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IAS 16
Property, Plant &
Equipment
PPE Recognition
Tangible Assets that are held in use of production, for rentals to others ,or for administrative purposes and which are expected to be used for more than one accounting period.
Tangible Assets which will probably generate future economic benefits and the cost of the item can be measured are recognized as assets.
PPE Recognition
Example: Items of Property Plant & Machinery Safety/ Environmental Equipment
Elements of Cost Purchase Price Cost directly attributable for installation. Borrowing cost if they comply with
requirements of IAS 23. Initial estimate of cost of dismantling. If payment is deferred beyond normal credit
terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit.
Cost If the asset is acquired by the entity at
the amount initially recognized in accordance with any other standard of IFRSs like IFRS -2 Share based payments under Cash settled share based payments or Equity based share based payments.
Capitalization of Subsequent Cost
Capital Expenditure is one which improves the earning capacity of the asset or it can last for longer time.
Revenue Expenditure is one which maintains the existing capacity of the asset.
Comprehensive Components Approach Each part of an item of PPE with the cost
that is significant in relation to the total cost of item should be depreciated separately.
If two or more significant parts of an item have same useful life and the depreciation method of this parts may be grouped together to determine the depreciation.
IAS-16 mandates component accounting
Non recurring replacement
If the replacement meets the recognition criteria the cost of new part is added and the cost if old parts deleted from the asset.
Measurement after Recognition
An entity can select any accounting policy from either.
Cost Model. Revaluation Model.
Cost v/s Revaluation ModelCost Model Revaluation Model
Componentization Componentization
Useful Life Useful Life
Cost Model
After recognition as an asset an item of PPE should be carried at its cost less any accumulated depreciation and impairment losses.
P P& E -Definitions Carrying Amount It is the amount at which an asset is
recognized after deducting any accumulated depreciation and accumulated amortization losses.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
P P & E -Definitions Recoverable amount is the higher of the of an assets net selling price and its
value in use. Depreciation is based on useful life.
Entity Specific Value
This value is the present value of cash flows and entity expects to arise from continuous use of an asset and from its disposal at the end of its useful life.
Recoverable amount is the higher of an assets net selling price and its value in use.
Revaluation Model Highlights
The item of PPE shall be carried at revalued amount and the value to be adopted shall be the fair value at the date of valuation.
Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
Revaluation Model Highlights
An item of property, plant and equipment is to be revalued for entire class to which the asset belongs revalued.
Revaluation Model Highlights
If an asset's carrying amount is increased as a result of a revaluation the increase:
a) Has to be recognized in Revenue to the extent that it reverses a revaluation decrease of the same asset previously recognized as an expense; or
b) in all other circumstances, credited directly to equity under the heading of revaluation surplus.
Revaluation Model Highlights
If an asset's carrying amount is decreased as a result of a revaluation the decrease:
a) debited directly to equity under the heading revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset; or
b) in all other circumstances, recognized as an expense in revenue.
Government Grant Income approach
The grant is treated as income and spread over the period over which depreciation on asset is charged
Government Grant Capital Approach
Under this approach the amount of grant is directly taken in equity
Any one approach is allowed under IFRS but income approach finds more suitability.
Grants - Assets1. Reduce from asset2. Deferred Income
Withdrawal of Grants 1. Increase the carrying Value or 2. Decrease the deferred Income
De-recognition
The carrying amount of PPE should be de-recognized on disposal or when no future economic benefit is expected out of asset. The resultant gain should be included in the other income and loss should be recognized in revenue.
Disclosures
The entity should disclose the measurement basis, useful lives, depreciation method and a reconciliation of opening and closing balances detailing out recognition and de recognition ,etc.
Disclose the amounts of PPE pledged as security for liabilities.
Disclosures For PPE stated at revalued amounts,
disclose: (a) the effective date of the revaluation; (b) whether an independent valuer was
involved; (c) the methods and significant
assumptions applied in estimating the items’ fair values
Disclosures For borrowing costs disclose The amount of borrowing costs
capitalized during the period; and the capitalization rate used to determine
the amount of borrowing costs eligible for capitalization.