Workbook 3 (July 2022)

Diploma in International Public
Sector Accounting Standards
Accounting for tangible and

intangible assets − advanced level
Workbook 3
IPSAS 17 Property, Plant and Equipment
Accounting for tangible and intangible

3 assets − advanced level
Learning objectives
In this workbook we will continue with part of syllabus learning aims aims
B and C, i.e.:
Aim B: Describe the main requirements of IPSASs (30% of the
Aim C: Apply the requirements of IPSASs to determine the appropriate

treatment of events and transactions in financial statements (40% of
the syllabus).
We started in workbook 2 by looking at IPSAS 1 Presentation of Financial

Statements. We will continue in this workbook by looking at the following
IPSAS:
IPSAS 5 Borrowing costs
IPSAS 13 Leases
IPSAS 31 Intangible Assets
IPSAS 16 Investment Properties
116
3.1 IPSAS 17 Property, Plant and Equipment
3.1.1 Overview of IPSAS 17

IPSAS 17 sets out the accounting treatment for property, plant
and equipment (PPE). The main issues covered by the standard
include:
• the recognition of non-current tangible assets (such as land

and buildings, equipment, and vehicles)
• heritage assets
• infrastructure assets
• the determination of carrying amounts
• depreciation
• de-recognition
• disclosure
3.1.2 Definitions
Property, plant and equipment are 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, are
expected to be used during more than one period.
Tangible assets are those that have a physical substance.

We will look at intangible assets later in this workbook.
The carrying amount is the amount at which an asset is

recognised in the statement of financial position, after deducting
any accumulated depreciation and accumulated impairment
losses.
3.1.3 Recognition
An item of property, plant and equipment is to be recognised
as an asset when:
• it is probable that future economic benefits or service potential

associated with the item will flow to the entity; and
• the cost or fair value of the item can be measured reliably.
3.1.4 Presentation in the statement of financial position

Property, plant and equipment is usually included within non-
current assets in the statement of financial position, on the basis
that they are expected to be used for more than one period.
Where an item of property, plant and equipment is being held

pending sale, it would be included within current assets.
110
3.1.5 Measurement of property, plant and

equipment: initial treatment
Initially, property, plant and equipment are measured at cost. Cost includes:
• the purchase price, including any import duties and other
taxes
• any costs directly attributable to bring the asset to the
location and condition for its intended use
• the estimated costs of dismantling and removing the asset at
the end of its useful life
Attributable costs which can be included in the cost of the asset include:
• costs of employee benefits (i.e., staff costs) arising directly from the
construction or acquisition of the item of property, plant and equipment
• costs of site preparation
• initial delivery and handling costs
• installation and assembly costs
• costs of testing the asset
• professional fees
Borrowing costs incurred during the construction of an asset may also

be capitalised if they meet the strict criteria laid down in IPSAS 5
Borrowing Costs, and we will cover this further in Section 3.2 of this
workbook.
Costs which cannot be included in the cost of the asset include:

• administration and other general overhead costs
• costs incurred while an item capable of operating in a manner
intended by management has yet to be brought into use or is
operated at less than full capacity
• abnormal amounts of wasted labour and materials (for self-
constructed assets)
• costs of relocation/reorganisation of operations
Non-exchange transactions
If a non-current asset is acquired in a non-exchange transaction,
it means that it is received without the recipient giving equal
value in exchange; for example, if a piece of medical equipment
asset is donated to a hospital by the government of a donor
country.
Assets acquired in a non-exchange transaction are

measured at their fair value as at the date of acquisition.
111
Key definition
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.
For example, if a book publisher donates some textbooks to a school, the

school will recognise these books at the amount that it would have otherwise
cost them to buy these books (i.e. the publisher’s list price), even though the
actual cost to the school is nil.
The increase in property, plant and equipment (debit) creates the need for
a credit entry to revenue in the statement of financial performance. This
represents revenue from a non-exchange transaction, which we will look at
further in workbook 5 of this course.
3.1.6 Valuation of property, plant and equipment: initial

treatment: subsequent treatment
After acquisition of PPE, an entity may choose either the cost model or the
revaluation model as its accounting policy.
Cost model
Using the cost model, the asset is carried at its historical cost less any
accumulated depreciation and impairment losses. We will consider
impairment losses in Workbook 4 of this course.
Revaluation model
Using the revaluation model, the asset is carried in the statement of financial
position at a re-valued amount:
‘After recognition as an asset, an item of property, plant and equipment

whose fair value can be measured reliably shall be carried at a revalued
amount, being its fair value at the date of the revaluation, less any
subsequent accumulated depreciation, and subsequent accumulated
impairment losses. Revaluation shall be made with sufficient regularity
to ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the reporting date.’
(IPSAS 17, paragraph 44)
As we saw in the previous section, fair value is the amount for which an asset
could be exchanged between knowledgeable, willing parties in an arms’ length
transaction.
For some public sector assets, it may be difficult to establish their market
value because of the absence of market transactions for these assets. Some
public sector organisations may have significant holdings of such assets. In
such circumstances, the fair value may be established by reference to other
items with similar characteristics, in similar circumstances and location.
If there is no market-based evidence of fair value because of the specialised
nature of an asset, the organisation may need to estimate fair value using one
of the following bases:
112
• Reproduction cost. In some cases, an asset’s reproduction cost will be

the best indicator of its replacement cost. For example, in the event of loss,
a parliament building may be rebuilt rather than replaced with alternative
accommodation, because of its significance to the community.
• Depreciated replacement cost. In many cases, the depreciated

replacement cost of an asset can be established by reference to the buying
price of a similar asset with similar remaining service potential in an active
and liquid market.
• Service unit approach. Under this approach, the present value of the
remaining service potential of the asset is used as the basis for valuation.
When an item of PPE is re-valued, the entire class of assets to which it

belongs must be re-valued. Classes are groups of similar assets, for example
land, buildings, machinery, vehicles, fixtures and fittings.
Frequency of revaluation depends on the changes in fair value. Where only

insignificant changes in fair value are experienced, it may be appropriate to
revalue these assets every three or five years.
3.1.7 Accounting for revaluations

Revaluations are dealt with as follows:
• any increase in value is credited to a revaluation reserve
• any reduction in value is recognised as an expense in the statement of

financial performance (although a decrease which reverses part or all of
a previous increase for the same asset class is debited to the revaluation
reserve).
When an item of property, plant and equipment is revalued, any accumulated

depreciation at the date of the revaluation is treated in one of the following
ways:
• restated proportionately with the change in the gross carrying amount of

the asset so that the carrying amount of the asset after revaluation equals
the revalued amount. This method is often used when an asset is
revalued by means of applying an index to its depreciated replacement
cost
• eliminated against the gross carrying amount of the asset and the net
amount restated to the revalued amount of the asset. This method is often
used for buildings.
You need to be able to use the second method for your exam, as illustrated in
the following worked example:
113
Worked example: Revaluation
At 31 December 20X0 a university owned a building that had cost

£800,000 ten years earlier. It was being depreciated on a straight line
basis at two per cent per year.
On 1 January 20X1 a revaluation to £1,000,000 was recognised. At this

date, the building had a remaining useful life of 40 years.
The university’s policy is to eliminate all previously recognised accumulated

depreciation upon revaluation.
How would the revaluation be entered into the accounts of the university?
Solution to worked example
To enter the revaluation into the accounts of the university, we need to

identify how much the asset has been re-valued by. This is determined by
taking the difference between the new value of the asset and the previous
net book value. This amount will be credited to the revaluation reserve.
The depreciation charge will be based on the re-valued amount from this
point on.
The net book value before revaluation for the asset, as the asset will have
been depreciated by ten years at this point, will be:
(800, 000 − 160, 000) = 640, 000
The new asset valuation is £1,000,000. This means the asset has been
re-valued by 1,000,000 − 640,000 = 360,000. The double entry in the
accounts to record the revaluation will be:
Dr Buildings £200,000
(to increase from 800,000 to 1,000,000)
Dr Buildings accumulated depreciation £160,000
(to remove previous depreciation and increase net book
value to new valuation)
Cr Revaluation reserve £360,000
You may find the following working helpful for determining the
amounts to be debited/credited:
Before After Movement

revaluation revaluation £’000
£’000 £’000
Cost 800 1,000 200 − Dr Asset

Accumulated (160) − 160 − Dr Accumulated
deprecation depreciation
Net value 640 1,000 360 − Cr Revaluation

reserve
114
Note that revaluation does not eliminate the need for depreciation. The
annual depreciation charge will be calculated as the net value spread over the
remaining useful economic life, i.e. £1,000,000 / 40 = £25,000.
We will cover depreciation further in Section 3.1.9, below.
3.1.8 Classes of assets

A class of property, plant and equipment is a grouping of assets of a similar
nature or function in an entity’s operation. The following are examples of
separate classes that may apply in a public sector organisation:
• land
• operational buildings
• roads
• machinery
• electricity transmission networks
• ships
• aircraft
• weapons systems
• motor vehicles
• furniture and fixtures
• office equipment
• oil rigs
• bearer plants
Heritage assets
Public sector organisations, unlike private companies, may acquire, inherit or
receive through a donation, certain assets that are not necessarily required
for service provision. They are, however, assets that the organisation would
want to retain, usually because these assets have some cultural or other
unique significance.
IPSAS 17 does not require an entity to recognise heritage assets that would
otherwise meet the definition and recognition criteria of property, plant and
equipment.
If an entity does recognise heritage assets, it must apply the disclosure

requirements of the standard and may, but is not required to, apply the
measurement requirements of the standard.
115
Characteristics of heritage assets
The following are the main characteristics of heritage assets, which distinguish
them from other assets held by an organisation:
• their value in cultural, environmental, educational and historical terms is

unlikely to be fully reflected in a financial value based purely on a market
price
• legal and/or statutory obligations may impose prohibitions or severe

restrictions on disposal by sale
• they are often irreplaceable and their value may increase over time even if
their physical condition deteriorates
• it may be difficult to estimate their useful lives, which in some cases could
be several hundred years.
Valuation of heritage assets
The valuation of heritage assets can be difficult, especially when they are not
used primarily for providing services or when they have been acquired at no
cost.
Some heritage assets have service potential other than their heritage value (for
example, an historic building being used for office accommodation). In these
cases, they may be recognised and measured on the same basis as other
items of property, plant and equipment.
For other heritage assets, their service potential is limited to their heritage
characteristics, for example, monuments and ruins. The existence of both
economic benefits and service potential can affect the choice of measurement
base. In some cases, heritage assets may be held in the statement of financial
position with a value of nil.
Disclosure requirements for heritage assets
In addition to the general disclosures covered below in section 3.1.12,

IPSAS 17 requires the following disclosure in respect of heritage assets:
• the measurement basis used
• the depreciation method used
• the gross carrying amount
• the accumulated depreciation at the end of the period
• a reconciliation of the carrying amounts at the beginning and end of the

period showing components thereof.
116
Infrastructure assets
Public sector organisations may incur considerable expenditure on large
assets such as road networks, sewers, power supply systems, etc. These are
commonly described as infrastructure assets and usually display some or all of
the following characteristics:
• they are part of a system or network
• they are specialised in nature and do not have alternative uses
• they are immovable
• they may be subject to constraints on disposal.
Infrastructure assets meet the definition of property, plant and equipment and
should therefore be accounted for in accordance with IPSAS 17. So, although
the standard acknowledges that this distinct group of assets exists, it does
not require any particular accounting treatment for these that is any different
to other property, plant and equipment. Other standards, such as IPSAS 11
Construction contracts, also refer to infrastructure assets when discussing
application of the standard in particular situations, but again these standards
tend not to require different treatment in respect of infrastructure assets.
3.1.9 Depreciation
This is the measure of the cost or re-valued amount of the economic benefits
of the non-current asset that have been consumed during the period. The
process involves allocating the cost of using the asset to the periods in which
the benefits are derived from it.
Key definition
Depreciation The systematic allocation of the depreciable amount of
an asset over its life.
Depreciation is the accounting mechanism for ensuring that the accounting
period bears the relevant expense of utilising a non-current asset.
Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated
separately. Depreciation is consistent with the accruals principles. Note that
‘loss in value’ does not necessarily mean the same as a reduction in the
potential selling price of the asset, which is a common misconception.
Depreciation has also been referred to as a measure of the cost or valuation of
the asset that has been consumed during the accounting period. Consumption
in this sense is said to be a using up or reduction in the useful economic life of
the asset, however caused.
Which assets are depreciated?

IPSAS 17 requires that all property, plant and equipment be depreciated with
only one or two exceptions.
An exception to the requirement to depreciate is land as this normally has an
unlimited life and as such is not normally depreciated. However, there are
exceptions to this, for example a quarry will be depreciated as this will lose
value over time.
A further exception is that depreciation is not charged where the carrying
amount of the asset is lower than its residual value.
117
Calculating depreciation
When determining the amount to be written off, it is necessary to consider
useful economic life and residual value. The depreciable amount of an asset
is to be allocated on a systematic basis over its useful life.
Key definitions
Useful life (of PPE) Either:
a. The period over which an asset is expected to be available for use by an

entity; or
b. The number of production or similar units expected to be obtained from the

asset by an entity.
Residual 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.
Depreciable amount The cost of an asset, or other amount substituted for cost, less its
residual value.
Depreciation method
The depreciation method selected should reflect the pattern by which the
economic benefits are consumed. This will allow the loss in value of the asset
to be allocated over several accounting periods.
Depreciation methods include the straight-line method, the diminishing

(reducing) balance method, and the units of production (output) method.
An entity chooses the depreciation method which best reflects the pattern in
which the asset’s economic benefits or its service potential are consumed. The
depreciation method used should be reviewed each year.
Where a change in estimated life occurs, the carrying value of the asset should
be depreciated over its remaining useful life.
Also, the depreciation charge should be adjusted for current and future periods
if the estimated residual value is changed.
118
Ledger accounts
Here is a quick reminder of the ledger accounts for accounting for property,
plant and equipment.
Property, plant and equipment cost
Each category (for example premises, computers, fixtures and fittings, motor
vehicles) of property, plant and equipment must have a separate account.
Assets are recorded at cost when initially purchased. The total of all assets in
the same class is shown in the statement of financial position.
The entry for acquiring property plant and equipment will be:
Dr Asset account
Cr Bank or supplier (payable)
Accumulated depreciation
You should have a separate accumulated depreciation account for each
category of non-current asset. Keep this account separate from the non-current
asset cost (or subsequent valuation) account. Depreciation charges for the
year are debited to the statement of financial performance and credited to the
accumulated depreciation account.
The entry for annual depreciation will be:

Dr Depreciation expense (statement of financial performance)
Cr Accumulated depreciation account
The total on the accumulated depreciation account is shown in the statement
of financial position.
Changes in expected life

The expected useful life of each asset is a matter of judgement, and in some
situations, it may be necessary to reassess an asset’s useful life. This will
have an impact on the depreciation charge in future periods. For example,
where the straight-line method is used, the depreciation
charge after the useful life has been changed is determined by dividing the net
book value of the asset by the revised remaining life.
For example, if an asset was purchased for £50,000 and initially had a useful
life of 25 years, after five years it will have been depreciated by £10,000. If
the life of the asset is then reassessed and it is expected to have 16 years
remaining life, the depreciation charge in year six will be:
(£50, 000 − £10, 000) /16 = £2, 500
Note that this is a change in an accounting estimate and not a change

in accounting policy. This important distinction will be covered later in
workbook 6, when we look at IPSAS 3 Accounting Policies, Changes in
Accounting Estimates and Errors.
119
3.1.10 Subsequent expenditure

The main recognition principle of IPSAS 17 applies to subsequent expenditure
on assets, i.e. recognition can only occur when:
• it is probable that future economic benefits will flow to the entity; and
• the cost of the asset can be measured reliably.
Therefore, the costs of day-to-day servicing of assets are not included within
assets and are instead recognised within expenses. Subsequent expenditure
can only be capitalised if it results in the enhancement of an asset beyond its
original state.
For example, replacing broken windows in a building would be recognised in

expenses, but building a new extension would be capitalised within assets,
since this represents additional economic benefits that the building can now
provide.
Treatment of subsequent costs which meet the recognition

criteria
The cost of any improvement to a non-current asset is added to the non-current
asset cost account. This will give an increased net book value (i.e. increased
cost less accumulated depreciation to date), and this is the basis for the
depreciation for future periods. The depreciation charge is calculated by
dividing the new net book value by the remaining life of the asset.
For example, if an asset with a life of 10 years that cost £20,000 and has been
depreciated by £4,000 is improved at a cost of £10,000, the new depreciation
charge will be calculated as:
(£20, 000 + £10, 000 − £4, 000) /8 = £3, 250
Other types of subsequent expenditure

Parts of some items of property, plant, and equipment may require replacement
at regular intervals. For example, a road may need resurfacing every few years,
a building may need the lifts to be replaced every few years, a furnace may
require relining after a specified number of hours of use, or aircraft interiors
such as seats and galleys may require replacement several times during the life
of the airframe. Such expenditure, where it meets the basic recognition criteria,
may be capitalised.
A condition of continuing to operate an item of property, plant, and equipment

(for example, an aircraft) may be performing regular major inspections for
faults regardless of whether parts of the item are replaced. When each major
inspection is performed, its cost is recognised in the carrying amount of the
item of property, plant, and equipment as a replacement if the recognition
criteria are satisfied. Any remaining carrying amount of the cost of previous
inspection (as distinct from physical parts) is derecognised.
120
3.1.11 Derecognition
IPSAS 17 raises some issues that should be considered when dealing with the
derecognition of assets − for example removing them from the statement of
financial position when they are disposed of.
The carrying amount of an item of property, plant and equipment shall be

derecognised:
• on disposal; or
• when no future economic benefits or service potential is expected from its

use or disposal.
The gain or loss arising from the derecognition of an item of property, plant
and equipment shall be included in surplus or deficit when the item is
derecognised (unless IPSAS 13 requires otherwise on a sale and leaseback
agreement).
However, an entity that, in the course of its ordinary activities, routinely sells
items of property, plant and equipment that it has held for rental to others shall
transfer such assets to inventories at their carrying amount when they cease
to be rented and become held for sale. The proceeds from the sale of such
assets shall be recognised as revenue in accordance with IPSAS 9 Revenue
from Exchange Transactions (see workbook 5).
The disposal of an item of property, plant and equipment may occur in a

variety ways (for example by sale, by entering into a finance lease or by
donation). In determining the date of disposal of an item, an entity applies the
criteria in IPSAS 9 for recognising revenue from the sale of goods. IPSAS 13
Leases applies to disposal by a sale and leaseback. We will cover this in
Section 3.3 of this workbook.
If, under the recognition principle, an entity recognises in the carrying amount
of an item of property, plant and equipment the cost of a replacement for part
of the item, then it derecognises the carrying amount of the replaced part
regardless of whether the replaced part had been depreciated separately.
If it is not practicable for an entity to determine the carrying amount of the
replaced part, it may use the cost of the replacement as an indication of what
the cost of the replaced part was at the time it was acquired or constructed.
The gain or loss arising from the derecognition of an item of property, plant
and equipment is the difference between the net disposal proceeds (if any)
and the carrying amount of the item. The consideration receivable on
disposal of an item of property, plant and equipment is recognised initially at
its fair value.
If payment for the item is deferred, the consideration received is recognised

initially at the cash price equivalent. The difference between the nominal
amount of the consideration and the cash price equivalent is recognised as
interest revenue in accordance with IPSAS 9, reflecting the effective yield on
the receivable.
121
Exercise 3.1: Revaluation and disposal − Agency A
Year 1: Agency A buys a tangible non-current asset for £155,000,

financed by long term loan. The residual value of the
asset after a useful economic life of 6 years is estimated
to be
£35,000.
Year 2: The asset is revalued and is estimated to have a value of
£150,000 with no residual value.
Year 3: The asset is sold for £100,000
It is the policy of Agency A to depreciate assets on a straight line basis,

providing a full year’s depreciation charge in the year of acquisition and
none in the year of disposal.
Prepare the ledger accounts for the non-current asset, accumulated

depreciation, revaluation reserve and disposal.
Exercise 3.2: Revaluation and disposal − Agency B
Year 1: Agency B buys a tangible non-current asset for £75,000. The

asset is financed by a long-term loan and the useful economic
life of the asset is estimated to be 5 years.
Year 2: The asset is revalued and is estimated to have a value of
£80,000.
Year 3: The asset is sold for £65,000.
It is the policy of Agency B to depreciate assets on a straight line basis

providing a full year’s depreciation charge in the year of acquisition and
none in the year of disposal.
Prepare the accounting entries required for the asset in each of the three
years.
122
3.1.12 Disclosure requirements

IPSAS 17 contains a long list of disclosure requirements for property, plant and
equipment. The key disclosures are as follows:
• The measurement bases used
• Depreciation methods used
• The useful lives or depreciation rates used
• The gross carrying amount and accumulated depreciation at the beginning

and end of the period
• A reconciliation of the carrying amount at the beginning and end of the

period showing:
◦ revaluations
◦ additions
◦ disposals
◦ depreciation for the period
◦ impairments
◦ any other changes
In addition, the following must be disclosed for each class of asset:
a. The existence and amounts of restrictions on title, and property, plant, and
equipment pledged as securities for liabilities;
b. The amount of expenditures recognised in the carrying amount of an item

of property, plant, and equipment in the course of its construction;
c. The amount of contractual commitments for the acquisition of property,

plant, and equipment; and
d. If it is not disclosed separately on the face of the statement of financial

performance, the amount of compensation from third parties for items of
property, plant, and equipment that were impaired, lost or given up that is
included in surplus or deficit.
Further disclosures for revalued PPE

If a class of property, plant, and equipment is stated at revalued amounts, the
following shall be disclosed:
a. The effective date of the revaluation;
b. Whether an independent valuer was involved;
c. The methods and significant assumptions applied in estimating the assets’

fair values;
123
d. The extent to which the assets’ fair values were determined directly by
reference to observable prices in an active market or recent market
transactions on arm’s length terms, or were estimated using other valuation
techniques;
e. The revaluation surplus, indicating the change for the period and any
restrictions on the distribution of the balance to shareholders or other
equity holders;
f. The sum of all revaluation surpluses for individual items of property, plant,
and equipment within that class; and
g. The sum of all revaluation deficits for individual items of property, plant, and
equipment within that class.
IPSAS 17 disclosure note

Many of the key disclosures for IPSAS 17 may be presented in a table as
illustrated on the following page. You will not need to prepare this note for the
exam but it can be a useful way of approaching your workings.
Illustrative IPSAS 17 disclosure note
Land Buildings Equipment Total
£’000 £’000 £’000 £’000

Cost or Valuation
As at 1 January 20X0 650 8,100 500 9,250

Revaluations 250 0 − 250
Additions − 300 100 400
Disposals − (150) (50) (200)
As at 31 December 20X0 900 8,250 550 9,700
Accumulated Depreciation
As at 1 January 20X0 − 730 100 830
Disposals − (40) (22) (62)
Charge for the year − 206 118 324
As at 31 December 20X0 − 896 196 1,092
Carrying Value
As at 1 January 20X0 650 7,370 400 8,420
As at 31 December 20X0 900 7,354 354 8,608
You can practise preparing this note in the following exercise.
124
Exercise 3.3: IPSAS 17 disclosure note

The following balances are an extract from Agency C’s trial balance at 31
December 20X0:
£ Dr £ Cr
Land and Buildings − at previous revaluation 118,000
Plant and Machinery − at cost 76,350
Accumulated depreciation: buildings (at 1 Jan 20X0) 24,500
Accumulated depreciation: plant and machinery (at 15,400
1 Jan 20X0)
The following information is available for non-current assets:
1. Land is valued at £20,000 and is considered to have an infinite useful

economic life.
2. Buildings are revalued regularly in line with IPSAS 17. They have been
valued at £105,000 as at 31 December 20X0. Depreciation is to be
charged based on the year-end value.
3. Buildings are depreciated on a straight line basis over their estimated

useful economic life. At 1 January 20X0 their useful economic life was
estimated to be 20 years.
4. Plant and machinery with original cost of £15,000 was disposed of

during 20X0. Accumulated depreciation on this asset at 1 January
20X0 was £7,500. The asset was sold for £9,000. No entries have been
made for this disposal.
5. Plant and machinery is depreciated using the reducing balance

method at 15%.
6. Assets are not depreciated in the year of disposal.
Prepare the IPSAS 17 disclosure note for tangible non-current assets.
125
IPSAS 5 Borrowing Costs
3.2 IPSAS 5 Borrowing Costs
3.2.1 What are borrowing costs?

Borrowing costs are interest and other costs that an organisation incurs in
connection with the borrowing of funds.
For example:
• Loan interest
• Finance lease interest charges
• Amortisation of discounts or premiums related to borrowing.
Usually borrowing costs are recognised as an expense in the period in which

they are incurred in the statement of financial performance. This is known as
the Benchmark Treatment. However, IPSAS 5 states that those borrowing
costs that are directly attributable to the acquisition, construction or
production of a qualifying asset may be included in the cost of that asset,
i.e. capitalised. This is known as the Allowed Alternative Treatment.
A qualifying asset is an asset that necessarily takes a substantial period of

time to get ready for its intended use or sale.
For example, property, plant and equipment or investment property during

the construction period, intangible assets during the development period, or
‘made to order’ inventories.
Borrowing costs that are ‘directly attributable’ are those that would have
been avoided if the expenditure on the qualifying asset had not been made.
Borrowing costs may include interest on short term borrowings, finance
charges in respect of finance leases and amortisation of discounts relating
to borrowings.
3.2.2 Specific borrowing costs

When an organisation borrows funds specifically for the purpose of obtaining a
qualifying asset, then those borrowing costs can be readily identified.
The amount of borrowing costs eligible for capitalisation will be the actual
borrowing costs incurred on that borrowing during the period less any
investment income earned on the temporary investment of these funds.
Worked example: Specific borrowing costs
An organisation incurred borrowing costs for the year of £30m, of

which £7m related specifically to the construction of a qualifying asset.
Investment income received on the funds during the year amounted to
£750,000 of which £160,000 relates to the borrowing for the qualifying
asset.
126
How should the £30m borrowing costs be recorded in the organisation’s

financial statements for that year?
The £7m borrowing costs less the £160,000 investment income relating to
the qualifying asset should be capitalised. The remainder of the borrowing
costs, £23m, and investment income, £590,000 should be charged to the
statement of financial performance.
Debit Non-current asset (£7m − £0.16m) £6.84m

Debit Statement of financial performance − finance costs £23.00m
Credit Statement of financial performance − investment £0.59m
income
Credit Bank (£30m − £0.75m) £29.25m
3.2.3 General borrowing costs

Where funds are borrowed generally and applied in part to a qualifying asset,
we need to calculate a weighted average cost of borrowing to determine the
amount of borrowing costs to capitalise.
Worked example: General borrowing costs
An organisation has the following loans in place:
1 Jan 20X0 31 Dec 20X0

£m £m
10% bank loan 120 120
9.5% bank loan 80 80
200 200
On 1 January 20X0 the organisation began to build a qualifying asset

using existing borrowings. Expenditure incurred on the construction was
£30m on 1 January 20X0 and £20m on 1 October 20X0.
How should the borrowing costs be recorded in the organisation’s

financial statements for that year?
The total interest charge for the year is:
(10% × £120 m) + (9.5% × £80 m) = £19.60 m
We need to calculate the borrowing costs relating to the qualifying asset −

to do this we need to calculate the weighted average borrowing rate and
apply it to the borrowing for the qualifying asset.
127
Weighted average rate:
(10% × 120/200) + (9.5% × 80/200) = 9.8%
Qualifying asset borrowing costs:
(£30 m × 9.8% × 12/12) + (£20 m × 9.8% × 3/12) = £3.43 m
£3.43m borrowing costs should be capitalised.
Debit Non-current asset £3.43m

Debit Statement of financial performance − finance costs £16.17m
Credit Bank £19.6m
3.2.4 Commencement and cessation of capitalisation

Commencement of capitalisation
Capitalisation of borrowing costs as part of the cost of a qualifying asset
commences when:
1. expenditure for the asset is being incurred
2. borrowing costs are being incurred
3. activities that are necessary to prepare the asset for its intended use or sale
are in progress.
If development of the qualifying asset is suspended for an extended period

then the capitalisation of borrowing costs should also be suspended.
Cessation of capitalisation
When the asset is substantially ready for use or sale then borrowing costs
should no longer be capitalised.
3.2.5 Disclosures for capitalised borrowing costs

An organisation should disclose:
• the accounting policy adopted for borrowing costs
• the amount of borrowing costs capitalised during the period
• the capitalisation rate used to determine the amount of borrowing costs

eligible for capitalisation (where it was necessary to apply a capitalisation
rate to general borrowings).
The following exercise requires a systematic approach.
128
Exercise 3.4: Capitalisation of borrowing costs (1)

On 1 July 20X7 an organisation began a £2.2m construction project for a
building. It is expected that the building will be completed by the end of
June 20X9. During the year ended 30 June 20X8, the following payments
were made to the contractor:
Payment date £’000s

1 July 20X7 200
30 Sept 20X7 600
31 March 20X8 1,200
30 June 20X8 200
Total 2,200
The organisation’s borrowings for the year ending 30 June 20X8 were as
follows:
• 10% four-year loan with simple interest payable annually which

relates specifically to the project. Debt outstanding on 30 June 20X7
amounted to £700,000 and there were no movements during the year.
Interest of £65,000 was incurred on these borrowings during the year,
and interest income of £20,000 was earned on these funds while they
were held in anticipation of payments.
• 12.5% 10-year with simple interest payable annually. Debt outstanding

at 1 July 20X7 amounted to £1,000,000 and remained unchanged
during the year. The debt does not relate to any specific project.
• 10% 10-year with simple interest payable annually. Debt outstanding

at 1 July 20X7 amounted to £1,500,000 and remained unchanged
during the year. The debt does not relate to any specific project.
The organisation’s policy is to capitalise all borrowing costs that meet the
IPSAS 5 requirements.
Calculate the amount of borrowing costs to be capitalised for the year

ending 30 June 20X8.
129
Exercise 3.5: Capitalisation of borrowing costs (2)

On 1 January 20X6 a government agency borrowed £1.5 million to finance
the production of two assets, both of which were expected to take a year
to build. Production started during 20X6.
The loan facility was drawn down on 1 January 20X6 and was utilised as
follows, with the remaining funds invested temporarily:
Payment date Asset A Asset B

£ £
1 January 20X6 250 500
1 July 20X6 250 500
The loan rate was 9% and the agency can invest surplus funds at 7%.
The agency’s policy is to capitalise all borrowing costs that meet the
IPSAS 5 requirements.
Ignoring compound interest, calculate the borrowing costs which may be

capitalised for each of the assets and consequently the cost of each asset
as at 31 December 20X6.
130
IPSAS 13 Leases
3.3 IPSAS 13 Leases

Many public sector organisations enter into legal arrangements where they
obtain the use of an asset (in return for a series of payments) but do not
take over the legal ownership of the asset. This raises issues regarding how
such transactions should be accounted for. IPSAS 13 has been developed
to prescribe how different types of lease should be treated in the financial
statements.
3.3.1 Operating and finance leases

IPSAS 13 defines a lease as “an agreement whereby the lessor [the party that
owns the asset] conveys to the lessee [the party that will use the asset], in
return for a payment or series of payments, the right to use an asset for an
agreed period of time.”
There will usually be a contract that specifies the details regarding the rights
and responsibilities relating to the asset. This might include who is to be
responsible for repairing and maintaining the asset, whether ownership
transfers at any point in time (for example after the final payment), how the
asset can and cannot be used (for example whether a building can be sub-let
to another party), etc.
The contract will also give details of the payments that are due under the terms
of the lease. These might be of a fixed amount each year over the lease period
or may include additional payments that depend on how the asset is actually
used, or other factors. There may, for example, be an extra payment in addition
to the annual payments.
As a result of there being individual contracts for individual leases, if there

were no standard prescribing the accounting treatment for leases, there would
be potential for an unlimited variety of accounting policies being applied by
different organisations. The objective of IPSAS 13 is to ensure reasonable
consistency in the accounting for leases irrespective of the legal requirements
under the terms of each individual contract or lease agreement.
3.3.2 Classification of a lease

The standard deals with two main types of lease, operating leases and finance
leases. Finance leases are defined very specifically, while anything that does
not fit the definition is deemed to be an operating lease.
Key definitions
Finance lease A lease that transfers substantially all the risks and
rewards incidental to ownership of an asset.
Operating lease Any lease that is not a finance lease.
As you can see, the distinction between a finance lease and an operating lease
is defined in terms of risks and rewards. Risks include the possibility of losses
from idle capacity, technological obsolescence or changes in the asset’s
value due to changing economic conditions. Rewards may be represented by the
expectation of service potential or profitable operation over the asset’s economic life
and a gain from an increase in the asset’s value.
In this context, the following are situations that would normally result in a lease
being classified as a finance lease, but not all of these needs to be met for a
lease to be treated as a finance lease:
131
IPSAS 13 Leases
• The transfer of ownership to the lessee by the end of the lease.
• The lessee has the option to purchase the asset at a price below the fair
value.
• The lease term is for the major part of the life of the asset.
• Minimum lease payments amount to substantially all the fair value of the
asset.
• Leased assets are of a specialised nature, such that only the lessee can
use them without major modifications being made.
• The leased asset cannot easily be replaced with another asset.
Exercise 3.6: Classification of leases

A government entity enters an arrangement with a private
company to lease six minibuses for two years. The lease can be
cancelled by either party by giving one month’s notice. The private
company is responsible for all servicing and repairs of the vehicles.
A university has entered into an arrangement with a private company

to lease a suite of offices for 25 years. The lease is only cancellable
with the agreement of both parties. The university must pay for all
insurance, repairs, taxes etc associated with the premises and is able
to make certain modifications to the premises if it needs to.
Explain whether you would classify each of these two leases as operating
or finance leases.
3.3.3 Accounting for operating leases

Accounting for an operating lease is the easier of the two, so we can deal with
this first. The basic requirement is that the operating lease payments should be
recorded as an expense in the statement of financial performance on a straight
line basis, unless another systematic basis is representative of the time pattern
of the user’s benefit.
132
IPSAS 13 Leases
The principle is because the risks and rewards have not been transferred to
the organisation that is using the asset, the payments should be recorded in a
similar way to expenses such as rental payments. The accounting entry then
is in most cases simply a debit to the appropriate operating expenses account
and a credit to the cash account for the annual lease payments.
The fact that the standard requires this to be on a straight line basis adds
a slight complication in some cases. For example, an operating lease may
involve the payments:
Year Payment
1 £10,000
2 £25,000
3 £25,000
If we want to account for this on a straight line basis, the annual expense
should be £20,000 (i.e. total payments of £60,000 over three years). In year
1, the statement of financial performance should show an expense of £20,000
and the accounting entries will be:
Dr Operating lease expenses £20,000

Cr Cash £10,000
Cr Payables £10,000
This means that we allocate the total lease cost of £60,000 over the periods in
which the benefit is received from the use of the asset. As the benefit received
from using the asset is the same in all three years, regardless of the fact that
we paid less for year 1, we recognise a lease cost of £20,000 each year.
.
£20,000 will be recognised in year two by reducing, in part, the liability

recorded in year one:
Dr Operating lease expenses £20,000

Dr Payables £ 5,000
Cr Cash £25,000
In the third and final year the same accounting entries will be put through as in
year two, thus fully accounting for the liability.
3.3.4 Accounting for operating leases – lessor

Lessors continue to present assets subject to operating leases in their
statements of financial position according to the nature of the asset. Where
appropriate, these assets continue to be depreciated or amortised.
Lease revenue from operating leases is recognised as revenue on a straight-
line basis over the lease term, unless another systematic basis is more
representative of the time pattern in which benefits derived from the leased
asset is diminished. This mirrors the accounting by lessees.
Initial direct costs incurred by lessors in negotiating and arranging an operating

lease shall be added to the carrying amount of the leased asset, and
recognised as an expense over the lease term on the same basis as the lease
revenue. In other words, the indirect costs are treated as a separate component
of the leased asset, and depreciated or amortised over the lease term, as this is
period over which the benefits of the indirect costs are consumed.
133
IPSAS 13 Leases
3.3.5 Accounting for finance leases - lessees

Finance leases can be much more complicated to account for. The key
difference from the accounting for an operating lease is that assets acquired
under a finance lease should be treated as assets in the lessee’s statement of
financial position along with assets actually owned by the organisation. This
entry is balanced initially by a liability in the statement of financial position of
an equal amount. This initial amount should be equal to the fair value of the
leased asset or the present value of the minimum lease payments if that is
lower.
Present values take into account the timing of a payment, reducing future
payments depending on how far into the future they occur using an appropriate
discount rate.
For example, let us assume that a government entity enters into a five year
lease arrangement for computer equipment. The assets are expected to have
a useful life of five years and the organisation will be responsible for all
maintenance of the equipment. The fair value of the computers is £75,000 and
annual payments are £20,000. To account for this fully, we need to complete
four steps which we will now look at in order.
Step 1 Record the asset and the associated liability

This will be at the fair value of the assets.
Dr Non-current assets £75,000

Cr Non-current liabilities £75,000
This shows the user of the statement of financial position that the organisation
has use of assets worth £75,000 and these will be included along with any
owned non-current assets.
Step 2 Depreciate the asset

As we are including the computers along with our other assets they should
be depreciated in the same way as the owned assets. Assuming straight line
depreciation, the entries would be:
£75, 000/5 years = £15,000
Dr Operating expenses £15,000

Cr Accumulated depreciation £15,000
This means after one year that the organisation will show an asset with a net
book value of £60,000 (i.e. non-current asset cost of £75,000 less one year’s
depreciation of £15,000).
Note that the asset should always be depreciated over the shorter of the useful
economic life and lease term.
134
IPSAS 13 Leases
Step 3 Split the payment into a finance charge and a

reduction in the outstanding liability
You may have noticed that the total payments are more than the fair value that we
have just shown under non-current assets, i.e. total payments are £100,000 and
the fair value is £75,000. The difference between the two is effectively a finance
charge and that is how IPSAS 13 requires it to be recorded. Each time a payment
of £20,000 is recorded this will need to be split into two, i.e. part of the £20,000 will
be shown as a reduction in the outstanding liability on the statement of financial
position and the remainder shown as finance charge in the statement of financial
performance.
The simplest way to do this would be on a straight line basis, i.e. split the
finance charge equally over the life of the asset (£25,000 (being the excess
of payment value compared to the fair value of the asset) / 5 years (life of
the lease term) = £5,000 p.a.). However, as the liability reduces, it would be
reasonable to expect the finance charge to reduce as well. For this reason
IPSAS 13 requires the finance charge to be allocated to periods in a way that
produces a constant rate of interest on the remaining balance of the liability.
It can be quite complicated to calculate this rate of interest so the standard
allows an approximation to be used to simplify the calculation.
One commonly used approach is the sum of digits method. This can be
applied to the example above to split the £20,000 annual payment between a
finance charge and a reduction in the liability. We do this by using the number
of years involved in the lease as a basis for weighting the finance charge in
each year, with year 1 being given the highest weighting:
Year Weight
1 5
2 4
3 3
4 2
5 1
Total 15
The sum of all the weightings is 15 and we allocate 5/15 to year 1, 4/15 to year
2 and so on. The finance charge in year 1 will therefore be 5/15 × £25,000 =
£8,333. This means that the remaining £11,667 of the annual payment will be
shown as a reduction in the liability.
Dr Finance charge £8,333

Dr Non-current liabilities: finance lease £11,667
Cr Cash £20,000
Step 4 Split the outstanding liability between current liabilities

and non-current liabilities
The liability has now been reduced to £63,333 (i.e. £75,000 − £11,667). This
amount is partly due to be paid within the next year and partly due to be paid
in more than one year. As the statement of financial position distinguishes
between current and non-current liabilities the £63,333 should be allocated
accordingly.
To do that, we need to work out the split in the payment for year 2. The
finance charge in year 2 will be 4/15 × £25,000 = £6,666 This means that the
reduction in the liability in year 2 will be £13,333 (i.e. £20,000 − £6,667).
135
IPSAS 13 Leases

Cr Current liabilities: finance lease £13,333
This results in the statement of financial position at the end of year 1 showing
the following information:
Non-current assets (NBV) £60,000

Current liabilities: finance lease £13,333
Non-current liabilities: finance lease £50,000
Note that, although initially the asset and the liability relating to the lease were
the same amount (i.e. the fair value of £75,000), at the end of year 1 they can
be different if, as in this case, the rate of depreciation is not the same as the
rate of reduction of the liability.
We can show the reduction in the liability in a table.
Year Liability b/f Interest Principal Payment Liability c/f

£ £ £ £ £
1 75,000 8,333 11,667 20,000 63,333
2 63,333 6,666 13,333 20,000 50,000
3 50,000 5,000 15,000 20,000 35,000
4 35,000 3,333 16,667 20,000 18,333
5 18,333 1,666 18,333 20,000 0
Exercise 3.7: Finance lease (Chocolate Standards Agency)
A non-current asset has been acquired on a finance lease by the

Chocolate Standards Agency. The lease period is 3 years. The fair value
of the asset is £40,000 and the lease charge payable on the last day of
each financial year is £15,000 per annum.
Show the amounts taken to the statement of financial performance and

the statement of financial position for the year-ended 31 December 20X0
using the sum of digits method.
136
IPSAS 13 Leases
Exercise 3.8: Finance lease (The Organic Farming Agency)

The Organic Farming Agency leased a piece of plant and machinery from
Millers Ltd on 1 January 20X0. The fair value of the leased machinery is
£82,000 and in return for five years use of the asset, the agency agreed to
pay Millers Ltd £20,000 per year on the last day of the year.

3.3.6 Finance leases with payments in advance

In the examples above, we assumed that the lease payments were made
at the end of the year. This meant that we needed to accrue a full year’s
interest when splitting the lease payment into interest and principal. If the lease
payment is actually made in advance, the pattern in which interest is accrued
will be different, and this should be taken into account in the way that interest
is calculated and accrued.
Worked example: Payments in advance
A government agency leased a piece of plant and machinery from

Leases-R-Us Plc on 1 January 20X0. The fair value of the leased
machinery is £100,000 and the lease term is three years.
Payments of £40,210 are made on the first day of each financial year.
Using the sum of digits method, show how the amounts are taken to the
statement of financial performance and the statement of financial position
for the year-ended 31 December 20X0. Use straight line depreciation.
The agency makes each of the three annual lease payments on the first
day of the year. Therefore, in the third (i.e. final) year of the lease, there
is no liability to the leasing company (as the final payment has been
made on the first day of the year) and hence no finance cost needs to be
recognised for the last year of the lease.
Therefore, when spreading the finance cost across the years of the lease
no allocation is needed for year 3.
137
IPSAS 13 Leases
Step 1: Capitalise asset
We need to debit non-current assets with the fair value of £100,000, with
the other side of the entry being a credit to liabilities.
Step 2: Depreciate the asset
The depreciation calculation is the same whether the payment is in

advance or arrears, i.e.:
£100, 000
= £33,333
3 years
Step 3: Split the payment into a finance charge and a reduction in the
liability
Total lease payments (3 × £40,210) £120,630

Fair value of asset £100,000
Total finance cost £20,630
As no finance cost is needed for year 3, we need to eliminate the final year
from our sum of digits calculation, i.e. 1 + 2 = 3
Year 1: 2/3 × £20,630 = £13,753

Year 2: 1/3 × £20,630 = £6,877
Year 3: No finance cost
Step 4: Split the outstanding liability between payables and non-

current liabilities
We can now use these finance cost amounts to calculate the closing
liability on the statement of financial position.
Note that this table is set out differently to the payments in arrears
example because the payment happens on the first day of the year
(hence the immediate reduction in the initial balance by the annual lease
payment).
Therefore, the finance cost for the year has to be accrued as it is not paid
to the leasing company until the first day of the next financial year.
Year Liability Interest Principal Payment Liability

b/f £ £ £ c/f
£ £
1 100,000 (40,210) 59,790 13,753 73,543
2 73,543 (40,210) 33,333 6,877 40,210
3 40,210 (40,210) 0 0 0
The total closing liability at the end of Year 1 has to include the interest
that has accrued during the year but will not be paid off until day 1 of
138
IPSAS 13 Leases
the next financial year (i.e. a total liability of £73,543). Of this, the current
liability amount is the whole of next year’s lease payment (as it is due
immediately after the end of the current financial year). Non-current
liabilities are the remainder, i.e. £33,333.
Therefore, the following amounts will be taken to the financial statements:
Statement of financial performance for the year ended 31 December

20X0 (extract)
Expenses
Depreciation expense
Finance costs
Statement of financial position for the year ended 31 December 20X0

(extract)
£
Non-current assets (NBV) 66,667
Non-current liabilities 33,333
Current liabilities 40,210
Exercise 3.9: Finance lease (payments in advance)

A government farming agency leased a piece of plant and machinery from
Millers Ltd on 1 January 20X0. The fair value of the leased machinery is
£82,000 and in return for five years use of the asset, the agency agreed to
pay Millers Ltd £20,000 per year on the first day of the year.

139
IPSAS 13 Leases
3.3.7 Finance leases: Other methods of allocating

finance costs
In the examples above, we have used the sum of digits method to allocate the
finance costs across the lease period. IPSAS 13 states (paragraphs 34 to 35):
‘The finance charge shall be allocated to each period during the lease
term so as to produce a constant periodic rate of interest on the
remaining balance of the liability. In practice, in allocating the finance
charge to periods during the lease term, a lessee may use some form of
approximation to simplify the calculation.’
The standard does not mention the sum of digits method, or any other specific
method of allocating the finance costs. The key issue is that the expense each
year should reflect the outstanding liability during that period at a constant rate
of interest. As the liability reduces, the finance cost should also reduce. It is
clear from the examples above that the sum of digits method achieves this
objective, but in a very simplified way.
An alternative approach would be to charge the finance costs using a straight

line method. This would mean that the same expense is charged to the
statement of financial performance each year. However, this would not meet
the requirements of IPSAS 13. If the expense remains the same while the
liability is being reduced, in effect this means that the interest rate being
applied must be increasing each year. IPSAS 13 clearly requires a constant
rate of interest to be applied.
A further method that would meet the requirements of IPSAS 13 is the

actuarial method. This involves using a specified percentage as the basis for
determining the interest expense in each period. The method for computing
this specified percentage is complex and outside the scope of your studies.
Therefore, you will be given the necessary percentage and you need to
understand only how to apply it. The only part of the process that is affected
is Step 3. All the accounting entries are the same as when using the sum of
digits method.
We can look at how this works by returning to an earlier example.
Worked example: Actuarial method
A government entity enters into a five year lease arrangement for

computer equipment. The assets are expected to have a useful life of
five years and the organisation will be responsible for all maintenance
of the equipment. The fair value of the computers is £75,000 and annual
payments are £20,000.
Using the actuarial method, and applying an effective interest rate of

10.42%, the following pattern of interest expenses would result (allowing
for rounding):
140
IPSAS 13 Leases
Opening Finance Reduction Closing

liability cost 10.42% in liability liability
£ £
£ £
75,000 7,815 12,185 62,815
62,815 6,545 13,455 49,360
49,360 5,143 14,857 34,503
34,504 3,595 16,405 18,098
18,098 1,902 18,098 0
25,000 75,000
The finance cost is determined by multiplying the opening liability by the

year). So in year 1, this is £75,000 × 10.42% = £7,815. In the final year,
the figures have been modified slightly to ensure that the total finance
costs over the life of the lease come to the required £25,000. Using the
actuarial method this adjustment may be needed unless the interest rate
is specified to several decimal places to avoid rounding differences.
We can see how the figures calculated are similar to the sum of digit
calculations in the previous example. As with the sum of digits method,
the finance cost reduces each year in line with the reduction in the
liability, thus complying with the requirements of IPSAS 13.
The use of technology can simplify the calculation of the effective
interest rate. For example, the use of the RATE function in a
spreadsheet, using the parameters of 5 payments of £20,000 at the end
of the period and a present value of the asset of £75,000 will return the
interest rate of 10.42% The ability to use technology will be beneficial in
applying IPSAS 13 in your work, but is not required as part of this
course.
A government farming agency leased a piece of plant and machinery
from Millers Ltd on 1 January 20X0. The fair value of the leased
machinery is
£82,000 and in return for five years use of the asset, the agency
agreed to pay Millers Ltd £20,000 per year on the last day of the year.
Show the amounts taken to the statement of financial performance
and the statement of financial position for the year-ended 31
December 20X0 using the actuarial method using an effective
interest rate of 7%.
141
IPSAS 13 Leases
3.3.8 Accounting for finance leases - lessor
Other IPSAS require the lessor to derecognise an asset that is subject to a

finance lease. For example, earlier, we noted that IPSAS 17 says that “the
disposal of an item of property, plant and equipment may occur in a variety ways
(for example by sale, by entering into a finance lease or by donation).”
Lessors shall recognize lease payments receivable under a finance lease as
assets in their statements of financial position. They shall present such assets as
a receivable at an amount equal to the net investment in the lease.
The net investment in the lease is the gross investment in the lease discounted at
the interest rate implicit in the lease.
The gross investment in the lease is the aggregate of:
(a) The minimum lease payments receivable by the lessor under a finance lease;
and
(b) Any unguaranteed residual value accruing to the lessor.
The interest rate implicit in the lease is the discount rate that, at the inception of
the lease, causes the aggregate present value of:
(a) The minimum lease payments; and
(b) The unguaranteed residual value to be equal to the sum of (i) the fair value of
the leased asset, and (ii) any initial direct costs of the lessor. A consequence of
the definition of the interest rate implicit in the lease is that it automatically
includes the initial direct costs of the lessor in the lease receivable; these do not
need to be added separately.
The recognition of finance revenue shall be based on a pattern reflecting a
constant periodic rate of return on the lessor’s net investment in the finance lease.
In the examples considered above for the lessee, there was no residual value,
and no incidental costs of the lessee. Assuming there were no incidental costs of
the lessor, the lessor’s accounting for the lease receivable would mirror the
lessee’s accounting for the lease liability.
142
IPSAS 13 Leases

Operating leases:
Lessees must disclose:
(a) The total of future minimum lease payments under non-cancellable operating
leases for each of the following periods:
(i) Not later than one year;
(ii) Later than one year and not later than five years; and
(iii) Later than five years;
(b) The total of future minimum sublease payments expected to be received
under non-cancellable subleases at the reporting date;
(c) Lease and sublease payments recognised as an expense in the period, with
separate amounts for minimum lease payments, contingent rents, and
sublease payments; and
(d) A general description of the lessee’s significant leasing arrangements
including, but not limited to, the following:
(i) The basis on which contingent rent payments are determined
(ii) The existence and terms of renewal or purchase options and escalation
clauses; and
(iii) Restrictions imposed by lease arrangements, such as those concerning
return of surplus, return of capital contributions, dividends or similar
distributions, additional debt, and further leasing.
Lessors must disclose:
(a) The future minimum lease payments under non-cancellable operating leases
in the aggregate and for each of the following periods:
(i) Not later than one year;
(ii) Later than one year and not later than five years; and
(iii) Later than five years;
(b) Total contingent rents recognised in the statement of financial performance in
the period; and
(c) A general description of the lessor’s leasing arrangements.
Finance leases:
Lessees must disclose:
(a) For each class of asset, the net carrying amount at the reporting date;
(b) A reconciliation between the total of future minimum lease payments at the
reporting date, and their present value;
(c) In addition, an entity shall disclose the total of future minimum lease
payments at the reporting date, and their present value, for each of the
following periods:
i. Not later than one year;
ii. Later than one year and not later than five years; and
iii. Later than five years;
143
IPSAS 13 Leases
(d) Contingent rents recognised as an expense in the period;
(e) The total of future minimum sublease payments expected to be received

under non-cancellable subleases at the reporting date; and
(f) A general description of the lessee’s material leasing arrangements

including, but not limited to, the following:
i. The basis on which contingent rent payable is determined;
ii. The existence and terms of renewal or purchase options and

escalation clauses; and
iii. Restrictions imposed by lease arrangements, such as those
concerning return of surplus, return of capital contributions, dividends
or similar distributions, additional debt, and further leasing.
Lessors must disclose:
(a) A reconciliation between the total gross investment in the lease at the
reporting date, and the present value of minimum lease payments
receivable at the reporting date. In addition, an entity shall disclose the
gross investment in the lease and the present value of minimum lease
payments receivable at the reporting date, for each of the following
periods:
i Not later than one year;
ii Later than one year and not later than five years; and
iii Later than five years;
(b) Unearned finance revenue;
(c) The unguaranteed residual values accruing to the benefit of the lessor;
(d) The accumulated allowance for uncollectible minimum lease payments

receivable;
(e) Contingent rents recognised in the statement of financial performance;

and
(f) A general description of the lessor’s material leasing arrangements.
144
IPSAS 13 Leases
3.4 IPSAS 31 Intangible Assets
3.4.1 Overview
IPSAS 31 Intangible Assets, specifies the criteria that determine when an
intangible non-current asset can be recognised, how to measure its carrying
value and explains disclosure requirements. Examples of intangible assets in
the public sector include:
• Airport landing rights
• Licences to operate radio and television stations
• Licences to operate mobile telecommunications networks
• Computer software
The standard’s objective is to provide guidance on the treatment of intangible

assets not dealt with in other standards, and therefore many types of assets
are outside of its scope, including:
• Financial assets (IPSAS 28)
• Assets arising from employee benefits (IPSAS 39)
• Intangible assets held for sale in the ordinary course of business (IPSAS 11
Construction Contracts and IPSAS 12 Inventories)
• Goodwill (IPSAS 40, Public Sector Combinations)
Key definition
Intangible asset An identifiable non-monetary asset without physical

substance.
An asset is identifiable if it either:
a. is separable, i.e., is capable of being separated or divided from the entity

and sold, transferred, licensed, rented, or exchanged, either individually or
together with a related contract, identifiable asset or liability, regardless of
whether the entity intends to do so; or
b. arises from binding arrangements (including rights from contracts or

other legal rights), regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.
3.4.2 Recognition and measurement of intangible assets

Recognition
The recognition of an item as an intangible asset requires an entity to
demonstrate that the item meets:
• the definition of an intangible asset (see above); and
• the recognition criteria.
145
The recognition criteria are as follows − both must be met in order for an
intangible asset to be recognised:
a. It is probable that the expected future economic benefits or service

potential that are attributable to the asset will flow to the entity; and
b. The cost or fair value of the asset can be measured reliably.
Internally generated goodwill cannot be recognised as an intangible asset as

it does not meet the recognition criteria: it is not an identifiable resource (i.e. it
is not separate and does not arise from binding arrangements) and it cannot be
reliably measured at cost.
Measurement
If the recognition criteria are met, then the asset will initially be measured at
cost. Cost includes the purchase price of the asset, including import duties,
non-refundable purchase taxes and any directly attributable cost of preparing
the asset for its intended use. Directly attributable costs include professional
fees and testing costs and exclude administrative overheads and costs
incurred while an asset is capable of operating but has yet to be brought into
use.
This is a similar principle to what we saw with regards to the initial
recognition of property, plant and equipment under IPSAS 17.
A public sector entity may acquire an intangible asset through a non-exchange

transaction ( for example donation of a pharmaceuticals patent to university)
The initial cost at acquisition will then be its fair value.
Key definition
Fair value The amount for which an asset could be exchanged, or a

liability settled, between knowledgeable, willing parties in
an arm’s length transaction.
3.4.3 Types of intangible assets

For the purposes of our studies intangible assets can be broken down into two
main categories:
• Internally generated (development costs), which is essentially where an

entity is incurring costs on developing a new product, materials or system
• Other (separately acquired) intangibles: this would include copyrights and

patents, brands, licenses and franchises.
Public sector organisations frequently expend resources, or incur liabilities,

on the acquisition, development, maintenance, or enhancement of intangible
resources such as scientific or technical knowledge, design and implementation
of new processes or systems, licences, intellectual property, and trademarks
(including brand names and publishing titles).
Common examples of items encompassed by these broad headings are

computer software, patents, copyrights, motion picture films, lists of users of a
service, acquired fishing licences, acquired import quotas, and relationships
with users of a service.
146
Some public sector entities may have intangible heritage assets, such as the
rights to use the likeness of a significant public person on postage stamps or
collectible coins. IPSAS 31 does not require an entity to recognise intangible
heritage assets but if it does so, it must apply the measurement requirements
of the standard.
3.4.4 Internally generated intangible assets: development

costs
IPSAS 31 makes an important distinction between research costs and
development costs. The significance of the distinction is that research costs
must be charged as an expense to the statement of financial performance,
whereas development costs, where they meet the recognised criteria,
are capitalised and recognised as an intangible non-current asset on the
statement of financial position.
Key definitions
Research is original and planned investigation undertaken with the

prospect of gaining new scientific or technical knowledge and
understanding.
Development is the application of research findings or other knowledge

to a plan or design for the production of new or substantially improved
materials, devices, products, processes, systems or services before the start
of commercial production or use.
A public sector entity must be able to demonstrate all of the following six
criteria in order to recognise development expenditure as an asset:
a. The technical feasibility of completing the intangible asset so that it will be

available for use or sale;
b. Its intention to complete the intangible asset and use or sell it;
c. Its ability to use or sell the intangible asset;
d. How the intangible asset will generate probable future economic benefits or
service potential. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the intangible
asset;
e. The availability of adequate technical, financial and other resources to

complete the development and to use or sell the intangible asset; and
f. Its ability to measure reliably the expenditure attributable to the intangible

asset during its development.
Accounting treatment for internally generated intangible

assets
Research costs: Written off as incurred to the statement of financial
performance (expenses).
147
Development costs: Written off as incurred to the statement of financial

performance, unless it meets all the criteria outlined above for capitalisation.
The costs to be capitalised comprise all directly attributable costs necessary

to create, produce and prepare the asset to be capable of operating in
the manner intended by management. This will include costs of materials,
employee benefits and amortisation of patents/licences used to generate the
asset and will exclude selling, administrative and other general overhead
expenditure unless it can be directly attributed to preparing the asset for use.
Expenditure on training staff to use the asset and initial operating deficits /
inefficiencies before the asset achieves planned performance should also be
excluded.
The directly attributable costs to be capitalised are measured from the date
when the asset first meets the recognition criteria. Expenditure previously
recognised as an expense may not be reinstated.
If the cost is to be capitalised, then recognise the development cost as an

intangible asset and, amortise over its useful life once commercial production
or the intended benefits commence.
Exercise 3.11: The IT Agency

The IT Agency has incurred research and development costs of £300,000
during the year ended 31 December 20X0.
The £300,000 included £50,000 in respect of development of a software

programme which has since been abandoned and £250,000 in respect of
development costs on an accounting package which is expected to come
into service next year.
Explain how the IT agency should account for the £300,000.
Exercise 3.12: University of Belleville

The University of Belleville has a wholly-owned company, DXP, which has
recently significantly increased its investment in research and
development in order to produce higher value added goods. The Director
of Finance of DXP is keen to know whether any of the costs incurred
can be treated as capital expenditure and recognised in the statement of
financial position. The costs incurred in year were as follows:
1. £100,000 was spent on the salary costs of a team working on the

development of a new manufacturing technology. The new technology
148
is in its final stages of testing and expected to come into use next
financial year. The technology is expected to result in savings in
production costs for the company of around £25,000 per year, and will
have a useful economic life of 5 years.
2. £150,000 was spent on the development of a ground-breaking quality

control process. The project is in its early stages, but the project
manager is confident it will lead to cost savings. He forecasts that
the new process will be ready for implementation in between 5 and 10
years. The Director of Finance, whilst being excited by the cost saving
forecasts produced by the project manager, is concerned that the time
horizon for the development of the product is too long and believes the
organisation should focus its resources on projects that are closer to
implementation.
3. The final project under development was a collaboration between three

different departments within the company and two of the company’s
customers who sell DXP’s products in the UK retail market. The aim of
the project is to further integrate their logistics management systems.
The managers of the project are expecting the integration to take place
in two years’ time and have the full backing of the Board of all three
companies and a commitment to providing the financial and other
resources needed to achieve a successful completion.
To date, the project managers have decided not to monitor the costs of
the project because the breadth of input from different staff made this too
complicated, and would be an unwanted distraction from the main tasks
of the project.
Explain whether each of the costs above can be treated as capital

expenditure in the statement of financial position.
3.4.5 Other intangible assets − measurement

Initial recognition
Assets in the other (separately acquired) class of intangibles will be recognised
initially at cost.
Subsequent recognition
Subsequent to initial recognition, an entity may choose the cost model or the
revaluation model, but if it chooses the revaluation model then all other assets
in the class should also be accounted for using the same model, unless there
is no active market for those assets.
Cost model: After initial recognition, an intangible asset should be carried at

its cost less accumulated amortisation and impairment losses. We will
consider impairment losses in Workbook 4 of this course.
149
Revaluation model: After initial recognition, an intangible asset should be

carried at a revalued amount (fair value at the date of revaluation less any
subsequent accumulated amortisation).
Fair value must be determined by reference to an active market.
Key definition
Active market A market in which all the following conditions exist:

a. The items traded within the market are homogeneous;
b. Willing buyers and sellers can normally be found at any time; and
c. Prices are available to the public.
For example, the value of a radio broadcasting licence might be determined

using an active market if licences are regularly traded between commercial
radio operators and hence a market value can be established. But for most
intangibles, no active market will exist because, by their very nature, they are
unique. For example, there will be no active market for a university’s internally
generated development costs for a bio-fuel project because the very value of
the project lies in the fact that no-one else has invented anything similar.
The revaluation model can only be applied under the following circumstances:
• The fair value must be able to be measured reliably with reference to an

• active market in that type of asset.
• The entire class of intangible assets of that type must be revalued at the
same time.
• 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.
• Revaluations should be made with such regularity that the carrying amount
does not differ from that which would be determined using fair value at the
statement of financial position date.
The guidelines state that there will not usually be an active market in an
intangible asset; therefore, the revaluation model will usually not be available.
For example, although copyrights, publishing rights and film rights can be
sold, each has a unique sale value and hence there is no active market where
identical assets are bought and sold. In such cases, revaluation to fair value
would be inappropriate. A fair value might be obtainable, however, for assets
such as fishing rights or quotas or taxi cab licences.
The treatment of revaluations of intangible assets is the same as you learnt

for property, plant and equipment under IPSAS 17 earlier in this workbook:
• Increases are credited directly to the revaluation surplus (reserve) unless it

reverses a revaluation decrease of the same asset previously recognised in
surplus or deficit.
• Decreases are recognised in surplus or deficit except to the extent of any

credit balance in the revaluation surplus (reserve) in respect of the asset.
150
3.4.6 Other intangible assets − amortisation

IPSAS 31 requires that intangible assets are amortised over their useful
economic life.
This is reasonably straightforward for, say, a 10 year fishing licence as the

useful life is finite and easy to determine.
However, other assets may have lives which are not easily determined (for
example brand names), i.e. there is no foreseeable limit to the period over
which the asset is expected to generate cash flows for the entity. This is
known as an indefinite useful life.
i) Amortisation of assets with a finite useful life

An intangible asset with a finite useful life should be amortised over its
expected useful life.
• Amortisation should start when the asset is available for use.
• Amortisation should cease at the date that the asset is derecognised.
• The amortisation method used should reflect the pattern in which the asset’s future
economic benefits are consumed. If such a pattern cannot be predicted reliably, the
straight-line method should be used.
• The amortisation charge for each period should normally be recognised in the statement
of financial performance as an expense.
The residual value of an intangible asset with a finite useful life is assumed to
be zero, unless a third party is committed to buying the intangible asset at the
end of its useful life or unless there is an active market for that type of asset
(so that its expected residual value can be measured) and it is probable that
there will be a market for the asset at the end of its useful life.
It may be difficult to establish the useful life of an intangible asset, and

judgment will be needed.
The amortisation period and the amortisation method used for an intangible
asset with a finite useful life should be reviewed at each financial year end.
Amortisation of assets with an indefinite useful life

An intangible asset with an indefinite useful life should not be amortised.
In accordance with IPSAS 21 and IPSAS 26, an entity is required to test an
intangible asset with an indefinite useful life for impairment by comparing its
recoverable amount with its carrying amount:
• Annually, and
• Whenever there is an indication that the intangible asset may be impaired.
We will look at impairment in more detail in Workbook 4.
3.4.7 Subsequent expenditure

The standard states that the nature of intangibles is such that there can be
no additions to, or replacement of parts, in the same way that can occur for
tangible assets. Therefore, most subsequent expenditure is likely to maintain
the expected future economic benefits of the existing asset rather than
represent an intangible asset which meets the recognition criteria.
151
3.4.8 Other intangible assets − de-recognition

An intangible asset should be eliminated from the statement of financial
position when it is disposed of, or when there is no further expected economic
benefit from its future use.
On disposal, the gain or loss arising from the difference between the net
disposal proceeds (if any) and the carrying amount of the asset should be
taken to the statement of financial performance as a gain or loss on disposal
(that is, treated as income or expense).
Any remaining balance relating to the asset within the revaluation reserve in the
statement of financial position should be transferred to retained earnings.
This treatment is no different from that for property, plant and equipment as
specified by IPSAS 17.
3.4.9 Intangible assets − disclosures

IPSAS 31 has extensive disclosure requirements for intangible assets.
For each class of intangible assets, disclosure is required of the following,

distinguishing between internally generated assets and other intangible assets:
a. Whether the useful lives are indefinite or finite and, if finite, the useful lives
or the amortisation rates used;
b. The amortisation methods used for intangible assets with finite useful lives;
c. The gross carrying amount and any accumulated amortisation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
d. The line item(s) of the statement of financial performance in which any
amortisation of intangible assets is included;
e. A reconciliation of the carrying amount at the beginning and end of the

period showing:
i. Additions, indicating separately those from internal development

those acquired separately, and those acquired in acquisitions [public
sector combinations];
ii. Disposals
iii. Increases or decreases during the period resulting from revaluations (if
any);
iv. Impairment losses recognised in surplus or deficit during the period in

accordance with IPSAS 21 or IPSAS 26 (if any);
v. Impairment losses reversed in surplus or deficit during the period in

accordance with IPSAS 21 or IPSAS 26 (if any);
vi. Any amortisation recognised during the period;
vii. Net exchange differences arising on the translation of the financial

statements into the presentation currency, and on the translation of a
foreign operation into the presentation currency of the entity; and
viii. Other changes in the carrying amount during the period.
152
More detailed disclosures are required in relation to:
• Assets with indefinite useful lives;
• Any individual intangible asset that is material to the financial statements;
• Intangible assets acquired in non-exchange transactions;
• Intangible assets with restricted titles/pledged as security, and;
• Contractual commitments for the acquisition of intangible assets.
Intangible assets measured after recognition using the revaluation model are
subject to further disclosure requirements, including the date of revaluation
and the carrying amount of revalued intangible assets.
An entity is encouraged, but not required, to disclose the following information:
a. A description of any fully amortised intangible asset that is still in use; and
b. A brief description of significant intangible assets controlled by the entity

but not recognized as assets because they did not meet the recognition
criteria in this Standard.
3.4.10 Application guidance: website costs

At the end of IPSAS 31 there is application guidance on the treatment of
website costs (Appendix A).
Website costs may only be treated as an intangible asset if they meet the same
general recognition criteria for the recognition of an intangible asset and can
satisfy the six criteria that we saw in Section 3.4.4.
To satisfy the requirement that the website will generate future economic
benefits, the website will have to be capable of generating revenues or service
potential, for example by enabling orders to be placed by customers or by
providing services using the website, rather than at a physical location using
civil servants. For example, a municipal government website may allow local
taxpayers and housing tenants to update their details and make online
payments as an alternative to phoning the authority or visiting in person. This
represents service potential to the authority as it would ultimately decrease the
amount of employee time needed to deal with phone calls and visitors, and
hence represents an economic benefit.
A website developed for promoting and advertising services is unlikely to be

able to demonstrate how it will generate probable future economic benefits or
service potential, and consequently all expenditure on developing a website is
recognised as an expense when incurred.
153
3.5 IPSAS 16 Investment Property

IPSAS 16 prescribes the accounting treatment for investment properties and
related disclosure requirements.
3.5.1 Definition
It is very important that you know the definition of an investment property
for your exam so that you are able to correctly classify property owned by
a government organisation as investment properties (IPSAS 16) or
owner-occupied property plant, and equipment (thus following IPSAS 17
rules).
Key definitions
Investment property Investment property is property (land or a building or
part of a building or both) held to earn rentals or for capital appreciation or
both, rather than for:
a. Use in the production or supply of goods or services or for
administrative purposes; or
b. Sale in the ordinary course of operations.
Owner occupied property Property held (by the owner or by the lessee
under a finance lease) for use in the production or supply of goods or
services or for administrative purposes.
The property may consist of land, land and buildings, buildings, or part of a
building.
Some examples of public sector assets that would be regarded as investment
properties by IPSAS 16 include:
• Land held by a hospital for capital appreciation which may be sold at a

beneficial time in the future.
• Land held for a currently undetermined future use.
• Property that is leased out to external parties under an operating lease on a

commercial basis.
• An office building which is currently vacant but is held to be leased out

under one or more operating leases on a commercial basis to external
parties.
• Property that is being constructed or developed for future use as

investment property.
An investment property is not any of the following:
• A building used in the production or supply of goods and services (which

would be an owner-occupied property and therefore covered by IPSAS
17 Property, plant and equipment). Note that a property might be used for
both service provision and to earn rentals/capital appreciation so the key
to determining the treatment is to consider whether the service/goods
provision is significant to the rental arrangement.
• Held for resale in the ordinary course of business, for example by a

public sector organisation that builds and sells affordable housing
(which would be covered by IPSAS 12 Inventories). This also applies
to a property previously used as an investment property which is now
being held pending sale.
154
• Being constructed for future use by a third party (which would be covered
by IPSAS 11 Construction contracts).
• Property leased to another entity under a finance lease.
• Property which is primarily held to provide a social service. For example,

homes owned by a housing association will generate rental cash flows,
but they are not rented out on a commercial basis.
Exercise 3.13: Identifying investment properties

Are the following assets investment properties under the IPSAS 16
definition?
A government owns a hostel that it manages through its general

property management agency. The ancillary services provided to
residents in the hostel are significant to the arrangement as a whole.
A hospital owns a building, part of which is used for administration and

part is leased out as apartments on a commercial basis.
3.5.2 Accounting treatment for investment properties

Initial recognition
The recognition criteria for investment property are the same as for property,
plant and equipment - it is probable that the future economic benefits or
service potential that are associated with the investment property will flow to
the entity; and the cost or fair value of the investment property can be
measured reliably.
Investment properties are initially measured at cost. If the investment

property has not been acquired through an arm’s length negotiation, then
the property is measured at fair value. The costs of a purchased investment
property include the purchase price and any directly attributable expenditure.
Examples of this type of expenditure would include professional fees and
property transfer taxes.
The standard includes costs that are specifically not to be included in the cost
of an investment property. Examples would include start-up costs, operating
losses and abnormal amounts of wasted material or labour.
Subsequent measurement
Investment properties may subsequently be recognised by one of two
methods (depending on the entity’s accounting policies):
• Cost model: recognising the investment properties in exactly the same

way as under IPSAS 17 Property, plant and equipment, except that an
additional disclosure of the fair value of the properties must be made.
155
• Fair value model: recognising the investment properties at fair value, with
any movement in the fair value of the asset resulting in a gain or loss being
recognised directly in the statement of financial performance.
The same model must be applied to all of an organisation’s investment

properties.
Exercise 3.14: Accounting for investment properties

For the following organisations, identify the accounting entries that
would be required at the year-end to report the investment properties in
accordance with IPSAS 16.
Organisation A uses the fair value model to account for its investment
properties. Organisation A owns an investment property which is
currently held in their accounts at fair value of £1m. At the end of the
year the fair value of the property is £1.1m.
At the end of the following accounting period, the fair value of

Organisation A’s properties was £900,000.
Organisation B uses the cost model to account for investment

properties. At the end of the previous reporting period the properties
had a carrying value of £1m. The company charges depreciation on
investment properties using 20% reducing balance. The fair value of
the properties at the end of the current period is £1.1m.
Transfers and Derecognition

An entity may change the use of its assets. An entity may start using a building
that previously was being used as an investment property to deliver services (i.e.,
as an owner-occupied building). Similarly, an entity may vacate an owner-
occupied building and lease out the building on a commercial basis.
An entity shall transfer a property to or from investment property when, and only
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. Examples of evidence of
a change in use include:
(a) Commencement of owner-occupation, or of development with a view to owner-

occupation, for a transfer from investment property to owner-occupied property;
(b) Commencement of development with a view to sale, for a transfer from
investment property to inventories;
(c) End of owner-occupation, for a transfer from owner-occupied property to
investment property; and
(d) Inception of an operating lease (on a commercial basis) to another party, for a
transfer from inventories to investment property.
156
IPSAS 16 provides guidance on measuring the asset at the point it is transferred.

Derecognition of investment property is accounted for in the same way as
derecognition of property, plant and equipment. That is:
• Investment property is derecognised on disposal or when the investment

property is permanently withdrawn from use and no future economic benefits
or service potential are expected from its disposal.
• Gains or losses arising from the retirement or disposal of investment property

shall be determined as the difference between the net disposal proceeds and
the carrying amount of the asset, and shall be recognized in surplus or deficit
(unless IPSAS 13 requires otherwise on a sale and leaseback) in the period of
the retirement or disposal.

An entity must disclose the following in relation to its investment properties:
a. Whether it applies the fair value or the cost model.
b. If it applies the fair value model, whether, and in what circumstances,

property interests held under operating leases are classified and accounted
for as investment property.
c. When classification is difficult, the criteria it uses to distinguish investment

property from owner-occupied property and from property held for sale in
the ordinary course of operations.
d. The methods and significant assumptions applied in determining the
fair value of investment property, including a statement whether the
determination of fair value was supported by market evidence or was more
heavily based on other factors (which the entity shall disclose) because of
the nature of the property and lack of comparable market data.
e. The extent to which the fair value of investment property (as measured
or disclosed in the financial statements) is based on a valuation by an
independent valuer who holds a recognised and relevant professional
qualification and has recent experience in the location and category of the
investment property being valued. If there has been no such valuation, that
fact shall be disclosed.
f. The amounts recognised in surplus or deficit for:
i. Rental revenue from investment property;
ii. Direct operating expenses (including repairs and maintenance)

arising from investment property that generated rental revenue during
the period; and
iii. Direct operating expenses (including repairs and maintenance) arising
from investment property that did not generate rental revenue during the
period.
g. The existence and amounts of restrictions on the realisability of investment
property or the remittance of revenue and proceeds of disposal.
h. Contractual obligations to purchase, construct or develop investment
property or for repairs, maintenance or enhancements.
157
Further disclosure requirements for properties held under the

fair value model:
In addition to the requirements above, entities that apply the fair value model
must show a reconciliation between the opening and closing carrying amounts
of investment property, which is required to include the following:
a. Additions
b. Disposals
c. Net gains or losses from fair value adjustments
d. Transfers to/from inventories and owner-occupied property
Further disclosure requirements for properties held under

cost model:
a. The depreciation methods used.
b. The useful lives or the depreciation rates used.
c. The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.
d. A reconciliation of the carrying amount of investment property at the

beginning and end of the period, showing details including additions,
disposals, depreciation, impairment losses and transfers to/from owner
occupied properties.
e. The fair value of investment property.
158
Summary
3.6 Summary
In this workbook, we have looked at several important accounting standards
dealing with accounting for non-current assets:
• IPSAS 17 Property, Plant and Equipment
• IPSAS 5 Borrowing costs
• IPSAS 13 Leases
• IPSAS 31 Intangible Assets
• IPSAS 16 Investment Properties
Non-current assets will often be an important component of a public sector

organisation’s financial position and performance, so you should ensure that
you fully understand all of the accounting treatments set out in this workbook.
We have covered many exercises in this workbook, each one designed to

test your understanding on an individual accounting issues in relation to
non-current assets. You will find the additional exercises and exam standard
questions which follow useful to consolidate your knowledge and ensure
that you are able to apply the knowledge gained to new scenarios and
transactions.
Exercise 3.15: St Andra Senior School

The following is the trial balance for St Andra Senior School as at 31
December 20X8:
£’000s £’000s
Buildings 10,550
Land 2,000
Equipment 1,800
Buildings accumulated depreciation 1,600
Equipment accumulated depreciation 300
Cash 1
Donations and fundraising income 400
Staff costs 925
General expenses 420
Bank interest charges (overdraft only) 4
General grant for operating activities 4,250
Inventories at 1 Jan 20X8 85
Other revenue 120
Receivables 125
Revenue from consultancy activities 1,260
159
Summary
Short-term investments 80
Payables 528
Training grant 120
Bank overdraft 450
General reserves 920
Long-term loans (3.5% − note 2) 500
Capital contributed by government 150
Accumulated surpluses 5,072
Revaluation reserve 150
Suspense account (CR) 170
15,990 15,990
Additional information:
1. St Andra is extending its premises with the creation of a new science

block. In order to do this, it has purchased new land at a cost of
£20,000 and undertaken building work at a cost of £150,000. All
amounts had been paid by the end of the year but no entries have
yet been made for in the accounts. The new science block went into
use on 31 December 20X8.
2. The long-term loan balance at the start of the year was £400,000. A
further £100,000 was drawn down on 30 June 20X8 specifically to fund
the new science block. This was immediately paid over to the building
contractor as an advance payment towards the £150,000 total building
cost.
No entries have yet been made for the annual interest cost of the loan,
which is due to be paid on 1 January 20X9 to the loan provider.
The school’s policy is to capitalise all finance costs as permitted by

IPSAS 5.
3. During the year, some surplus land was disposed of. The only
transaction that has been recorded is the sale proceeds from selling
the surplus land and this has been credited to the suspense account.
The land disposed of was held in the school’s books at £150,000, and
had previously been revalued upwards by £35,000.
4. Depreciation has not yet been accounted for. Buildings are to be

depreciated over a 30 year period based on the straight line method
and equipment is to be depreciated over a 10 year period, also using
the straight line method. The depreciation policy is to charge a full year
in the year of acquisition and none in the year of disposal.
5. Inventories at 31 Dec 20X8 were £340,000.
160
Summary
From the information above:
Prepare the property, plant and equipment disclosure note as required

by IPSAS 17 for St Andra School’s year-ended 31 December 20X8.
Prepare the statements of financial performance and changes in equity

for St Andra School for the year ended 31 December 20X8 and a
statement of financial position at that date.
All figures should be rounded to the nearest £’000.
Exercise 3.16: The Improvements Agency

The following trial balance has been extracted from the records of the
Improvements Agency for the year ended 31 December 20X7:
Debit Credit
£’000 £’000
Land 3,000
Buildings 12,550
Equipment 1,800
Cash 1
Buildings accumulated depreciation 1,600
Equipment accumulated depreciation 300
Staff costs 925
General expenses 420
Bank interest charges 4
Grants for operating activities 5,900
Inventories at 31 December 20X7 85
Other revenue 750
Receivables 125
Revenue from consultancy activities 900
Payables 350
Bank 320
161
Summary
General reserves 1,200

Capital contributed by government 6,650
Revaluation reserve 1,200
Accumulated surpluses 240
Suspense account (notes 3 and 5) 220
19,310 19,310
Further information:
1. The land balance includes a car park held at £500,000 which the
agency no longer requires and which was rented out to a neighbouring
private sector company commencing on the first day of the financial
year. The agency’s policy is to account for investment properties under
the revaluation method.
2. The agency revalues land and buildings as permitted by IPSAS 17 and
performs a full valuation at the end of every year. Land and buildings
were revalued as at 31 December 20X7 and the following increases
were found, which have not been included in the trial balance:
• Buildings were found to have increased in value to £13m during the
year.
• Land was found to have increased in value to £3.8m during the

year, of which £650,000 relates to the car park discussed in point
1, above.
3. On 1st January 20X7 a vehicle was acquired by finance lease. The fair
value of the vehicle is £30,000, and the terms of the lease require the
agency to make 3 annual lease payments of £13,000 commencing
31 December 20X7. The annual lease payment for 20X7 has been
debited to the suspense account, but no other entries have been made
in relation to the leased asset.
4. Depreciation has still to be accounted for.
• Equipment is depreciated using the straight line method over five

years after allowing for a residual value of £150,000. All equipment
held was acquired on or after 1 January 20X3.
• Buildings are to be depreciated over their total useful economic life
of 50 years, of which 37 years remain as at 1 January 20X7.
• Leased vehicles are to be depreciated over their lease term.
5. A payment was made into the agency’s bank account in November for
£233,000, but the accountant did not know what this was for, so it was
initially credited to a suspense account. Subsequent investigations
revealed that this was a grant for creating new internet-based services.
6. At the end of 20X7, there was an outstanding instalment of General
Grant of £80,000 that had not yet been received by the Agency.
162
Summary
From the information above, prepare the statements of financial

performance and changes in equity for the Improvements Agency for the
year ended 31 December 20X7, and a statement of financial position at
that date.
163
Summary
Answer
Exercise 3.1
Tangible non-current assets
Yr 1 Long-term loans 155,000
155,000
Yr 2 Bal b/d 155,000 Revaluation reserve (w) 5,000
Bal c/d
155,000
Yr 3 Bal b/d 150,000
Disposals account 150,000
150,000 150,000
Yr 1 Expenses
20,000
20,000 20,000
Yr 2 20,000
Revaluation reserve (w) 20,000 Expenses 30,000
30,000
50,000 50,000
Yr 3 Bal b/d 30,000
Disposals account 30,000
Bal c/d −
30,000 30,000
Revaluation reserve
Yr 2 Non-current assets (w) 5,000 Accumulated depreciation20,000

(w)
Bal c/d 15,000
20,000 20,000
Yr 3 Bal b/d 15,000
Accumulated surpluses 15,000
15,000 15,000
164
Summary
Disposals account
£ £
Yr 3 Non-current assets 150,000 Accumulated 30,000
depreciation
Bank (proceeds) 100,000
Expenses (loss on 20,000
disposal)
150,000 150,000
(w) Revaluation Before After Difference

revaluation revaluation
£ £
Cost 155,000 150,000 Cr Asset
Accumulated 20,000 Dr Accumulated

deprecation depreciation
Carrying value 135,000 15,000 Cr Revaluation
reserve
Answer
Exercise 3.2
Year 1
In year 1 we need to record the purchase of the asset and its annual
depreciation charge.
Depreciation for year 1 is £75,000 / 5 years = £15,000
Year 1: £
Dr Non-current asset 75,000
Cr Non-current liability − long term loan (being purchase 75,000
of non-current asset)
Dr Statement of financial performance − expenses 15,000
Cr Accumulated depreciation (being depreciation charge 15,000
for the year)
Year 2
In year 2 the asset is revalued. To work out the journal entries it helps to
set up a table:
165
Summary
Before After Difference

revaluation revaluation £
£ £
Cost 75,000 80,000 5,000
Accumulated 15,000 − 15,000
deprecation
Carrying value 60,000 80,000 20,000
Depreciation is based on the revalued amount of the asset and the

remaining useful life. So, the depreciation charge for year 2 is £80,000 /
4 years = £20,000
Year 2: £
Dr Non-current asset 5,000
Dr Accumulated depreciation 15,000
Cr Revaluation reserve ( for revaluation of non-current 20,000
asset)
Dr Statement of financial performance 20,000
Cr Accumulated depreciation (depreciation charge for the 20,000
year)
Year 3
In year 3 the asset is disposed of. We need to work out the profit or
loss on disposal. In this case the carrying value of the asset is £60,000
(£80,000 − £20,000) and the sale proceeds are £65,000 so there is a
profit of £5,000. This profit is recognised in the statement of financial
performance. The surplus held in the revaluation reserve is transferred to
accumulated surpluses.
Year 3:
£
Dr Disposals 80,000
Cr Non-current asset 80,000
Dr Accumulated depreciation 20,000
Cr Disposals 20,000
Dr Cash / Bank 65,000
Cr Disposals 65,000
Dr Disposals 5,000
Cr Statement of financial performance (being disposal of 5,000
non-current asset) − other revenue
Dr Revaluation reserve 20,000

Cr Accumulated surpluses (being transfer of revaluation 20,000
surplus on disposal)
166
Summary
Answer
Exercise 3.3
Land Building P&M Total

£ £ £ £
Cost/valuation
Opening balance 20,000 98,000 76,350 194,350
Disposal (15,000) (15,000)
Addition −
Revaluation 7,000
7,000
Closing balance 20,000 105,000 61,350 186,350
Opening balance 24,500 15,400 39,900
Disposal (7,500) (7,500)
Revaluation (24,500) (24,500)
Charge for year 5,250 8,018 13,268
Closing balance − 5,250 15,918 21,168
Carrying amount 1 Jan 20X0 20,000 73,500 60,950 154,450

Carrying amount 31 Dec 20,000 99,750 45,432 165,182
20X0
Workings:
Building − revaluation
Before After Difference

revaluation revaluation £
£ £
Cost (118,000 − 20,000) 98,000 105,000 7,000
Accumulated deprecation (24,500) 0 24,500
Carrying amount 73,500 105,000 31,500
Depreciation charge for year = 105,000 / 20 = £5,250
167
Summary
Plant and machinery
Gain/loss on disposal:
Cost = 15,000
Accumulated depreciation = (7,500)
Carrying amount = 7,500
Sales proceeds = 9,000
Gain on disposal = 1,500
Depreciation charge for year = [61,350 − (15,400 − 7,500)] × 15% =

£8,018
Answer
Exercise 3.4
Expenditure incurred in obtaining a qualifying asset is first allocated to

any specific borrowings. The remaining expenditure is allocated to general
borrowings.
Analysis of Expenditure Specific General
expenditure (£’000) borrowing borrowing
(£’000) (£’000)
1 July 20X7 200 200
30 Sept 20X7 600 500 100
31 March 20X8 1,200 1,200
30 June 20X8 200 200
Total 2,200 700 1,500
Weighted average borrowing cost (general borrowing only):
(12.5% × 1, 000/2, 500) + (10% × 1, 500/2, 500) = 11%

Borrowing costs: £
Specific interest costs 65,000
Specific interest income (20,000)
General borrowing costs (see workings below) 41,250
Total borrowing costs to be capitalised 86,250
Workings:
(£100 × 9/12)+(£1, 200 × 3/12)+(£200 × 0/12) = £375, 000×11% = £41, 250
168
Summary
Answer
Exercise 3.5
Borrowing costs: Asset A Asset B

£ £
Asset A
1 Jan X6 − 31 Dec X6 (500,000 × 9%) 45,000
Asset B
Jan X6 − 31 Dec X6 (1,000,000 × 9%) 90,000
Less: investment income
Asset A (250,000 × 7% × 6/12)
Asset B (500,000 × 7% × 6/12)
36,250 72,500
Cost of assets: Asset A Asset B
Expenditure incurred 500,000 1,000,000

Borrowing costs 36,250 72,500
Total 536,250 1,072,500
Answer
Exercise 3.6
a. Lease of minibuses
Risks: These mainly remain with the private company (e.g.

the company will have to bear the cost of repair if a vehicle is
damaged).
Rewards: The government enterprise has some of the benefits as it

can make use of the asset but the private company has retained
the right to have the vehicles returned with one month’s notice.
Two years is likely to be much less than the life of the asset so the
government enterprise is only getting part of this benefit.
Conclusion: The lease should be treated as an operating lease, as

substantially all the risks and rewards have not been transferred to
the government enterprise.
169
Summary
b. Lease of office suite
Risks: These mainly transfer to the university (for example the

costs of repair).
Rewards: The university will have the full benefit of the use of the
asset for a substantial period (i.e. for 25 years and the lease cannot
be cancelled by one party on its own). They can also modify the
asset to suit their requirements.
Conclusion: The lease should be treated as a finance lease as

substantially all the risks and rewards have been transferred to the
university.
Answer
Exercise 3.7
Step 1 Capitalise asset:
Dr Non-current assets £40,000
Cr Non-current liabilities: finance lease £40,000
Step 2 Depreciate the asset:
Dr Statement of financial performance £13,333 (£40,000 /3)
Step 3 Split payment into finance charge and reduction in liability:
Calculate the interest and principal payments using sum of digits method:
Total financing charge = total payments (15,000 × 3) less value of asset

£45, 000 − £40, 000 = £5, 000
Financing charge years 1 and 2:
Sum of digits: 3 + 2 + 1 = 6
Year 1 £5,000 × 3/6 = £2,500

Year 2 £5,000 × 2/6 = £1,667
Principal years 1 and 2:
Total payment year 1 − financing charge year 1 = principal year 1

£15, 000 − £2, 500 = £12,500
Year 2:
£15, 000 − £1, 667 = £13, 333
170
Summary
Accounting entries year 1:
Annual lease payment (principal)

Cr Cash £12,500
Annual lease payment (interest)

Dr Statement of financial performance (finance cost) £2,500
Cr Cash £2,500
Step 4 Split liability on statement of financial position:
Current liabilities − finance lease £13,333 (i.e. year 2 principal)

Non-current liabilities: finance £14,667
lease
Answer
Exercise 3.8
Calculate total finance cost
£
Total lease payments (5 × £20,000) 100,000
Fair value of asset 82,000
Total finance cost 18,000
Calculate sum of digits: 1 + 2 + 3 + 4 + 5 = 15
Allocate the finance cost over the years of the lease

(NB − only do the calculation for the current year plus one further year)
Year 1 5/15 × £18,000 = £6,000

Year 2 4/15 × £18,000 = £4,800
Complete lease table and calculate closing liability balances
Year B/f Interest Principal Total C/f

1 82,000 6,000 14,000 20,000 68,000
2 68,000 4,800 15,200 20,000 52,800
171
Summary
Or as laid out in example:
Year Liability Payment Bal after Interest Liab C/f

1 82,000 (20,000) 62,000 6,000 68,000
2 68,000 (20,000) 48,000 4,800 52,800
Depreciate asset
£82, 000
= £16, 400
5 years
Therefore the following amounts will be taken to the financial statements:
Statement of financial performance for the year-ended 31 December

20X0 (extract)
Finance costs (6,000)
Statement of financial position for the year-ended 31 December 20X0

(extract)
£
Non-current assets (£82,000 − £16,400) 65,600
Non-current liabilities: finance lease 52,800
Current liabilities: finance lease 15,200
Answer
Exercise 3.9
Calculate total finance cost
£
Total lease payments (5 × £20,000) 100,000
Fair value of asset 82,000
Total finance cost 18,000
Allocate the finance cost over the years of the lease
Remember that sum of digits is 1 + 2 + 3 + 4 = 10 as year 5 has no

finance cost when payments are made in advance.
Year 1 4/10 × £18,000 = £7,200

Year 2 3/10 × £18,000 = £5,400
172
Summary
Year B/f Payment C/f after Interest C/f

payment
1 82,000 (20,000) 62,000 7,200 69,200
2 69,200 (20,000) 49,200 5,400 54,600
Depreciate asset
£82, 000
= £16, 400
5 years
Therefore the following amounts will be taken to the financial statements:

20X0 (extract)
Finance costs (7,200)

(extract)
£
Answer
Exercise 3.10
Year B/f Interest Principal Total C/f

(7%)
1 82,000 5,740 14,260 20,000 67,740
2 67,740 4,742 15,258 20,000 52,482
Therefore, the following amounts will be taken to the financial statements:
173
Summary

20X0 (extract)
Depreciation expense (£82,000/5)

Finance costs

(extract)
£
Answer
Exercise 3.11
The IT agency needs to apply IPSAS 31 and determine whether or not the
expenditure meets the criteria for capitalisation.
The £50,000 does not meet the criteria so should be included as an

expense in the statement of financial performance.
The £250,000 does meet the criteria so should be capitalised as an

intangible non-current asset. It will be amortised from when it is used for
service i.e. next year.
Answer
Exercise 3.12
From the information available this expenditure appears to meet the

criteria for recognition as an asset as per IPSAS 31 Intangible Assets:
the proposed technology can be used by the entity
the information available suggests it is technically feasible
economic benefit is expected to be received by the entity in the
the expenditure is measurable and identified as £100,000
174
Summary
the organisation has the intention to bring the technology into use
next year (and hence to complete it)
given the organisation is in the pre-implementation final test stage

and no concerns about feasibility have been raised, it would be
reasonable to conclude that the project will be completed by the
entity.
Accounting entries:
£100,000
Dr Intangible assets
Cr Expenses − salaries £100,000
The assets will be amortised when they come into use and result in
economic benefits for the entity.
In this case, the expenditure does not meet all the recognised criteria
and will therefore be written off as an expense in the statement of
financial performance. Specifically, the entity does not appear to have
a clear intention to complete the project and it seems unlikely that it
will receive the resources needed in order to complete it. Furthermore,
given the expected time horizon before completion and that the project
is in its early stages, uncertainty remains as to whether it is technically
feasible or whether it will genuinely result in future economic benefits
(cost savings) for the organisation.
In this case, the expenditure also does not meet all the criteria for
recognition and will therefore be written off as an expense in the
statement of financial performance. The expenditure on the project is
not measurable and identifiable and therefore cannot be recognised as
an intangible asset.
Answer
Exercise 3.13
Hostel: As the services provided to guests are significant to the

arrangement, the owner-managed hostel is in effect an owner-occupied
property rather than an investment property.
Hospital building: If the parts of the building could be sold or leased out
separately on a finance lease, the organisation would be able to account
for them separately, so the part that is leased out could be treated as
an investment property. If the parts could not be sold separately, the
property would not be an investment property unless the part used for
administration was a very insignificant proportion of the whole building.
In other words, some judgement is often required to determine whether a

property can be treated as an investment property or not.
175
Summary
Answer
Exercise 3.14
a. Using the fair value method, the gain in the value of the asset is
recognised directly in the statement of financial performance.
Dr Investment properties £100,000

Cr Other income £100,000
b. Again, as the fair value method is being used, the loss is recognised
directly in the statement of financial performance.
Dr Expenses £200,000
Cr Investment properties £200,000
c. Note that the company has chosen the cost model to account for
investment properties so it will not revalue the investment property
up to £1.1m. The new fair value of the investment property would
nevertheless have to be disclosed in a note to the accounts.
Dr Expenses (depreciation) £200,000

Answer
Exercise 3.15
a. IPSAS 17 disclosure note
Land Buildings Equipment Total

£’000 £’000 £’000 £’000
Cost or valuation
As at 1 January 20X8 2,000 10,550 1,800 14,350
Additions (150 + 2(w2)) 20 152 172
Disposals (150) (150)
As at 31 December 20X8 1,870 10,702 1,800 14,372
176
Summary
As at 1 January 20X8 1,600 300 1,900
Disposals
Charge for the year (W1) − 357 180 537
As at 31 December 20X8 − 1,957 480 2,437
Carrying value
As at 1 January 20X8 2,000 8,950 1,500 12,450
As at 31 December 20X8 1,870 8,745 1,320 11,935
Working 1: Depreciation
Buildings: 10,702/30 = 357
Equipment: 1,800/10 = 180
b. Statement of financial performance for St Andra Senior School for

the year-ended 31 December 20X8
Workings £’000
Revenue:
Revenue from consultancy 1,260
activities
Grants 4,250 + 120 4,370
Donations and fundraising income 400
Other revenue 120 + 20 140
Total revenue 6,170
Expenses:
Wages, salaries and employee (925)
benefits
Depreciation W1 (537)
Other expenses 420 + 85 − 340 (165)
Finance costs 4 + 14 (W2) 18
Total expenses (1,645)
Surplus for the period 4,525
177
Summary
Statement of financial position for St Andra Senior School as at 31

December 20X8
Workings £’000
ASSETS
Current assets
Inventories 340
Receivables 125
Cash and cash equivalents 1
546
Non-current assets
Land (a) 1,870
Buildings (a) 8,745
Equipment (a) 1,320
11,935
Total assets 12,481
LIABILITIES
Current liabilities
Payables 528
Accrued expenses W2 16
Bank overdraft 450 + 170 650
1,164
Non-current liabilities
Long-term borrowings 500
Total liabilities 1,664
Net assets 10,817
NET ASSETS/EQUITY
Capital contributed by government 150
Revaluation reserve 150 − 35 115
General reserves 920
Accumulated surpluses 5,072 + 35 + 4,525 9,632
Total net assets/equity 10,817
178
Summary
Statement of changes in equity for St Andra Senior School for the

year-ended 31 December 20X8
Capital General Revaluation Accumulated Total

contributedreserves reserve surpluses £000
by £’000 £’000 £’000
government
£’000
150
Balance at 150 920 150 5,072 6,292
31/12/ 20X7
Transfer on 35
disposal of land
Net surplus for 4,525 4,525
year
Balance at 150 920 115 9,632 10,817
31/12/ 20X8
Working 2: Interest on loan

Amount owed at start of year (500 − 100) 400
3.5% interest for full year − to statement of financial 14
performance
New borrowings in year:
100 × 6/12 × 3.5% to capitalise (IPSAS 5)
Total interest accrual to statement of financial position
Answer
Exercise 3.16

20X7
Workings £’000
Revenue:
Revenue from consultancy 900
activities
Grants 5,900 + 233 + 80 6,213
Other revenue 750 + 150 900
Total revenue 8,013
179
Summary
Operating expenses:
Wages, salaries and employee (925)
benefits
Depreciation (W1) (691)
Other expenses (420)
Finance costs 4 + 5 (W4) 9
Total expenses (2,045)
Surplus for the period 5,968
Statement of financial position as at 31 December 20X7
Workings £’000
ASSETS
Current assets
Inventories 85
Receivables 125 + 80 205
Cash and cash equivalents 320 + 1 321
691
Non-current assets
Investment properties 650
Land and buildings 3,150
Infrastructure, plant and 12,649
equipment
Equipment 1,170
Vehicles 20
17,639
Total assets 18,330
LIABILITIES
Current liabilities
Payables 350
Finance lease liability W4 10
360
Non-current liabilities
Finance lease liability W4 12
Total liabilities 372
Net assets 17,958
180
Summary
NET ASSETS/EQUITY
Capital contributed by 6,650
government
Revaluation reserve 1,200 + 2,050 + 650 3,900
General reserves 1,200
Accumulated surpluses 240 + 5,968 6,208
Total net assets/equity 17,958
Statement of changes in equity for the year-ended 31 December 20X7
Capital General RevaluationAccumulatedTotal

contributed reserves reserve surpluses £’000
by £’000 £’000 £’000
government
£’000
Balance at 31 6,650 1,200 1,200 240 9,290
December 20X
67
Revaluation 2,700 2,700
(2,050 (W2) + 650
(W2))
Net surplus for 5,968 5,968
year
Balance at 31 6,650 1,200 3,900 6,208 17,958
December 20X
78
Workings:
Working 1: Property, plant and equipment

Land Buildings Equipment Vehicles Total
£’000 £’000 £’000 £’000 £’000
Cost or valuation
As at 1 January 3,000 12,550 1,800 − −17,350
20X7
Revaluation (W2) 650 450 1,100

Additions 30 30
Transfer to (500) (500)
investment property
As at 31 3,150 13,000 1,800 30 17,980
December 20X7
181
Summary
As at 1 January − 1,600 300 − 1,900
20X7
Revaluation (W2) − (1,600) (1,600)
Charge for the − 351 330 10 691
year (W3)
As at 31 − 351 630 10 991
December 20X7
Carrying value
As at 31 3,150 12,649 1,170 20 16,989
December 20X7
Working 2: Revaluation
Land
Total increase: 3,800 − 3,000 800
Investment property element (to statement of financial 150
performance) 650 − 500
PPE element (to revaluation reserve) − remainder 650
Note that the transfer to investment properties occurred on the 1st day of
the financial year, prior to the increase in value for the year, so therefore
car park is transferred out of PPE at £500k, and thus the increase of
£150k during the year is treated as an investment property gain and hence
recognised in surplus/deficit for the year.
Buildings Before After Movement

revaluation revaluation £’000
£’000 £’000
Cost 12,550 13,000 450
Dr NCA
Accumulated (1,600) − 1,600
deprecation Dr Accum. dep’n
Carrying amount 10,950 13,000 2,050
Cr Revaluation
As the revaluation happened at the end of the year, it would also be

acceptable to depreciate the building prior to revaluation − full credit
would be given in the exam if you did this.
182
Summary
Working 3: Depreciation
Buildings: Spread revalued amount over remaining life (37 351
years)
Equipment: (1,800 − 150) / 5
Leased vehicles: 30 / 3 10
Working 4: Lease
Total finance cost: £’000
Fair value 30
Payments: 3 × 13 39
S.O.D. = 1 + 2 + 3 = 6
Year 1 interest = 3/6 × 9 = 5

Year 2 interest = 2/6 × 9 = 3 3
Lease table
B/f Interest Principal Total
£’000 £’000 £’000 payment
£’000
Year 1 30 13 22
Year 2 22 10 13 12
183

Workbook 3 (July 2022)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Workbook 3 (July 2022)

Uploaded by

Copyright:

Available Formats

Diploma in International Public

Sector Accounting Standards

Accounting for tangible and

Accounting for tangible and intangible

Aim B: Describe the main requirements of IPSASs (30% of the

Aim C: Apply the requirements of IPSASs to determine the appropriate

We started in workbook 2 by looking at IPSAS 1 Presentation of Financial

IPSAS 17 Property, Plant and Equipment

IPSAS 5 Borrowing costs

IPSAS 31 Intangible Assets

IPSAS 16 Investment Properties

3.1 IPSAS 17 Property, Plant and Equipment

3.1.1 Overview of IPSAS 17

• the recognition of non-current tangible assets (such as land

• the determination of carrying amounts

Tangible assets are those that have a physical substance.

The carrying amount is the amount at which an asset is

• it is probable that future economic benefits or service potential

• the cost or fair value of the item can be measured reliably.

3.1.4 Presentation in the statement of financial position

Where an item of property, plant and equipment is being held

3.1.5 Measurement of property, plant and

Borrowing costs incurred during the construction of an asset may also

Costs which cannot be included in the cost of the asset include:

Assets acquired in a non-exchange transaction are

For example, if a book publisher donates some textbooks to a school, the

3.1.6 Valuation of property, plant and equipment: initial

‘After recognition as an asset, an item of property, plant and equipment

• Reproduction cost. In some cases, an asset’s reproduction cost will be

• Depreciated replacement cost. In many cases, the depreciated

When an item of PPE is re-valued, the entire class of assets to which it

Frequency of revaluation depends on the changes in fair value. Where only

3.1.7 Accounting for revaluations

• any increase in value is credited to a revaluation reserve

• any reduction in value is recognised as an expense in the statement of

When an item of property, plant and equipment is revalued, any accumulated

• restated proportionately with the change in the gross carrying amount of

Worked example: Revaluation

At 31 December 20X0 a university owned a building that had cost

On 1 January 20X1 a revaluation to £1,000,000 was recognised. At this

The university’s policy is to eliminate all previously recognised accumulated

Solution to worked example

To enter the revaluation into the accounts of the university, we need to

(800, 000 − 160, 000) = 640, 000

Before After Movement

Cost 800 1,000 200 − Dr Asset

Net value 640 1,000 360 − Cr Revaluation

We will cover depreciation further in Section 3.1.9, below.

3.1.8 Classes of assets

• electricity transmission networks

• furniture and fixtures

If an entity does recognise heritage assets, it must apply the disclosure

Characteristics of heritage assets

• their value in cultural, environmental, educational and historical terms is

• legal and/or statutory obligations may impose prohibitions or severe

Valuation of heritage assets

Disclosure requirements for heritage assets

In addition to the general disclosures covered below in section 3.1.12,

• the measurement basis used

• the depreciation method used

• the gross carrying amount

• the accumulated depreciation at the end of the period

• a reconciliation of the carrying amounts at the beginning and end of the