2020/03/14

PROPERTY, PLANT & EQUIPMENT (PPE)

A GUIDE TO INTERNATIONAL FINANCIAL REPORTING STUDY OBJECTIVES:

1. IDENTIFICATION OF PPE
2. RECOGNITION OF PPE
Chapter 5 3. ELEMENTS OF COST
2019 4. MEASUREMENT OF INITIAL COST
5. FOREIGN CURRENCY AND HEDGING
PROPERTY, PLANT & EQUIPMENT 6. GOVERNMENT GRANTS
IAS 16; IFRIC 1 & IFRIC 5
7. BORROWING COSTS
8. ASSET REVALUATIONS

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PROPERTY, PLANT & EQUIPMENT PROPERTY, PLANT & EQUIPMENT

STUDY OBJECTIVES: REFERENCES:

9. DEPRECIATION ISSUES
a) IAS 16 Property, Plant & Equipment
10. REVALUATION OF PPE b) IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
11. IMPAIRMENT & COMPENSATION FOR IMPAIRMENTS c) IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds (see Chapter 13 – Provisions and contingencies)
12. DERECOGNITION d) Chapter 5: Prescribed text book: A Guide to International Financial Reporting
13. CHANGES IN DECOMMISIONING /RESTORATION PROVISIONS – IFRIC 1
14. COMISSIONING RIGHTS TO INTERESTS ARISING FROM DEFUNDS – IFRIC 5
15. DISCLOSURE

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IDENTIFICATION OF PPE IDENTIFICATION OF PPE

1. IAS 16 para 6, defines PPE as tangible assets

3. Example:
 held for use in production/supply of goods/services,
 for rental to others, or for administrative purposes
Do the following qualify as PPE?
 and are expected to be used during more than one period
 Goods purchased for resale
2. Important to distinguish between:
 Trademarks purchased with a useful life of 10 years
 investment property
 Plant acquired under a finance lease
 NCA held‐for‐sale
 Own‐use factory building under construction
 inventories
 Office building held for rental income
 intangible assets
 3‐year old truck fleet held‐for‐sale
 financial assets
 Replacement of a major part in a machine
 monetary assets
 Investment property under construction

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RECOGNITION OF PPE ELEMENTS OF COST

1. Recognition of PPE ‘borrows’ conceptual framework principles for both initial and 1. Cost is the purchase price & any directly attributable costs to bring the asset to the
subsequent costs: location & working condition necessary for it to be capable of operating in the manner
Meets the definition of an asset ‐ intended by management, for example:
• an economic resource controlled by the entity as a result of past events • The purchase price
Meets the recognition criteria – • Import duties
• Meets the definition criteria and provides users with information that is relevant and a faithful • Non‐refundable purchase taxes (e.g. VAT if non‐refundable)
representation
• Site preparation
Once recognised, select a basis for measurement.
• Initial delivery & handling costs and installation & assembly costs
2. The concept of ‘component accounting’ is very important for PPE
• Costs of testing the asset less any selling proceeds from items produced during the
3. Major spare parts, standby & servicing equipment meet the definition of PPE
testing phase
4. Safety & environmental equipment, indirectly necessary for the entity to obtain future
• Professional fees
economic benefits from its other assets, is accounted for as PPE
• NOTE: cost is reduced by any trade discounts, volume rebates & settlement discounts
5. Replacement parts are capitalised, e.g. relining of furnaces, seats & galleys in aircraft
(however, day‐to‐day servicing costs are expensed)
ILLUSTRATIVE EXAMPLE 5.1 Chapter 5, Page 4
6. Major inspection costs are recognised as costs of PPE

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ELEMENTS OF COST MEASUREMENT OF INITIAL COST

1. Examples that are NOT PPE costs are:

• Relocating costs 1. Measured at its cost (define?)
• Opening a new facility  PV if deferred payment terms
• Launch costs
2. If equity instruments is purchase consideration:
 use fair value of asset acquired unless…
2. For initial measurement of installed PPE, see:  i.e. refer to IFRS 2 Share based payments
• ILLUSTRATIVE EXAMPLE 5.2, Chapter 5, pages 5 – 6
3. Asset exchanges:
3. For recognition of inspection costs, see:  cost of asset acquired is measured at fair value
 is it the fair value of asset acquired or given up?
• ILLUSTRATIVE EXAMPLE 5.3, Chapter 5, page 7  use carrying amount of asset given up if:
 no commercial substance to transaction
4. Dismantling, removal & restoration costs are included when an asset in acquired (other than  fair values not reliably measurable
to produce inventories)
4. ‘Cost’ of asset leased under finance lease?

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FOREIGN CURRENCY & HEDGING ACCOUNTING FOR GOVERNMENT GRANTS & DISCLOSURE OF
GOVERNMENT ASSISTANCE
1. The spot rate is used if PPE is acquired in a foreign currency. IAS 20 requires government grants related to PPE to be recognised as either
• deferred income, or
2. With regard to hedged items: • by deducting the grant against the CA of the PPE

Hedged item ‐ creates the exposure to risk of changes in fair value or of ILLUSTRATIVE EXAMPLE 5.4 Chapter 5, pages 8 – 9
variability in cash flows, e.g. foreign creditor, foreign loan
Hedge instrument ‐ instrument used to reduce/offset the risk exposure on the Government grants related to income are presented either:
hedged item, e.g. FEC or options • separately as “other income” in the Statement of Comprehensive Income, or
• deducted from the related expense
3. See chapter 21 – Foreign Currency Transactions

Any repayments of government grants are treated as a change in estimate

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COST‐ SELF‐CONSTRUCTED ASSETS (INCLUDING BORROWING BORROWING COSTS

COSTS)
Costs of a self constructed asset include: Qualifying assets include:
• PPE
• Any component costs (as discussed previously) • Investment property
• Costs of construction (excluding internal profits and abnormal wastage) • Inventories produced under construction contracts
• Costs of employee benefits arising directly from the construction
• Borrowing costs capitalised i.t.o. IAS 23 Qualifying assets take a substantial period of time to get ready for their intended use/sale

Core principle i.r.o. borrowing costs: Qualifying assets exclude:

• Inventories (investments and products) produced in production lines over short time periods
Borrowing costs directly attributable to the acquisition, construction or production of a
qualifying asset are capitalised as part of the cost of the asset.

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BORROWING COSTS cont. BORROWING COSTS cont.

Where funds are raised specifically for the production of a qualifying asset:
Borrowing costs include:
• Costs attached to funds are capitalised but reduced by any earnings on investment of surplus funds
• Interest expense (effective interest rate method)
• Finance charges on finance leases
Where general funds are used (i.e. funds the business already has e.g. bank o/d):
• Exchange differences on foreign borrowings if they represent interest rate differentials
• Apply a suitable weighted average capitalisation rate
• Costs associated with preference shares when (or part) classified as a liability
START capitalising from date when ALL the following apply:
• Expenditures are being incurred
Borrowing costs exclude:
• Borrowing costs are being incurred
• Actual or imputed cost of equity (including preference shares if not classified as a liability)
• Activities to prepare the asset have begun

STOP capitalising when substantially all activities to prepare asset are completed

ILLUSTRATIVE EXAMPLES 5.5 and 5.6 Chapter 5, pages 12 ‐ 14

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SUBSEQUENT EXPENDITURE DEPRECIATION ISSUES

1. Allocate cost to significant parts (components)

Use same principles used for initial recognition  and depreciate components separately
 (e.g. aircraft engine and aircraft frame)
Subsequent expenditure must: 2. Depreciation to P/L but can also be capitalised
• Meet the definition of an asset, and  e.g. inventories; intangible assets (R&D costs)
• Recognition criteria 3. Residual values and useful life reviewed at each reporting date
 if changed, treat as change in accounting estimate
Day‐to‐day servicing is expensed  meaning of ‘residual value’ ? (… the estimated amount an entity would
currently obtain from disposal of the asset, after deducting estimated
disposal costs, if the asset were already of the age & in the condition
ILLUSTRATIVE EXAMPLE 5.7 Chapter 5, pages 15 ‐ 16 expected at the end of its useful life)
ILLUSTRATIVE EXAMPLE 5.9 Chapter 5, page 18

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DEPRECIATION ISSUES – cont. DEPRECIATION ISSUES – cont.

4. If residual value = or > CA: 5. Depreciation starts:

 depreciation charge is zero  when the asset is available for use
 may resume in future though  and ceases earlier of date that asset is classified as held‐for‐sale or is de‐recognised

6. Land is not depreciated

ILLUSTRATIVE EXAMPLE 5.10 Chapter 5, page 19
7. Buildings always depreciated unless… (list!)

8. Review depreciation method at each reporting date

 method reflects pattern of future expected benefits expected to be consumed
 may be significant change in expected pattern of consumption
 latter is a change in accounting estimate (e.g. RB vs SL)

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REVALUATIONS OF PPE REVALUATIONS OF PPE cont.

IAS 16 allows 2 alternative accounting models: To explain the accounting entries, see Plant A in ILLUSTRATIVE EXAMPLE 5.11, Chapter
• Cost model, and 5, pages 22 – 23.
• Revaluation model.
Information (in R’000):
The accounting policy must be applied to an entire class On 1 January an asset with a cost of R5 000 and accumulated depreciation of R2 000 is
revalued to R10 000. The company depreciates its plant using SL over 10 years with a
It must be possible to measure the fair value of the PPE reliably to use revaluation model nil residual value. The tax rate is 35%.

• Two methods can be used to record the revaluation (see next 3 slides) Required: Prepare the JE to record the revaluation assuming:
• DT arises as there has been an increase in the CA of the asset without a corresponding • Acc deprn is adjusted to equal the difference between the gross CA and the CA of
increase in the TB the asset (Method 1) .
• Acc deprn is eliminated against the gross CA of the asset. The resultant net CA is
restated (Method 2).

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REVALUATIONS cont. – Method 2: Acc deprn is eliminated

REVALUATIONS cont. – Method 1: Adjust accumulated deprn
against the gross CA of the asset

Method 2
Method 1
Debit Credit Debit Credit
R’000 R’000 R’000 R’000
Plant A Plant A
Plant – valuation 16 667 Plant – valuation 10 000
Plant – cost 5 000 Plant – cost 5 000
Accumulated depreciation 4 667 Accumulated depreciation 2 000
Revaluation surplus ‐ OCI 4 550 Revaluation surplus ‐ OCI 4 550
Deferred taxation (SOFP) 2 450 Deferred taxation (SOFP) 2 450
1 January 20.0: Revaluation 1 January 20.0: Revaluation
(NB – Acc deprn account is R6.667m after JE processed)

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ASSET REVALUATIONS – cont. REVALUATIONS cont.

Revaluation increase: Revaluation decrease:

 gain recognised in ‘other comprehensive income ‐OCI’ and accumulated in
equity under ‘revaluation surplus’  If asset’s CA is decreased as a result of a revaluation, and there exists a
credit balance in revaluation reserve in respect of asset, then recognise
OR decrease in OCI
 recognised in P/L to the extent it reverses a revaluation decrease of the
same asset previously recognised in P/L  If decrease>revaluation reserve i.r.o that asset, excess is recognised in
P/L

 If no credit balance relating to a previous revaluation of asset in

revaluation reserve, recognise in P/L

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ASSET REVALUATIONS – Taxation implications IMPAIRMENT OF PPE

1. At reporting date, if there are indicators of impairment:

 Recognise deferred tax on revaluation  review carrying amounts
 for impairment
 Para 51B of IAS 12 clarifies: Deferred Tax consequences of revaluing
non‐depreciable PPE (e.g. land), shall be measured at the amount that 2. Impairment occurs if recoverable amount is less than carrying amount
would arise were land to be sold
3. Recoverable amount is the higher of fair value less cost to sell or value in use
 Capital Gains Tax effects will therefore arise from such revaluations
4. NB> Prior year impairment losses may be reversed
ILLUSTRATIVE EXAMPLES 5.12 & 5.13 Chapter 5, pages 24 – 26 5. Details of impairment dealt with in IAS 36 Impairment of assets – see Chapter 11

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COMPENSATION FOR IMPAIRMENTS DE‐RECOGNITION

1. Such compensation included in P/L when becomes receivable 1. Besides disposal, assets are also de‐recognized if no future economic benefits
are expected from use or disposal
2. Identify the separate economic events separately and account for separately
12. Gains/losses on de‐recognition:
3. Separate economic events are:  recognised in P/L
 the impairment  not classified as revenue
 the de‐recognition (if applicable)  is the difference between net disposal proceeds and carrying amount
 compensation from third party (e.g. insurance company)  may be treated differently on sale and leaseback
 the cost of items restored/ purchased as replacements
3. Date of disposal of PPE is date is when recipient obtains control per
ILLUSTRATIVE EXAMPLE 5.14 Chapter 5, page 28 satisfaction of performance obligations i.t.o. IFRS 15

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DE‐RECOGNITION CHANGES IN DECOMMISSIONING/RESTORATION PROVISIONS

4. Entities that routinely sells PPE that was previously held for rental purposes ‐ 1. Initial cost includes estimate of dismantling/restoration – IAS 16
P68A of IAS 16  note link with IAS 37 re provision
 e.g. Avis Car Rentals  what if changes in existing provision? … IFRIC 1 applies
 such assets are transferred to inventories when they cease to be rented  e.g. due to changes in expected CFs or discount rate
and become held for sale 2. If cost model used:
 and are transferred at their carrying amounts  change in liability added to /deducted from cost of asset
 proceeds from sale recognized as revenue per IFRS 15  if deducted – cannot exceed carrying amount – if so, excess recognised in
 IFRS 5 Non‐current Assets Held for Sale does not apply P/L
 if added – may be an ‘impairment indicator’, if so test for impairment
5. De‐recognize the carrying amount of the replaced part
 whether or not depreciated separately
 may use the cost of replacement as indication of cost ILLUSTRATIVE EXAMPLE 5.15 Chapter 5, page 29

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RIGHTS TO INTEREST ARISING FROM DECOMMISSIONING DISCLOSURE

FUNDS – See chpt 13
1. IFRIC 5 ‐ applies to accounting in the FS of a contributor 1. For each class of PPE:
 for interests arising from decommissioning funds  measurement bases used
 where the assets are administered separately  depreciation methods
 and contributor’s right to access the assets are restricted  useful lives / depreciation rates
2. Accounting for interests in a “fund” (meaning??)
 recognition of obligation to pay decommissioning costs and recognition of 2. Gross carrying amounts and accumulated deprecation
its interests in the fund separately  accumulated depreciation aggregated with accumulated impairment
 contributor to determine if it has control, joint control or significant losses
influence and account for fund accordingly
 if no control, joint control or significant influence, recognize right to 3. Reconciliation of the carrying amount ‘note’ to AFS
receive reimbursement from the fund i.t.o. IAS 37  from beginning of year to end of year
12.3 Accounting for obligations to make additional contribution
 e.g. bankruptcy of another party, use IAS 37 accounting.. 4. For other disclosures ‐ refer to Chapter 5, pages 33 to 34

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