IAS 16, IAS 40

PROPERTY, PLANT &

EQUIPMENT AND
INVESTMENT
This material is PROPERTY
the property of Department of Accounting
1

and Finance, CoBE, AAU. Permission must be obtained from

RELEVANT STANDARDS
Topic List

Standards

Property, plant and equipment

IAS 16

Investment property

IAS 40

Fair Value

IFRS 13

Impairment

IAS 36

LEARNING OBJECTIVES
Up on completion of the chapter, trainers are
supposed to
Define the initial cost of a non-current asset and
apply this to various examples of expenditure
Describe, and be able to identify, subsequent
expenditures that should be capitalized
State and appraise the effects of the IASB's rules
for the revaluation of property, plant and
equipment
Account for gains and losses on the disposal of revalued assets
3

LEARNING OBJECTIVES

Calculate depreciation on:

revalued assets, and
assets that have two or more major items or
significant parts
Discuss the way in which the treatment of
investment
properties
differs
from
other
properties
Apply
the
requirements
of
international
accounting standards to investment properties.

SCPOE
Property, Plant and Equipment
Are held for use in the production or supply of goods or
services, for rental to others, or for administrative
purposes
Are expected to be used during more than one period.
This Standard does not apply to:
Property, plant and equipment classified as held for sale.
Biological assets.
Mineral Resources and Mineral rights
Applies to PPE used to develop or maintain the assets
described above
5

BASIC CONCEPTS AND

TERMINOLOGIES
Plant, Property & Equipment
Cost:
The amount of:
cash or cash equivalents paid or
the FV of the other consideration given to
acquire an asset at the time of its acquisition or
construction.
Residual value:
The net amount that will be obtained for an asset
at the end of its UL after deducting the expected
costs of disposal.
6

BASIC CONCEPTS AND

TERMINOLOGIES
Entity specific value:
The PV of the cash flows an entity

expects to arise from the continuing use of an asset &

from its disposal at the end of its UL ,
or expects to incur when settling a liability.
Fair value (FV):
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 date.
Carrying amount(CA):
The amount at which an asset is recognized after
deducting any accu. depreciation and accumulated
7
impairment losses.

BASIC CONCEPTS AND

TERMINOLOGIES
An impairment loss:
It is the amount by which the carrying amount of an
asset exceeds its recoverable amount.
Depreciation:
It is the result of systematic allocation of the depreciable
amount of an asset over its estimated useful life.
Depreciable Assets
These are assets:
Expected to be used during more than one accounting
period
Have a limited useful life
8

BASIC CONCEPTS AND

TERMINOLOGIES
Held by an entity for use in the production or supply of
goods & services, for rental to others, or for
administrative purposes
Useful life
The period over which a depreciable asset is expected
to be used by the entity, or
The number of production or similar units expected to
be obtained from the asset by the entity.
Depreciable Amount:
The historical cost or other amount substituted for cost
in the financial statements, less the estimated residual
value.

BASIC CONCEPTS AND

TERMINOLOGIES
Investment Property
Property (land or a building or part of a building
or both) held (by the owner or by the lessee
under a finance lease) to earn rentals or for
capital appreciation or both.
Owner-Occupied Property
Property held by the owner (or by the lessee
under a finance lease) for use in the production or
supply of goods or services or for administrative
purposes.
10

RECOGNITION AND
MEASUREMENT
Recognition and Measurement
Recognition
Incorporation
of the item in the business's
accounts, in this case as a non-current asset.
Criteria to be fulfilled
It is probable that future economic benefits
associated with the asset will flow to the entity.
The cost of the asset to the entity can be
measured reliably

These criteria apply to subsequent expenditure as well

as costs incurred initially.
11

RECOGNITION AND
MEASUREMENT
Separate Items
For significant assets parts having different useful lives,
different depreciation rates are applied to each part.
Example
an aircraft, where the body and engines are separated
as they have different useful lives.
Environmental and safety equipment
The
standard acknowledges that there may be
expenditures forced upon an entity by legislation that
requires it to buy assets that do not meet the
recognition
criteria
(environmental
protection
equipment).
12

RECOGNITION AND
MEASUREMENT
These expenditures should be recognized as assets.
An entity may voluntarily invest in environmental
equipment even though it is not required by law
The Expenditure will be capitalized if:
The expenditure meets the definition of an asset; or
There is a constructive (self imposed) obligation to
invest in the equipment.
If
the entity can demonstrate that the
equipment is likely to increase the economic
life of the related asset,
the expenditure meets the definition of an asset.

13

RECOGNITION AND
MEASUREMENT
Measurement
The process of determining monetary amounts at
which elements are recognized
Financial
reports are based on estimates,
judgments and models rather than exact
depictions.
These measurements include:
Historical Cost
Cost Model
Revaluation Model
14

RECOGNITION AND
MEASUREMENT
Measurement at Time of Acquisition (Initial
Measurement)
Historical Cost (HC)
An item of PPE that qualifies for recognition as an
asset shall be measured at its cost.
The HC of an asset is the consideration given to
acquire or to develop it and it includes:
The amount of cash or cash equivalents paid;
or
The fair value of the consideration given to
acquire it
15

RECOGNITION AND
MEASUREMENT

Cost of an item of property, plant and equipment

comprises:
Its purchase price
import duties and
non-refundable purchase taxes, after deducting trade
discounts and rebates.
Any costs directly attributable to bringing the asset to
the location and condition necessary for it to be capable
of operating in the manner intended by management.
The initial estimate of the costs of dismantling and
removing the item and restoring the site on which it is
located.
16

RECOGNITION AND
MEASUREMENT
Example:
An oil refinery is purchased on December 31,
20x1, at a cost of ETB 50 million cash (allocated
ETB10 million to land and ETB40 million to the
refinery
itself).
The
organization
has
a
legal/constructive obligation to dismantle the site
at the end of its 30-year useful life. The best
estimate of this cost is ETB10 million. Assuming a
discount rate of 5%, the present value of the
asset retirement obligation is ETB 2,313,774:

17

RECOGNITION AND
MEASUREMENT
Solution
The journal entry to record the purchase of
the oil refinery would be as follows:
Dec 31, 20x1
Land-------------------------- -10,000,000
Refinery------------------------42,313,774
Cash
--------------------------------------------50,000,000
Asset Retirement Obligation
---------------2,313,774
18

RECOGNITION AND
MEASUREMENT
Examples of directly attributable costs are:
Costs of employee benefits arising directly from the
construction or acquisition of the item of PPE.
Costs of site preparation;
Initial delivery and handling costs;
Installation and assembly costs;
Testing Costs
deducting the net proceeds from selling any items
produced while bringing the asset to that location
and condition ; and
Professional fees.
19

RECOGNITION AND
MEASUREMENT
Examples of costs that are not costs of an
item PPE are:
Costs of opening a new facility;
Costs of introducing a new product or service
(including costs of advertising and promotional
activities);
Costs of conducting business in a new location or
with a new class of customer (including costs of
staff training); and
Administration and other general overhead costs.
20

RECOGNITION AND
MEASUREMENT
Subsequent Expenditure
When assets require replacement at regular
intervals:
This cost is recognized in full when it is incurred and
added to the carrying amount of the asset
It will be depreciated over its life which may be d/t from
the expected life of the other components of the asset
The CA of the item being replaced, is derecognized.
A similar approach is also applied when a separate
component of an item of PPE is identified :

in respect of a major inspection to enable the continued use of

the item.
21

RECOGNITION AND
MEASUREMENT
Today you exchange:
ETB1,100,000

(including ETB200,000 refundable purchase

taxes collected from you by the dealer on behalf of the
government) for a new delivery vehicle.
ETB70,000 cash for modifications to be made to the vehicle
to enable it to transport more safely the volatile chemicals that
you manufacture.
ETB10,000 cash for your branding to be embossed on the
vehicle.
ETB20,000 for mandatory environmental safety inspection
and certification of the modified delivery vehicle for the
transport of hazardous chemicals
ETB2,000 for diesel to fuel initial running of the vehicle
22

RECOGNITION AND
MEASUREMENT

2
What is the historical cost of the delivery vehicle? 3
Choose 1 of:
1) ETB900,000; 2) ETB902,000; 3) ETB910,000; 4)
ETB912,000;
5) ETB920,000; 6)
ETB930,000; 7) ETB990,000; 8) ETB992,000;
9) ETB1,000,000; 10) ETB1,002,000; 11)
ETB1,100,000; 12) ETB1,200,000; or 13)
ETB1,202,000.

Michael JC

RECOGNITION AND
MEASUREMENT
Example
On 1 July 2013 a company exchanged goods that it
manufactured at a cost of ETB 80,000 for a
passenger motor vehicle which it will receive on 1
July 2013. Had it paid cash for the vehicle it would
have paid ETB 100,000.
What is the historical cost of the passenger
motor vehicle?
Choose 1 of: 1) ETB 80,000; or 2) ETB 100,000.

24

RECOGNITION AND
MEASUREMENT
Example
On 1 July 2013 a company exchange a promised to
pay ETB 121,000 on 30 June 2015 for a passenger
motor vehicle which it will receive on 1 July 2013
On 30 June 2015 it paid ETB 121,000 to settle the
claim against you.
What is the historical cost of the passenger
motor vehicle?
Choose 1 of: 1) ETB 100,000; or 2) ETB 121,000.

25

RECOGNITION AND
MEASUREMENT
Example
On 1 July 2013 a company exchange chemicals it
manufactured at a historical cost of ETB80,000 (with a
market value/fair value = ETB100,000) for a promise to
receive a motor vehicle on 30 June 2015 (i.e. 2 years
later).
On 30 June 2015 it exchanged the promise to receive
the motor vehicle for the motor vehicle when the fair
value of the motor vehicle is ETB150,000.
What is the historical cost of the motor vehicle?
Choose one of: 1) ETB 80,000; 2) ETB 96,800; 3) ETB
100,000; 4) ETB 121,000; or 5) ETB 150,000.
26

RECOGNITION AND
MEASUREMENT
When will Plant Assets start depreciation ?
A. When acquired or purchased
B. When physically received
C. When it starts providing services
D. When available for use

27

RECOGNITION AND
MEASUREMENT
When is land depreciated?
A.
neverits service potential does not reduce with
time/use
B.
alwaysits service potential always reduces with
time/use
C.
when its Rec. Amt declines below its unmodified
historical cost (e.g., when market prices decline)
D.
when its service potential is consumed through use
(for example, when used as a landfill site)
E.
when its service potential is consumed with time (for
example, a 99 year right to use the land)
F.
both D and E above
28

RECOG. & MEAS.

INVESTMENT PROPERTY
Investment Property
is property (land or a buildingor part of a buildingor
both) held by the owner or by the lessee under a finance
lease to earn rentals or for capital appreciation or both.
The following are examples of investment property:
Land held for long-term capital appreciation rather than
for short-term sale in the ordinary course of business.
Land held for a currently undetermined future use.
If an entity has not determined that
it will use the land as owner-occupied property or
for short-term sale the land is regarded as held for
capital appreciation.
29

SUBSEQUENT

MEASUREMENT

A building owned by the entity (or held by the

entity under a finance lease) &leased out under
one or more operating leases.
A building that is vacant but is held to be leased
out under one or more operating leases.
Property that is being constructed or developed
for future use as investment property.
A building held by a parent and leased to a
subsidiary.

30

RECOGNITION AND
MEASUREMENT

Some properties comprise a portion that is held to

earn rentals or for capital appreciation and
another portion that is held for use.
If these portions could be sold separately an
entity accounts for the portions separately.
If the portions could not be sold separately, the
property is investment property only
if an insignificant portion is held for use in the
production or supply of goods or services or for
administrative purposes.
31

RECOGNITION AND
MEASUREMENT
Recognition
Investment property should be recognized as an
asset when two conditions are met.
It is probable that the future economic benefits
that are associated with the will flow to the
entity.
The cost of the investment property can be
measured reliably.
Initial measurement
An
investment property should be measured
initially at its cost, including transaction costs.
32

RECOGNITION AND
MEASUREMENT
Measurement subsequent to initial recognition
The fair value model
A gain or loss arising from a change in the fair value
should be recognized in net profit or loss
Once the entity has chosen the fair value or cost
model, it should apply it to all its investment property.
It should not change from one model to the other
unless the change will result in a more appropriate
presentation.
It is highly unlikely that a change from the FV model to
the CM will result in a more appropriate presentation.
33

RECOGNITION AND
MEASUREMENT
The cost model
Transfers to or from investment property should
only be made when there is a change in use.
For example, owner occupation commences so
the investment property will be treated under
IAS 16 as an owner-occupied property.
When there is a transfer from investment property
carried at fair value to owner-occupied property or
inventories,

the property's cost for subsequent accounting

under IAS 16 or IAS 2 should be its fair value.
34

RECOGNITION AND
MEASUREMENT

Conversely, an owner-occupied property may

become an investment property and need to be
carried at fair value.
An entity should apply IAS 16 up to the date of
change of use
It should treat any difference at that date
between the carrying amount of the property
under IAS 16 and its fair value as a revaluation
under IAS 16.

35

RECOGNITION AND
MEASUREMENT
Exchanges of Assets
Are measured at FV,
unless
the
exchange
transaction
lacks
commercial substance or
the FV of neither of the assets exchanged can be
measured reliably.
If the acquired item is not measured at FV, its
cost is measured at the carrying amount of the
asset given up.

36

SUBSEQUENT
MEASUREMENT
Subsequent
Measurement
(Measurement
after
Recognition)
After initial measurement the historical cost of an asset
may be modified to reflect, when relevant:
The consumption of its service potential(depreciation)
That part of the historical cost of the asset is no longer
recoverable because of impairment due to, for example
Deterioration of the asset quality; or
A decline in its economic value.

An entity shall choose either the cost model or the revaluation

model.
The revaluation model is available only for items whose fair value can
be measured reliably
37

SUBSEQUENT
MEASUREMENT
Cost Model (CM)
PPE
shall be carried at its cost less any
accumulated depreciation and any accumulated
impairment losses.
Revaluation Model (RV)
PPE whose FV can be measured reliably shall be
carried at a revalued amount,
Revalued amount
its FV at the date of the revaluation less any
subsequent acc. Dep. & subsequent accumulated
impairment losses.
38

SUBSEQUENT
MEASUREMENT

Revaluations shall be made with sufficient regularity

to:
ensure that CA doesnt differ materially from that
which would be determined using FV at end of the
reporting period.
The frequency of revaluations depends upon the
changes in fair values of PPE.
When FV of a revalued asset differs materially from
its CA, a further revaluation is required.
Some PPE experience significant and volatile changes
in fair value, thus necessitating annual revaluation.
39

SUBSEQUENT
MEASUREMENT
For PPE only with insignificant changes in fair value,
it is necessary to revalue the item only every three or
five years.
If PPE is revalued, the entire class of PPE to which
that asset belongs shall be revalued.
If an assets CA is increased as a result of a
revaluation the increase,

shall be recognized OCI & accumulated in equity

under the heading of revaluation surplus (RS).
shall be recognized in (PL) to the extent that it
reverses a rev. decrease of the same asset
previously recognized in profit or loss.

40

SUBSEQUENT
MEASUREMENT

If an assets CA is decreased as a result of a

revaluation,

the decrease shall be recognized in profit or

loss.
the decrease shall be recognized in OCI to the
extent of any credit balance existing in the
revaluation surplus in respect of that asset.
The decrease recognized in OCI reduces the
amount accumulated in equity under the heading
of RS.
41

SUBSEQUENT
MEASUREMENT
In allocating a reversal of an impairment loss for a
cash-generating unit, the reversal shall not increase
the carrying amount of any asset above the lower of
its recoverable amount, and
the
carrying amount that would have been
determined (net of amortization or depreciation)
had no impairment loss been recognized for the
asset in prior periods.
Any excess amount of the reversal of the impairment
loss that cannot be allocated to an asset because of
the restriction in shall be allocated pro rata to the
other assets of the cash-generating unit, except for
goodwill.
42

SUBSEQUENT
MEASUREMENT
Depreciation Accounting
All assets with exception of land held on freehold or very
long leasehold depreciate.
Depreciation of an asset begins when it is available for use.
Depreciation of an asset ceases at the earlier of the date
that
the asset is classified as held for sale or
Included in a disposal group that is classified as held for
sale and
The date that the asset is derecognized.
An entity does not stop depreciating an asset merely because
it has become idle or
has been retired from active use (unless the asset is fully
43
depreciated).

SUBSEQUENT
MEASUREMENT
However, if the entity is using a usage method of
depreciation the charge can be zero while there is
no production.
Allocating depreciation requires judgement to
estimate the useful life of an item
measure the residual value of an item
determine the appropriate depreciation method
identify components of an item that must be
depreciated separately
Depreciation judgments apply equally to the cost
model and the revaluation model.

44

SUBSEQUENT
MEASUREMENT
Useful Life
The standard requires asset useful lives to be
estimated on a realistic basis and
reviewed at the end of each reporting period.
The effects of changes in useful life are to be recognized
prospectively, over the remaining useful life of the
asset.
It is quite possible for an assets useful life to be shorter
than its economic life.
Many entities have a policy of disposing of assets when
they still have a residual value,(others can benefit from
the asset).
45

SUBSEQUENT
MEASUREMENT
Factors to be considered when estimating the
useful life of an asset:
Expected
usage of the asset (the assets
expected capacity or physical output).
Expected physical wear and tear
Technical or commercial obsolescence
Legal or similar limits on the use of the asset,
such as the expiry dates of related Leases.

46

SUBSEQUENT
MEASUREMENT
Residual Value
The amount that the entity would currently obtain
from disposal of the asset.
Depreciation Methods
Depreciation method should reflect the pattern in
which the assets future economic benefits are
expected, and
Similar assets may have different depreciation
methods(see executive cars below)
Appropriateness
of the method should be
reviewed at least annually
47

RECOGNITION AND
MEASUREMENT
The standard leaves the choice of method to the entity,
even though it does cite

straight-line,
diminishing balance, and
units of production as possible depreciation methods.
Component Depreciation
Significant parts (called components) of a depreciable
item must be depreciated separately for items:
with materially different consumption patterns
Different useful lives and
the amount is insignificant compared with the total
cost

48

ILLUSTRATIONS
A Sugar Corporation purchased a heavy duty
equipment with a total cost of ETB 100 million
allocated as follows:
ETB 60 million for the permanent basic structure
ETB 20 million for the electronics (replace after 6
years)
ETB 19.8 million for the protective lining (replace
every 3 years)
ETB 0.2 million health and safety certification
(required every 2 years)
Management
expect to continuously use the
equipment for its entire 12-year economic life.
49

ILLUSTRATIONS
Must any components of the equipment be depreciated
separately?
A.
No, depreciate the furnace as a whole evenly over 12
years
B.
Yes, 4 components(i) basic structure; (ii) electronics;
(iii) lining; and (iv) health and safety inspection
C.
Yes, 3 components(i) basic structure; (ii) electronics;
and (iii) lining (i.e. health and safety inspection
component need not be depreciated separately)
D.
Yes, 2 components(i) basic structure; and (ii)
combined electronics and lining component (i.e.
health and safety inspection component need not be
depreciated separately)
50

ILLUSTRATIONS
Your corporation bought 2 identical executive cars:
Car1 is used to provide executive travel services to
discerning clients. Management expect to sell Car 1 after
it has travelled 2,000,000 miles.
Car2 is for the exclusive use of the Corporations
Directors and Executive Management. As part of their
remuneration package they each have the exclusive use of
the car for 30 days per year. The corporation expects to:
replace car2 three years after acquiring it (irrespective
of the distance car2 has travelled)
donate
car2 to an international disaster relief
programme when it is three years old.
51

ILLUSTRATIONS
Which depreciation method must be used for the
cars?
A.
straight-line method for both cars
B.
units of production method (based on miles
travelled) for both cars
C.
revenue-based depreciation for both cars
D.
straight-line for car1 and units of production (based
on miles travelled) for car2
E.
straight-line for car2 and units of production (based
on miles travelled) for car1
F.
management is free to choose a depreciation
method
52

ILLUSTRATIONS
The useful life of each car is?
A.
Car1 and Car2 = three years
B.
Car1 and car2 = 2,000,000 miles
C.
Car1 2,000,000 miles and Car2 three years
D. Car1 three years and Car2 2,000,000 miles
The residual value of Car2 is?
A.
nil
B.
the amount that the airline could sell car2 for
today (the measurement date) if car2 was already
three years old and in the condition that the
corporation expects it to be in after using it for
three years.
53
C.
another amount

ILLUSTRATIONS
Cost Model
A Sugar Corporation bought a heavy duty machinery
on January 1, 2011 on cash. The machinery has a cost
of Br 1,000,000.00, useful life of 10 years and nil
residual value. In addition, the machinery has
recoverable amount of Br 300,000.00 and Br
800,000.00 on December 31, 2014 and 2016
respectively. Assume that the company uses straight
line method for estimating periodic depreciation.
Required
A. Record the acquisition of the asset on January 1, 2011
B. Record depreciation for the first four years of operation
54

ILLUSTRATIONS
C.

Record the impairment of the asset and

determine the carrying amount of the asset on
December 31,2014
D. Record depreciation on December 31,2015 and
2016
E. Record the recovery of the impairment loss on
December 31, 20106
F. Record depreciation on December 31, 2017
through 2020

55

ILLUSTRATIONS
Solutions
A. Record the acquisition of the asset on January 1,
2011
Asset---------------1,000,000.00
Cash ---------------------------1,000,000.00
B. Record depreciation for the first four years of
operation
Annual Depreciation= 1,000,000.00-0 = 100,000.00
10 Years
December 31, 2011 through December 31, 2014
Depreciation-Expense---------------100,000.00
Accumulated Depreciation--------------------100,000.00
56

ILLUSTRATIONS
C. Record the impairment of the asset and determine the
carrying amount of the asset on December 31,2014
Carrying Amount= 1,000,000.00-400, 000.00=
600,000.00
Recoverable amount=300,000.00
Impairment loss=600,000.00-300,000.00=300,000.00
Impairment loss----------------------------300,000.00
Accumulated dep. -----------------------300,000.00

Allowance, Asset,

imp..

D. Record depreciation on December 31,2015 and 2016

Annual Depreciation= 300,000.00/6=50,000.00
December 31, 2015 and December 31, 2016
Depreciation Expense------------------50,000.00
Accumulated Depreciation-----------------50,000.00 57

ILLUSTRATIONS
E. Record the recovery of the impairment loss on December 31,
20106

Recoverable amount= 800,000.00

CA (based on cost)= 400,000.00

Value of the impaired asset=200,000.00(300,000.00-100,000.00
(dep for 2015 and 2016)

Rev of Imp. =200,000.00(from 200,000.00 to 400,000.00)

Accumulated Imp. Loss--------------200,000.00
Impairment Reversal-------------------------200,000.00
F. Record depreciation on December 31, 2017 through 2020
Annual Depreciation=400,000.00/4=100,000.00
December 31, 2017 through December 31, 2020
Depreciation Expense--------------100,000.00
Accumulated Depreciation----------------58
100,000.00

ILLUSTRATIONS
Revaluation Model
A Sugar Corporation bought a heavy duty machinery
on January 1, 2011 on cash. The machinery has a
cost of Br 1,000,000.00, useful life of 10 years and nil
residual value. In addition, the machinery is revalued
at an amount of Br 1,200,000.00 on December 31,
2012, has a recoverable amount (fair value less cost
to sell) of Br 300,000.00 on December 31, 2014 and
finally the machinery is revalued (fair value) at an
amount of Br 800,000.00 on December 31, 2016.
Assume that the company uses straight line method
for estimating periodic depreciation.
59

ILLUSTRATIONS
Required
A.
Record Depreciation on December 31, 2011 and
December 31, 2012
B.
Record the revaluation of the asset on December
31,2012
C.
Record Depreciation on December 31, 2013 and
December 31, 2014
D.
Record transactions related to impairment of the
asset on December 31, 2014
E.

F.

G.

Record depreciation on December 31,2015 and December

31,2016
Record transactions related to the revaluation of the asset
on December 31, 2016
60
Record depreciation for the remaining life of the asset

ILLUSTRATIONS
Solutions
A. Record Depreciation on December 31, 2011 and December 31,
2012
Annual depreciation=1,000,000.00/10=100,000.00
December 31, 2011 and December 31, 2012
Depreciation Expense-------------------100,000.00
Accumulated Depreciation-----------------100,000.00
B. Record the revaluation of the asset on December 31,2012
CA =1,000,000.00-200,000.00=800,000.00
Revalued amount=1,200,000.00
Revaluation surplus=1,200,000.00-800,000.00=400,000.00

61

ILLUSTRATIONS
Accumulated Depreciation---------------200,000.00
Asset Value-----------------------------------200,000.00
Revaluation Surplus--------------------------400,000.00
C. Record Depreciation on December 31, 2013 and December 31,
2014
Annual Depreciation=1,200,000.00/8=150,000.00
December 31, 2013 and December 31, 2014
Depreciation Expense-------------------150,000.00
Accumulated
Depreciation--------------------150,000.00
*Revaluation surplus-------50,000.00(400,000.00/8)
R/E-----------------------------------50,000.00

*The balance in the revaluation surplus is realized when the

asset is de recognized or used

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D. Record transactions related to impairment of the asset on
December 31, 2014
Value of the asset=900,000.00(1,200,000.00-300,000.00 Acc.dep)
Recoverable amount=300,000.00
CA (based on cost) =1,000,000.00-400,000.00=600,000.00
Impairment Loss---------------300,000.00
Revaluation Surplus----------300,000.00
Asset---------------------------600,000.00
E. Record depreciation on December 31,2015 and
December 31,2016
Annual Depreciation=300,000.00/6=50,000.00
December 31, 2015 and December 31, 2016
Depreciation Expense------------------50,000.00
Accumulated Depreciation--------------------63
50,000.00

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F. Record transactions related to the revaluation December
31, 2016
Carrying amount(based on Revalued amount)=300,000.00100,000.00=200,000.00
Fair value=800,000.00

CA (based on cost) =400,000.00(1,000,000.00-600,000.00

Accumulated Depreciation---------400,000.00
Asset --------------------------------------200,000.00
Impairment Rev---------------------------200,000.00
Revaluation Surplus----------------------400,000.00
G. Record depreciation for the remaining life of the asset
Annual Depreciation=800,000.00/4=200,000.00
December 31, 2017 through December 31, 2020
Depreciation Expense-------------------200,000.00
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Accumulated Depreciation---------------------200,000.00

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Reporting Performance
Reporting Performance
2011 to 2020

Cost
model

Revaluation
model

(1,000,000
)

(1,500,000)

- depreciation

(900,000)

(1,400,000)

- impairment

(300,000)

(300,000)

200,000

200,000

Profit or loss

- impairment reversal
Other comprehensive
income
- revaluation

500,000
800,000

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Reporting Performance
Assume the entity sold the machine on
31/12/2013 for Br 1,050,000
2011 to 2013

Cost
model

Revaluation
model

Profit or loss

50,000

(350,000)

(300,000)

(350,000)

- depreciation 2011 to
2013
- profit on sale of PPE in
2013
Other comprehensive
income
- revaluation in 2012

350,000
400,000
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400,000

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Note: The above figures are computed as
follows:
Cost Model
In 2013, BV= 1, 000, 00.00-300,000.00=700,000.00
Proceeds= 1,050,000.00
Profit on sale=1,050,000.00-700,000.00=350,000.00
Revaluation Model
In 2013, BV= 1, 200,000.00-150,000.00=1,050,000.00
Proceeds= 1,050,000.00
Profit on sale=1,050,000.00-1,050,000.00=0

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Which model gives management more flexibility

in reporting profit or loss for the period?
A. cost model; or
B. revaluation model

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Component Accounting Vehicle
On Jan 01, 01, your corporation acquires a
vehicle for Br 108 that is available for use on the
same day. Payment is effected in cash on the
same day. It is planned to use the engine for 24
years. After every six years a major inspection of
the engine is necessary. On Jan 01, 01, the cost of
this inspection would be Br 24. The engine
consists of the following components:

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Costs of purchase
Pivot mounting with wheel sets--------16
Engine box-----------------------------------19
Transformer---------------------------------24
Electric power converter-----------------13
Control units---------------------------------18
Auxiliary converter-------------------------18
Total------------------------------------------108
The transformer is replaced after 12 years and is not
serviced during the major inspection. The other parts
each have a useful life of 24 years and are serviced
during each major inspection.
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ILLUSTRATIONS
Required
Prepare any necessary entries in Corporations financial statements as on Dec 31, 01.
Solution
Jan 01, 01
Engine------------108
Cash-------------- 108
Components
Cost (as on Jan 01, 01)
UL (in years)
Depreciation
Transformer
24.0
12
2.0
Major inspection
24.0
6
4.0
Other components
60.0
24
2.5
Total
108.0
8.5
Dec 31, 01
Depreciation expense---------8.5
Acc. Dep.- Engine----------------------8.5

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Revaluation Surplus
A Sugar Corporation has an item of equipment
carried in its books at Br13,000. Two years ago a
slump in equipment values led the corporation to
reduce the carrying value from Br15,000. This was
taken as an expense in profit or loss. There has been
a surge in equipment prices in the current year,
however, and the equipment is now worth Br20,000.
Required
Account for the revaluation in the current year.

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Solution
Asset value (statement FP.) -------------------7,000
Reversal of
Impairment(P&L)----------------------2,000
Revaluation surplus
(OCI)---------------------------5,000

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Revaluation Decrease
The original cost of an equipment is Br 26,000,
revalued upwards to Br30,000 3 years ago. The
value has now fallen to Br20,000.
Required
Account for the decrease in value.

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Solution
Revaluation surplus------------------------------4,000
Profit or loss----------------------------------------6,000
Asset value (statement of financial
position) ---------10,000

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ILLUSTRATIONS
Revaluation and Depreciation
A Sugar Corporation bought an equipment for
Br10,000 at the beginning of 20X6. It had a useful
life of five years. On 1 January 20X8 the
equipment was revalued to Br12,000. The
expected useful life has remained unchanged (i.e.
three years remain).
Required
Account
for the revaluation and state the
treatment for depreciation from 20X8 onwards.
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ILLUSTRATIONS
Solution
On 1 January 20X8 the carrying value of the asset is
Br10,000 (2 ETB10,000/5) = Br6,000. For the
Revaluation:
Accumulated depreciation----------------4,000
Asset value------------------------------2,000
Revaluation surplus----------------------6,000
The depreciation for the next three years will be Br12,000/3
= Br4,000, compared to depreciation on cost of Br10,000/ =
Br2,000 or 6000/3. So each year, the extra Br2,000 can be
treated as part of the surplus which has become realized:
Revaluation surplus---------------2,000
Retained earnings---------------------2,000
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Investment Property
A Corporation owns a building which it has been using as a
head office. In order to reduce costs, on 30 June 20X9 it
moved its head office functions to one of its production
centers and is now letting out its head office. Company
policy is to use the fair value model for investment property.
The building had an original cost on 1 January 20X0 of ETB
250,000 and was being depreciated over 50 years. At 31
December 20X9 its fair value was judged to be ETB350,000.
Required
How will this appear in the financial statements at 31
December 20X9?
The building will be depreciated up to 30 June 20X9.

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Original cost----------------------------------------------------250,000
Depreciation 1.1.X0 1.1.X9 (250/50 9) --------------(45,000)
Depreciation to 30.6.X9 (250/50 6/12) ----------------(2,500)
Carrying amount at 30.6.X9-------------------------------202,500
Revaluation surplus------------------------------------------147,500
Fair value at 30.6.X9----------------------------------------350,000
The difference between the carrying amount and fair value is
taken to a revaluation surplus in accordance with IAS 16. However
the building will be subjected to a fair value exercise at each year
end and these gains or losses will go to profit or loss. If at the end
of the following year the fair value of the building is found to be
Br380,000, Br 30,000 will be credited to profit or loss.
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