Property, Plants & EquipmentsSLPSAS 07

P.AriyasenaChief AccountantMinistry of Foreign Employment Promotion and Welfare-

ObjectiveThe objective of this Standard is to prescribe

the accounting treatment for PPEsThe principle issues in accounting for PPEs are Recognition of assetsMeasurement of AssetsDepreciation and ImpairmentDisclosures

Scope

Entities which are prepared their FS on accrual basis of accounting

This standard applies to all public sector entities other than GBEs

DefinitionPPEs are tangible items that:• Are held for use in the production or supply

of goods or services for rental to others or for administrative purpose,

and• Are expected to be used during more than

one reporting period

Application of the standardThis standard applies to PPEs including• Specialized military equipments• Infrastructure assets

This standard does not apply to• Biological assets related to agriculture

activity• Mineral rights and mineral reserves such as

oil, natural gas and similar non generative recourses

Recognition Criteria The cost of an item of PPE shall be

recognized as an assets if and only• It is probable that future economic benefits or

service potential associated with the item will flow to the entity

and• The cost or fair value of the item can be

measured reliably

Issues in RecognitionSpare parts and service equipmentsMajor spare parts and standby equipmentsSpecialized military equipmentsInfrastructure assetsInitial costSubsequent cost

Measurement at Recognition

1.An item of PPE qualifies for recognition as asset shall be measured at its cost of acquisition

2.When an assets is acquired through a non exchange transaction, its cost shall be measured at its fair value as at the date of acquisition

Issues in measurement at recognitionNon Exchange TransactionElements of costDirectly attributable cost

Measurement after Recognition An entity shall choose either the cost model

or the valuation model as its accounting policy and shall apply that policy an entire class of PPEs Cost Model After recognition as an asset, an item of PPE

shall be carried at its cost less any accumulated depreciation and any accumulated impairment loss

Revaluation ModelAfter recognition of an asset ,an item of PPE

whose fair value can be measured reliably shall be carried at a amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss

Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materiality from that which would be determined using fair value at the reporting date

Issues in Revaluation

Market based evidence

Absence of market Transaction

Entire class of PPE to be revalued

DepreciationEach part of an item of PPE with a cost that

is significant in relation to the total cost of the item shall be depreciated separately This is known as Component Depreciation

The depreciation charge for each period shall be recognized in surplus or deficit

Depreciation Amount and Period

The depreciable amount of an asset shall be depreciated on a systematic basis over its useful life

The residual value and useful life of an asset shall be reviewed at least at each annual reporting date and it expectation differ from previous estimates, the changes shall be encountered for as explained in SLPSAS 03

Issues in Depreciation If fair value exceeds its carrying value

Assets useful life should be reassessed

When residual value is more, depreciation charge is zero

Depreciation of an assets ceases when it is derecognized

When the item is idle or is retired, depreciation does not ceases

Depreciation MethodThe depreciation method shall reflect the

pattern in which the asset’s future economic benefits or service potential is expected to be consumed by the entity

The method applied to an asset shall be reviewed at least at each annual reporting date and if there has been a significant change in the expected pattern of consumption of the future economic benefits or service potential embodied in the asset, the method shall be changed to reflect the changed position

Compensation for Impairment

Compensation from third parties for items of PPE, that were impaired, lost or given up shall be included in surplus or deficit when the compensation becomes receivable.

De- RecognitionThe carrying amount of an item of PPE shall

be de recognizedOn disposalWhen no future economic benefits or service

potential from its use or disposalThe gain or loss arising from the de

recognition of an item of PPE shall be included in surplus or deficit when the item is derecognized.

Disclosure on PPEThe Financial Statements shall disclose for

each class of PPE recognized in the FSThe measurement bases used for determining

the gross carrying amountThe depreciation Method usedThe useful lives or the depreciation rates usedThe gross carrying amount and the

accumulated depreciation at the beginning and end of the period

Disclosure on PPE Cont…..A recognition of the carrying amount at the

beginning and end of the period showingsAdditionsDisposalsAcquit ion through entity combinationsIncrease or decrease resulting from

revaluation and from impairment lossesImpairment losses recognized in surplus or

deficit

Disclosure on DepreciationDepreciation method adopted, the estimated

useful lives or depreciation rates to be disclosed

In addition, following disclosures are necessaryDepreciation, whether recognized in surplus or

deficit or as a part of the cost of other assetAccumulated depreciation at the end of the

periodResidual values of the assetsThe estimated cost of dismantiling,removing or

restoring items of PPEUseful Lives

Disclosure on Depreciation in the case of RevaluationThe effective date of the revaluationWhether an independent valuer was involvedThe method and significant assumptions

applied in estimating the assets fair valuesThe extent to which the assets fair values

were determined directly by reference to observable prices in an active market or recent market transactions on arms' length or were estimated using other valuation techniques.

Transitional provisions Entities are not required to recognize PPE for

reporting periods beginning on a date five years following the date of first adoption of accrual accounting in accordance with SLPSAS

An entity that adopts accrual accounting for the first time in accordance with SLPSAS shall initially recognized PPE at cost of fair value. For items of PPE that were acquired at no cost, or for a nominal cost, cost of the item’s fair value as at the date of acquisition

Transitional provisions Cont …. The entity shall recognized the effect of the

initial recognition of PPE as an adjustment to the opening balance of accumulated surpluses or deficits for the period in which the PPE is initially recognized.

Prior to first application of this standard, an entity may recognize its PPE on a basis other than cost or fair value as defined in this standard, or may control assets that it has not recognized.

Transitional provisions Cont …. Where assets are initially recognized at cost

and were acquired at no cost, or for a nominal cost, cost will be determined by reference to the asset’s fair values as at the date of acuisition.Where the cost of acquisition of an asset is not known, its cost may be estimated by reference to its value as at the date of acquisition.

When entities adopt accrual accounting for first time ,there are often difficulties in compiling comprehensive information on the existence and valuation of assets