PROPERTY, PLANT AND EQUIPMENT

(PPE)(IAS 16)

C MBAHIJONA

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 LEARNING OUTCOME
• Explain how the cost basis is applied in recording property,
plant and equipment;
• Explain the concept of depreciation;
• Calculate periodic depreciation by means of different methods;
• Show how property, plant and equipment is disclosed in
financial statements.

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 NATURE OF PROPERTY, PLANT AND
EQUIPMENT
PPE consists of tangible and intangible assets also called fixed
assets, which:
Definition:
• Are held for use in the production of goods; or
• The supply of services; or
• For administrative purposes
• Are expected to be used during more than one financial period.
The intention is clearly to use these assets to generate revenue
rather than to sell them.

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 NATURE OF PROPERTY, PLANT AND
EQUIPMENT
In order to recognise PPE as an asset in terms of the framework:
Recognition:
• A resource controlled by the entity (power, control and can
restrict others);
• As a result of past events (refer to the date of acquisition or
completion);
• From which future economic benefits are expected to flow to the
entity (revenue from good sold or services rendered)

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 NATURE OF PROPERTY, PLANT AND
EQUIPMENT
Measurement of PPE items that qualify for recognition as an
assets:
Measurement:
• The purchase price, including import duties and non-refundable
purchase taxes, after the deduction of trade discounts and
rebates. VAT paid by registered vendor is refundable and is
therefore excluded. VAT forms part of the cost if the buyer is not
registered for VAT or no input VAT can be claimed on the asset.
• Any directly attributable costs of bringing the asset to the
location and condition necessary for it to operate in the way
management intended:

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 NATURE OF PROPERTY, PLANT AND
EQUIPMENT
Example of directly attributable costs are:
» The cost of employee benefits arising directly from the construction or
acquisition of the PPE;
» The cost of site preparation;
» Initial delivery and handling costs;
» Installation and assembly costs;
» The cost of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced
» Professional fees
• The initial estimate of the cost of dismantling, removing and restoring
the site on which asset is located.
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 NATURE OF PROPERTY, PLANT AND
EQUIPMENT
Property consist of Land and Building
» Land – does not have limited life and is therefore not depreciated
» Building – have limited life and are therefore depreciated

Plant refers to machinery and production line of a manufacturing

and have limited life and is depreciated.

Equipment is a generic term referring to all other categories of

assets of this nature that do not fall within the categories of plant
and property, Motor vehicles, furniture, computer equipment.
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 EXAMPLE
Entity acquires premises with an existing building at a cost of N$
150 000 with the intention of erecting a factory on the site. The
agent’s commission of N$5 000 is to be paid by the purchaser over
and above the purchase price. Transfer and other legal costs
amounted to N$10 000. demolishing costs will amount to N$2
000, scrap materials from demolished building are sold for N$500.
the cost of excavating the site in preparation for the erection of the
new building amounts to N$25 000. The entity raised a mortgage
bond of N$100 000 to purchase the land with bond costs
amounting to N$4 000.
What is the cost of land?

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 DEPRECIATION OF PPE
• Depreciation is the systematic allocation of the depreciation
amount of an asset over its useful life.
• Depreciation amount refers to the cost of an asset less residual
value
• The residual value of an asset is the estimated amount that the
entity would currently obtain from the 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.

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 DEPRECIATION OF PPE
In order to decide on the amount of depreciation that should be
matched with income, three aspects should be considered:
• The useful life;
• The expected residual value;
• And depreciation method.

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 USEFUL LIFE OF PPE
The following factors are considered in determining useful life:
• The expected use of the asset by the entity
• The expected wear-and-tear,
• The technical or commercial obsolescence resulting from
changes and improvement in production,
• Legal and similar limitations on the use of the asset such as
maturity date.

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 DEPRECIATION METHODS
Depreciation is allocated from the date on which the asset is
available for use. Depreciation on asset will cease only when the
asset is derecognised or when classified as held for sale.
Depreciation is calculated using variety of methods:
• The straight-line methods
• The diminishing-balance method (reducing balance method)
• The units of production method

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 DEPRECIATION METHODS
Straight-line method
• The allocation of depreciation in fixed instalments is usually
adopted where the income produced by the asset or part of the
asset is a function of time rather than of usage, and where the
repair and maintenance charges and benefits are fairly constant.
Diminishing-balance method (reducing balance method)
• This method of depreciation, where the amount allocated declines
on an annual basis, is used where there is uncertainty about the
amount of income that will be derived from the asset.
• Units of production method

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 DEPRECIATION METHODS
Units of production method
• The units of production method results in a charge based on the
expected use or output of the assets. The units of production
method probably provides the best approximation of the
consumption of economic benefits contained in the asset.

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 EXAMPLE
Alpha has the following equipment:
Cost of equipment (1 Jan 20.4) N$310 000
Residual value N$10 000
Useful life 5 years
Year end31 Dec
The asset was available for use on 01 Jan 20.4.
No of units per year (year 1:8000, 2:6000, 3:3000, 4:2000 and year
5:1000 = 20 000 units. Assume a 25% for reducing balance.
Calculate depreciation for first 3 years, using a) Straight line
method b) diminishing balance c) units of production method
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 DISCLOSURE OF PPE
The financial statement should disclose for each group of
property, plant and equipment;
• The measurement bases used for determining the gross carrying
amount;
• The depreciation methods used;
• The useful life or depreciation rate used;
• The gross carrying amount and the accumulated depreciation at
the beginning and end of the period;
• Reconciliation of the carrying amount at beginning and end of
the period showing additions, and disposals.

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 QUESTIONS!!

THANK YOU

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