Net realisable value

$ Alpha Beta Omega NRV Cost NRV 120 – 25 = 85 – 15 = 95 50 70 ____ 215 ____

Overview

Objective

 To explain the accounting rules for tangible non-current assets.

 Accounting policy  Cost model  Revaluation model SCOPE RECOGNITION INITIAL MEASUREMENT SUBSEQUENT COSTS SUBSEQUENT MEASUREMENT DEPRECIATION IMPAIRMENT LOSSES DISCLOSURES DERECOGNITION REVALUATIONS  Scope  Exclusions  Definitions  Criteria  Components of cost  Exchange of assets  Accounting treatment  Part replacement  Major inspection  Frequency  Accumulated depreciation  Increase/decrease  Subsequent accounting  Deferred taxation  Accounting standards  Depreciable amount  Depreciation methods  Impairment  Compensation  Accounting treatment  Derecognition date

 For each class  Others

 Items stated at revalued amounts  Encouraged

1 Scope

1.1 Scope

 This standard should be applied in accounting for property, plant and

equipment except when another IAS requires or permits a different treatment. Commentary

IAS 1 “Presentation of Financial Statements”, IAS 17 “Accounting for Leases”, IAS 23 “Borrowing Costs”, IFRS 3 “Business Combinations” (which includes rules of accounting for goodwill), IAS 36 “Impairment of Assets” and IAS 38 “Intangible Assets” all need to be considered in a study of non-current asset accounting.

1.2 Exclusions

 IAS 16 does not apply to:

 items classified as held for sale (IFRS 5 Non-current Assets Held for

Sale and Discontinued Operations);

 biological assets related to agricultural activity (IAS 41 Agriculture);

 the recognition and measurement of exploration and evaluation assets (IFRS 6 Exploration for and Evaluation of Mineral Resources);

 mineral rights and mineral reserves (e.g. oil, natural gas and similar non-regenerative resources).

Commentary

However, the standard does apply to items of property, plant and equipment used to develop or maintain such assets.

1.3 Definitions

 Property, plant and equipment – Tangible items:

 held for use in production or supply of goods or services or for rental or admin purposes; and

 expected to be used during more than one period.

 Depreciation – Systematic allocation of depreciable amount over an asset’s useful life.

 Depreciable amount – Cost (or amount substituted for cost) less residual value.

 Cost – Amount of cash/cash equivalents paid and fair value of other consideration

given to acquire an asset at the time of its acquisition or construction.

 Fair value – the price that would be received to sell an asset (or paid to transfer a

liability) in an orderly transaction between market participants at the measurement (e.g. reporting) date (IFRS 13).

 Residual value – Estimate of the amount that would currently be obtained

from disposal of the asset, after deducting estimated disposal costs, assuming the asset to be of the age and condition expected at the end of its useful life.

 Useful life – Either:

 period of time over which an asset is expected to be used; or

 number of production or similar units expected to be obtained.

 Carrying amount – At which an asset is recognised after deducting any

accumulated depreciation and any accumulated impairment losses.

 Impairment loss – The amount by which the carrying amount of an asset

exceeds its recoverable amount. Commentary

The rules on measurement and recognition of impairment loss are set out in IAS 36.

 Recoverable amount – The higher of an asset’s fair value less costs of disposal and its

value in use. Commentary

Value in use is defined in IAS 36.

 Entity-specific value – The present value of the cash flows expected to arise from

the continuing use of an asset and from its disposal at the end of its useful life. Commentary

Or expected to be incurred when settling a liability.

2

Recognition of property, plant and equipment

2.1 Criteria

 As for all assets (in accordance with “The Framework”), an item of property, plant and equipment is recognised if, and only if:

 It is probable that future economic benefits associated with it will flow to the entity; and

Commentary

This is satisfied when risks and rewards have passed to entity.

 Cost of the item can be measured reliably. Commentary

This is usually readily satisfied because exchange transaction evidencing purchase identifies cost. For self-constructed asset, a reliable measurement of cost can be made from transactions with third parties for the acquisition of materials, labour and other inputs used (see Activity 1).

2.2 Capital expenditure v revenue expenditure

 In determining whether items of expenditure should be recognised in the cost of asset it is important to distinguish whether they should be included in the statement of financial position (“capital expenditure”) or profit of loss (“revenue expenditure”):

STATEMENT OF FINANCIAL

POSITION

PROFIT OR LOSS

Expenditure incurred in:

 acquiring property and equipment intended for long-term use (benefits future accounting periods);

 increasing revenue-earning capacity of existing non-current asset (by increasing efficiency or useful life).

Expenditure incurred in daily running of the business, for example:

 in buying or manufacturing goods and providing services;

 selling and distributing goods;

 administration; and

 repairing long-term assets.

 Items of capital expenditure (except for the cost of land) will ultimately be expensed to the profit or loss (through depreciation) as the asset is “consumed” through its use.

 A revenue expense is charged to profit or loss immediately. Thus it is “matched” with the revenues of the accounting period in which it is incurred.

Illustration 1

(i) $27,000 spent on acquiring new car for a sales executive is capital expenditure. (ii) An annual road (or vehicle) tax of $1,800 included in the purchase price of (i)

should be excluded from the amount capitalised as it is a revenue expense (a “running” cost).

(iii) $10,000 on the purchase of a second hand delivery vehicle will be capital cost (that it is not a new asset which is purchased is irrelevant).

(iv) $12,000 spent on the refurbishment (i.e. renovation) of (iii) to bring it into use will be capital also.

3

Initial measurement at cost

Commentary

Remember, an item must meet the recognition criteria before it is measured.

3.1

Components of cost

 Purchase price, including import duties and non-refundable purchase taxes (after deducting trade discounts and rebates.)

 Directly attributable costs of bringing the asset to location and working condition, for example:

 costs of employee benefits (e.g. wages) arising directly from construction or acquisition;

 costs of site preparation;

 initial delivery and handling costs;

 installation and assembly costs;

 borrowing costs, in accordance with IAS 23;

 costs of testing proper functioning (net of any sale proceeds of items produced); and

 professional fees (e.g. architects and engineers).

 An initial estimate of dismantling and removing (i.e. “decommissioning”) the asset and restoring the site on which it is located. The obligation for this may arise either:

 on acquisition of the item; or

 as a consequence of using the item other than to produce inventory. Commentary

To include this estimate in initial cost the obligation must meet the criteria for recognition of a liability under IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”.