Choice of Model = Cost model Vs. Revaluation Model

Year 1 Year 2Class M Cost Acc. Dep C.V Revalued at Rev. Gain/ (Loss) Revalued at Rev. Gain/ (Loss)

Asset 1 20000 5000 15000 20000 5000 12000 -8000Asset 2 20000 5000 15000 15000 0 20000 5000Asset 3 20000 5000 15000 10000 -5000 20000 10000

Note :-1 Revaluation is triggered = at assets level.2 Revaluation is done at = class level.3 Accounting of revalutaion gain / loss = asset wise.

Rule :- 1st Knock off Accumulated Dep. First then reduce the cost of the asset.

Journal Entry year 1

Asset 1 Accum. Dep A/c 5000To Rev. Res A/c 5000

(being increase in the value of the assets)

Asset 3 P & L A/c Dr. 5000To Asset A/c 5000

Journal Entry year 2

Asset 1 P & L A/c Dr. 3000Rev. Res. A/c Dr. 5000

To Assets A/c 8000

Asset 2 Asset A/c Dr. 5000To Rev. Reserves A/c 5000

Asset 3 Asset a/c Dr. 10000To Rev. Reserve A/c 10000

To P&L A/c 10000

Subsequent costsAsset Overhaul Remarks

Carrying Value 50000 25000 To be ExpensedResidual Value 0 0 Treat this overhaul component as separateLife (in years) 10 5

Dep. As per IAS 16 5000 5000 10000

New Cost of Asset 75000Less : Dep. 10000

65000Less : Dep. 10000

55000Less : Dep. 10000

45000Less : Dep. 10000

35000Less : Dep. 10000

Carrying Value 25000 Other OverhaulCost 30000Life 5 Years

New Value 55000

Now if overhaul is scheduled in 3rd year

Carrying Value 55000Add : O/H Cost 30000Less : Trf. Of old O/H Cost 15000 To P&L A/c

70000

IAS 16 PROPERTY, PLANT AND EQUIPMENTS By - CA Nalin Sharma

Note :- From exam point of view IAS 16 very important.2006 1 Question2007 1 Question2008 1 Question2009 2 Question2010 1 Question

Topics to be covered in the compiled video

IAS 16 Prpoerty Plant and Equipment Session 1IAS 23 Borrowings Session 2IAS 36 Impairment of Assets Session 3

Session 1 Non Current Assets

1Apply various examples of expenditure distinguishingcapital or revenue

2345 Gains/Loss on accounting of revalued assets.6 Depreciation

Scope of IAS 16Applies for accounting of PPE except when other IAS permits different treatment.

ExceptionIFRS 5 Items classified as HFS

Covererd in respective IFRS 6 R & M of exploration and evaluation assetsStandards IAS 41 Biological Assets

- Mineral rights and mineral reserves

Key Definitions

1 Tangible Assets (PPE) Held for Production or Supply of goods or admin purpose + exp to be used more than one year

2 Depreciation Systematic allocation of DA over an asset's useful life.

3 Depr. Amount Amt on which we provide depreciation = Cost - Residual Value

4 Cost Amt of C+CE paid initially + Fair Value of other considerations given (in case of exchange of asset)

5 Fair Value Arm's Length Price = Moderate Price = Not a favourable price of relative transaactions

6 Residual Value Scrap Value - upon buying we estimate the amount we exp. To realize upoin disposal

7 Useful Life period of time of expected usage of asset OR productions units expected to be obtained.

8 Carrying Amount Amt recognized in FS - Acc. Dep - Acc. Imparment Losses

9 Imparment Loss Reduction in value of the asset because of market condition or break out = CV less than Recoverable

Value

Example of Tangible Non Current Asset as per IAS-16Meaning of TNCA Tangible (Physical/Touchable) + Other than Current Assets

Current Assets1 Realised in the companies Normal Operating Cycle (RM/WIP/FG/Debtors)

2 Cash and Cash Equivalents

3 Held for Trading ( Inventory)

4 Exp to realised after 12 months

Tangible Non - Current Assets

In IFRS base financial statements they call it as PPEIn IND-As based financial statements they call it as FA

Define the initial cost of NCA (+Self const. Assets)

Identify the Pre Conditions for capitalising Borrowing Cost.Describe and idntify subsequent exp that may be capitalized.Rules for Revaluations.

Detais Covered By

1. Property, Plant and Equipment

Covered by IAS 16 PPEa Buildingb Machineriesc Computers

Traditionally called Fixed Assets.

2. Investment Property

Covered by IAS 40 Investment Propertya Bulding given on rentb Plot of Land given for

Capital Appreciation

3. Property constructed on behalf of Covered by IAS 11 Construction Contracts third party

4. PPE classified as Held for Sale Covered by IFRS 5 NCA-HFS + Discontinued Operations

Recognition of NCA

Capital Expenditure vs. Revenue Expenditure

Cap Ex. Incurred to acquier PPE intended for long term use + increase rev. earning capacity N.C.A. ( SOFP)

Rev. Ex. Incurred to run day to day operations like buy-sell / admin exps / reparing(P&L)

Quiz Time1 Rs 50000 Speant on acquiring new asset. Cap Ex

2 Road Tax of Rs 1500 included in this? Rev Ex

3 Rs 10000 on purchse of Second hand vehicle? Cap Ex

4 Rs 12000 spent on refurbishment? Cap Ex

5 Rs 1000 monthly rental for hire of vehilce? Rev Ex

Component of cost - Restoring the Site12

Location(Employees Cost+Site Prep Cost+Delivery & handling Cost+Installation assembly cost+borrowing cost IAS 23+Testing Cost+Professional Fees)

3site (= Decommissioning) the asset and restoring the site

Purchase Price in exchange of Transactions(car is exchanged for another car)

When the assets are acquired not in money then it may be neceesary to measure the value.

FAIR VALUR OR CARRYING AMOUNTType 1 F.V. Basis

(a) When transaction lacks commercial substance.(b) When F.V. of neither of the two assets is measured reliably.

Type 2 If F.V. fails then on the basis of C.V.Quiz Time

1 Mr. X buys bike of Rs 100000 and pays cash of Rs 80000and trade is activa.Bike A/C Dr. 80000

To Cash A/c 80000

1. When future economic benefit will flow to entity. 2. When cost is measured reliably

Purchase Price+import duties+non-refundable taxes after discounts/rebateDirect attributable cost of bringing the asset to the present condition and

Estimated cost of dismanteling and removing the asset and restoring the

Bike A/C Dr. 20000To Disposal A/c 20000

(Profit)2 A machinery is acquired in exchange of the plot of land.

The Fair Value of the machinery agreed at $ 200000 and the Fair Value of the Plot of Lanf agreed at $ 250000 and The Book Value of the Land is $ 225000The difference of $ 50000 will be settled by the cash.The Machinery acquired will be recoreded at the $ 200000

Acquiring Machinery A/C Dr 200000Cash A/c Dr 50000

Disposing Plot of Land A/C 225000Profit on Plot A/C 25000

Self Constructed Assets1 Principles of Measurement are similar to that of TNCA2 Indicative Cost = Cost of other similar asset const. 4 Sale3 Capitalised Cost =as per IAS 23 Boroowing Costs4 Non Capit. Cost = Cost of abnormal wastage

Component Accounting 1 IAS 16 requires separate recognition of each significant item of PPE2 Item of PPE means a part that is having significant cost in relation

to total cost of an asset.3 Not necessary that the part has different useful life.4 IAS 16 New Requirement

The Parts of PPE has to be identified seperately.So that cost of replacing part recognised seperately.

Example of Component AccountingVarious Component identifed at

the time of Cap. Ex. Request made

are :-

Sr. No. Particulars Useful Life Amount (in Rs.)

1 Heat Vault 4 Years 1500000

2 Heat system,burner,pipes 10 Years 600000

3 Control Mechanism 5 Year 200000

4 Visits and Overhaul Exps 2 years 200000

5 Furnace (Main Element) 20 Years 2400000

Total Cap. Ex. 4900000

That means various component of PPE is break up into number of different parts having diff. useful life.

NEW CONCEPT - NOT IN OLD AS 10 of INDIAN ACCOUNTING STANDARDS.Mainly used in Power or Infra Co.

Subsequent CostsAccounting Treatment

1 C.V. of PPE doesn’t include day-to-day servicing of the item.2 Servicing Cost (Labour+Consumables - Tr to P&L A/c)

Part Replacement1 C.V. of PPE recognize the Cost of replacing a Part when the cost is

incurred if the recognition criteria are met.2 CV of Replaced Part = Derecognized.

Major Inspection or Overhaul costs are capitalised.

How to measure after recognition

Select the Accounting Policy

Cost Model Revaluation ModelCost Revalued Amount

Less Acc. Dep. Acc. Dep.Less Impaitment Loss Impaitment Loss

A New Furnace is installed in the Heater Plant. The Total Expense for the furncae is Rs 50Lac Expected useful life - 20 years

1 Revalued amount = Fair Value (F.V.) of asset at the revaluation date.

2 F.V. has to be derived from Market Values.3 When F.V. is not available we use replacement cost approach.

How to determine Fair Value (F.V.)

Land & Buildings Derived from market based values as evidenced by an appraisalthat is normally undertaken by professionally qualified valuers.

Plant & Equipment Derived from market based values as evidenced by an appraisalperformed by experts.

Quiz Time Zodaic Ltd purchase a building at the cost of Rs. 5,00,000 on 1/1/2008.(If there is Experts value them at Rs. 7,00,000 on 31/12/2009.

market basedIgnore Depreciation.

evidence) How will you revalued amounts be recognised?

Accounting Entry :- Revalution Res shown in SOCE and not to P&L A/c.

Quiz Time Find the Fair Value if, equipment which is purchased 4 years ago, (If there is Cost Rs. 80,000 today.

SLM Based Depreciation rate = 10%.evidence) Ans - Rs. 48000

Frequency of Revaluation

Ravaluations must be made sufficiently regularly.Frequency depends on movements in fair value.

Increase / Decrease of Revaluation Amount

1 Recognise on Asset by Asset Basis.2 Increase = recognised as gains in SOCI

and accumulated in Equity under the head "Rev. Surplus."3 Decrease = recognised in P&L

Unless reversing a gain previously recognised in SOCI4 Decrease = recognised in OCI to the extent of any suplus prev. recognised

and still remaining in respect of same asset.

Accounting for Revaluations

Cost of AssetC.V. - Rs. 10000

P&L Dr 2K First TimeTo Asset

Rs. 8000 Rs. 12000

Rs. 5000 Rs. 11000 Rs. 9000 Rs. 15000

P&L Dr 3K Asset A/c Dr 3KTo Asset To P&L 2 K

NO market based

To Rev. Res 1K

Accumulated Depreciation

At the date of revaluation accumulated depreciation is eitherRESTATED PROPORTIONATELY (Method 1) ELIMINATED (Method 2)

with the change in Gross C.V. against Gross C.V. and so that C.V. after revaluation Net amount is restatedequals at revalued amount. to the revalued amt.

Most popular in use forbuildings.

Quiz TimeX Co. bought item of plant for $10000. The palnt has 10 years of life.R.V.=Nil The X Co. follows a policy to revalue its such items every two years.The assets were revalued at the year end for Rs. $8800 8000

Required.What will be the entry under Proportionate Restatement Method and under Elimination Method?

Method 1 PRMAssets A/C Dr 1000

To Acc. Dep. 200To SOCI (Rev. Gain) 800

Method 2Acc. Dep. A/C Dr. 2000

To Asset A/C 1200To SOCI (Rev. Gain) 800

Subsequent Accounting

to retained earnings as the assets.

Quiz Time An item of PPE acquired on 1/1/2009 for $ 100000.Estimated Useful life - 10 years+SLMR.V. - NilRevalued at $ 104000 on 31/12/2010

Required Calculate the depreciation charge for the year 3 to 10and the amount of the revaluation surplus that can betransferred to retained earnings annually.

13000Rev Surplus 3000 TO R.E 3000

Deferred Taxation

When an asset is revalue, the amount of revaluation is adjusted to reflect the impact of Deferred Taxation on revaluation

The Tax Base will not change when compan revalue its assets.Thus resulting in Taxable Temporary Difference.

IAS 16 ALLOWS, but does not requier and entity to transfer from revaluation reserve

The transfer is the difference between the annual depreciation expense based on the revalued amount and the anuual depreciation

expense based on historical cost.

The credit recognised in OCI will be net of taxation and subsequent transfer fromrevaluation resereve will also be net of taxation.

Example C.V. of Asset - $ 500000Life 10 yearsRevalued $ 600000IT Rate 30%

Required JV of Revaluations, Annual Dep. And RE

Assets A/C Dr. 100000Deff. Tax Cr. 30000Rev. Res 70000

Dep 60000To Acc Dep 60000

Excess Dep because of Revaluation6000050000 10000

Related tr. From RR to RERR A/C Dr 7000

To RE A/C 7000

ConclusionNo adjustment to deferred tax is required as a result of transfer of excess dep.This is because the deferred taxbalance is adjusted as a result of Dep. Charge($60000)which reduces the temporary diff.

Depreciation of non-current tangible asset

1 Depreciation is systematic allocation of depreciable amount of an asset over useful life.

2 Useful life and residual value must be reviewed at each financial year end.

3 If expectation differs from previous estimates the changes are accounted for change in accounting estimates.

Depreciation calculation after revaluation

1 Deprecaition will be based on revalued amount.2 Full depreciation amount charged off as as expense in SOCI.3 Difference between depreciation on revalued amount & original cost

may be transferred from Revalued Reserve to Retained Earnings

Depreciable Amount

Useful Life Factors to be considered1 Expected usage assessed by reference to capacity / physical output.2 Expected physical wear and tear. (Depends upon operational factor - No. of Shifts)3 Technical obsolscene srising from change in the production or market demand for the product.4 Legal or similar limits on the use. (e.g. expiry dates of related leases)5 Asset Management Policy may involve diposal of the assets after specific time therfore useful life

may be shorter than the economic life.6 Repairs and Maintenance Policy may also affect useful life but do not negate the need for depreciation

Residual Value1 Often insignificant and immaterial as compard to depreciable amount.2

value in which case depreciation will be zero.

Depreciaiton PeriodDepreciaiton is

IAS 16 does not specify any method

of depreciation

Dep. Is always recognised even if F.V. exceeds C.V. except where residual value is greater than carrying

Begin from Ceases at the earlier of the date the asset is

1 Classified as HFS as per IFRS 52 Derecognised. (as scraped or sold)

DPERECIATION DOES NOT CEASE WHEN ASSET IS IDLE OR RETIRED FROM USE FOR SALE.

Land and Building1 These are the separate assets and are seperately accounted for even they are acquired togather.2 Land is not depreciated.3 Building is depreciated.

However if the land has limited useful life e.g. landfill, mining site, Quarry thenland is depreciated.

Depreciaiton Method1 SLM Constant charge over useful life.2 WDV A decreasing charge over useful life.3 Sum of units chrged based on expected use / units.

Method

IAS 16 PARA 43 INSIGNIFICANT PARTS ARE DEPRECIATED TOGATHER.

Derecognizing - Removing Assets

SOFP Eliminate on disposal or when no future economic benefits are expected from use or disposal.

SOCI Recognise gain or loss in Profit and Loss

Note Gains are not classified as revenue as per IAS 18 but are income.

Disclosures1 Measurement basis used for determining Gross Carrying Amount.2 Depreciation method used.3 Useful life or Dep. Rates.4 Gross CV Less Acc. Dep. From Beginning and End of the Period.5 Accumulated imparment Loss are aggregated with acc. Dep.6 A reconciliation of the carrying amount at the beginning and end

of the period showing - a Additionsb IFRS 5 clssified itemsc Acquisition throgh business combinationsd Increase or decrease through revaluations e Impairment Lossesf Reversal of Impairment Losses.g Depreciation.

the date when asset is available for use.