UNEC

Chapterengagements
Audit and other assurance 3
Non-current assets

Instructor: Elkhan Mahmud

Financial Reporting
 OUTLINE

Property, Plant and Equipment (IAS 16)

Investment property (IAS 40)
Borrowing costs (IAS 23)

Financial Reporting
Overview

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Accounting for property, plant and

equipment (PPE)
• Accounting for revaluations
• Revaluation surpluses
• DEBIT Carrying amount (statement of
financial position) X
• CREDIT Other comprehensive income
(revaluation surplus) X
• Reversing a previous decrease in value

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Illustration 1: Reversing a revaluation decrease

• Binkie has a year end of 30 June 20X6. At 1 July 20X5,
Binkie had land with a carrying amount of $130,000 in
its financial statements. On 1 July 20X3, a decline in land
values led the company to reduce the carrying amount of
the land from $150,000. The decline was recorded as an
expense in profit or loss. There has been a surge in land
prices in the current year and the land is worth $200,000
at 30 June 20X6.
• Required: Account for the revaluation in the current year.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• The revaluation at 1 July 20X3 resulted in a decrease in value

of $20,000, which was recorded in profit or loss. As land is
not depreciated, the decrease can be reversed in full in the
year to 30 June 20X6. The excess value is recognised in other
comprehensive income.
• The double entry is:
• DEBIT Carrying amount of land (statement of financial position)
$70,000
• CREDIT Profit or loss $20,000
• CREDIT Other comprehensive income (revaluation surplus) $50,000

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Revaluation decreases
• Illustration 2: Revaluation decrease
• Using the information in Illustration 1, but swapping
round the figures. Let’s assume that the land original
cost was $150,000, it was revalued upwards to
$200,000 on 1 July 20X5 and the valuation at 30 June
20X6 has fallen to $130,000.
• Required: Account for the decrease in value.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• When the asset was revalued on 1 July 20X5, the revaluation

surplus of $50,000 would have been credited to other
comprehensive income. The decrease of $70,000 in the current
year will first be debited to the revaluation surplus to reduce the
balance to nil, with the remaining loss charged as an expense to
profit or loss.

• The double entry is:

• DEBIT Other comprehensive income (revaluation surplus) $50,000

• DEBIT Profit or loss $20,000

• CREDIT Carrying amount (statement of financial position) $70,000

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Revaluation of depreciated assets

• Timing of the revaluation
Revaluation at the start of the year
Depreciation for the year is based on the revalued amount.
Revaluation at the end of the year
Depreciation for the year is based on the cost or valuation
brought forward at the start of the year. Depreciation for
the year must be deducted in arriving at the carrying
amount of the asset at the date of valuation.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

Revaluation mid-way through the year

Two separate depreciation calculations are
required:
Pro rata on the brought forward cost or valuation
to arrive at carrying amount at the date of
valuation
Pro rata on the revalued amount

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Depreciation and the revaluation surplus

• Example: Transfer of revaluation surplus to retained
earnings
• If an asset is revalued from $100,000 to $140,000 and
has a remaining useful life of 40 years at that date, a
revaluation surplus of $40,000 is recognised. The
revaluation surplus can then be transferred to retained
earnings over the remaining useful life to represent the
depreciation difference as a result of the asset being
revalued.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Revaluation surplus $40,000 / 40 year remaining useful life

= $1,000 per annum OR
• Depreciation per annum if value of asset is $100,000 / 40
years = $2,500 per annum
• Depreciation per annum if value of asset is $140,000 / 40
years = $3,500 per annum
• Therefore, additional depreciation of $1,000 can be
transferred from the revaluation surplus to retained
earnings.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• The following entry can be made annually over the

remaining life of the asset:
• DEBIT Revaluation surplus $1,000
• CREDIT Retained earnings $1,000
• If this entry is not made the full $40,000 is transferred
to retained earnings when the asset is disposed
of/retired.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Depreciation of complex assets

• Illustration 3: Depreciation of complex assets
Cost Useful life
$’000
Fuselage 20,000 20 years
Undercarriage 5,000 500 landings
Engines 8,000 1,600 flying hours

• Required: Calculate the depreciation for the year.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Depreciation at the end of the first year, in which 150

flights totalling 400 hours were made would then be:
$’000
• Fuselage (20,000 / 20 years) 1,000
• Undercarriage (5,000 × 150/500 landings) 1,500
• Engines (8,000 × 400/1,600 hours) 2,000
4,500

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• Replacements and Overhauls

• Following Illustration Depreciation of complex
assets above, an overhaul of the aircraft was
required at the end of year 3 and every third year
thereafter at a cost of $1.2 million.
• Required: Explain how the overhaul would be
accounted for.

Financial Reporting
 Property, Plant and Equipment (IAS 16)

• The cost of the overhaul would be capitalised as a

separate component. $1.2 million would be added to
the cost and the depreciation (assuming 150 flights
again) would therefore be:
$’000
• Total as above 4,500
• Overhaul $1,200,000/3) 400
4,900

Financial Reporting
 Investment property (IAS 40)

• Investment property
Use in the production or supply of goods or services or
for administrative purposes, or
Sale in the ordinary course of business.
• Owner-occupied property
• Fair value
• Cost
• Carrying amount

Financial Reporting
 Investment property (IAS 40)

• Recognition
It is probable that future economic benefits associated
with the investment property will flow to the entity
The cost of the investment property to the entity can
be measured reliably
• Initial measurement
Investment property is measured initially at cost

Financial Reporting
 Investment property (IAS 40)

• Subsequent measurement
• Cost model (=IAS 16)
Carry the asset at its historic cost less
Depreciation and Any accumulated impairment loss
• Fair value model
Investment property is measured at fair value at the end of
the reporting period
Any resulting gain or loss is included in profit or loss for the
period
The investment property is not depreciated
Financial Reporting
 Investment property (IAS 40)

• Transfers
• Investment property to PPE/Inventory
Transfer from investment property to owner-occupied
or inventories
Cost for subsequent accounting is fair value at date of
change of use
Apply IAS 16 or IAS 2 as appropriate after date of
change of use

Financial Reporting
 Investment property (IAS 40)

• PPE to Investment property

Financial Reporting
 Investment property (IAS 40)

• Kapital owns a building which it has been using as a head

office. In order to reduce costs, on 30 June 20X9 it moved
its head office functions to one of its production centres and
is now letting out its head office. Company policy is to use
the fair value model for investment property.
• The building had an original cost on 1 January 20X0 of
$250,000 and was being depreciated over 50 years. At 31
December 20X9, its fair value was judged to be $350,000.
• Required: Explain how the building will be accounted for in
the financial statements of Kapital Co at 31 December 20X9

Financial Reporting
 Investment property (IAS 40)

The building will be depreciated up to 30

June 20X9.
$
250,000
Original cost

Depreciation 1.1.X0 – 1.1.X9 (250/50 × 9) (45,000)

Depreciation to 30.6.X9 (250/50 × 6/12) 2,500
Carrying amount at 30.6.X9 202,500
Revaluation surplus 147,500
Fair value at 30.6.X9 350,000

Financial Reporting
 Investment property (IAS 40)

• The difference between the carrying amount and fair value

at the date of transfer is taken to the revaluation surplus.
• After the date of transfer, the building is accounted for as
an investment property and will be subjected to a fair value
exercise at each year end and these gains or losses will go to
profit or loss. If at the end of the following year, the fair
value of the building is found to be $380,000, then
$30,000 will be credited to profit or loss.

Financial Reporting
 Investment property (IAS 40)

• Disposals
• Disclosure requirements
Choice of fair value model or cost model
Criteria for classification as investment property
Assumptions in determining fair value
Use of independent professional valuer (encouraged but not
required)
Rental income and expenses
Any restrictions or obligations
• Fair value model – additional disclosures
• Cost model – additional disclosures

Financial Reporting
 Borrowing costs (IAS 23)

• Accounting treatment
• Borrowing costs eligible for capitalisation
Funds borrowed Capitalise actual borrowing costs incurred
specifically for a less investment income on temporary
qualifying asset investment of the funds (IAS 23: para. 12)
Funds borrowed Weighted average of borrowing costs
generally outstanding during the period (excluding
borrowings specifically for a qualifying
asset) multiplied by expenditure on
qualifying asset. The amount capitalised
should not exceed total borrowing costs
incurred in the period (IAS 23: para. 14).

Financial Reporting
 Borrowing costs (IAS 23)

• Commencement, suspension and cessation

• Commencement
Expenditures for the asset are being incurred;
Borrowing costs are being incurred; and
Activities that are necessary to prepare the asset for its
intended use or sale are in progress.
• Suspension
• Cessation

Financial Reporting
 Borrowing costs (IAS 23)

• On 1 January 20X6, Stremans Co borrowed $1.5 million to

finance the production of two assets, both of which were
expected to take a year to build. Work started during 20X6.
The loan facility was drawn down and incurred on 1 January
20X6, and was utilised as follows, with the remaining funds
invested temporarily.
Asset Alpha Asset Bravo
$’000 $’000
1 January 20X6 250 500
1 July 20X6 250 500

The loan rate was 9% and Stremans Co can invest surplus

funds at 7%.

Financial Reporting
 Borrowing costs (IAS 23)

Ignoring compound interest, calculate the borrowing

costs that may be capitalised for each of the assets and
consequently, the cost of each asset as at 31 December
20X6.

Financial Reporting
 Borrowing costs (IAS 23)

Asset Alpha Asset Bravo

$ $
• Borrowing costs
• To 31 December 20X6
• $500,000/$1,000,000 × 9% 45,00090,000
• Less investment income (8,750) (17,500)
• To 30 June
• 20X6 $250,000/$500,000 × 7% × 6/12 36,250 72,500
• Cost of assets
• Expenditure incurred 500,00 1,000,000
• Borrowing costs 36,250 72,500
1,072,500

Financial Reporting
Questions

Financial Reporting
Financial Reporting