MFRS116:

PROPERTY, PLANT AND

EQUIPMENT
LEARNING OUTCOME

🞂 Refer to course outline/syllabus

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MASB, IASB, IFRS & MFRS

⚫ The MASB is implementing its policy of convergence through adopting International Financial Reporting
Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).

⚫ IASB defines IFRSs as comprising:

⚪ International Financial Reporting Standards;

 ⚪ International Accounting Standards;
⚪ IFRIC Interpretations; and
⚪ SIC Interpretations.
⚫ Malaysian Financial Reporting Standards (MFRSs) equivalent to IFRSs that apply to any reporting period
beginning on or after 1 January 2012 are:

⚪ Malaysian Financial Reporting Standards; and

⚪ IC Interpretations.

znz.nh.2013

MFRS 116
⚫ is equivalent to IAS 16 Property, Plant and Equipment.

⚫ MFRS 116 does not apply to:

 ⚪ PPE classified as held for sale (MFRS 5).

⚪ biological assets related to agricultural activity (MFRS 141).

⚪ the recognition and measurement of exploration and evaluation assets (MFRS 6).

⚪ mineral rights and mineral reserves (oil and natural gas)

znz.nh.2013

DEFINITION OF ASSET (per revised CF 2018)

An asset is an economic resource (being “rights” that have the potential
to produce economic benefits) controlled by the entity as a result of
past events
 •An asset is a present economic resource controlled by an entity as a result of past
transaction or past events, and

•It gives the entity the right to future economic benefit which could be measured in the
form of cash inflow/cash equivalent or in the form of reduction of cash outflow/cash
equivalent.

Note:
The “expected flow” is removed from definition of assets (refer Conceptual Framework 2018)

DEFINITION of PPE
Tangible assets
• held by an entity
 (a) for use in the production/ supply of goods & services, (b)
for rental to others;
(c) or for administrative or maintenance purposes; and, •
are
expected to be used during more than one reporting
period
Examples of PPE
• Machinery acquired for production of goods •
Vehicle acquired to deliver goods to customers •
Building acquired and used as headquarters

OTHER RELATED TERMS

⚫CARRYING AMOUNT
⚫ amount at which an asset is recognized XX
(-) accumulated depreciation (XX)
(-) accumulated impairment losses. (XX)

⚫COST
⚫ the amount of cash or cash equivalent paid for
⚫ or the fair value of the other consideration given to acquire an asset at
the time of its acquisition
⚫ or construction
⚫ or, the amount attributed to that asset when initially recognized in
accordance with specific requirements of other reporting standards.
OTHER RELATED TERMS
⚫FAIR VALUE
⚫ the amount at which an asset could be bought or sold (exchanged)
between knowledgeable and willing parties in an arm’s length

⚫ RESIDUAL VALUE OR SCRAP VALUE ⚫ the estimated

amount that an entity would currently obtain from disposal of the asset,
after deducting the estimated costs of disposal, if the asset were already of
the age and in the condition expected at the end of its useful life.

⚫ RECOVERABLE AMOUNT
⚫ the higher of an asset’s fair value less costs to sell and its value in use.
Q1: Determining Asset & PPE
•A brick manufacturer purchased a building to administer the entity’s
 business. The head office building houses the entity’s accounting,
human resources and other administrative staff. The manufacturer
expects to use its head office building for about 50 years.

Question:
• Is the head office building an asset?
• Is the head office building an item of PPE?

???
RECOGNITION CRITERIA
The cost of a PPE item shall be recognized as an asset when (FEBC):

1. it is probable that future economic benefits (FEB) associated with

 the item will flow to the entity; and
2. the cost (C) of the item can be measured reliably

Note: Must be consistent with definition of asset per revised CF 2018

*CF2018: only items that meet the definition of an asset, a

liability or equity are recognized in the SOFP
RECOGNITION CRITERIA
1. Future economic benefits (FEB) flow to the entity ⚫
Certainty – risks and rewards transferred to entity ⚫ Entity
is able to enjoy benefits associated with the asset ⚫ Entity
is responsible for safekeeping of asset
 2. Cost (C) of asset can be measured reliably ⚫ Asset
acquired for cash or non monetary consideration
RECOGNITION CRITERIA - COMPONENT
APPROACH
• Adoption of component approach – to recognize significant items of PPE
– refer to “unit of accounts”
• MFRS 116 – total expenditure of a significant item of PPE shall be allocated to
its component parts and accounted for separately – esp. component parts
with different estimated useful lives and require periodic replacements. • E.gs:
• Ship – treat engines as separate unit of asset (its useful lives different
from ship in entirety)
• Aircraft – different components = airframe, engines, interior seats &
 galleys
• Building - different components = land, building structure, building
life/elevator, building equipment
RECOGNITION CRITERIA - COMPONENT
APPROACH
*Unit of accounts

• Revised CF2018 introduces the concept of ““unit of account” for assets and liabilities to facilitate a
thought process to follow in selecting and identifying the unit of account when setting the
recognition and measurement requirements in the MFRSs. This concept requires judgments to be
applied in deciding whether the recognition and measurement principles in the MFRSs shall be
applied individually to each asset or liability, grouped into portfolios of assets or liabilities, or
grouped in a single unit.
• A unit of account is defined as “the right or the group of rights, the obligation or the group of
obligations, or the group of rights and obligations, to which recognition criteria and measurement
concepts are applied”.
• A unit of account is selected for an asset or liability when considering how recognition criteria and
measurement concepts will apply to that asset or liability and to the related income and expenses. •
A unit of account may include an individual asset or liability, a group of assets or liabilities, a portfolio
of similar items.

IDENTIFICATION
1. Easily identified
⚫ if assets are big – house – individual cost
⚫ If assets are small – tools, moulds, jigs – aggregate value
2. Large assets
⚫ Made up of different assets – ship, shopping complex – segregate
assets
3. Spare parts, servicing equipment –
⚫ Major parts, sole purpose – part of asset cost
⚫ Minor parts – inventory
 ⚫ Maintenance – expense
MFRS 116 – MEASUREMENT
MEASUREMENT

Initial measurement Subsequent measurement

the asset to location and condition for
intended use.
• Initial estimate of cost of dismantling and
at Cost removing and restoring the site.
costs

model znz.nh.2013
• Purchase price etc.
revaluation model
• Other directly attributable costs to bringing

MEASUREMENT AT RECOGNITION
• Initial cost - All costs incurred in bringing the asset to its present
location and condition, ready for its intended use
• The initial cost of PPE under the following circumstances:
🞂 Purchased PPE – Normal credit terms
🞂 Purchased PPE – Deferred payment
🞂 Self constructed PPE
🞂 PPE exchanged with another PPE
🞂 PPE exchanged with entity’s securities

??
Initial cost – PURCHASED ASSET
• Includes
• Its purchase price including import duties & non-refundable purchase taxes,
after deducting trade discounts & rebates.
 • Any costs directly attributable to bringing the asset to the location &
condition for its operation – Site preparation costs, initial delivery and
handling costs, installation and assembly costs, testing costs,
professional fee
• Present value of future costs (the initial estimate of the costs) of
dismantling and removing costs, restoration of site costs incurred at end
of production

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Q2: Initial cost - PURCHASED ASSET

• On 1 January 2012, Yuna acquired a machine from Dina under the
following terms:
RM
 List price of machine 82,000
Import duty 1,500
Delivery fees 2,050
Electrical installation costs 9,500
Pre-production testing 4,900
Purchase of a 5 year maintenance contract 7,000

• In addition, Yuna was given a trade discount of 10% on the initial price
and 5% discount if payment is made within 30 days. Yuna paid for the
machine on 27 January 2012.
Q: How should the machine be accounted for in the financial statements?
DEFERRED PAYMENT
⚫If a PPE item is acquired and payment is deferred over
several accounting periods
⮚ the cost of asset is the cash price equivalent at recognition date or the
present value of future payment

⚫The difference between the present value and the quoted

price is
⮚ recognized as interest expense over the credit period 20

Initial cost – SELF CONSTRUCTED ASSETS

•cost of site preparation (less any proceeds from the demolition of old
building)
•costs of construction (direct materials, direct labour, overheads allocated)

•professional fees (architect’s fees)

 Borrowing costs which satisfy criteria under MFRS 123
(Refer to MFRS 123 on criteria for the recognition of interest as a component of
the carrying amount of a self-constructed item of property, plant and
equipment)

EXCLUDE & ELIMINATE:

•Certain operations that are not necessary to the construction of the asset

abnormal amounts of wasted materials

• internal profit

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Q3: Initial cost - SELF CONSTRUCTED ASSETS

A storage company constructed a small building to store its unused vehicles and other moveable assets. The
costs incurred in constructing the building include the following:
RM

Contractors’ costs 300,000

 Direct materials and labour 50,000
Technical overheads 12,000
General administrative overheads 8,000
Interest costs in financing the construction 3,000
373,000

The company purchased RM50,000 of materials for the construction. However due to technical inaccuracies in
estimating the necessary amount of material for construction, only RM48,000 of materials were used. In
addition, during the construction, several of the foreign labours involved were affected with an infectious
disease. The disease had disrupted the construction and cost the company a further RM15,000.
Required: Determine the cost of the building for capitalization ???

(Source: Akmalia et. al., 2019)

ASSETS EXCHANGED with another PPE

• Cost of the new asset – fair value unless the exchange
transaction lacks commercial substance or the fair value
cannot be measured reliably
• Then, it is measured at the carrying amount of the asset
given up
• Any gain or loss is recognized in the income statement 23

Q4: ASSETS EXCHANGED with another PPE

Company A has a factory building with carrying amount of RM100,000
 whilst the fair value of RM140,000. Company B owns a commercial
building that has a fair value of RM200,000. Company A wants to
exchange the factory building with the commercial building by paying
additional cash of RM60,000.
• Required:
1. Calculate the initial costs of new commercial building

2. Calculate the gain of exchange

???
ASSETS EXCHANGED with entity’s securities
▪ Cost of asset is measured at the fair value of the PPE item.
▪ If its fair value is undeterminable, then cost of asset is the
fair value of shares issued
▪ Any difference between fair value and the nominal value of
the shares is adjusted in the share capital

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Q5: ASSETS EXCHANGED with entity’s

securities
• Company A purchase two tracts of land by issuing 4,500,000 ordinary
shares of RM1 each. The shares of company were actively traded on
Bursa Malaysia at RM2.00 per share on that date
• Required:-
1. Determine the initial cost of the land if an independent professional

valuer valued the land at RM8,000,000

2. Determine the initial costs of the land if the fair value of the land
cannot be estimated reliably
???