20 Applied Aucting SUMMARY OF PROPERTY, PLANT AND EQUIPMENT Definition Property, Plant and Equipment are tangible Kems that are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes and are expected to be used during more than one period. Recogaltion | in recording property, plant and equipment in the financial position the ; following conditions should be met: ! + Itis probable that the future esonomic benefits associated with the asset ‘vill flow to the enterprise. | + The cost of the asset has a value that can be measured reliably. | initia “An Tom of propeny, plant and equipment shall be initially measured at its | Measurement? | purchase price, including any cost directly atiributable to bringing the asset to Valuation the location and condition necessary for it to be capable of operating in the ‘manner intended by the management. Cost also includes the initia estimate of dismantling costs thet are recognized as provision at the date of acquisition. The purchase price of an item of property, plant and equipment is the ‘cash price equivalent atthe recognition date. | . Lf payment ie defeired beyond normal credit terms, the difference | between the cash price equivalent and the total payment is recognized 9s finance cost over the credit period. = If the asset is acquired by issuing equity securities of the enterprise, its purchase price is the fair value of the asset received or the fair value of the seoutities issued, whichever is more reliably measurable, i = The cost of an item of property, plant and equipment acquired in ‘exchange for a nonmonetary asset (or combination of monetary and non- monetary assets) is measured at fair value, unless the transaction lacks commercial substance or the fair volue of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. * An item of property, plant and equipment acquired through | fgrants/donation is initially recorded at fair market value at the time of donation. = An asset constructed by the enterprise using its own facilities is the total of direct materials, direct labor, and reasonably allocated overhead and | capitalized borrowing costs, J!Audit of Property, Plantand Equipment 308 [Subsequent | Measurement Valeation ‘After initial recognition, an entity shall choose either the cost model or the revaluation model and shall epply that policy to an entire class of property, plant and equipment. * Using the cost model, property, plant and equipment shall be carried at cost less any accumulated depreciation and any accumulated impairment loss. * Under the revaluation model, an item of property, plant and equipment | whose fair value can be measured reliably shall be carried at a revelued | amount, being its fair value at the date of the revaluation less any subsequent depreciation and subsequent impairment loss. ‘Once an item of property, plant and equipment is revalued, the entire class to which that asset belongs shall likewise be revalued, Revaluation must be made with sufficient regularity so that the assets’ fair values are not materially different from their carrying amount on the statement of Financial position. | Financial | Position Classification! j Presentation Property, Plant and Equipment should be presented under non-current assets and divided into three groups: * Assets subject to depreciation, such as land improvements, buildings, equipment, machinery, furniture and fixtures Assets subject to depletion, such as ruineral and oil deposits Assets not subject t0 depreciation or depletion, such as land poo ‘Notes and : Disclosures | Requirements | | | i | { ' ‘ach class of property, plant, and equipment, should disclose the following: basis for measuring carrying amount depreciation method{(s) used usefu! lives or depreciation rates ‘g70ss carrying amount and accumulated depreciation and impairment losses * seconeiliation of the carrying amount at the beginning and the end of the period, showing: additions disposals acquisitions through business combinations revaluation increases or decreases impairment losses reversals of impairment losses depreciation net foreign exchange differences on translation other movements SAKA SARK Also disclose: + _ restrictions on titleApplied Auditing > expenditures to construct property, plaot, and equipment during the period ‘ ‘contractual commitments to acquire property, plant, and equipment + compensation from third parties for items of property, plant, and : equipment that were impaired, lost or given up that is included in profit or ! loss 18 property, plant, end equipment is stated at revatued amounts, certain additional disclosures are required: the effective date of the revaluation ‘whether an independent valuer was involved the methods and significant assumptions used in estimating fair values the extent to which fair values were determined directly by reference to | observable prices in an active market or recent market transactions on arm's length terms or were estimated using other valuation techniques * for each revalued class of property, the carrying amount that would have been recognized had the assets been carried under the cost model the revalustion surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders ‘Other Concerns: Depreciation Is the systematic allocation of the depreciable amount of an asset over its useful life, The choice by the enterprise of the depreciation method depends on the expected pattem of use for the item of property, plant and equipment, ‘The following methods are commonly used: a, Time-Factor Methods * Straight-line deprecation = Sum-of-the-years depreciation = Declining-balance depreciation b. Use-Factor Methods * Service hours depreciation * Productive-output depreciation . Group and Composite Methods The residua} vatne and the useful life of an asset shall be reviewed at least at each financial year-end, and if expectations differ from previous estimates. the change/s shall be accounted for as a change in accounting estimates and will require an adjustment in the depreciation for the current and future years. Likewise, the depreciation method applied to an asset shall be reviewed at Teast at each financial year-end and, if there has been a significant change it the expected pattern of consumption of the future economic benefits, the method shall be changed to reflect the change pattem. The remaining depreciable amount of the asset shalt be depreciated in the current year and future periods based on the new method of depreciation.‘Audit of Property, Plent and Equipment 207 An enterprise should write down the canying Value of an asset to Te recoverable amoumt if the asset has suffered impairment in value. An | impairment loss is recognized as an expense in the period when the | impairment oeours. However, for an asset carried at a revalued amount, the impairment is treated as reduction of the amount of revaluation surplus pertaining to that asset and any further decrease in the value should be recognized in profit or loss. When an asset's value recovers after recording the initial impairment, recovery of the impairment loss is taken up in profit or loss to the extent of the impairment loss previously recorded minus the amount recovered through lower depreciation. However, if the asset is ‘measured using the revaluation model, any recovery in value is credited to profit or Joss to the extent of the previously recovered impairment loss Pertaining to the asset (net of amount recovered through lower depreciation); ‘ny further inerease in revalued amount is credited to revaluation surplus. Subsequent expenditure on property, plant and equipment is only recognized as asset when it is probable that future economic benefits associated with the item will flow to the enterprise and the expenditure significantly improves the Present condition of the asset beyond its originally assessed standard of performance, When the subsequent cost is capitalized, the increased in carrying amount of the asset is to be depreciated over the remaining useful life. The carrying amount of an item of property, plant and equipment shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal, When @ previously rented item of property, plant and equipment is held for sale on a routine basis, this item is reclassified as inventories and its disposal Proceeds are recorded as revenues, Likewise, if an item of property, plant and equipment is held for sale and ils remaining carrying amount will be Tecovered through a sale transaction rather than through continuing use, this item és reclassified as current assets under the caption “Assets Held for Sale” provided that the asset must be available for immediate sale and the safe is highly probable. Entities engaged in extractive activities shall formulate its accounting policies on the recognition of exploration and evalustion assets. If recognized, exploration and evaluation assets shall be initially measured at cost, On the Statement of financial position, the exploration and evaluation assets shall be Slassified elther as property, plant and equipment or intangible assets depending on the nature of the assets, They are measured on the statement of financial position following either the cost model or the revaluation model.