IAS 16

Property, Plant & Equipment (PPE)

Presentation on…

Presented by …Presented by … M.K.Jahid Shuvo Saidur Rahman Md. Kabir Hasan Hasan Shah Ripon Md. Ruhul Amin Masum Rana

Dept. of Accounting & Info. SystemsJahangirnagar University

Savar, Dhaka

Objectives Scope of the standard Definitions regarding PPE Recognition of PPE Subsequent costs Measurement after recognition- Cost model & Revaluation model Depreciation procedure Impairment Derecognition Presentation & Disclosure Summary

Objectives:

Timing of the recognition of assets

Determination of assets carrying amounts using both the cost model

and the revaluation model

Depreciation charges and impairment losses to be recognized

Disclosure requirements

Scope of the standard:

This standard applies in the accounting for elements of tangible fixed

assets, except when another International Accounting Standard requires

or permits a different accounting treatment.

Scope of the standard:

This standard does not apply to-

Property ,plant & equipment that is for sale

Biological assets related to agricultural activity

Mineral rights and mineral reserves

Definition : Property, plant & Equipment (PPE)Definition : Property, plant & Equipment (PPE)

Property Plant and Equipment defines Property Plant and Equipment as tangible assets that-

1) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

2) are expected to be utilized in more than one period.

Other important definitions:

Cost:

Cost is the amount of cash or cash equivalent paid to acquire an asset at the time of its acquisition and construction.

Fair Value:

Fair value represents the present market price of an asset.

Other important definitions:

Carrying amount:

Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation or losses.

Formula:

Carrying amount = Acquisition cost – Accumulated depreciation

Recognition : Property, Plant & Equipment (PPE) Recognition : Property, Plant & Equipment (PPE)

An item of Property, Plant & Equipment that qualifies for recognition as an asset shall be measured at its cost.

Elements of Cost:

Its purchase price and duties paid.

Directly attributable costs.

Initial estimate of the cost of dismantling and removing the item and restoring the

site.

Materials, labor and other inputs for self constructed assets.

The cost of Property, Plant & Equipment shall be recognized as an asset if, and only if:

a) It is probable that future economic benefits associated with the item will flow to the entity; and

b) The cost of the item can be measured reliably.

Costs NEVER to be Capitalized

Costs of opening new facility;

Costs of introducing new product or service;

Costs of conducting business in new location or with new class of customer;

Administration and other general overhead costs;

Costs incurred in using or redeploying an item;

Amounts related to certain incidental operations.

Additional costs are incurred after the asset becomes operational is called subsequent costs.

Example of this cost includes-

Expense day-to-day servicing cost.

Capitalize replacement or renewal components and major inspection costs.

Subsequent MeasurementSubsequent Measurement

Revaluation

Depreciate revalued amount over useful life

Depreciate costover useful life

Revaluation Model Cost Model

Cost Model :

Carrying amount is-

At cost Less

any accumulated Depreciation less

any accumulated impairment losses

Revaluation Model : Carrying amount is-

Fair value less

subsequent accumulated depreciation less

subsequent accumulated impairment losses

Depreciation :Depreciation :

Depreciation is the systematic allocation of the depreciable amount of an asset over it’s useful life.

Residual value :

Residual Value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated cost of disposal.

Depreciable amount is the cost of an asset or the amount that has replaced it, less its residual value.

Depreciable amount :

Depreciation methods:

1.Straight line method

2. Sum of the years digits method

3. Double declining balance method

4. Units of production method

Straight line depreciation method :

Assumes uniform consumption pattern of economic benefits The depreciation expense:

Depreciable amount

Estimated useful life

= Depreciation expense

* Depreciable amount = Cost – Salvage Value

Sum-of-the-Years’-Digits method

Each fraction uses the sum of the years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator is the number of years of estimated life remaining as of the beginning of the year.

Alternate sum-of-the-years’ calculation,n(n+1)

2==

5(5+1)

2= 15

Double declining method :

Double declining depreciation rate is a fixed percentage which is

equal to double of the straight line rate.

If the straight line rate is 20% then twice of the straight line rate

would be 40% that is double declining rate.

Units of production method :

Units of production method measures the amount of depreciation dividing the total estimated units by total estimated hours.

Here the total estimated hours is identified by subtracting salvage value from cost multiplying specific working hours.

(Cost – Salvage value) X Hours this year

Total estimated hours= Depreciation charge

Impairment : Definition

An impairment is the amount by which the carrying amount of an asset exceeds its recoverable amount. Recoverable amount is the higher of an asset’s net selling price and its value in use.

When impairment occurs-

Significant decrease in the market value of an asset

Significant changes in the usage of an asset

The significant adverse effects of climate change in the value of an asset

Asset exchange transactions:

Assets are exchanged for two reasons-

1. Acquired asset will be measured at fair value

2. Given up asset will be measured at carrying amount

Acquired asset will be measured at fair value if:

Exchange has commercial substance.

Fair value of the asset acquired can be measured reliably.

Acquired asset will be measured at carrying amount of the asset given up if:

Exchange lacks commercial substance.

Fair value of the asset acquired can not be measured reliably.

Derecognition:

When no future benefits expected from use or disposal-

Difference between carrying amount and net disposal proceeds recognised as gain/loss in profit or loss.

Gains not classified as revenue

Consideration receivable measured at fair value

Presentation and disclosure:

Measurement basis-

Depreciation methods

Useful lives or depreciation rates

Gross carrying amount and accumulated depreciation at beginning and end of period

Reconciliation at beginning and end of period showing:

Comparative information required

Residual values

Estimated cost of removing or restoring items

Useful lives

Depreciation methods

Disclosure of the nature & effectiveness of change in Accounting estimate with respect to-

At the revaluation of PPE , the followings must be disclosed:

Effective date of revaluation

Independent valuator involvement

Methods and significant assumptions applied

Carrying amount should be recognized under cost model

Revaluation surplus

Summary: Clear concept view of IAS 16 which is about PPE. Helps us to know about different constitutional terms of accountancy

Provides help to prepare financial statement which is internationally granted

Removes confusions that arises among the accountants about different accounting terms and conditions.

Measures properly the financial position of the organization.

It helps to implement the rules and regulations in the practical field

Thanks to all…

Any Questions…