Chapter 3: Property, Plant and Equipment

Financial Reporting (FR)

FR Tutor: Kim Mara (Telegram: 087 699 906)

Initial measurement Revenue expenditure
Capital expenditure Revenue expenditure is expenditure on maintaining the capacity of non-current
assets. Costs that are regarded as revenue expenditure should be expensed in the
• Capital expenditure is the costs of acquiring non-current assets.
statement of profit or loss and other comprehensive income and may not be
• According to IAS 16 the following costs may be capitalized in the statement of capitalized according to IAS 16 are:
financial position on acquisition of a non-current asset:
(Mnemonic: RIMTA)
(Mnemonic: IIIID)
1. Repairs expenses
1. Initial cost (purchase price)
2. Insurance expenses
2. Import duty not refundable (if asset is bought from other country)
3. Maintenance expense
3. Installation costs
4. Training Costs
4. Intended use relating costs (lawyer, surveyor costs)
5. Advertising Expense
5. Delivery costs

Finance cost
After we’ve purchased the non-current asset the accountant needs to record that non-current asset into the non-current asset register.
A non-current asset register is generally maintained in the finance department.
Companies can purchase specifically designed packages or a register can simply be maintained on an Excel spreadsheet.
And this is used to reconcile the NCA in the NCA register to the individual asset in place, ie, an example of control procedure by company.
Subsequent measurement Depreciation
Cost model: cost - accumulated depreciation* = carrying value Basic Idea
Depreciation method should be reviewed each year to see whether or not it is Depreciation is the charge to the statement of profit or loss and other
reasonable. A change in depreciation method should be treated as a change in comprehensive income to reflect the use of an asset in a period and this is based
accounting estimate and prospective adjusting method according to IAS 8 should on ACCRUALS CONCEPT which applies the cost of using the asset to the
be applied. I.e., disclose the depreciation method in the note of the financial statement of profit or loss and other comprehensive income for the same period as
statements. the revenue earned from the asset.
Revaluation Model: revalued amount Methods of depreciation
*Depreciation 1. Straight line basis depreciation
*Revaluation • Idea: An equal amount is charged in every accounting period over the life of the
asset.
*Disposal
• Calculation: Depreciation per year = original costs - estimated residual value/
*Impairment [IAS 36]
estimated useful life
*Non-current asset held for sale & discontinued operations [IFRS5] 2. Reducing balance basis depreciation
[Note]:
• Idea: at the start of year we charge more depreciation and at the end of the year
IAS 16 the test was whether the expenditure was Capital or Revenue e.g. an we charge less depreciation given the fact that machine will be less efficient at
improvement could be capitalized but maintenance or repair could not be the end of its life, i.e., less revenue can be earned so less expenses matched
capitalized. against with it.
The following circumstances should be capitalized: • Calculation: Depreciation per year = % x carrying value
(Mnemonics: LOSE)
L: Life extension
O: major overhaul cost
S: separate component, e.g., new engine for an aircraft
E: energy saving, e.g., improving production capacity
Changes in useful life and residual value 
• On acquiring an asset, its useful life and residual value will be estimated.
Subsequently, it may be appropriate to revise these estimates.
• Any changes to them would be changes to accounting estimates.

Example: The cost of asset is $10 and useful life is estimated to be 10 years at the
point of purchase.
The estimated residual value is $2.
After the 2nd year, the useful life is revised to be 5 years.
Required:
Calculate the depreciation expense after 2nd year.


Revaluation
As time goes by initial costs of asset may be very different from their market value.
Eg, if a company purchased a property 35 years ago and therefore subsequently
charged depreciation for 35 years, it would be safe to assume that the carrying
value of the asset would be significantly different from today’s market value.
If revaluation policy per IAS 16 may be adopted (i.e. the business has a choice), and
if so the following rules must be applied per the standard: (mnemonic: CRRR)
1, No Cherry picking (If a company chooses to revalue an asset they must revalue
all assets in that category.)
2, Regular (Revaluations must be regular but IAS 16 doesn't specify how often)
3, Revalued amount (Subsequent depreciation must be based on the revalued
amounts.)
4, Revaluation Reserve (Gains from revaluations are taken to revaluation reserve
rather than retained earnings unless they are sold)
How to determine fair value? (IFRS 13)
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.
3 valuation techniques/ 3 levels
1. Market approach/level 1 input: directly use the market price as the fair value.
2. Cost approach/level 2 input: use current replacement cost(similar asset price).
For example, company has got an asset which is not recorded in the
accounting system and the cost of the similar asset in the market place is $40
so this is the current replacement cost.
3. Income approach/level 3 input: use discounted future cash flows to determine
fair value of the asset, ie, present value.