for factory extension 75
1,745
Depreciation – straight-line method @ 10% 175

Grinding machine – cost less residual value (298 – 8) 290

Accumulated depreciation at 1 January 20X7 (58)
Carrying amount 232
The carrying amount must be written off over the machine's remaining useful life of four years.
CU
 232, 000  58,000
Depreciation charge  4 years 
 
Total depreciation charge for plant CU000
Grinding machine 58
Other plant 175
233
(6) Historical cost depreciation on freehold land and buildings
CU'000
Cost at 1 January 20X7 1,440
Addition – extension 500
Cost at 31 December 20X7 1,940
Accumulated depreciation at 1 January 20X7 144
Depreciation charge at 2% 39
Accumulated depreciation at 31 December 20X7 183

24 PLOVER Ltd
(a) Financial statement extracts
Balance sheet as at 30 September 20X9
CU'000 CU'000
ASSETS
Non-current assets
Property, plant and equipment 2,026
X

Current assets X
Non-current assets held for sale 175 X
X

204 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

Notes to the financial statements

Property, plant and equipment
Factory Plant Assets in Total
premises and the course
equipment of
construction
CU'000 CU'000 CU'000 CU'000
Cost
At 1 October 20X8 500 – 1,100 1,600
Additions (W1 & W2) – 887 150 1,037
Transfers 1,250 – (1,250) –
Classified as held for sale (500) – – (500)
At 30 September 20X9 1,250 887 – 2,137
Depreciation
At 1 October 20X8 (W4) 190 – – 190
Charge for the year (W3) 18 103 – 121
Classified as held for sale (W4) (200) – – (200)
At 30 September 20X9 8 103 – 111
Carrying amount
At 30 September 20X9 1,242 784 – 2,026
At 1 October 20X8 310 – 1,100 1,410
(b) Impairment loss
CU'000
Carrying amount brought forward 310
Depreciation to 30 September (W3) (10)
300
Recoverable amount (200 – 25) (175)
Charge to income statement 125
WORKINGS
(1) Additions to new factory
CU'000
Construction costs 125
Legal fees 25
150
(2) Additions to plant and equipment
CU'000
External costs 800
Labour (80,000  100/120) 67
Start-up costs 20
887
(3) Depreciation
CU'000
New factory ((1,250 – 600)  2%  7/12) 8
Old factory (500  2%) 10
18
Plant and equipment (887  20%  7/12) 103

(4) Old factory accumulated depreciation

CU'000
Brought forward at 1 October 20X8 (500 – 310) 190
Charge for year (W3) 10
200

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 Financial accounting

Answers to Interactive questions

Answer to Interactive question 1

Cost of facility
CU'000
Site preparation 400
Net income while site used as a car park Incidental, so taken to profit or loss –
Materials used (2,000 – 300) 1,700
Labour costs (4,000 – 500) 3,500
Testing of facility's processes 300
Sale of by-products (60)
Consultancy fees re installation and assembly 500
Professional fees 450
Opening of facility –
Overheads incurred:
– Construction 800
– General –
Relocation of staff to new facility –
Cost of dismantling facility 750
8,340
Allocated to components:
Safety inspection 150
To be replaced in 8 years (40%  (8,340 – 150)) 3,276
Remainder 4,914
8,340

Answer to Interactive question 2

The revaluation gain on 1 January 20X7 is CU35 (60 – 25).
If the previous downward revaluation had not taken place the carrying amount on 31 December 20X6
would have been CU50 (CU100 less five years' depreciation at CU10 each year).
The 'excess' revaluation gain recognised directly in equity is CU10 (60 – 50).
The amount recognised in profit or loss is CU25 (50 – 25).

Answer to Interactive question 3

CU'000
Annual charge re:
Over 3 years (150 ÷ 3) 50
Over 8 years (3,276 ÷ 8) 410
Over 20 years (4,914 ÷ 20) 245
705

206 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

Answers to Interactive question 4

Year 1 Year 2 Year 3
CU CU CU
Cost 1,000 1,000 1,000
Accumulated depreciation (80) (160) (320)
Carrying amount 920 840 680

Charge for the year (W) 80 80 160

WORKING
1, 000 - 200 1, 000 - 200 840 - 200
10 10 4

Answer to Interactive question 5

(a) Journal entry to record the classification as held for sale
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation (30%  (100 – 10)) 27
DR Non-current assets held for sale (40 – 2) 38
DR Income statement () 35
CR PPE – cost 100
(b) Income statement for the year ended 31 December 20X8
CU'000
Impairment loss on reclassification of non-current assets as held for sale 35
(c) Income statement for the year ended 31 December 20X8
With sales proceeds of CU32,000
 The impairment loss would remain the same
 Loss on disposal of CU6,000 would be included.

Answer to Interactive question 6

(a) Journal entry to record the classification as held for sale
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation (30%  (100 – 10)) 27
DR Non-current assets held for sale () 73
CR PPE – cost 100
As fair value less costs to sell is greater than carrying amount, there is no impairment loss at the time
of classification.
(b) Income statement for the year ended 31 December 20X8
CU'000
Gain on disposal of non-current assets held for sale (77 – 73) 4

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 Financial accounting

Answer to Interactive question 7

(a) Journal entry to record the revaluation
CU'000 CU'000
1 January 20X5
DR PPE – at valuation 50
CR Revaluation reserve 50
(b) Journal entry to record the classification as held for sale
CU'000 CU'000
1 January 20X8
DR Non-current assets held for sale – fair value less costs to sell (235 – 5) 230
DR Income statement – costs to sell 5
DR Revaluation reserve (250 – 235) 15
CR PPE – at valuation 250

Answer to Interactive question 8

(a) Journal to record the revaluation
CU CU
1 January 20X4
DR PPE cost/valuation (136,000 - 120,000) 16,000
DR PPE accumulated depreciation 18,000
CR Revaluation reserve (136,000 - 102,000) 34,000
(b) Revised depreciation charge
Annual charge from 20X4 onwards
CU CU
DR Income statement depreciation expense (136,000 ÷ 17) 8,000
CR PPE accumulated depreciation 8,000
Annual reserve transfer
DR Revaluation reserve 2,000
CR Retained earnings 2,000
Being the difference between the actual depreciation charge and the charge based on historical cost
(CU6,000).
Shown in the statement of changes in equity as follows:
Revaluation Retained
reserve earnings
CU CU
Brought forward X X
Profit for the year – X
Transfer of realised profits (2,000) 2,000
Carried forward X X
(c) Journal to record classification as held for sale
At 1 January 20X8, balances relating to the asset will be as follows:
CU
Property, plant and equipment at valuation 136,000
Accumulated depreciation (4  8,000) (32,000)
Carrying amount 104,000
Revaluation reserve (34,000 – (4  2,000)) 26,000
CU'000 CU'000
1 January 20X8
DR PPE – accumulated depreciation 32
DR Non-current assets held for sale – fair value less costs to sell 137
DR Income statement – costs to sell 3
CR PPE – cost/valuation 136
CR Revaluation reserve (ß) 36
172 172

208 © The Institute of Chartered Accountants in England and Wales, March 2009
 PROPERTY, PLANT AND EQUIPMENT 5

(d) Financial statements for the year ended 31 December 20X8

In the income statement:
 A charge of CU3,000 will be made for the costs to sell, classified as an impairment loss.
 No profit or loss on disposal will be shown, as the asset is sold for its fair value less costs to sell.
Remaining balance on revaluation reserve is transferred to retained earnings as a reserve transfer in
the statement of changes in equity:
Revaluation Retained
reserve earnings
CU CU
Brought forward X X
Retained profit for the year – X
Transfer of realised profits (26 + 36) (62,000) 62,000
Carried forward X X

Answer to Interactive question 9

RSBH Ltd: Reconciliation of opening and closing property, plant and equipment
Freehold Plant and Fixtures Total
Property Machinery and Fittings
CU'000 CU'000 CU'000 CU'000
Cost/valuation
I January 20X7 1,000 700 300 2,000
Revaluation 200 – – 200
Additions 100 400 80 580
Classified as held for sale – (360) – (360)
Disposals – – (40) (40)
At 31 December 20X7 1,300 740 340 2,380

Depreciation
I January 20X7 300 330 180 810
Revaluation (300) – – (300)
Charge for the year (W) 26 73 48 147
Classified as held for sale (W) – (269) – (269)
Disposals (W) – – (28) (28)
At 31 December 20X7 26 134 200 360

Carrying amount
31 December 20X7 1,274 606 140 2,020
1 January 20X7 700 370 120 1,190
WORKINGS
Plant and Fixtures
Machinery and Fittings
CU'000 CU'000
Depreciation charge for the year
Items reclassified/disposed of during year
(360  10%  1/4) and (40  15%  1/2) 9 3
Items owned throughout year
((700 – 360)  10%) and ((300 – 40)  15%) 34 39
Items acquired during year (400  10%  3/4) and (80  15%  1/2) 30 6
73 48

Accumulated depreciation on items reclassified/disposed of

Brought forward 260 25
Charge for year (360  10%  3/12) 9 3
269 28

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210 © The Institute of Chartered Accountants in England and Wales, March 2009