Ppe MFRS116 (Part 1)

MFRS116
PROPERTY, PLANT AND EQUIPMENT
Microsoft account
KOLEJ UNIVERSITI POLY-TECH MARA
MFRS116
KOLEJ UNIVERSITI POLY-TECH MARA, KUALA LUMPUR
DEFINITION
‘Assets held by enterprise to generate income/ carry out its operations (not for resale in the
ordinary course of business)’.
MFRS116 defines PPE as tangible items that:

a) Are held for use in the production or supply of goods and services, for rental to others, or
for administrative purposes; and
b) Are expected to be used during more than one accounting period.
OTHER DEFINITION:
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MFRS116
INITIAL RECOGNITION
PPE shall be recognized as an asset if:
a) It is probable that future economic benefits associated with the item will flow to the entity;
and
b) The cost of the item to the entity can be measured reliably.
INITIAL MEASUREMENT/COSTS
PPE initially is measured at cost. The cost shall comprise:
a) Purchase price, including import duties and non-refundable purchase taxes, after deducting
trade discounts and rebates;
b) Any cost directly attributable to bringing the asset to the location and condition; and
c) The initial estimate of the costs of dismantling and removing the item.
Example 1: FINISHED GOODS/ PURCHASED ASSETS
On 1 January 2018, ABC Bhd places an order for a machine from a company in Japan. The
machinery is delivered on 31 January 2018 and the invoice price is RM300,000 with a cash
discount of 1% if paid within 30 days. Import duties and taxes amount to RM15,000.
The following costs are also incurred:
RM
Delivery and transport costs from Klang port to the 2,500
factory
Installation and commissioning costs 11,500
Administrative costs incurred in processing and 5,000
inspection
Start-up and pre-production costs 10,000
Required:
Determine the initial cost of the machine above.
Solution
RM
Purchase price 300,000
Less: 1% cash discount (3,000)
297,000
Import duties and taxes 15,000
Delivery and transport costs 2,500
Installation and commissioning costs 11,500
326,000
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Example 2:
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SUBSEQUENT COSTS
Replacement parts
Major inspection
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MFRS116
There are TWO types of expenditure/ COST:
1. CAPITAL EXPENDITURE
The cost can only be capitalized if the cost:
 Increase the useful life of the PPE
 Increase the production/capacity of the PPE
 Reduce the costs of production
ACCOUNTING TREATMENT: The costs incurred will be capitalized (added) to the initial costs
of the PPE.
2. REVENUE EXPENDITURE
 Maintenance costs, Renewal of licenses, Services costs, Training costs OTHERS
ACCOUNTING TREATMENT: The costs incurred will be expensed to Profit or Loss Account.
Exercise:
PAYMENTS TYPES OF EXPENDITURE
Purchase of delivery van by a retailer
Payment of wages to workers
Repayment of loan
Payment of electricity
Purchase of goods for resale
Payment to mechanics for upgrade the car engine
Renovation of toilet for restaurant
COST THAT CANNOT BE CAPITALISED
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MFRS116
SUBSEQUENT MEASUREMENTS
There are TWO types of subsequent measurement:
1. COST MODEL
When adopting cost model, the PPE shall be valued at INITIAL COST. Depreciation charged
will always be based on INITIAL COST.
2. REVALUATION MODEL
When adopting revaluation model, the PPE shall be valued at FAIR VALUE. Depreciation
charged will now be based on FAIR VALUE.
Adjustments to the initial costs shall be made. As a result, there will be:
1. SURPLUS ON REVALUATION
Occurs when:
FAIR VALUE of the PPE is more than NET CARRYING AMOUNT of the PPE.
ACCOUNTING TREATMENT:
The surplus value will increase (add) the PPE value and shall be transferred to ASSET
REVALUATION RESERVE.
2. DEFICIT ON REVALUATION
Occurs when:
FAIR VALUE of the PPE is less than NET CARRYING AMOUNT of the PPE.
ACCOUNTING TREATMENT:
The deficit value will decrease (less) the PPE value and shall be transferred to PROFIT
OR LOSS ACCOUNT.
In the event of subsequent revaluation, the amount of surplus and deficit shall be offset
between ASSET REVALUATION RESERVE and PROFIT OR LOSS ACCOUNT.
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MFRS116
Example 3
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MFRS116
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Example 4
TKO Bhd owns two pieces of freehold land in Selangor. Land A is purchased in 2011 at a cost of
RM10 million while land B is purchased in 2012 at a cost of RM12 million. The lands are classified
as property, plant and equipment.
Fair Market Value
Land A Land B
RM’m RM’m
Year revalued
2013 8 16
2015 12 11
2017 11 14
Required:
a) At each valuation date, calculate the surplus or deficit arising on the revaluation of both lands.
b) Determine the balances in the land and the revaluation reserve account respectively at the
end of each year.
c) Show the journal entry to record the revaluation at each revaluation date.
Solution
a) Surpluses and deficit:
Land A Land B
RM’m RM’m
Balance b/d – 1/1/2013 10 12
Revaluation surplus/(deficit) – 2013 (2) 4
Balance c/d : 31/12/2013 - 8 16
Balance b/d : 1/1/2015
Revaluation surplus/(deficit) – 2015 4 (5)
Balance c/d : 31/12/2015 12 11
Balance b/d : 1/1/2017
Revaluation surplus/(deficit) – 2017 (1) 3
Balance c/d – 31/12/2017 11 14
IMPORTANT!
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MFRS116
When adopting revaluation model, entity shall revalue:

 Only if Fair Value can be measure reliably.
 Should be carried out regularly (annually or every 3- 5 years).
 Whole class of asset which it belong should entirely be revalued.
 Land and building by appointing professional valuer.
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Ppe MFRS116 (Part 1)

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MFRS116

PROPERTY, PLANT AND EQUIPMENT

MFRS116 defines PPE as tangible items that:

Example 1: FINISHED GOODS/ PURCHASED ASSETS

There are TWO types of expenditure/ COST:

COST THAT CANNOT BE CAPITALISED

There are TWO types of subsequent measurement:

When adopting revaluation model, entity shall revalue:

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