FINANCIAL REPORTING 3

Property, Plant
and Equipment

Objectives
At the end of this session you should be able
to:
Deal with the issues concerning the cost of an
item of property, plant and equipment
Deal with the entries associated with the lifetime
of a tangible non-current asset
Depreciation
Revaluation
Impairment

Deal with the disposal of a non-current asset

Explain the distinction between depreciation and

impairment, establish whether an asset has been

impaired and account for impairment

Property, Plant &

Equipment
IAS 16
Held by an entity for use in production or

supply of goods & services

Expected to be used during more than one
accounting period
EU defines as fixed assets held for
continuing use within the business

Tangible vs.
Intangible Non-Current asset
Tangible A physically observable item
Intangible - An identifiable non-monetary asset
without physical substance held for use
in the
production or supply of goods or
services.
Therefore tangible non-current assets have physical
substance.

Cost of Acquisition
In general, the cost of acquisition is the cash

or cash equivalents paid to obtain the asset

and bring it to the location and condition
necessary for its intended use.
Directly attributable costs that may be
included
Freight
Import Taxes
Installation
Professional fees

Calculating the Cost

An invoice from a garage is itemised as follows:
White Van
49,000
One years insurance
1,200
Roof Rack 400
Personalised Number Plates
350
Delivery Charge
250
Tank full of diesel 100

What is the initial cost to be recorded in noncurrent assets?

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Calculating the Cost

Answer:
White Van
49,000
Roof Rack
400
Personalised Number Plates
350
Delivery Charge
250

Total

50,000

Depreciation
IAS 16 defines depreciation as
A systematic allocation of the depreciable
amount of an asset over its useful life
Think about the words in this definition!
Systematic?
Depreciable Amount?
Useful Life?

Depreciation calculation
So before we can calculate the depreciation

expense we have to consider

1. Cost
2. Useful economic life
3. Residual value
4. Methods
Straight line
Reducing balance
Or?

Depreciation: a reminder!
An non-current asset costs 10,000, it has an

expected useful economic life of 5 years a residual

value of 2,000. Calculate depreciation for the 1 st 2
years using the straight line and reducing balance
methods (reducing balance at a rate of 20%).
Straight line method

Reducing balance method

Cost

10,000

10,000

Accumulated
depreciation

(1,600)

(2,000)

8,400

8,000

(3,200)

(3,600)

6,800

6,400

Net book value Yr 1

Accumulated
depreciation
Net book value Yr 2

Accounting for Depreciation

Double entry
Dr Depreciation expense account

(comprehensive income statement)

Cr Provision for depreciation (accumulated
depreciation) (financial position statement)

Cost less provision for depreciation = net

book value (NBV)

Show the NBV of assets on the face of the
financial position statement

Which method should be used?

Straight line:
Suited to assets with a definite economic life.

Reducing balance:
Uncertainty of life.
This is true of many assets.
Great drop in value in early year therefore will

avoid a substantial loss if sold early.

What is this value on the

Statement of Financial
Position?

..IT IS NOT..
the
the
the
the

historical cost
market value
insured value
replacement cost (new or second
hand).....etc

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What is this value on

the
Statement of Financial
Position?
..IT IS..
the value in the companys books - the net

book value.
based on estimates and is subjective
it depends on the methods/rates chose
The accountants estimation of the proportion
of a non-current asset that has not been
consumed yet.

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Practical difficulties
Determining useful economic life
review and adjust if necessary
technically should not hold fully

depreciated assets
Small value items
Residual value - at prices in force when
asset was purchased
Mid year purchases
monthly
full in year of acquisition & nil in year of
disposal?

Impairment
IAS 36
Impairment of an asset occurs when:
Carrying Value exceeds recoverable amount

Where
Carrying Value is the depreciated HC
Recoverable amount is the higher of

Net Selling Price or Value in Use

Impairment loss to be recognised in the income

statement for assets carried at cost or as a

revaluation decrease for assets carried at valuation
Note: This is an issue for INTANGIBLES as well

Determining recoverable
amount
Financial Position Statement Value

What needs to happen?

At each financial position statement date, review all assets

to look for any indication that an asset may be impaired

External sources:

market value declines

negative changes in technology, markets, economy, or

laws

Internal sources:

obsolescence or physical damage

asset is part of a restructuring or held for disposal
worse economic performance than expected
an asset is impaired if its carrying amount is in excess of

the greater of its net selling price and its value in use.

Lecture Example
James buys an oil well as an investment at the start of Year 1
for 50,000. He includes it in his financial statements at
historical cost and depreciates it over 10 years. At the end of the
year he suspects that the value of his asset may have impaired
and he provides you with the following information:
The relevant rate of return is 10% per annum
Investment returns over 3 years are anticipated to be:

Yr 2 25,000; Yr 3 30,000 Yr 4 20,000

The values of 1 discounted at 10% are:
End of Yr1 0.909;
Yr2 0.826; Yr3 0.751
He could have sold the investment immediately for 40,000;
or
Bought a similar one for 55,000
Has the value of the investment impaired?

1Historical Cost
Cost 50,000
Accumulated depreciation 5,000
Net book value 45,000

2 Present value / economic value

Net Present Value of Investment:
Year 1 25,000 @ 0.909 =
22,725
Year 2 30,000 @ 0.826 =
24,780
Year 3 20,000 @ 0.751 =
15,020
Total Discounted Cash Flow (DCF)
value of asset at start of Yr 1
62,525

3 Net Selling Price

(or Net Realisable Value
- NRV)
Say: 40,000

4 Replacement Cost (RC)

Say:

55,000

Calculating Alternative Asset Values

Possible Valuations:
1. Historical Cost

45,000

2. Present Value/Value in Use 62,525

3. Net Selling Price

(Net

Realisable Value) 40,000

4. Replacement Cost

55,000

Use the deprival value model to determine

whether an impairment has taken place.

Determining recoverable
amount
Value to the Business
= lower of
Depreciated cost and
45,000

Recoverable Amount
= higher of

Value in Use
and
62,525
40,000

Net Selling Price

Answer: 45,000
Value of the asset has not impaired.

Asset Disposal
Remove cost from accounting records
Remove accumulated depreciation from

accounting records
Record cash
Record profit on disposal

Double Entry for asset disposal

Accounting entries on the

sale of a non-current asset

a)Transfer cost price of

asset sold to an asset

disposal a/c
DR: Machinery disposal a/c
CR: Machinery a/c
b)Transfer depreciation

already charged to the

assets disposal account
DR: Provision for depreciation:
machinery
CR Machinery disposals a/c

c) For remittance received on

disposal
DR: Cash Book
CR: Machinery disposals

d) Transfer difference
(amount to balance the

account

account) to IS
If machinery disposals = credit
balance = profit
DR: Machinery disposals a/c
CR: IS a/c
If machinery disposals = debit
balance = loss
DR: IS a/c
CR: Machinery disposals a/c

Asset disposal: Lecture example

Smart Limited has three vans which it uses for deliveries. At 1 April 2008 the
following balances were extracted from its books:
Motor Vans (at cost)
53,000
Provision for depreciation of Motor Vans

20,375

During the year to 31 March 2009 a van was sold for 11,000. The van was
originally acquired on 1 April 2006 and had cost 18,000. A replacement van
was purchased for 22,000 cash.
The policy of the business is to provide for depreciation in the year of asset
acquisition and not in the year of disposal. Smart Ltd uses the reducing
balance method and a rate of 25%.
Requirement
(a) Prepare the following accounts for the year ended 31 March 2009.
(i) Motor Vans at cost;
(ii) Provision for depreciation of Motor Vans;
(iii) Motor Van Disposal.
(b) Show the amounts to be charged to the income statement for the financial

year 2008/09.
(c) Show how motor vans would be shown in the financial position statement
at 31 March 2009.

Revaluation
Allowed as an alternative to historical cost
Gain to revaluation reserve
Depreciate on the basis of revalued amount
Revaluation Gain: Reported as a component

of other comprehensive income within the

comprehensive income statement
Revaluation Loss: Recognised in the income
statement

Revaluation: double entry

Upon revaluation:

Dr Cost/valuation
Cr Revaluation reserve (reported as other comprehensive income)

BUT if a fall in value:

Dr Revaluation Reserve to extent a previous surplus is in there; or

Dr Income Statement
Cr Non-current Asset

Depreciation (based on revalued amount):

Dr Depreciation expense
Cr Provision for depreciation

On disposal:

Calculate profit on disposal based on carrying value (see double entry for

disposal of a non-revalued asset)

Release the revaluation reserve through retained earnings not directly to
the income statement
Dr Revaluation reserve
Cr Retained earnings

Revaluation: Lecture example

Z Limited with a year end of 31 December buys

an asset on 1 January 2004 for 200,000.The

asset is to be depreciated on a straight line basis
over 20 years.
On 1 January 2005 the asset is re-valued to a
value of 500,000.
On the 1 January 2006 the asset is disposed of for
750,000. The company do not depreciate in the
year of disposal.
Calculate depreciation in 2004 & 2005 and profit
on disposal in 2006.

Key points
To tackle the trial balance question you need

to be able to:

Calculate and account for depreciation

Deal with the double entry on disposal of an asset
Deal with the above when an asset has been

revalued

You need to be able to both calculate an

impairment and deal with a discussion

question which covers the requirements of
IAS 36 as it applies to property, plant &
equipment.