MFRS116 –

PROPERTY, PLANT &

EQUIPMENT
TOPIC 3
FAR210
[Part A]
HAFIDZAH & YUSNALIZA APR2020
 LESSON OUTCOME
Students should be able to:
 Define property, plant and
equipment in accordance with
MFRS116.
 Explain the recognition criteria of
property, plant and equipment.
 Determine the initial cost (initial
measurement).
 Show journal entries for initial
cost and disclosure in the
financial statements.
 Explain accounting entries of
subsequent costs and disclosure
in the financial statements.
2
 Explain the accounting treatment of
subsequent measurement of
property, plant and equipment (cost
model and revaluation model)
 Calculate the depreciation expense.
 Explain accounting treatment for
derecognition of property, plant and
equipment (selling, write-off).
 State the disclosure requirements of
MFRS116 on property, plant and
equipment.
 Prepare notes to the accounts for
property, plant and equipment.
HAFIDZAH & YUSNALIZA APR2020
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Examples of Property, Plant & Equipment

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OBJECTIVE OF “The objective of financial

reporting is to provide
FINANCIAL information about the
REPORTING reporting entity that is useful
As in the conceptual to existing and potential
framework: investors, lenders and other
creditors in making
decisions about providing
resources to the entity.”

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Why information about company’s property,

plant & equipment is useful to investors?

To inform that decision,

A potential investor must Consequently, the
the potential investor
decide whether to buy Those potential returns potential investor
assesses the potential
shares in the entity that depend on the property, assesses the amount,
returns from investing in
owns and use the plant & equipment timing and uncertainty of
the entity that use the
property, plant & prospects for future net (or the prospects for)
property, plant &
equipment in their cash inflows. future net cash inflows to
equipment in generating
business operation. the entity.
income.

HAFIDZAH & YUSNALIZA APR2020

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SCOPE OF MFRS116

MFRS 116 does not apply to:

✘ Non-current assets held for sale and

discontinued operation
✘ Investment property

✘ Biological assets – agricultural activity

✘ Exploration for and evaluation of mineral

resources
✘ Mineral rights and mineral reserves
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INVOLVED JUDGEMENT WHETHER OR NOT

THERE IS ANY ELEMENT OF FINANCIAL
STATEMENT.

IS THE ITEM AN ASSET?

DOES THE REPORTING ENTITY HAVE AN
ASSET?

IDENTIFICATION
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IS THE ITEM AN ASSET?

✘ For an item to be classified as an asset in

financial statements, the item should meet or
satisfy the definition of ASSET.

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Definition of ASSET (as in conceptual framework)

An asset is defined as:

- A present economic resource controlled by the
entity as a result of past events.
- An economic resource is a right that has the
potential to produce economic benefit.

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Definition of ASSET (as in conceptual framework)

The criteria to determine the existence of assets ( as in
the conceptual framework) :
✘ Control of an economic resource as a result of past

event;
✘ Right to, including:

a) Rights that correspond to an obligation of another

party;
b) Rights that do not correspond to an obligation of
another party;
✘ Potential to produce economic benefits from;
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EXAMPLE 1:
 Mutiara Cruise Bhd owns and operates a ferry that transports
passengers, their motor vehicles and goods between the
mainland and Penang. The ferry service is the main business
of the entity.
 On 1 January 20X7, the entity purchased a new ferry for
RM1,000,000 cash.
 The entity’s management expects that after operating the ferry for
20 years the ferry will be scrapped.
Question:
Identify whether or not the ferry is an asset to Mutiara Cruise
Bhd.

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Answer for Example 1: Mutiara Cruise Bhd

ANSWER:
Yes, the ferry is an asset because it meet
✘ First: Recall the the definition of asset as follows: Focus on the
definition of  it is a present economic resource RED words
“ASSET” controlled by the entity; the ferry is (these are the
An asset is defined as: used at the company/entity discretion keywords in
to provide transportation services definition)
- A present economic
resource controlled  as a result of past event; the entity
The BLUE
by the entity as a purchased the ferry on 1 January
result of past events. 2017 words are to
- justify/give
An economic  the company has the right to use the
resource is a right reasons for
ferry (economic resource is a right)
that has the potential the RED
to produce economic that will result in expected cash inflow
benefit. collected from customers who use the words
services (potential to produce
economic benefits) HAFIDZAH & YUSNALIZA APR2020
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CLASSIFICATION
Classification of an asset is important because it determines which
Standard applies to the accounting of the asset.
✘ Is the asset property, plant and equipment?

✘ Is the asset inventories?

✘ Is the asset biological asset?

✘ Is the asset held for resale?

✘ Is the asset investment property?

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Is the asset Property, Plant & Equipment?

✘ To classify an asset as property, plant and
equipment, the asset should meet the definition
of Property, Plant and Equipment as per MFRS
116.

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Definition of Property, plant and equipment:

MFRS 116 Property, Plant and Equipment defines property, plant

and equipment as:
tangible items that:
 are held for use in the production or
 supply of goods or
 supply of services,
 for rental to others, or
 for administrative purposes; and
- are expected to be used during more than one period.
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Refer - EXAMPLE 1:
 Mutiara Cruise Bhd owns and operates a ferry that transports
passengers, their motor vehicles and goods between the mainland
and Penang. The ferry service is the main business of the
entity.
 On 1 January 20X7, the entity purchased a new ferry for
RM1,000,000 cash.
 The entity’s management expects that after operating the ferry for
20 years the ferry will be scrapped.
Question:

Is the ferry an item of property, plant and equipment?

HAFIDZAH & YUSNALIZA APR2020


Answer:
Recall the definition of property, plant &
equipment:
MFRS 116 Property, Plant and
Equipment defines property, plant and
equipment as:
tangible items that:
 are held for use in the
production or
 supply of goods or
 supply of services,
 for rental to others, or
 for administrative
purposes; and
- are expected to be used during
more than one period.
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Yes, the ferry is an item of property,
plant and equipment, because:
 It is a tangible item/has physical
substance; made of steel,
 It is held for supply of services;
ferrying the customers, their
vehicles and their goods
between the mainland and the
island,
 The ferry is expected to be used
more than one period, it has
useful life of 20 years.
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EXAMPLE 2: PIJOT BHD

On 1 April 2018, Pijot Bhd places an order for a machine
from India. The machine was delivered on 1 August
2018. The new machine is to be used in the production
of company’s product; furniture. The machine has an
estimated useful life of 10 years.
✘ Question: Explain whether the machine is an item of
property, plant & equipment in accordance with
MFRS 116 Property, Plant and Equipment

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Answer for Example 2: Pijot Bhd

Recall the definition of property, plant & The machine is an item of property,
equipment:
MFRS 116 Property, Plant and
plant and equipment because:
Equipment defines property, plant and
equipment as:
 It is tangible item; the
tangible items that:
machine are made of steel
 are held for use in the  It is held for use in the
production or production; it is used to
 supply of goods or produce furniture
 supply of services,
 are expected to be used
 for rental to others, or
during more than one
 for administrative period; the machine has an
purposes; and
estimated useful life of 10
- are expected to be used during
years.
more than one period.
HAFIDZAH & YUSNALIZA APR2020

Explanation for Answer – Example 2: Pijot Bhd
Answer:
Yes, the machine is an item of property,
plant and equipment because:
 It is tangible item; the machine are
made of steel
 It is held for use in the production; it
is used to produce furniture
 are expected to be used during more
than one period; the machine has an
estimated useful life of 10 years.
 5. State the 3rd definition (in purple),
reason/justify “for more than one period”
- the machine has an estimated useful
life of 10 years (“10 years” is to justify a
period more than one year).
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Explanation:
 1. State whether your answer is “YES”
or “NO”.
 2. Then, write the definition (it is
tangible item)
 3. To explain/justify “tangible item”, -
the machine are made of steel (has
physical substance)
 4. State 2nd definition – choose the
suitable definition/function of the item.
In this case the definition in green is
most appropriate. Then, justify why or
how it is use in the production – “it is
use to produce furniture”.
HAFIDZAH & YUSNALIZA APR2020
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Recognition of Property, Plant & Equipment

✘ What is “RECOGNITION”?
- Process of including in the Statement of
Financial Position or Statement of Profit or
Loss an item that meets the definition of one
of the elements of financial statements.

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Recognition CRITERIA of Property, Plant &

Equipment

Recognition criteria (as per MFRS116):

✘ An item of property, plant and equipment shall be
recognized 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 to the entity can be measured
reliably.

HAFIDZAH & YUSNALIZA APR2020

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Recognition of Property, Plant & Equipment

 It is probable that future The management of a business would usually not

economic benefits purchase property, plant and equipment unless it is
associated with the probable that, in using it, future economic benefits will
flow to the business.
item will flow to the
entity. Entities usually acquire property, plant and equipment
is to generate income directly or indirectly from
their use:
- directly (for example, by using a
machine to manufacture goods for sale)
or
- indirectly (for example, an entity’s head
office building houses the staff who
administer the business that generates
the cash inflows) HAFIDZAH & YUSNALIZA APR2020
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Recognition of Property, Plant & Equipment

 The cost of the  The cost of an item of PPE can

item can be be measured precisely
measured
- Example: purchase price of the
reliably.
asset
 The cost must be estimated
- Example: the cost of a retail
outlet constructed by an auto
dealer for use as a showroom
to market its cars would include
many estimates

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EXAMPLE 3: ✘ Answer:
The Delivery Trailer can be recognized as
assets of the company and included in the
✘ Question: Statement of Financial Position when:

Describe the recognition  It is probable that future economic benefits

associated with the item will flow to the
criteria for Delivery entity – The Delivery Trailer were
Trailer to account for as purchased to provide transport for the
asset under MFRS116 imported cars that ultimately to generate
Property, Plant and income for the company.
Equipment  The cost of the item can be measured
reliably – the company can measured the
cost reliably.
(the sentences in red are the recognition criteria as
per MFRS116)
HAFIDZAH & YUSNALIZA APR2020
1. End of Part A
Have a nice day. Don’t forget to complete your
tutorial for PART A – Topic 3

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References

Tan Liong Tong (2019). “Financial Accounting and Reporting

in Malaysia’, CCH (Malaysia) Sdn Bhd, Vol. 1, 7th Edition.
IFRS Foundation (2018). The Conceptual Framework for
Financial Reporting.
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