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ACCA Paper F 7 Financial Reoirting F7FR Session07 d08
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OVERVIEW Objective ¾ To prescribe the accounting treatment for tangible non current assets.
¾ Depreciable amount
¾ Revaluation Model
¾ Fair value
¾ Accumulated Depreciation
¾ Accounting standards
¾ Depreciation methods
¾ Accounting policy
¾ Non depreciation
¾ Accounting treatment
¾ Derecognition date
¾ Components of cost
¾ Cost Model
DERECOGNITION RECOVERY OF CARRYING AMOUNT DEPRECIATION REVALUATIONS MEASUREMENT AFTER RECOGNITION
INITIAL MEASUREMENT AT COST
INTRODUCTION SUBSEQUENT COSTS
¾ Running costs
¾ Part replacement
¾ Major inspection or overhaul costs
¾ For each class
¾ Items stated at revalued amounts
¾ Exchange of assets 1 INTRODUCTION
1.1 Scope ¾
This standard shall be applied in accounting for property, plant and equipment except when another IFRS requires or permits a different treatment.
1.2 Exclusions ¾
IAS 16 does not apply to biological assets that relate to agricultural activity (IAS 41) mineral rights and reserves such as oil, natural gas and similar non-regenerative resources.
1.3 Definitions ¾
Property, plant and equipment are tangible assets that:
are held for use in the production or supply of goods or services or for rental or for admin purposes and
are expected to be used during more than one period.
¾ Depreciation is systematic allocation of depreciable amount of an asset over its useful life.
¾ Depreciable amount is the cost (or other amount substituted for cost) less its residual value.
¾ Useful life is either the period of time over which an asset is expected to be
used, or the number of production or similar units expected to be obtained from the asset.
¾ Cost is the amount of cash/cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or construction.
¾ Residual value is the estimated amount that an entity would currently
obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of an age and in the condition expected at the end of its useful life.
¾ Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
¾ 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 thereon.
¾ Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.2 RECOGNITION2.1 Criteria3 INITIAL MEASUREMENT AT COST
costs of site preparation; initial delivery and handling costs; installation and assembly costs;
Directly attributable costs of bringing the asset to location and working condition, for example: costs of employee benefits (e.g. wages) arising directly from construction or acquisition;
Purchase price, including import duties and non-refundable purchase taxes (after deducting trade discounts and rebates.)
¾ Property, plant and equipment shall initially be measured at cost.
¾ Entity-specific value – The present value of the cash flows expected to arise
In certain circumstances it is appropriate to allocate the total expenditure on an asset to its component parts and account for each component separately.
Commentary Usually readily satisfied because exchange transaction evidencing purchase identifies cost. For self-constructed asset, a reliable measurement of cost can be made from transactions with third parties for the acquisition of materials, labour and other inputs used.
the cost of the asset to the entity can be measured reliably.
An item of property, plant and equipment shall be recognised when: it is probable that future economic benefits associated with the asset will flow to the entity, (satisfied when risks and rewards have passed to entity), and
from the continuing use of an asset and from its disposal at the end of its useful life.3.1 Components of cost
costs of testing proper functioning (net of any sale proceeds of items produced); and
professional fees (e.g. architects and engineers).
Borrowing costs (IAS 23 requires the capitalisation of borrowing costs related to a qualifying asset)
An initial estimate of dismantling and removal costs (i.e. “decommissioning”) the asset and restoring the site on which it is located. The obligation for this may arise either: on acquisition of the item; or as a consequence of using the item other than to produce inventory.3.2 Exchange of assets
Cost is measured at fair value of asset received, which is equal to fair value of the asset given up (e.g. trade-in or part-exchange) adjusted by the amount of any cash or cash equivalents transferred. Except when: the exchange transaction lacks commercial substance; or the fair value of neither the asset received nor the asset given up is reliably measurable.
Whether an exchange transaction has commercial substance depends on the extent to which the reporting entity’s future cash flows are expected to change as a result of the transaction.4 SUBSEQUENT COSTS
The issue is whether subsequent expenditure is capital expenditure (i.e. to the statement of financial position) or revenue expenditure (i.e. to the profit or loss).
4.1 Running costs ¾
The carrying amount of an item of property, plant and equipment does not include the costs of day-to-day servicing of the item.
Servicing costs (e.g. labour and consumables) are recognised in profit or loss as incurred.
Often described as “repairs and maintenance” this expenditure is made to restore or maintain future economic benefits.
4.2 Part replacement ¾
Some items (e.g. aircraft, ships, gas turbines, etc) are a series of linked parts which require regular replacement at different intervals and so have different useful lives.
The carrying amount of an item of property, plant and equipment recognises the cost of replacing a part when that cost is incurred, if the recognition criteria are met.
¾ The carrying amount of replaced parts is derecognised (i.e. treated as a disposal). ¾4.3 Major inspection or overhaul costs
5.1 Accounting policy ¾
Carry at a revalued amount, being fair value at the date of the revaluation less any subsequent accumulated depreciation and any accumulated impairment losses.
5.3 Revaluation Model ¾
Carry at cost less any accumulated depreciation and any accumulated impairment losses.
5.2 Cost Model ¾
Classes include land, land and buildings, factory plant, aircraft, vehicles, office equipment, fixtures and fittings’ etc
An entity may choose between the cost model and the revaluation model. However, the same policy must be applied to each entire class of property, plant and equipment.
An airline is required by law to perform a major overhaul on each aeroplane’s engines every five years. The engines may be identified as assets with a separate life from the rest of the aeroplane and written off to zero over five years. Overhaul expenditure might at first sight seem to be a repair to the aeroplane but it is actually a replacement of the engine. As such it must be capitalised.
A common term used to describe these type of assets that have more than one major component, with different useful life, is that of a ‘complex asset’.
Any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is derecognised.
On initial recognition an estimate will be made of the inspection costs and that amount will be depreciated over the period to the 1 st inspection. This amount is part of the original cost recognised and is not an additional component of cost.
The cost of each major inspection performed is recognised in the carrying amount, as a replacement, if the recognition criteria are satisfied.
Performing regular major inspections for faults, regardless of whether parts of the item are replaced, may be a condition of continuing to operate an item of property, plant and equipment (e.g. a ship).
¾5 MEASUREMENT AFTER RECOGNITION
¾ To use this model fair values must be reliably measurable. ¾ All revalued assets are still depreciated, unless the asset is land.6 REVALUATIONS6.1 Fair value
6.1.2 Plant and equipment ¾ Fair value is usually market value determined by appraisal. ¾
If there is no market-based evidence of fair value (e.g. because items are of a specialised nature or rarely sold), fair value is estimated using: depreciated replacement cost; or
− Depreciated replacement cost is what a new equivalent asset would cost (i.e.