Chapter 4

PPE

Recognition

- Probable that future economic benefits associated with the item will flow to the entity
- Cost of the item can be measured reliably
- Smaller items such as tools may be classified as consumables and expensed rather than capitalised. Where they
are capitalised, they are usually aggregated and treated as one.
- Large and complex assets should be broken down into composite parts and each depreciated separately, if the
parts have differing patterns of benefits and the cost of each is significant. Expenditure to renew individual parts
can then be capitalised.

Measurement at recognition

- Purchase price, less trade discount/rebate + Directly attributable costs of bringing the asset to working condition
for intended use + Finance costs: capitalised for qualifying assets
- The cost of testing whether an asset is functioning properly is a directly attributable cost and should be
capitalised as part of the cost of the item of PPE
- Any proceeds received from selling items made during such testing can no longer be deducted from the cost of
PPE and must instead be credited to profit or loss.

Measurement after recognition

- Cost model - cost less depreciation and any accumulated impairment losses
- Revaluation model - FV less subsequent accumulated depreciation and any accumulated impairment losses

Revaluations

- Must be carried out regularly

- Should be reduced to FV
- If one asset is revalued, so must the whole class
- Increase in value is credited to OCI
- Decrease in value is expensed to PL

Depreciation

- Based on the carrying amount in the SOFP. Must be determined separately for each significant part
- Excess over historical cost depreciation can be transferred to retained earnings
- Residual value, useful life and depreciation method must be reviewed at least at each FYE. Changes are changes
in accounting estimates, and accounted for prospectively
- Depreciation does not cease when asset becomes temporarily idle, retired from active use or held for disposal,
unless it is held for sale.

Derecognition

- When disposed or when no future economic benefits are expected

- On disposal of revalued assets, revaluation surplus should be transferred to RE

Exchanges of assets

- Measured at FV, unless the transaction lacks commercial substance or FV of either asset can’t be measured
reliably
- If not measured at FV, the cost is measured at the carrying amount of the asset given up
Impairment of Assets

- Written off against profit immediately; for assets carried at HC, Impairment loss recognised in PL; for assets
revalued, Impairment loss is expensed first to OCI.
- Entity should look for evidence of Impairment at the end of each period and conduct an impairment review on
any asset where there is evidence of impairment
- External indicators of impairment:
(a) Observable indications that the asset's value has declined during the period significantly more than
expected due to the passage of time or normal use
(b) Significant changes with an adverse effect on the entity in the technological or market environment, or in
the economic or legal environment
(c) Increased market interest rates or other market rates of return affecting discount rates and thus reducing
value in use
(d) Carrying amount of net assets of the entity exceeds market capitalisation.
- Internal indicators of impairment
(a) Evidence of obsolescence or physical damage
(b) Significant changes with an adverse effect on the entity*:
(i) The asset becomes idle
(ii) Plans to discontinue/ restructure the operation to which the asset belongs
(iii) Plans to dispose of an asset before the previously expected date
(iv) Reassessing an asset's useful life as finite rather than indefinite
(c) Internal evidence available that asset performance will be worse than expected
- * Once the asset meets the criteria to be classified as ‘held for sale’, it is excluded from the scope of IAS 36 and
accounted for under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
- Annual impairment tests are required for Intangible assets with indefinite useful life/not yet available for use
and goodwill acquired in a business combination
- Assets must be carried at no more than their recoverable amount
- Recoverable amount = Higher of FV less Disposal costs or Value in use
- Value in use – PV of future estimated CFs + estimated net disposal value
- Cash flow projections are based on the most recent management-approved budgets/forecasts. They should
cover a maximum period of five years, unless a longer period can be justified
- Cash flows should include:
(a) Projections of cash inflows from continuing use of the asset
(b) Projections of cash outflows necessarily incurred to generate the cash inflows from continuing use of the
asset
(c) Net cash flows, if any, for the disposal of the asset at the end of its useful life
(d) Future overheads that can be directly attributed, or allocated on a reasonable and consistent
- The cash flows should exclude:
(a) Cash outflows relating to obligations already recognised as liabilities (to avoid double counting)
(b) The effects of any future restructuring to which the entity is not yet committed
(c) Cash flows from financing activities or income tax receipts and payments
- Discount rate should be pre tax rate that reflects current market assessments of the time value of money and
the risks specific to the asset for which cash flow estimates have not been adjusted
- After impairment review, depreciation/amortisation is adjusted in future periods to allocate the assets revised
carrying amount less Residual value

Cash-generating units

- Where it is not possible to estimate the recoverable amount of an individual asset, the entity estimates the
recoverable amount of the cash-generating unit to which it belongs
 - Cash-generating unit: The smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets
- Goodwill does not generate independent cash flows and therefore its recoverable amount as an individual asset
cannot be determined. It is therefore allocated to the CGU to which it belongs and the CGU tested for
impairment. Goodwill that cannot be allocated to a CGU on a non-arbitrary basis is allocated to the group of
CGUs to which it relates.
- Impairment loss is allocated to goodwill, followed by other NCA on a pro-rata basis
- Current assets are assumed to be stated at their recoverable amount
- A reversal of impairment for a CGU is allocated on a pro-rata basis with the carrying amounts of the assets,
except for goodwill.
- Any unallocated amounts are allocated to other assets pro-rata, except for goodwill.
- Reversal is recognised in PL, except when reversing impairment on assets carried at a revalued amount, eg, an
impairment loss reversal on revalued property, plant and equipment reverses the loss recorded in profit or loss
and any remainder is credited to OCI
- Impairment loss on goodwill cannot be reversed

Corporate assets

- Group or divisional assets such as head office building etc

- Do not generate cash flows independently from other assets
- Treated similarly to goodwill
- CGU includes corporate assets , or a portion of them, that can be allocated to it on a reasonable and consistent
basis. Where this is not possible, the assets, or unallocated portion, are tested for impairment as part of the
group of CGUs to which they can be allocated on a reasonable and consistent basis.
- Where not all assets or goodwill will have been allocated to an individual CGU then different levels of
impairment tests are performed to ensure the unallocated assets are tested.
- Test of individual CGUs – Test the individual CGUs (including allocated goodwill and any portion of the carrying
amount of corporate assets that can be allocated on a reasonable and consistent basis).
- Test of group of CGUs – Test the smallest group of CGUs that includes the CGU under review and to which the
goodwill can be allocated/a portion of the carrying amount of corporate assets can be allocated on a reasonable
and consistent basis.

Fair value measurement

- The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date
- Fair value is a market-based measure
- Fair value hierachy:
(a) Level 1 inputs – Quoted prices in active markets for identical assets or liabilities that the entity can access at
measurement date
(b) Level 2 inputs – Inputs other than quoted prices within level 1 that are Observable directly or indirectly, eg,
quoted prices for similar assets in active markets or for identical or similar assets in non-active markets or
use of quoted interest rates for valuation purposes
(c) Level 3 inputs – Unobservable inputs, eg, Discounting estimates of CFs. Level 3 inputs are only used where
relevant observable inputs are not available or where the entity determines that transaction price or quoted
price does not represent fair value.
- FV measurement assumes that the transaction takes place in the principal and most advantageous market
- ‘Most advantageous market’ is assessed after taking into account transaction costs and transport costs. FV takes
into account transport costs but excludes transaction costs. FV should be measured using assumptions market
participants would use when pricing an asset or liability.
 - Active market: A market in which transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- For non-financial assets, the fair value measurement is the value for using the asset in its highest and best use or
by selling it to another market participant that would use it in its highest and best use
- The measurement of the fair value of a liability assumes that the liability remains outstanding and the market
participant transferee would be required to fulfil the obligation, rather than it being extinguished
- The fair value of a liability also reflects the effect of non-performance risk (the risk that an entity will not fulfil an
obligation)

Intangible assets

- An identifiable non-monetary asset without physical substance

- Measurement at recognition
(a) Separate acquisition – Purchase price
(b) Acquired as part of business combination – FV
(c) Internally generated goodwill – Not recognised
(d) Internally generated Intangible asset – Recognised when ‘PIRATE’ criteria met
(e) Acquired by government grant – Asset and grant at fair value, or nominal amount plus expenditure directly
attributable to preparation for use
- To assess whether an internally generated intangible assets meets the criteria for recognition, an entity classifies
the generation of the asset into a research phase and a development phase
- During the research phase, all expenditure is recognised as an expense
- During the development phase, internally generated intangible assets that meet all of the following criteria must
be capitalised:
(a) P – Probable future economic benefits
(b) I – Intention to complete and use/sell asset
(c) R – Resources adequate and available to complete and use/sell asset
(d) A – Ability to use/sell asset
(e) T – Technical feasibility of completing asset for use/sale
(f) E – Expenditure can be measured reliably
- The costs allocated to an internally generated intangible asset should be only costs that can be directly attribute
- The cost of an internally generated intangible asset is the sum of the expenditure incurred from the date when
the intangible asset first meets the recognition criteria.
- After recognition, entities can choose between the cost model and the revaluation model.
- If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active
market for this asset, the asset should be carried at its cost less any accumulated amortisation and impairment
losses.
- There will not usually be an active market in an intangible asset; therefore the revaluation model will usually not
be available
- An intangible asset with a finite useful life should be amortised over its expected useful life. An intangible asset
with an indefinite useful life should not be amortised. IAS 36 requires that such an asset is tested for impairment
at least annually.
- Amortisation begins when the asset is available for use
- The useful life and amortisation method must be reviewed at least at each financial year end and adjusted
where necessary.
- Disclosure:
(a) a reconciliation of the carrying amount of intangible assets at the beginning and end of the reporting period
(b) the amortisation methods used for assets with a finite useful life
(c) the amount of research and development recognised as an expense and
(d) a description areas of judgement such as the reasons supporting the assessment of indefinite useful lives
Investment property

- Property held to earn rentals or for capital appreciation or both, rather than for use in the production or supply
of goods or services, or sale in the ordinary course of business
- The following are not investment property
(a) Property held for sale in the ordinary course of business or in the process of construction or development
for such sale
(b) Owner-occupied property, including property held for future use as owner-occupied property, property held
for future development and subsequent use as owner-occupied property, property occupied by employees
and owner-occupied property awaiting disposal
(c) Property leased to another entity under a finance lease
- Held under FV model – any change reported to PL, not depreciated
- Cost model – same as IAS 16
- Transfers to or from investment property should only be made when there is a change in use
- A change in use occurs when the property meets, or ceases to meet, the definition of investment property and
there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a
property does not provide evidence of a change in use
- Transfer from IP to owner-occupied/inventories – Use FV at date of change of use; apply IAS 16, 2 or IFRS 16 as
appropriate after date of change of use
- Transfer from owner-occupied/Inventories to IP – Apply IAS 16 or IFRS 16 up to date of change of use; At date of
change, property revalued to FV, any difference with carrying amount treated as revaluation under IAS 16
- Gain/loss on disposal recognised in PL

Government grants

- Grants are not recognised until there is reasonable assurance that the conditions will be complied with and the
grant will be received
- Government grants are recognised in profit or loss so as to match them with the related costs they are intended
to compensate on a systematic basis
- Government grants relating to assets can be presented either as deferred income or by deducting the grant in
calculating the carrying amount of the asset
- Grants relating to income may either be shown separately or as part of ‘other income’ or alternatively deducted
from the related expense
- A government grant that becomes repayable is accounted for as a change in accounting estimate. Repayments
of grants relating to income are applied first against any unamortised deferred credit and then in profit or loss.
Repayments of grants relating to assets are recorded by increasing the carrying amount of the asset or reducing
the deferred income balance. Any resultant cumulative extra depreciation is recognised in profit or loss
immediately

Borrowing costs

- Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are
capitalised
- A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or
sale
- Funds borrowed specifically for a qualifying asset – capitalise actual borrowing costs incurred less investment
income on temporary investment of the funds
- Funds borrowed generally – weighted average of borrowing costs outstanding during the period (excluding
borrowings specifically for a qualifying asset) multiplied by expenditure on qualifying asset. The amount
capitalised should not exceed total borrowing costs incurred in the period
 - Commencement of capitalisation begins when borrowing costs and expenditures for the asset are being
incurred, and activities that are necessary to prepare the asset for its intended use or sale are in progress.
- Capitalisation is suspended when development is interrupted
- Capitalisation ceases when substantially all the activities necessary to prepare the asset for its intended use or
sale are complete
- FS disclose the amount of borrowing costs capitalised during the period & the capitalisation rate used tp
determine the amount of borrowing costs eligible for capitalisation

Agriculture

- Bearer plants are excluded from IAS 41

- Measured at FV – selling costs on initial recognition & the end of each reporting period
- After harvest, produce is measured at lower of cost or NRV
- Changes in FV are recognised in PL
- If FV can’t be measured reliably, measure at cost – accumulated depreciation and impairment losses