MFRS 116- Property

Plant and Equipment

DR WAN ZURINA NIK ABDUL MAJID
PUAN ROSLINA SALWANI SHUKRI
PUAN WAN MUZLAINA MUSTAFA
UiTM CAWANGAN MACHANG, KELANTAN
 1. DEFINITION OF PROPERTY PLANT AND EQUIPMENT

• MFRS 116 Property plant and equipment defines property, plant and equipment as tangible assets that are :

• (a) held for use in the production or supply of goods or services, for rental to others, or for administrative or
maintenance purposes; and
• (b) expected to be used for more than one reporting period.
• Based on the above definition, it indicates that the classification of property, plant and equipment depends on both the
purpose of an asset and the entity’s intention with regard to the asset. The assets are used for the operations of the
business on a continuing basis in order to generate revenues.

• However, MFRS 116 Property, plant and equipment does not apply to the following :
• (a) property plant and equipment classified as held for sale in accordance with MFRS 5 Non-current Assets Held for
Sale and Discontinued Operations
• (b) a property calssified as investment property in accordance with MFRS 140 Investment Properties
• (c) biological asset related to agricultural activity other than bearer plant in accordance with MFRS 141 Agriculture.
This Standard applies to bearer plants but it does not apply to the produce on bearer plants
• (d) exploration and evaluation asset under MFRS 6 Exploration for and Evaluation of Mineral Resources; and
• (e) and mineral rights and mineral reserves
2. RECOGNITION OF PROPERTY, PLANT
AND EQUIPMENT

• An item of property, plant and equipment is

recognised as an asset if and only 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 can be measured reliably
. MEASUREMENT AT RECOGNITION OF PROPERTY, PLANT
AND EQUIPMENT
• An item of property, plant and equipment should initially be measured at cost regardless of whether they are bought, exchanged or
constructed. The cost of an item of property, plant and equipment shall comprised :
• (a)purchase price including import duties, non-refundable purchase taxes and after deducting trade discounts and rebates;
• (b) any 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 management; and
• (c)the initial estimate of the costs of dismantling or removing the assets and restoring the site on which it is located, the obligation for which
an entity incurs either when the item is acquired, or as a consequence of having used the item during a particular period, for purposes other
than to produce inventories during that period.
• These are cost that would have been avoided if the asset have not been purchased or constructed. General overhead costs cannot be allocated
to the cost of propety, plant and equipment.

• The initial cost of a property, plant and equipment shall not include:
• (a)Cost of opening a new facility
• (b) Cost of introducing a new product or services (advertising)
• (c)Cost of conducting business in new location or with new customer (staff training cost)
• (d) Administrative and general overhead cost
 Property, Plant and Equipment Purchased for
Cash
• Example 1
• On 1 January 2020 a piece of land was acquired and the following costs have been
incurred in relation to the land, invoice price RM8,800,000, trade discount
RM800,000, professional fees RM100,000, site clearance cost RM250,000, title
search fees RM9,000 and allocation of general overhead RM30,000. Present value
of future restoration cost of RM300,000 will be incurred at the end of 20 years.

• Required:
• (a) Determine the cost of the land above.
• (b) Show the journal entries to record the acquisition of the land.
• (a) The
Solution:
initial cost of the land that can be capitalised are :

• RM
• Purchase price (RM8,800,000-800,000) 8,000,000
• Professional fees 100,000
• Site clearance cost 250,000
• Title search fees 9,000
• Present Value of future restoration 300,000
• Cost of land 8,659,000

• (b) Journal entries to record the land acquisition on 1 January 2020:

• RM RM
• Dr Land 8,659,000
• Dr. SOCI-Operating expenses 30,000
• Cr Cash 8,389,000
• Cr Provision for future restoration cost 300,000
 Example 2
• On 1 April 2019, XYZ Bhd acquired a machine from Singapore and incurred the following costs :
• RM
• Invoice price of machine 650,000
• Import duties 12,600
• Electrical installation fees 14,000
• Pre-production testing 8,200
• Purchase two years maintenance contract 5,000

• In addition to the above, XYZ Bhd was also granted at 6% trade discount on the invoice price. A 2% discount was also
given for an early settlement received within one month of purchase.

• Required:
• (a) Determine the initial cost of the machine .
• (b) In accordance with MFRS 116, state the accounting treatment in relation to the acquisition of the machine.
 Solution:
• (a) The initial cost of the machine is :
• RM
• Purchase price (RM650,000-39,000) 611,000
• Import duties 12,600
• Electrical installation costs 14,000
• Pre-production testing 8,200
• Cost of machine 645,800
•

• (b) In accordance with MFRS 116, on 1 April 2019 the initial cost of the machine
comprise of the invoice price RM650,000 less 6% trade discount RM39,000, import duties
RM12,600, electrical installation fees RM14,000 and pre-production testing RM8,200. The total amount
capitalised is RM645,800. The maintenance contract of RM5,000 is an expense and therefore should be
spread over two years periods. In addition the settlement discount received of RM12,220 (RM611,000 x 2%)
is to be shown as other income in the statement of profit or loss.
 Exercise 1
• Andaman Bhd purchased a plant and incurred the following costs :
•
• RM
• Suppliers invoice price plus taxes 1,550,000
• Delivery and handling costs 12,600
• Consultant fees for advice on acquisition of plant 15,000
• Estimated dismantling costs (present value RM25,000) 30,000
• Start-up and pre-production costs 10,000
• Operating losses before commercial production 4,500

• Required :
• Determine the initial costs of the plant
 Self-Constructed Property, Plant and
Equipment
• Example 3

• In year 2020 a building was constructed using the company’s own resources – direct materials
(RM5,000,000), direct labour (RM7,000,000, direct overheads (RM2,000,000) and general
administrative overheads (RM640,000). Interest on borrowing to fund the construction was
RM1,150,000. Material wastage was RM200,000.

• Required:
• (a) Determine the cost of the building.
• (b) Show the journal entries to record the above
 Solution (Example 3)
• (a) The cost of the building:
• RM
• Initial cost of self constructed building:
• Direct material (RM5, 000,000 –RM200,000) 4,800,000
• Direct labor 7,000,000
• Direct overhead 2,000,000
• Borrowing cost 1,150,000
• General administative cost 0
• Initial cost 14,950,000

• (b)Journal entries to record the building:

• RM RM
• Dr Land 14,950,000
• Dr. SOCI-Operating expenses 640,000
• Dr SOCI – cost of sales 200,000
• Cr Bank 15,790,000
 Exercise 2
• On 1 January 2020 a building was constructed using the company’s own resources. The details related to the construction
of the building is as follows :

• RM
• Direct materials 2,500,000
• Direct labour 3,000,000
• Direct overheads 1,850,000
• Architect fees 1,000,000
• 5% MBB Loan for the construction of the building 8,000,000
•
• Required:
• (a) Determine the cost of the building.
• (b) Show the journal entries to record the above
Non-Monetary Consideration and Barter Trade
• Example 3

• An old Honda costing RM200,000 was traded in for a new vehicle Toyota Camry.
The trade in allowance and accumulated depreciation on the old vehicle was
RM80,000 and RM72,000 respectively. Cash payment for the Toyota Camry was
RM250,000.

• Required:
• (a) Determine the cost of the Toyota Camry.
• (b) Show the journal entries to record the exchange of vehicle.
 Solution (Example 3):
• (a) The initial cost of the Toyota Camry :
RM
• Trade in allowance for old vehicle 80,000
• Additional payment 250,000
• Cost of the new vehicle 330,000

• Loss on the disposal of the old vehicle Honda:

• RM
• Carrying amount (RM200,000-72,000) 128,000
• Trade in allowance 80,000
• Loss on disposal 48,000

• (b) Journal entries to record the exchange of vehicle :

• RM RM
• Dr. Vehicle (new) 330,000
• Dr. Accumulated depreciation (old vehicle) 72,000
• Dr. SOPL - loss on disposal 48,000
• Cr Vehicle (old) 200,000
• Cr Bank 250,000
 Example 4
• Ding Dong Quarry Bhd trade in an old lorry for a new vehicle Toyota Highlander.
The carrying amount of the old lorry is RM25,000 and has a market value of
RM45,000.

• The cash equivalent purchase price for the new vehicle is RM230,000 and a trade
in allowance given by the dealer for the old lorry is RM38,000. Ding Dong Quarry
Bhd pays the balance by cash.

• Required:
• (a) Determine the cost of the new vehicle Toyota Highlander.
• (b) Show the journal entries to record the exchange of vehicle.
 Solution:
• (a) A new Toyota Highlander will be recorded at the fair value of the asset acquired, RM230,000.
• - The use of the fair value of the asset given up (fair value RM45,000 plus cash paid RM192,000) is not
appropriate or relevant since it will result in an amount higher than the equivalent purchase price; and
• - The use of the carrying amount of the asset given up where the net carrying amount RM25,000 plus cash
paid RM192,000 is considered as unrealistic because it will result in an amount lower than the cash
equivalent purchase price.

• On disposal of the old vehicle, a gain of RM13,000 will be recognised, being the difference between the
carrying amount RM25,000 and the trade in allowance of RM38,000.
• (b) Journal entries to record the exchange of vehicle :
• RM RM
• Dr. Vehicle (new) 230,000
• Cr. Motor vehicle (old) 25,000
• Cr Profit on disposal 13,000
• Cr Cash 192,000
 Exercise 3
• Min Bhd and Nani Bhd are both in the same line of business of selling
manufacturing equipment. They enter an agreement in which Min Bhd gives up
manufacturing equipment with a fair value of RM80,000 and cash of RM20,000 in
exchange for manufacturing equipment from Nani Bhd. The carrying amount of
the manufacturing equipment given up by Min Bhd is RM75,000.

• Required :
• Show the journal entries for the above non-monetary exchange in the books of
Min Bhd
 Purchase beyond normal credit terms
• Example 5

• On 1 March 2018 an equipment was acquired. The purchase price of RM6,000,000 was paid in 3
installments. The first 40% was paid immediately upon delivery, the remaining 60% was paid in 2
installments. The present value of the 2 installments were RM 1,750,000 and RM1,350,500
respectively. Delivery and handling charges cost of RM 285,000 were paid immediately.

• Required :
• (a) Calculate the purchase price of the equipment
• (b) Journal entries for the acquisition of equipment
• Purchase price
Solution (Example 5)
• RM
• Immediate payment - 40% (40% XRM600,000) 2,400,000
• Present value of 1st deferred payment 1,750,000
• Present value of 2nd deferred payment 1,350,500
• Delivery and handling cost 285,000
• Cost of equipment 5,785,500

• The journal entries to record the acquisition as at 31 March 2018

• RM RM
• Dr. Equipment 5,785,500
• Cr. Cash 2,685,000
• Cr. Payable 3,100,500
 SUBSEQUENT COST ON PROPERTY,
PLANT AND EQUIPMENT
• Subsequent expenditure on an item of property, plant and equipment occurs after the
acquisition/initial recognition of the item. It refers to such costs which are incurred after the
asset is recognized in the financial statement and brought to the location and condition intended.
Examples of such expenditures include repair and maintenance, overhauling, upgradation,
replacement costs etc. For accounting purposes, entities need to evaluate whether these
subsequent expenditures are to be regarded as capital in nature (ie treated as capital expenditure)
or to be regarded as an expense ( ie treated as a revenue expenditure) at the time incurred.
• In some cases, entities need to apply professional judgement to determine if the subsequent
expenditure is capital in nature. The subsequent expenditures shall be capitalised only if they
increase the future economic benefits from the existing asset beyond its originally assessed
standard of performance. Examples of increase future benefits include :
• (a) an extension in the asset’s estimated useful life;
• (b) an increase its production capacity;
• (c) a substantial improvement its production quality or service potential; and
• (d) a significant reduction in previous operating costs.
 Example 6
• On 1 January 2018, Sparkle Bhd acquired a printing machine at a cost of
RM1,000,000. The estimated life of the machine was ten years with no
residual value. The company decided to use the revaluation model. On 31
December 2019, the fair value of the machine was RM1,400,000.
• It is the company’s policy to make an annual transfer from revaluation
reserve to retained profits in respect of the realisation of revaluation surplus.

• Required :

• Determine the carrying amount of the machine and the balance on the
revaluation reserve on 31 December 2020.
 Solution (Example 6)
• RM
• Cost as at 1 January 2018 1,000,000
• Accumulated Depreciation (2018-2019) (200,000)
• Carrying amount 31 December 2019 800,000
• Revalue 1,400,000
• Surplus on revaluation 600,000

• On 1 January 2020, there is a revaluation surplus of RM600,000 which are recognised in other
comprehensive income and credited to revaluation reserves. On 31 December 2020, the carrying
amount of the machine is RM1,400,000 and the accumulated depreciation is RM175,000.

• Since the policy of the company is to make an annual transfer from revaluation reserve to
retained profits, the balance on revaluation reserve is RM525,000.
 Example 7
• A machine costing RM2,000,000 with a useful life of 10 years was acquired
on 1 January 2015. The annual maintenance of the machine was RM20,000.
On 31 December 2018, a major component costing RM200,000 was replaced
with a new component , RM250,000.

• Required:
• (a) Calculate the carrying amount of the machine after replacement
• (b) Journal entries to record the above transaction
• (c) The extract statement of profit or loss for the year ended 31 December
2017 - 2019
•
Solution (Example 7):
(a) The carrying amount of the machine after replacement:
• RM
• Cost as at 1 January 2015 2,000,000
• Accumulated Depreciation (2015-2018) (800,000)
• Carrying amount 1,200,000
• Cost of new component as at 31 December 2018 250,000
• Carrying amount of old component (200,000-80,000) (120,000)
• Carrying amount of machine as at 31 December 2018 1,330,000

• (b) Journal entries:

• RM RM
• Dr. Machine-new component 250,000
• Dr. Accumulated Depreciation 80,000
• Dr. SOCI (CA of old component) 120,000
• Cr Machine- Cost of Old component 200,000
• Cr Cash 250,000

• (c ) Extract Statement of Profit or Loss for the year ended 31 December

• 2017 2018 2019

• Depreciation expenses 200,000 200,000 221,667

• Maintenance expense 20,000 20,000 20,000
• Carrying amount of old component - 120,000 -
 SUBSEQUENT MEASUREMENT OF
PROPERTY, PLANT AND EQUUIPMENT
• After recognition, an entity shall chooses either the cost model or the revaluation model as its accounting
policy and applies that policy to an entire class of property, plant and equipment [MFRS 116.29]:

• (a) Cost Model

• An item of property, plant and equipment is carried at its cost less any accumulated depreciation and any
accumulated impairment losses. Any increase in the fair value of the item will not be made or recognized.
Depreciation using the straight line method is thus based on cost less residual value.

• (b) Revaluation Model

• An item of property, plant and equipment whose fair value can be measured reliably is carried at a revalued
amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation
and subsequent accumulated impairment losses.
 Revaluation principles
• Revaluation shall be performed regularly to ensure the carrying amount of an item of
property, plant and equipment does not differ materially from that which would be
determined using fair value at statement of financial position date.
• When an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belongs should be revalued, ie no
selective revaluation is allowed.

• Revalued assets are depreciated in the same way as under the cost model.

• The fair value of land and building is usually its market value determined by appraisal
undertaken by professional qualified valuer, while the fair value of plant and equipment is its
market value determined by appraisal. However, if there is no market based evidence of
fair vaue because of the specialised nature of the item of property, plant and equipment,
and the item is rarely sold, an entity may need to estimate fair value using an income or a
depreciated cost approach.
 Methods to Record Revaluation
• There are two methods of recording a revaluation of an item of property, plant and
equipment :
• (a) The gross carrying amount is restated in a manner consistent wth the revaluation of
the carrying amount. The accumulated depreciation is the difference between the gross and
net carrying amounts. This methods adjusts both the gross carrying amount and the
accumulated depreciation so that the adjusted net carrying amount is equal to the net
revalued amount. This method is often used for plant and equipment; and

• (b) Revaluation and elimination of accumulated depreciation The second method

eliminates the accumulated depreciation at the valuation date against the gross carrying
amount and the net amount is restated to the revalued amount of the asset. This method is
often used for land and building
 Example 8
• On 1 April 2017, Alkazam Bhd purchased an industrial plant at a cost of RM12 million. It
is being depreciated on the staright line method over an estimated useful life of 10 years.

• On 1 June 2020, the plant is being revalued by reference to a market price which have
increased substantially. The gross fair value, ie cost of an equivalent new plant is RM14
million. The net fair value less accumulated depreciation of the plant is is RM10 million

• Required :
• (a) Calculate the gain or loss on the revaluation and show the journal entry under each of
the two methods of recording revaluation of assets.
• (b) Present the plant account after the revaluation under each of the two methods.
Solution :
Solution (Example 8)
(a) RM
Initial cost 12,000,000
Accumulated depreciation (2017-2019) (3,600,000)
Carrying amount as at 31 December 2019 8,400,000
Revalued amount on 1 June 2020 10,000,000
Revaluation Surplus 1,600,000

Before After Adjustment

RM RM RM
Gross carrying amount 12,000,000 14,000,000 2,000,000
Accumulated depreciation (3,600,000) (4,000,000) (400,000)
Net carrying amount 8,400,000 10,000,000 1,600,000

Journal entries year ended 31 December 2020

Method 1 RM RM
Dr, Plant 2,000,000
Cr. Accumulated depreciation 400,000
Cr. SOCI – Revaluation Reserve 1,600,000

Method 2
Dr. Accumulated depreciation 3,600,000
Cr. Plant 2,000,000
Cr. SOCI – Revaluation Reserve 1,600,000
 Solution (Example 8)
(a) Presentation of plant :

Method 1 Method 2
RM RM
Plant at valuation 14,000,000 10,000,000
Less Accumulated depreciation (4,000,000) -
Net carrying amount 10,000,000 10,000,000

Note :
Irespective of which method applied, the gain or surplus arising on the revaluation shall be
recognised in other comprehensive income and credited to a revaluation reserve. MFRS 116
prohibits crediting to income, the accumulated depreciation existing at the revaluation date.
 Accounting For Revaluation Surplus or Deficit
• A revaluation of an asset should be carried out when there could be material difference between the carrying amount of an asset
and its fair value on revaluation of that asset. The fair value could be higher or lower than the carrying amount of the asset.

• Surplus on revaluation
• When an item of property, plant and equipment is revalued for the first time, MFRS 116 requires that “ïf an asset’s carrying amount
is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and credited in equity under
the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a
revaluation decrease of the same asset previously recognised in profit or loss”.

• Deficit on revaluation
• If an asset’s carrying amount is decrease as a result of a revaluation, the decrease shall be recognised in profit or loss. However,
the decrease shall be recognised in other comprehensive income and debited to equity under the heading of revaluation surplus, to
the extent of any credit balance existing in the revaluation surplus in respect to that asset. A deficit arising from the revaluation of
an asset cannot be offset against a surplus arising from the revaluation of another asset.
• When a revalued asset is disposed off, any revaluation surplus may be transferred directly to retained earnings, or it may be left in
equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss
Measurement Subsequent to Initial Recognition
(off-setting of surplus and deficit)

• In any subsequent revaluation, off-set is required provided that the surplus or

deficits relates to a previous deficit or surplus of the same asset revalued.
• (a) The increase is recognized as income to reverse a previous revaluation
decrease of the same asset previously recognized as an expenses to the extent that it
offsets the previously recorded decrease.
• (b) Similarly, if a deficit relates to a previous surplus which has been credited to
other comprehensive income and the reserve is still available, the deficit shall be
recognised in other comprehensive income and charged to the revaluation reserve
to the extent of the balance available.
 Example 9
• Syarifah bought a piece of land in 2013 for 6,000,000. The fair value of land
in 2015, 2017, and 2019 were RM8,000,000, 5,000,000 and RM9,000,000
respectively.

• Required :
• (a) Explain the accounting treatment on the revaluation of land for year
2015, 2017, and 2019
• (b) Show the journal entries to record the revaluation of the land
 Solution (Example 9)
• In 2015, there was a revaluation SURPLUS of RM2,000,000 which is credited to
revaluation reserve.

• In 2017, there was a revaluation DEFICIT of RM3,000,000 . Since the first

revaluation is SURPLUS, RM2,000,000 is debited to revaluation reserve, and the
remaining is recognized in profit or loss as expenses.

• In 2019, there was a revaluation SURPLUS of RM4,000,000 . In the previous

revaluation, RM1,000,000 is written off in profit or loss, therefore RM1,000,000 is
credited to profit or loss and the remaining RM3,000,000 is credited to revaluation
reserve.
 Solution (Example 9)
Journal entries to record the revaluation :
2015 RM RM
Dr. Land 2,000,000
Cr OCI -Land Revaluation Reserve 2,000,000

2017
Dr. Land Revaluation Reserve 2,000,000
Dr. Profit or loss account 1,000,000
Cr Land 3,000,000

2019
Dr. Land 4,000,000
Cr. Profit or loss account 1,000,000
Cr OCI - Land Revaluation Reserve 3,000,000
 Exercise 4
• On 1 January 2013, Aman Bhd acquired a building with a useful life of 20 years for
RM10,000,000. Following is the schedule of revaluation:

• 31 December 2015 31 December 2018

• Fair Value RM8,000,000 RM10,000,000

• Required:
• (a) Explain the accounting treatment for the revaluation of the building using the
second method ie revaluation and elimination of accumulated depreciation . Show
the calculation.
• (b) Show the journal entry to record the revaluation at each valuation date.
 No reclassification Adjustment to Profit or
Loss
• When the revalued asset is realised either by sale or through use, there are two ways to account for
the revaluation surplus, that is :
• (a) the revaluation surplus included in equity may be transferred diretly to retained profits
when the asset is derecognised. This may involved transferring the entire surplus when the asset is
retired or disposed of, or

• (b) an entity may choose to transfer some of the surplus to retained profits as and when the
asset is used by the entity. The amount of the surplus transferred would be the difference
between the depreciation based on the revalued carrying amount and depreciation based on on
the asset’s original costs.

• MFRS 116 does not permit the transfers from revaluation surplus to be made through profit or
loss when the surplus is realised.
 Example 10
• On 1 April 2014, Hujab Bhd purchase a property at a cost of RM14,000,000. The property is
depreciated on a straight line basis over an estimated useful life 50 years, charging a full year
depreciation in the year of purchase and none in the year of disposal.

• On 1 January 2019, the property is revalued upwards by professional valuers at RM15,000,000.

• In July 2020, the property is sold for RM18,000,000.

• Required :
• (a) Calculate the surplus or deficit arising on the revaluation of the property in 1 January 2019
and show the journal entry to record the revaluation.

• (b) Calculate the profit or loss on disposal of the property in July 2020 and show the journal
entry to record the disposal.
 Solution (Example 10)
• (a) Surplus or deficit on revaluation
• RM
• Initial cost as at 1 April 2014 14,000,000
• Accumulated depreciation as at 31 December 2018 (1,400,000)
• Carrying amount as valuation date at 1 January 2019 12,600,000
• Revalued amount 15,000,000
• Surplus 2,400,000

• Journal entries to record the revaluation in 2019:

• RM RM
• Dr Property 1,000,000
• Dr Accumulated depreciation 1,400,000
• Cr OCI -Revaluation Reserve 2,400,000
 Solution (Example 10)
• (b)Profit or loss on disposal of property
• RM
• Carrying amount at 1 January 2019 15,000,000
• Accumulated depreciation as at 31 December 2019 (333,333)
• Carrying amount as at 31 December 2019 14,666,667
• Proceeds from disposal 18,000,000
• Profit on disposal 3,333,333

• Journal entries to eliminate the property and to recognise gain :

• RM RM
• Dr Bank 18,000,000
• Dr Accumulated depreciation 333,333
• Cr Profit on disposal 3,333,333
• Cr Property 15,000,000
•
• Transfer from revaluation reserve to retained profits
• Dr Revaluation reserve 2,400,000
• Cr Retained profits 2,400,000
 DEPRECIATION OF PROPERTY, PLANT
AND EQUUIPMENT

• MFRS 116 defines depreciation as the systematic allocation of the

depreciable amount of an asset over its estimated useful life. It is a measure
of the consumption, the wear and tear, and/or decline in value due to
technological obsolescence or passage of time as the property, plant and
equipment is used up in the operations, or in the ordinary course of business
of the entity.
 Example 11
• An equipment is purchased at a cost of RM160,000. This asset is expected to
have a useful life of 5 years and then be sold for RM10,000.
• Required :
• (a) Calculate the depreciation charge in the five year period under :
• - Straight line method
• - Reducing balance method at the rate of 15% per annum

• (b) Calculate the depreciation change in the five year period using the sum
of digits method. Show your working.
 solution
(a)
Year Straight line method Diminishing balance method
RM RM
First 32,000 24,000
Second 32,000 20,400
Third 32,000 17,340
Forth 32,000 14,739
Fifth 32,000 12,528

(a) Depreciation change in the five year period using the sum of digits method :

Formula sum of digits: n(n+1) divided by 2, where n = the useful life in years.
Using this formula : 5(5+1)/2 = 5(6)/2 = 30/2 = 15.
Depreciation charge for the year will be debited to Depreciation Expense and credited to Accumulated
Depreciation. Remember that the total amount of depreciation during the asset's useful life needs to
totaled up to RM150,000.

Year Calculation Depreciation

First (5/15 of RM150,000) RM50,000
Second (4/15 of RM150,000) RM40,000
Third (3/15 of RM150,000) RM30,000
Forth (2/15 of RM150,000) RM20,000
Fifth (1/15 of RM150,000). RM10,000
Total RM150,000
 IMPAIRMENT OF PROPERTY, PLANT
AND EQUUIPMENT
MFRS 116 requires that an entity shall determine whether an item of property, plant and
equipment is impaired by applying MFRS 136 Impairment of Assets. That Standard
explains how an entity reviews the carrying amount of its assets, how it determines the
recoverable amount of an asset, and when it recognises, or reverses the recognition of
an impairment loss. Companies are required to evaluate whether there is an indication
that an asset may be impaired at the end of each financial year.

Recognition of Impairment Loss

If the carrying amount exceeds the recoverable amount, an impairment expense equal
to the difference is recognized in the period. If the carrying amount is less than the
recoverable amount, no impairment loss needs to be recognized.
 Example 12
• On January 1, 2010 XYZ Bhd. purchased a building for RM2 million. Its estimated
useful life at that date was 20 years and the company uses the straight-line
depreciation method. On December 31, 2014 the government embarked on a plan
to construct a fly-over adjacent to the building which would reduce access to the
building thereby decreasing its value. The company estimated that it can sell the
building for RM1 million but it would have to incur costs of RM50,000.
Alternatively, if it continues to use it, the present value of the net cash flows the
building will generate amounts to RM1.2 million

• Required :

• (a) Determine if there is an impairment loss in year 2014

• (b) Sow the journal entry to record the impairment loss.
 Solution (Example 12)
(a) The basic rule to recognize impairment : if carrying amount exceeds the recoverable amount.

Step :

1. Determine the carrying amount.

The building's cost is RM2 million, useful life is 20 years and has been used for 5 years . This means
that accumulated depreciation is RM2/20×5 or 0.5 million and carrying amount is RM1.5 million (i.e.
RM2 million minus RM0.5 million).
2. Determine the recoverable amount
Recoverable amount is the higher of fair value less costs to sell RM0.95 million and value in use RM1.2
million
Fair value less costs to sell is RM1 million minus RM0.05 million equals to RM0.95 million.
Value in use is the present value of future cash flows which amounts to RM1.2 million.
3. So, is there an impairment to be recognised?
The carrying amount is RM1.5 million while recoverable amount is RM1.2 million. An impairment loss
of RM0.3 million is to be recognized.

(b) Journal entries :

RM RM
Dr Impairment Loss 300,000
Cr Accumulated Impairment Loss 300,000
 Reversal of impairment loss
• MFRS 136 requires that an impairment loss, recognized for an asset in the prior
years, shall be reversed if there has been a change in the estimates used to determine
the asset’s recoverable amount, since the last impairment loss was recognised.
However , the amount of the reversal shall be restricted to the carrying amount net
of accumulated depreciation that would have been determined, had no impairment
losses been recognised in the prior period.

• A reversal of an impairment loss for an item of property, plant and equipment

carried on the cost model shall be recognised as income immediately in profit or
loss. However, any reversal of impairment losses on a revalued asset shall be
treated as a revaluation increase.
 Example 13
• Let us extend the example of XYZ Bhd. In 2016 the government
constructed a service road parallel to the high way which improved the
recoverable amount to RM1.4 million.
• Required :

• (a) Explain the accounting treatment for the above events.

• (b) Show the journal entries.
 Solution (Example 13)
• (a) The carrying amount of the building as at December 31, 2016 is RM1.04 million
(RM1.2 million minus RM0.16). The recoverable amount is RM1.4 million which indicates
that the building has to be appreciated by RM0.36 million. RM0.3 of this amount is to be
credited to income statement because the original impairment loss routed through income
statement was RM0.3 million. The additional RM0.06 million will be credited to revaluation
reserve

• (b) Journal entries :

• RM RM
• Dr Accumulated Impairment Loss 300,000
• Dr Building 60,000
• Cr Gain in Value of Building 300,000
• Cr Revaluation Surplus 60,000
 DERECOGNITION OF PROPERTY,
PLANT AND EQUIPMENT
• The standards requires that carrying amount of an item of property, plant
and equipment shall be derecognized :
• (a) on disposal; or
• (b) when no future economic benefits are expected from its use or disposal.
 DERECOGNITION OF PROPERTY,
PLANT AND EQUIPMENT

• An item of property, plant and equipment should be removed from the statement of financial position on disposal or when
it is withdrawn from use and no future economic benefits are expected from its disposal. Both the gross carrying amount
and the accumulated depreciation of the item should be removed from the entity’s accounting records. For example, on 1
January 2015, a building cost RM480,000 with an accumulated depreciation of RM 220,000 was disposed of at
RM380,000. The journal entry to eliminate the asset disposed and to recognize the gain is as follow :

• Journal entries :
• RM RM
• Dr Bank 380,000
• Dr Accumulated depreciation 220,000
• Cr Building 480,000
• Cr Profit on disposal 120,000
 DERECOGNITION OF PROPERTY, PLANT AND EQUIPMENT
• Items of property, plant and equipment which are expected to have no future economic benefits are also removed from the accounting records and the
remaining net carrying amount at the date of derecognition is recognised as an expense in profit or loss.

• For items of property, plant and equipment which are temporarily retired from active use or which are abandoned, they shall be retained in the property,
plant and equipment accounts of the entity. In this case, the entity shall applies the impairment standards of MFRS 136 to determine whether any
impairment loss is required.

• The standard prescribes that any gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the
difference between the net disposal proceeds, if any, and the carrying amount of the item. The gain or loss arising from the derecognition of an item of
property, plant and equipment shall be included in profit or loss (unless MFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be
classified as revenue.

• When an asset is disposed of that has previously been revalued, a profit or loss on disposal is to be calculated. Any remaining revaluation reserve of the
asset is now considered to be ä ‘realised’ gain and therefore shall be transferred directly to retained earnings within the statement of changes in equity.
Note that this shall be a direct transfer from a non-distributable reserve to a distributable reseve without passing through the profit or loss, ie no
reclassification adjustment to profit or loss. Example, let say if the assets disposed was previously revalued upwards and results in a surplus on
revaluation of RM146,000

• Journal entries :
• RM RM
• Dr Revaluation reserve 146,000
• Cr Retained earnings 146,000
 Example 14
• On 1 January 2014, Min Bhd acquired a plant at a cost of RM2,900,000 with an estimated useful
life of 10 years. The asset was depreciated on a staright line basis. On 1 January 2017, the plant
was revalued to RM3,500,000 and subsequently was sold on 1 March 2021 for RM1,700,000.

• It is the company’s policy not to charge for depreciation in the year of disposal.

• Required :
• (a) Discuss the accounting treatment for the above plant.
• (b) Calculate the surplus or deficit on the revaluation of the plant in 2017 and show the
journal entries to record the revaluation
• (c) Calculate the gain or loss on disposal of the plant in 2021 and show the journal entries to
record the disposal.
• (d) Calculate the gain or loss on disposal if the plant is dispose at RM1,000,000 in 2021 and
show the journal entries to record the disposal.
 Solution (Example 14)
• (a) The plant will be recognised at RM2,900,000 and depreciated at RM290,000 per annum.

• On 1 January 2017, the carrying amount of the plant is RMRM2,030,000 . Since the fair value RM3,500,000 on this date is
is higher than the carrying amount RM2,030,000, this result in a surplus on revaluation of the plant of RM1,470,000 which
is credited to revaluation reserve and disclosed in ‘other comprehensive income’.

• The annual depreciation charge in year 2017 to 2020 will be RM500,000 which is RM210,000 more than if the plant were
not measured at fair value. Therefore, in year 2017 to 2020, there will be transfers from the revaluation reserve to retained
earnings of RM210,000 per year. A total of RM840,000 would be transferred from the revaluation reserve to retained
earnings. So, the revaluation reserve will have a balance of RM630,000.

• On the date of disposal, 1 March 2021, the carrying amount of the plant will be RM1,500,000. There will be a gain on
disposal of RM200,000, that is the difference between the proceeds of RM1,700,000 and the carrying amount RM1500,000.
The gain will be credited to the stament of profit or loss. The remaining surplus RM630,000 will be transferred to the
retained profits.
 Solution (Example 14)
(a) Revaluation of property in 2017 RM
Initial cost on 1 January 2014 2,900,000
Accumulated depreciation 2014 -2016 (2,900,000/10 x3) 870,000
Carrying amount as at 31 December 2016 2,030,000
Fair value on 1 January 2017 3,500,000
Surplus on revaluation 1,470,000

Journal entries
RM RM
Dr. Plant 600,000
Dr. Accumulated depreciaation 870,000
Cr. Revaluation reserve 1,470,000
 Solution (Example 14)
(a) Gain or loss on disposal of property RM
Valuation as at 1 January 2017 3,500,000
Accumulated depreciation 2017 -2020 (3,500,000/7 x4) 2,000,000
Carrying amount as at 31 December 2020 1,500,000
Sale proceeds on 1 March 2021 1,700,000
Gain on disposal 200,000

Journal entries :
To eliminate the plant and recognise the gain :
RM RM
Dr. Bank 1,700,000
Dr. Accumulated depreciaation 2,000,000
Cr. Profit on disposal 200,000
Cr. Plant 3,500,000
 Solution (Example 14)
To effect transfer from revaluation reserve to retained profits :
Dr. Revaluation reserve 1,470,000
Cr. Retained profit 1,470,000

(a) Gain or loss on disposal of property RM

Valuation as at 1 January 2017 3,500,000
Accumulated depreciation 2017 -2020 (3,500,000/7 x4) 2,000,000
Carrying amount as at 31 December 2020 1,500,000
Sale proceeds on 1 March 2021 1,000,000
Gain on disposal 500,000

Journal entries :
To eliminate the plant and recognise the gain :
RM RM
Dr. Bank 1,000,000
Dr. Accumulated depreciaation 2,000,000
Dr. Loss on disposal 500,000
Cr. Plant 3,500,000

To effect transfer from revaluation reserve to retained profits :

Dr. Revaluation reserve 1,470,000
Cr. Retained profit 1,470,000
 Exercise 5
• On 1 January 2015, ABC Bhd purchased a property which consist of land RM1,500,000
and building RM3,500,000. The building’s is depreciated on a straight-line basis over an
estimated useful life of 50 years, charging a full year’s depreciation in the year of purchase
and none in the year of disposal.
•
• On 1 January 2017, the property was revalued upward by an independent professional
because the current prices has increased substantially at RM8,000,000. RM2,600,000 is
attributable to the land portion. The surplus is incorporated in the accounts.
•
• In 2020, the property is sold for RM12,000,000. Ignore deferred tax considerations.
•
• Required :
(a) At the valuation date, calculate the surplus or deficit on the revaluation of the property
and show the journal entries to record the revaluation.
(b) Calculate the gain or loss on disposal of the property in 2020 and show the journal
entries to record the disposal.
•
 Past year Questions
• Dec 2019, Q2
• June 2019, Q2
• Aug 20, MCQ
• Feb 21, MCQ
• Feb 22, MCQ
Thank you