PPE=

items that are

i) Tangible

ii) Non-current i.e. expected to be used in more than one fiscal year

iii) held for use in production of goods, provision of service, or for administrative purpose.

o “Property” encompasses land and buildings

o property being held by owner for purposes of PPE is also known as owner occupied
property

o plant is a subset of equipment

investment property=

property (i.e. real estate) that is

i) non- current; and

ii) held for rental income or capital appreciation

issue:

What if a property is held for sale in the ordinary course of business

o It should be regarded as inventory (not as either PPE or investment property)

What if a part of the property is held for purpose(s) of PPE and another part is for rental income, is it
owner occupied or investment property?

 If the two portions can be sold as two separate units then the 2 units should be recognized
separately, as owner occupied and IP.
 If the portions cannot be sold separately, and that a significant portion is held for use, then
the entire property is regarded as owner-occupied.
 If the portion being held for use is insignificant, then the property is regarded as IP

A significant portion is held for use- what level of owner’s occupation can be considered significant

o 1 floor out of 4 will be considered significant

What if a property is rented to a third party and the owner also uses the property to provide service
to the third party, then is the property owner occupied or IP?

o If the services provided are significant (e.g. hotel to guests), then the property is regarded as
owner occupied
 o If the services provided are not significant (like LINK to shopping mall tenants), then the
property is regarded as IP

What if a property is rented out to employees?

o property occupied by employees are regarded as owner’s occupied regardless of whether

they pay market rent.

What if a parent company rents a property to a subsidiary?

o On Consolidated financial statements (which represents the entire group including the
parent company and subsidiary), the rented property is recognised as owner-occupied.

o On Individual financial statements (which only represents the parent company w/o the
subsidiary), the rented property is recognised as IP.

Further issues: cases that seem to defy straightforward classification

Property Classification
Property under construction or development IP
for future use as investment property
Vacant building held to be rent out IP
Land held by an entity which has not yet IP
decided that it will be used as owner-occupied
property or for short-term sale

AKB Square is a recently started development which had 2/3 completed. OUHK intends to let this
out to a company called NMB in which it has a controlling interest. How to account for AKB square?

o Not yet complete so accounting treatment relates to the cost incurred to date
o OUHK is constructing the property to let out to another company, NMB. During construction,
and after completion, the property should be accounted for as an investment property in
OUHK’s individual accounts.
o As NMB is a subsidiary of OUHK, the property will be owner-occupied from a group
perspective and therefore HKAS 16 is applied at a consolidation level.

Intangible asset

What is an intangible asset in the context of accounting?

 Intangible asst that is i) identifiable, ii) has potential to generate economic benefits in future
and iii) is under an entity’s control

clarifications

what does it mean for an intangible to be identifiable?

It means an intangible asset is either

o separable from the entity (i.e. can be separated from other assets and sold on its own), or
o asset subsists as some legal right (i.e. license from the authorities)

what does it mean that an intangible asset is being controlled by an entity?

 That means the entity can obtain economic benefits from it and can legally exclude others
from such benefits

Goodwill=

Difference between the purchase price for a business and the net fair value of such business

o Net fair value being the difference between fair value of assets and debts
o Assets here include both tangible and intangible assets

Issues

is goodwill a form of intangible asset?

o Yes, but it is a special kind

o b/c it is not identifiable i.e. not separable/ does not subsist as legal right
o it is considered an intangible asset b/c it has value and can contribute to future cash flows

Corporate asset=

Asset that is

1. Not goodwill,
2. can help more than 1 CGU to generate cash inflow
3. but cannot create cash inflow independently

Examples of corporate asset x3

o Headquarters
o IT system

CGU

CGU=

Smallest identifiable group of assets that

- can generate cash inflows

- that are measurable and
- can do so independent from other assets/ group of assets
o how to tell- suppose other assets disappear, can the asset/ CGU being considered
still generate a cash inflow?
Examples of CGU x2

o a production line among a number of production lines;

o a franchise shop among a number of franchise shops

Issue

Entity M owns plant A and plant B. Plant A makes components which are then shipped to plant B. At
plant B, the components are assembled and then sold. Is plant B a CGU?

 It depends. If entity M can buy components elsewhere for plant B then plant B is a CGU. If
plant B must rely on plant A then plant B is not a CGU.