• Property, plant and equipment (PPE) are physical assets used in the business to provide future economic benefits for a number of yearsAccording to AASB 116 economic
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• According to AASB 116, economic benefits derived from the use of an asset must be recognised on a systematic basis over the asset’s useful life
• This decline is recognised as depreciation expense in the income statement
PROPERTY, PLANT AND EQUIPMENT continued
Two classes of PPE assets:• Property
– Includes land and buildings• Plant and equipment
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• Plant and equipment– Includes cash registers, computers,
office furniture, factory machinery, motor vehicles
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Determining the cost of PPE
• PPE assets are initially recorded at costin accordance with AASB 116, para 6– The amount of cash or cash equivalents
paid or the fair value of the other
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consideration given to acquire the asset• Fair value is the amount for which an
asset could be exchanged between knowledgeable willing partners in an arm’s-length transaction
Determining the cost of PPE continued
• The cost of an asset– Consists of the fair value of all
expenditure necessary to acquire the asset and make it ready for use
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e.g. purchase price, freight costs paid, installation costs (capital expenses)
– Excludes non-capital expenditures which are expensed immediately
Determining the cost of PPE continued
Property• Cost of land includes
– purchase price– settlement costs (e g solicitor’s fees)
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settlement costs (e.g. solicitor s fees)– stamp duty– accrued property taxes assumed by
purchaser
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Determining the cost of PPE continued
• Example
LANDCash price of property $100 000Net removal cost of warehouse 6 000
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Net removal cost of warehouse 6 000Solicitor’s fee 1 000Stamp duty 2 000Cost of land $109 000
Determining the cost of PPE continued
Plant and equipment• Cost includes
– purchase price– freight charges
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freight charges– insurance during transit– installation costs
• During the useful life of an asset, a firm may incur costs for:
a. Ordinary repairs– Expenses in maintaining operating
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g gefficiency of the asset
– Expensed in operating statementb. Additions and improvements
– Costs incurred to increase operating efficiency
– Expenditure capitalised and depreciated over asset’s remaining useful life
Impairments
• All PPE items must be tested for impairment in accordance with AASB 136
• An impairment loss is the amount by
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p ywhich the carrying amount of an asset (or a cash-generating unit) exceeds its recoverable amount
• The recoverable amount is the higher of its fair value less costs to sell and its value in use
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Impairments continued
• Value in use is the present value of net cash flows expected to be derived from using the asset
• A cash-generating unit is the smallest
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g gidentifiable group of assets that generates cash inflows
Impairments continued
Accounting for impairments• To apply the impairment test
– Calculate fair value less costs to sell and value in use
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– The higher of these two values must be compared with the carrying amount
– Impairment loss is only recognised if recoverable amount is lower
Impairments continued
• Example– Recoverable amount is higher of
• Net selling price $18 000• Value in use $16 500
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– Carrying value of $25 000 exceeds recoverable amount
– Impairment write-down of $7000 required
Jun 30 Impairment Loss 7 000Accumulated Impairment Loss - Computers 7 000(To record impairment write-down on equipment)
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Impairments continued
Reversal of impairments• These are permitted so long as new
carrying value is no greater than it would have been had no impairment
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ploss been recognised in previous years
Impairments continued
Revaluation• This is a reassessment of the fair value
of a non-current asset at a particular date
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• AASB 116 requires each class of PPE to be measured either on cost basis or revalued basis
Impairments continued
• To record the revaluation journal entries:a. Record depreciation to date of asset
revaluation
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b. Transfer balance of Accumulated Depreciation account to asset account to give asset’s carrying amount
c. Record the revaluation
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Impairments continued
• Example– A firm decides to record equipment at its
fair value of $45 000. The equipment was originally purchased for $75 000
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and now has a book value of $50 000Jan 1 Accumulated Depreciation - Equipment 25 000
Equipment 25 000(To close off accumulated depreciation against
the asset)Jan 1 Revaluation Expense 5 000
Equipment 5 000(To record revaluation decrement on equipment)
Impairments continued
• If initial revaluations reverse in a subsequent period revaluation increment (decrement) should be offset against previous revaluation decrement (increment) to the extent of the amount
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(increment) to the extent of the amount of the previous revaluation
• ExampleSep 30 Revaluation Reserve 50 000
Revaluation Expense 30 000Land 80 0000
(To record reversal of revaluation increment of Land A by writing down the Revaluation Reserve by $50 000 and recognising an expense of $30 000)
Impairments continued
• Impairment testing applies to assets held on the revalued basis
• If impairment is indicated, whole class of assets need not be adjusted
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j• The asset which is impaired is written
down and it is treated as a revaluation decrement
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Disposals of PPE assets
• PPE assets may be disposed of by– Sales
• Equipment is sold to another party– Scrapping
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pp g• Equipment is scrapped or discarded
– Exchange• Existing equipment is traded for new
equipment
Sale of PPE assets
Example (Gain on sale)– Wright Ltd sells office furniture on
1 July 2010 for $160 000 cash– Original cost was $60 000
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g– Accumulated depreciation to
1 January 2010 is $41 000– Depreciation expense for first 6 months
Accumulated Depreciation – Office Furniture 8 000(To record depreciation expense for first 6 mths
of 2010)
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• Calculation of gain on disposal
of 2010)
Cost of office furniture $60 000Less: Accumulated depreciation ($41 000+ $8000) 49 000Carrying amount at date of disposal 11 000Proceeds from sale 16 000Gain on disposal of asset $ 5 000
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Sale of PPE assets continued
• Recording the sale of the assetJul 1 Cash 16 000
Gain on Disposal 5 000(To record sale of office furniture at a gain)
Sale of PPE assets continued
Example (Loss on sale)– Assume that office furniture was sold for
$9000 rather than $16 000– Calculation of loss on disposal
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p
Cost of office furniture $60 000Less: Accumulated depreciation ($41 000+ $8000) 49 000Carrying amount at date of disposal 11 000Proceeds from sale 9 000Loss on disposal of asset $ 2 000
1. Patents– Exclusive right granted by IP Australia
enabling recipient to manufacture, sell or otherwise control an invention
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2. Research and development costs– Expenditures that may lead to patents,
copyrights, new processes and new products
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Types of intangible assets continued
3. Copyright– Gives the owner exclusive right to
reproduce and sell an artistic or published work
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4. Trademarks and brand names– Words, phrases, jingles or symbols that
distinguish or identify a particular business or product
Types of intangible assets continued
5. Franchises and licences– A contractual arrangement under the
franchisee is granted certain rights6. Goodwill
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– Represents all favourable attributes that relate to an entity and is defined as future benefits from unidentifiable assets
OTHER NON-CURRENT ASSETS
• We will examine two particular types of assets related to specific industries– Agricultural assets– Natural resources
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Agricultural assets
• AASB 141 prescribes the accounting treatment and disclosures relating to agricultural activity
• An agricultural activity is the management by an entity of the
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management by an entity of the biological transformation of biological assets for sale, into agricultural produce or into biological assets
• A biological asset is a living animal or plant
Agricultural assets continued
• Biological assets must be recognised– when the assets can be reliably
measured,– it is probable future economic benefits
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pwill eventuate, and
– fair value or cost can be reliably measured
• When harvested, biological assets become agricultural produce and are treated as inventory
Agricultural assets continued
• Agricultural assets comprise grape vines and olive trees
• They are measured at net market value• Any change in net market value during
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Any change in net market value during the period is recognised in the income statement
• Costs are recognised as expenses when incurred
• Revenue is recognised in period of harvest
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Natural resources
• Entities in extractive industries are involved in the search and extraction from the ground of natural substances e.g. minerals, oils, natural gas
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• Under AASB 6 the capitalisation of pre-production costs is not permitted until a resource is extracted
• Once production has begun, pre-production costs are charged to inventory by amortisation
Natural resources continued
• Amortisation (depletion) is the periodic allocation of the cost of natural resources to reflect the units removed
• Example
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p– Wallace Tin Mine contains 7M tonnes of ore – Capitalised pre-production costs $150M– Residual value $10M– Current year’s production 2M tonnes– Direct production costs $10M– Depletable amount $140M ($150M – $10M)
Natural resources continued
Formula for calculating depletion
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Natural resources continued
• Journal entry to record depletion
Jun 30 Inventory of Ore 40 000 000Accumulated Depletion – Tin Mine 40 000 000
(To record the depletion for the year)
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REPORTING AND ANALYSING ISSUES
• How are non-current assets reported in the financial statements?
• What methods are used to evaluate the use of non-current assets?
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Reporting non-current assets in the financial statements
• See AASB 101 and NZ IAS 1 gives minimum classification which must be shown on balance sheet– Under ‘non-current assets’
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• Property, plant and equipment• Intangibles
• Also requirements for extensive note disclosures of accounting policies and break-up of summarised accounts into separate categories
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Analysis and interpretation
1. Average useful life of PPE assets= average cost of PPE assets
depreciation expense
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Example:Fantastic Holdings Limited($ in thousands)
($25 362 + $19 014)/2 = 8.6 years$2577.7
Analysis and interpretation continued
2. Average age of PPE assets= accumulated depreciation
depreciation expense
Example:
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Example:
Fantastic Holdings Ltd Nick Scali Ltd$7710 = 3 years $16 772 = 4.6 years
$2577.7 $6611
Analysis and interpretation continued
3. Asset turnover rationet sales .
average total assets– $ sales generated for each $ invested in
