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PROPERTY, PLANT & EQUIPMENT – Lecture

Historical Cost of Property, Plant and Equipment

Cash Basis – is the cash price (net of trade discounts and rebates) and other incidental costs incurred
in connection with its acquisition plus necessary costs incurred to bring the asset to its present location and
condition and to prepare the asset for its intended use.

On Account Subject to Cash Discount – is the purchase price (net of trade discounts and rebates), net
of the cash discount whether taken or not and other incidental costs incurred in connection with its
acquisition plus necessary costs incurred to bring the asset to its present location and condition and to
prepare the asset for its intended use.

By Installment (but with a cash price) –is the cash price and other incidental costs incurred in
connection with its acquisition plus necessary costs incurred to bring the asset to its present location and
condition and to prepare the asset for its intended use.

By a Deferred Installment Plan (without a cash price) – is the present or discounted value of all
future payments.

Issuance of Debt or Equity Securities –is the fair market value of the asset received or securities
issued whichever is clearly determinable.

Donation –the asset received is initially measured at its fair market value with a corresponding credit
to Additional Paid in Capital/Share Premium.

Transfer of PPE from a Customer – the asset received is measured at its cost. The deemed cost of
that asset is tits fair value on the date of transfer. If
there are separately identifiable services received by the customer is exchange for the transfer, then the
recipient should split the transaction into separate components as required by IAS 18. If there is only one
component identified, revenue is recognized when the service is performed (which could, for example, be as
soon as access to a utility network is provided). IFRIC 18 provides guidance on how to identify the entity’s
obligation to provide one or more separately identifiable services in exchange for the transferred asset – and,
therefore, how to recognize revenue:

 If the entity has only one service obligation, it would recognize revenue when the service is
performed.
 If the entity has more than one separately identifiable service obligation, it should allocate the fair
value of the total consideration received to each service and recognize revenue from each service
separately in accordance with IAS 18.
 If the entity has an obligation to provide ongoing services, the period over which revenue is
recognized is generally determined by the terms of the agreement with the customer. If the
agreement does not specify a period, the revenue shall be recognized over a period no longer than
the useful life of the transferred asset used to
o Provide the ongoing series

Exchange with Commercial Substance – the fair market value of the asset received or asset
surrendered whichever is clearly determinable. Gain or loss is recognized in their entirety.

Exchange without Commercial Substance – the asset received is initially measured at carrying value
or impaired value. Gain is not recognized however if there’s objective evidence that the non-cash asset given
up is impaired the amount of impairment loss is recognized.

An exchange transaction has commercial substance when:

a. The Cash flows of the asset received differ from the cash flows of the asset transferred and the
difference is significant relative to the fair value of the asset exchanged.
b. The entity specific value of the portion of the entity’s operations affected by the transaction changes
as a result of the exchange is significant relative to the fair value of the asset exchanged. The entity
specific value is the present value of the cash flows an entity expects to arise from the continuing use
of an asset and from its disposal at the end of its useful life.

Examples of Directly Attributable Costs

a. Cost of employee benefits arising directly from construction of acquisition of the item of PPE
b. Costs of site preparation
c. Initial delivery and handling costs
d. Installation and assembly costs
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e. Costs of testing whether the asset is functioning properly, after deduction the net proceeds from
selling any items produced while bringing the asset to that location and condition (such as samples
produced when testing the equipment)
f. Professional fees

Examples of costs that are not costs of an item of PPE

a. Cost of opening a new facility

b. Cost of introducing a new product or service (including cost of advertising and promotional activities)
c. Cost of conducting business in a new location or with a new class of customer (including costs of staff
training)
d. Administrative and other general overhead costs

Subsequent Costs – the costs of the day to day servicing of an item of property, plant and equipment are
recognized in the profit or loss as they are incurred. Costs of day-to-day are primarily the costs of labor and
other consumables, and may include the cost of small parts. The purpose of these expenditures is often
described as “repairs and maintenance” (PAS 16)

Parts of some PPE may require replacement at regular intervals. Items of the PPE may also be
acquired to make a less frequently recurring replacements or to make a non-recurring replacements. Such
items of the PPE is recognized (when it is probable that future economic benefit associated with the item of
PPE will flow to the entity and the cost of the item can be measured reliably) but the carrying amount of those
parts that are replaced is derecognize (PAS 16).

Measurement after Recognition:

Cost Model – after recognition as an asset, an item of PPE shall be carried at its cost less any
accumulated depreciation and any impairment loss.

Revaluation Model – after recognition as an asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any
subsequent accumulated depreciation and any subsequent impairment losses. Revaluation shall 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 balance sheet date.

Depreciation– is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation of an asset begins when it is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by the management.

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance with PFRS 5 and the date that the
asset is derecognized. Therefore, depreciation does not cease when the asset becomes idle or retired from
active use unless the asset is fully depreciated. However, under the usage methods of depreciation, the
depreciation can be zero while there is no production.

The residual value and 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 an
accounting estimate.

Depreciation is recognized even if the fair value of the asset exceeds its carrying value, as long as the
asset’s residual value does not exceed its carrying amount.

The depreciation amount of an asset is determined after deduction its residual value. In practice the
residual value of an asset is often insignificant and therefore immaterial in the calculation of the depreciable
amount.

The residual value of an asset may increase to tan amount equal to or greater than the carrying value
of the asset. If it does, the asset’s depreciation charge is zero unless and until its residual value subsequently
decreases to an amount below the asset’s carrying amount.

The depreciation method applied to an asset shall be reviewed at least at each financial year-end, if
there has been a significant change in the expected pattern of consumption of the future economic benefits
embodied in the asset, the accounting estimate in accordance with PAS 8.

Derecognition – an item of property plant and equipment should be derecognized when:

a. It is disposed of
b. No future economic benefits are expected from its use or disposal.
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Gain or Loss on Derecognition:

IAS/PAS 16 requires that the gain or loss on derecognition of an item of property, plant and equipment is the
difference between the estimated net disposal proceeds and the carrying amount. The consideration
receivable or received is measured at fair value. Therefore, if payment is deferred, the consideration is
recognized at the cash price equivalent. The difference between the cash price equivalent and the actual
amount of receivable is treated as interest receivable under IAS/PAS 18 over the period of credit. The gain or
loss is reported in the profit or loss for the period in which derecognition occurs. The only exception is where
IAS/PAS 17 requires a different treatment on sale and leaseback.

Exploration and Evaluation (E&E) Assets – are merely those E&E expenditures that have been
capitalized as assets in accordance with the entity’s accounting policy.

Exploration and Evaluation Expenditures – related to costs incurred on the explorationand

evaluation of potential mineral reserves and resources and includes cost such as exploratory drilling and
sample testing and the costs of pre-feasibility studies. Exploration and evaluation expenditure for each area
of interest other than that acquired form the purchase of another mining company is carried forward as an
asset provided that one of the following conditions is met:

 Such costs are expected to be recouped in full through successful development and exploration of
the area of interest or alternatively, by its sale; or
 Exploration and evaluation activities in the area of interest have not yet reached a stage which
permits a reasonable assessment of the existence or otherwise of economically recoverable reserves
and active and significant operations in relation to the area are continuing or planned for the future.

Purchased exploration and evaluation assets are recognized as assets at their cost of acquisition or at fair
value of purchased as part of a business combination.

Measurement of Exploration and Evaluation Assets:

Initial recognition measurement – exploration and evaluation assets shall be measured at costs.

Elements of Cost of Exploration and Evaluation Assets

The following expenditures that might be included in the initial measurement of exploration and evaluation
asset (the list is not exhaustive)

a. Acquisition of rights to explore

b. Topographical, geological, geochemical and geophysical studies
c. Exploratory drilling
d. Trenching
e. Sampling
f. Activities in relation to evaluating the technical feasibility and commercial viability of extracting a
mineral resource

Costs related to activities undertaken prior to commencement of E&E activities, which is presumed to be
before the entity has obtained the legal rights to explore a specific area, and costs incurred for the
development of mineral resources after the E&E phase are not covered by the standard and therefore
should be accounted for in accordance with other applicable IFRS and the Framework. In practice, this
usually results in the immediate expensing of costs incurred prior to obtaining exploration licenses and the
treatment of development costs as intangible assets accounted for under IAS 18 Intangible Assets.

Obligation for removal and restoration:

Obligations for removal and restoration incurred as a result of E&E activities are recognized in
accordance with IAS 37 Provisions, contingent liabilities and contingent assets. This means if an entity has an
obligation to restore an area of interest damaged by its E&E activities in that are, it must recognize a liability
for that restoration as the related damage is incurred.

Subsequent measurement of exploration and evaluation assets:

Exploration and evaluation assets must be measured using the cost or revaluation model. The
revaluation model in IAS 38 requires the existence of an active market, whereas the revaluation model in IAS
16 only requires that fair value be reliably measurable. Note that regardless of which model is selected, cost
or revaluation, it must be applied consistently.

Impairment of exploration and evaluation assets:

E&E assets shall be assessed for the impairment when facts and circumstances suggest that the
carrying amount of an exploration and evaluation asset may exceed its recoverable amount. When facts and
circumstances suggest that the carrying amount exceeds the recoverable amount and entity shall measure,
present and disclose any resulting impairment loss in accordance with IAS36 except as provided in IFRS/PFRS
6 par. 21.
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Classification of exploration and evaluation assets:

An entity shall classify exploration and evaluation assets as tangible or intangible according to the
nature of the assets acquired and apply the classification consistently. Some exploration assets are treated as
intangible such as drilling right whereas others are tangible such as vehicles and drilling rigs. To the extent
that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption
is part of the cost of the intangible asset. However, using a tangible asset to develop an intangible asset does
not change a tangible asset into an intangible asst.

Depletion – is a systematic allocation of the cost of the natural resource or wasting asset. The computation
of depletion expense is an adaptation of the productive output method of depreciation.

When structures and improvements are constructed in connection with the removal of natural
resources and their usefulness is limited to the duration of the project, it is reasonable to recognize the
depreciation on such properties using the output method. However, when the structures and improvements
provide benefits expected to terminate prior to the exhaustion of the natural resource, the cost of such
improvements should be allocated on the basis of the expected number of units to be extracted or produced
during the life of the improvements or on a time bases, whichever is more suitable.

Equipment used in the exploration and development activity should be depreciated using the shorter
of the life of the natural resource or life of the equipment, provided the equipment will be of no use after the
natural resource has been totally exhausted. However, if the equipment is of a significant use after the
natural activity is over, the equipment should be depreciated using its own estimated life.

Revaluation of Property, Plant and Equipment:

After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be
carried at a revalued amount being its fair value at the date of revaluation less any subsequent accumulated
depreciation and any subsequent impairment losses. Revaluation shall 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 balance sheet date.

The frequency of revaluation depends upon the changes in fair values of the items of
property, plant and equipment being revaluation. When the fair value of a revalued asset differs
materially from its carrying amount, a further revaluation is required. Some items of PPE experience
significant and volatile changes in fair value, thus, necessitating annual revaluation while items of PPE
with only insignificant changes in fair value may be necessary to revalue every three or five years.

When an item of PPE is revalued, any accumulated depreciation at the date of the revaluation
is treated in one of the following ways: (a) restated proportionately with the change in the gross
carrying amount of the asset so that the carrying amount of the asset after revaluation equals its
revalued amount (this method is often used when an asset is revalued by means of applying index to
its depreciated replacement cost), (b) eliminated against the gross carrying amount of the asset and
the net amount restated to the revalued amount of the asset (this method is often used for buildings).

If an asset’s carrying amounts increased as a result of a revaluation, the increase shall be

credited directly to equity under the heading revaluation surplus; however, the increase shall be
recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset
previously recognized in the profit or loss.

If an asset’s carrying amount is decreased as a result of revaluation, the decrease shall be

recognized in profit or loss; however, he decrease shall be debited directly to the equity under the
heading revaluation surplus to the extent of the credit balance existing in the revaluation surplus in
respect of that asset.

The revaluation surplus in the equity I respect of an item of PPE may be transferred to the
retained earnings/accumulated profits and losses when the asset is derecognized. This may involve
transferring the whole of the surplus when the asset is retired or disposed of. However, some of the
surplus may be transferred as the asset is used by an entity. In such a case, the difference between
depreciation based on the revalued carrying amount of the asset and depreciation based on the
asset’s original cost shall be transferred directly to Accumulated Profits & Losses/Retained Earnings.
The transfers from revaluation surplus to retained earnings/accumulated profits and losses shall be a
debit to the Revaluation Surplus and a credit to Accumulated Profits & Losses account.
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Impairment of Assets (Individual Asset):

a. Measurement of recoverable amount – is the higher of an asset’s fair value less cost to sell and value
in use.
b. The recoverable amount is determined for an individual asset, unless the asset does not generate
cash inflows from continuing use that are largely independent of those from other assets or groups of
assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the
asset belongs.
c. The fair value less cost to sell is a price in binding sale agreement in an arm’s length transaction,
adjusted for incremental costs that would be directly attributable to the disposal of the asset. If there
is no binding sale agreement but an asset is traded in an active market, fair value less cost to sell is
the asset’s market price less the costs of disposal. The appropriate market price is usually the current
bid price. When current bid prices are unavailable, the price of the most recent transaction may
provide a basis from which to estimate fair value less cost to sell, provided thatthere has not been a
significant change in economic circumstances between the transaction date and the date as at which
the estimate is made (PAS 36, paragraphs 25 and 26). If there is no binding sale agreement or
active market for an asset, fair value less cost to sell is based on the best information available to
reflect the amount that an entity could obtain, at the balance sheet date, form the disposal of the
asset in an arms’ length transaction between knowledgeable, willing parties, after deducting the
costs of disposal. In determining this amountand entity considers the outcome of recent transactions
for similar assets within the same industry. Fair value less cost to sell does not reflect a forced sale,
unless management is compelled to sell immediately (PAS 36, paragraph 27).
Cost of disposal, other than those that have already been recognized as
liabilities are deducted in determining fair value less cost to sell. Example of such costs is legal costs,
stamp duty and similar transaction taxes, cost of removing the asset, and direct incremental costs to
bring the asset into condition for sale. However, termination benefits (as defined in PAS 19) and cost
associated with reducing or reorganizing a business following the disposal of an asset are not direct
incremental costs to dispose of the asset.

d. Value in use is the present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful life.

Estimate of future cash inflows and outflows to be derived from continuing use of the asset and form
its ultimate disposal, should include the following:

1. Cash outflows that are necessarily incurred to generate the cash inflows from continuing use of
the asset (including cash outflows to prepare the asset for use) and that can be attributed or
allocated on a reasonable and consistent basis.
2. Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
3. Cash outflows include future overheads that can be attributed or allocated on a reasonable and
consistent basis, to the use of the asset.
4. Cash flows for future expenditure necessary to maintain or sustain an asset at its original
assessed standard.
5. Cash flows should include the cost savings and other benefits form the restructuring of the asset
where the company is committed to the restructuring.

Estimate of Future Cash Flows does not include the following:

 Cash inflows from assets that generate cash inflows that are largely independent of the cash inflows
form the asset under review (ex: Financial assets such as Receivables);
 Cash outflows that relate to obligations that already been recognized as liabilities (ex: Payables,
pensions or provisions);
 Cash flows for future restructuring to which the company is not yet committed;
 Cash flows for future expenditure that will improve or enhance the asset in excess of its original
assessed standard of performance;
 Cash inflows or outflows from financing activities;
 Income tax receipts or payments.

e. The discount rate or rate should be a pretax rate or rates that reflect(s) current market assessments
of the time value of money and the risks specific to the asset.
f. If the recoverable amount of an asset is less than its carrying amount, the carrying amount should be
reduced to its recoverable amount. The reduction is an impairment loss.
g. An impairment loss on a revalued asset is recognized as an expense in the income statement.
However, an impairment loss on a revalued asset I s recognized directly against any revaluation
surplus for the asset to the extent that the impairment loss does not exceed the amount held in the
revaluation surplus for that same asset.
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h. After the recognition of an impairment loss, the depreciation charge for the asset should be adjusted
in future periods to allocated the asset’s revised carrying amount, less its residual value (if any) on
systematic basis over its remaining useful life.

Reversal of Impairment Loss(Individual Asset): The

increased carrying amount of an asset other that goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined (net of amortization or
depreciation) had no impairment loss been recognized for the asset in prior years.

A reversal of an impairment loss for an asset other that goodwill shall be recognized immediately in
profit or loss, unless the asset is carried at revalued amount. Any reversal of an impairment loss of a
revalued asset shall be treated as a revaluation increase and credited directly to equity under the heading
Revaluation Surplus.

Reversal of Impairment Loss for an Individual Asset:

Cost Model – the reversal should not exceed the carrying value that would have been determined (net of
accumulated depreciation or amortization) had no impairment loss been recognized for the asset in prior
years. The amount of reversal be recognized immediately in the income statement.

Revaluation Model - the amount of reversal of impairment loss on a revalued asset is credited directly to
equity under the heading Revaluation Surplus, however, to the extent that an impairment loss on the same
asset was previously recognized as an expense in the income statement. A reversal of that impairment loss is
recognized as income in the income statement.

Impairment Loss (Group of Assets):

An impairment loss should be recognized for a cash-generating unit if, and only if, its recoverable
amount of the unit (group of units) is less than its carrying amount of the unit (group of units). The
impairment loss should be allocated to reduce the carrying amount of the assets of the unit (group of units)
in the following order:

First, to reduce the carrying amount of any goodwill allocated to the cash –generating unit (group of
units); and then to the other assets of the unit (group of units) on a pro-rata basis based on the carrying
amount of each asset in the unit (group units).

In allocating an impairment loss, the carrying amount of an asset should not be reduced below the highest
of (a) Its fair value less cost to sell (if determinable) (b) its value in use (if determinable) and (c) zero.
The
amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro
rata to the other assets of the unit (group of units).

The goodwill allocated to a cash-generating unit is reduced before reducing the carrying amount of
the other assets of the unit because of its nature.

Reversal of an Impairment Loss for a Cash-Generating Unit:

The reversal of an impairment loss for a cash generating unit shall be allocated to the assets of the
unit, except for goodwill, on a pro rata based on the carrying amount of those assets. These increases in
carrying amounts shall be treated as reversals of impairment losses for individual assets and recognized in
profit of loss, unless the assets are carried at revalued amount, that any reversal of impairment on revalued
assetor assets shall be treated as revaluation increase and credited directly to equity.

In allocating a reversal of an impairment loss for a cash-generating unit, the carrying amount of an
asset shall not be increased above the lower of: (a) its recoverable amount (if determinable), (b) the
carrying amount that would have been determined (net of accumulated depreciation or amortization) had
no impairment loss been recognized for the asset in prior periods.

The amount of reversal of the impairment loss that would otherwise have been allocated to the asset
shall be allocated pro rata to the other assets of the unit, except for goodwill
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Differences between IFRS for SMEs and Full IFRS

IFRS for SMEs Full IFRS

No scope exclusion for PPE held for sale and Scope exclusion for PPE held for resale and
exploration and evaluation of assets. exploration and evaluation assets.
Applies to PPE and investment property whose fair Only applicable to PPE, Investment property
value cannot be measured reliably without undue carried at cost is depreciated by following the
cost or effort. principles in IAS 16 – Property, Plant and
Equipment and not reclassified
The scope of any replacement part is capitalized if Capitalization of replacement parts are based on
the replacement is expected to provide the normal recognition criteria.
incremental future benefits.
If the major components of an item of PPE have Each part of an item of PPE with a cost that is
significantly different patterns of consumption of significant in relation to the total cost of the item
economic benefits, an entity must allocate the must be depreciated separately.
initial cost of the asset to its major components
and depreciate each component separately over
its useful life.
Borrowing costs are not capitalized. Borrowing costs are capitalized.
Only the cost model is applied. The cost or revaluation model is applied.
Re-assessment is only applicable when there is an Annual re-reassessment of the residual value,
indication of changes in the residual value, depreciation method, or useful life of an item of
depreciation method, or useful life of an item of PPE is required.
PPE.
When an investment property is reclassified due to When an investment property is reclassified to PPE
a reliable estimate of the property not being due to reliable estimate of the property not being
determinable without undue cost or effort, there is determinable, the residual value must be zero for
no prescription or limitation on the residual value depreciation purposes.
for depreciation purposes.
A plan to dispose of an asset before a Non-current assets held for sale are
previous expected date is an indication of classified separately limited to the fair
impairment. value less cost to sell.
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