Notes ON Property, Plant AND Equipment PDF

Preview

Summary

ACCOUNTING FOR FIXED ASSETSI. PROPERTY, PLANT AND EQUIPMENTA. Characteristics of Property, Plant, and Equipment. (All must be present) 1. Acquired for use and not resale (production of goods and services, rental to others and administrative used) 2. Long-term in nature and subject to depreciation, e...

Description

ACCOUNTING FOR FIXED ASSETS I.

PROPERTY, PLANT AND EQUIPMENT

A. Characteristics of Property, Plant, and Equipment. (All must be present) 1. Acqui r edf orus eandnotr es al e( pr oduct i onofgoodsandser v i c es ,r ent al t oot her sandadmi ni s t r at i v eus ed) 2. Longt er mi nnat ur eands ubj ec tt odepr ec i at i on,ex c eptf orl and(expec t ed t obeusedmor et hanoney ear ) 3. Pos s es sphy s i cals ubs t anc e( T angi bl e) I ncl udedasPPEar easf ol l ows: Thes t andar ddoesappl yt obear erpl ant sbuti tdoesnotappl yt ot hepr oduc eonbear er pl ant s .[ I AS16. 3]whi c happl i est oannualper i odsbegi nni ngonoraf t er1J anuar y2016. 

Abear erPl anti sal i v i ngpl antt hati sus edi nt hepr oduc t i onors uppl yof agr i c ul t ur al pr oduc e,i sex pec t edt obearpr oduc ef ormor et hanoneper i od,and, hasar emot el i k el i hoodofbei ngs ol dasagr i c ul t ur alpr oduc e,e x ceptf ori nc i dent al sc r aps al es .



Thecos tmodeli nI AS16al s oappl i est oi nves t mentpr oper t yacc ount edf orus i ng t hec os tmodel underI AS40I nv es t mentPr oper t y .[ I AS16. 5]

NotI ncl udedi nPPEUnderI AS16ar et hef ol l owi ng:    

As s et sc l ass i fiedashel df ors al ei nac cor danc ewi t hI FRS5Nonc ur r entAs s et s Hel df orSal eandDi s c ont i nuedOper at i ons Bi ol ogi calas s et sr el at edt oagr i cul t ur al act i v i t yac count edf or underI AS41Agr i c ul t ur e Ex pl or at i onandev al uat i onass et sr ec ogni z edi nacc or dance FRS6Ex pl or at i onf orandEv al uat i onofMi ner alRes our c es wi t hI Mi ner alr i ght sandmi ner alr es er v ess uc hasoi l ,nat ur algasands i mi l arnonr egener at i v er es our c es.

B. Acquisition and Initial Valuation of Property, Plant, and Equipment. 1. Historical cost is the usual basis for valuation. This is the cash or cash equivalent price or fair value of other consideration given of obtaining the asset and getting it ready for its intended use plus the obligation to dismantle or restoring the site. Cases of Acquisition Cash basis Lump-sum price On Account Installment –w/cash price Installment – w/out cash price Issuance of Share Capital

Issuance of Debt Security

Valuation Cash Price Equivalent. Cash Paid plus freight, handling, installation Prorate single price based on their relative fair values Invoice Price less discount , regardless whether taken or not Cash price Equivalent. In excess of total amount paid = Interest Present Value of payments at implied interest rate a. b. c. a. b. c. a.

Fair Value of Consideration received Fair Value of Share Capital Par or Stated Value of Shares Fair Value of Debt Security Fair Value of Asset Received Face amount of Debt Security Fair Value of property given plus cash given or less cash received

Exchange with commercial substance

b. Fair Value of property received plus cash given or less cash received c. Book Value of property given plus cash given or less cash received Exchange without Book Value of property given plus cash given or less cash received Commercial Substance Trade In a. Fair Value of Asset Given up plus cash given b. Trade In Value of Asset given up plus cash given Fair Value of assets received and charged to donated capital. Expenses Donation from Shareholders incurred in connection with the donation are charged to Donated Capital. Direct cost subsequesnt to donation will be capitalized Donation from Non- Fair Value when received or receivable and charged to Income (subsidies) shareholders or liability (with restrictions) Direct materials and labor, Indirect cost and incremental overhead Construction identifiable to the construction. Savings, Internal Profit, errors and inefficiencies are not to be capitalized as part of cost C. LAND WITH BUILDING PURCHASED AT SINGLE COST If building is usable Prorate single cost to land and building based on their relative fair values If building is unusable Single Cost will be for land only plus demolition cost less any salvage value. Old building is demolished immediately to Usable cost of old building will be charged to loss. Demolition make room for the construction of a new cost less any salvage value is capitalized to the new building building to be recorded as PPE or Investment property Old building is demolished immediately to Usable cost of old building will be capitalized as cost of the make room for the construction of a new new building. Demolition cost less any salvage value is building to be recorded as Inventory capitalized to the new building Old building is demolished immediately to Usable cost of old building will be capitalized as cost of the prepare the land to its intended use new building. A previously owned building will be The Carrying Value of the old building will be charged to loss demolished to construct a new building The net demolition cost as well as cost incurred to induce tenants to vacate the place will be capitalized as cost of the new building D. BORROWING COST – interest and other costs that the entity incurs in connection with borrowing of funds for the purchase, construction or production of qualifying assets. PROCEDURE IN COMPUTING BORROWING COST Assets Financed by specific Actual Borrowing cost incurred during the period deducted by any borrowing investment income for temporary placement of funds 1. Average Carrying Amount of the Asset during the period multiplied by Assets Financed by general average capitalization rate. Investment Income will not be deducted. borrowings 2. The amount computed in no. 1 above should not exceed the actual interest incurred. Avearge Carrying Amount = Previous period actual cost plus interest capitalized plus Average Expenditure this period. Average Capitalization Rate = Annual borrowing cost / Total General Borrowings 1. Compute Average Carrying Value of the Asset during the period Assets financed by both 2. Deduct the amount of specific borrowings from no. 1 above to get specific and general borrowings the expenditures finance from general borrowings 3. The capitalizable borrowing costs = (Actual borrowing cost incurred less investment income from specific borrowings) plus

( Expenditure financed by general borrowings x general capitalizable rate) Assets financed by specific The borrowing is treated as a general borrowing, and follow the same borrowings used for general procedure using general borrowings. purposes Construction period is more The average expenditures during the period shall include the previous than one year capitalized cost and considered incurred at the beginning of the year

E. SUBSEQUENT COSTS

Additions Improvement

Meaning Increase physical size and capacity Substitution for a better or superior one Replacement for equal or lesser quality

Replacement

Replaced Original Cost can be identified Replaced Original Cost can’t be identified

Repairs

Restoring to good operating condition (Curative)

Maintenance Rearrangement

Keeps the asset in good condition ( Preventive) Relocation and redeployment of PPE

F. DEPRECIATION METHODS Depreciation Rationale of the Method Methods Straight line This is adapted when the major reason of depreciation is passage of time giving each period equal amount. Group of dissimilar assets in terms of characteristics and useful life treated Composite as a single unit

Group

Working Hours Output/Productio n

Group of similar assets in terms of characteristics and useful life treated as a single unit

Based on the usage or function of asset used. Based on the output of the asset produced

Accounting Procedure Capitalized as usual Capitalized as usual a. A new one – Capitalized b. Major Parts- Capitalized c. Minor Parts - Expensed The Carrrying Value will be charged to loss and replacement cost will be capitalized as assets Use the discounted replacement cos as substitute to the cost and charged the depreciated value to loss Capitalized replacement cost as asset a. Extraordinary – Capitalized b. Ordinary – Expensed Expense as incurred Expense

Formula of Computing Annual Depreciation Cost – Salvage Value or Residual Value Estimated Useful life in years

1. The composite rate (total annual depreciation / total cost ) is multiplied to the total cost to get depreciation expense 2. When asset is retired, Accumulated Depreciation is debited equal to the cost credited minus any debited proceeds. No gain, No loss 3. When asset is replaced, assets is debited and the corresponding payments or liabilities are credited 4. Multiply the composite rate by the balance of the asset accounts for succeeding periods to get the depreciation expense 1. Depreciation Rate per hour or output = Cost-Salvage / estimated use hours/output 2. Multiply actual hours used or output

produced x Depreciation rate A decreasing charge method whereby the depreciable cost is Sum of the years’ multiplied by decreasing series of fractions where the numerator is Method equal to the digit of the year in consideration while the denominator is equal to the total digits of the years This method cannot be used unless Declining Balance there is a residual value. In the absence of residual value , we can assigned P 1 A fixed rate is multiplied by the declining carrying or book value. Double Declining The fixed rate is equal to double the Straight line rate This is generally applied to small Inventory method inexpensive items. This method is not systematic. No contra asset account is maintained, deoreciation is credited direcly from the asset account Retirement No depreciation is recorded unless there is asset retired.

Replacement

No depreciation is recorded unless Assets are retired and replaced

(Cost – Salvage) x Digit of the Year Sum of the Years Digit

Rate ( 1Residual Value / Cost) x diminishing book value

Rate ( 100%/ estimated diminishing book value

life x

2)

c

Balance per Inventory at year end – Balance per Inventory Account = Depreciation Expense

Original Cost of Asset Retired – Proceeds 1. If retired and replaced, depreciation = Replacement cost of assets retires – proceeds 2. If retired but not replaced original cost of that asset is depreciation

Measurement subsequent to initial recognition IAS 16 permits two accounting models: 

Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]



Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The revaluation model Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]. If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36] Revalued assets are depreciated in the same way as under the cost model (see below). If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in which case it should be recognized in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40] When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41] Depreciation (cost and revaluation models) For all depreciable assets: 1. The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life [IAS 16.50]. 2. The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51] 3. The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. [IAS 16.62A] Note: The clarification regarding the revenue-based depreciation method was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016. 4. The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56] Note: The guidance on expected future reductions in selling prices was introduced by Clarification of Acceptable Methods of Depreciation and Amortisation, which applies to annual periods beginning on or after 1 January 2016. 5. Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48]. 6. Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55] Recoverability of the carrying amount Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

Derecognition (retirements and disposals) An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in profit and loss. [IAS 16.67-71] If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A] Disclosure 1.Information about each class of property, plant and equipment For each class of property, plant, and equipment, disclose: [IAS 16.73]     

bas i sf ormeas ur i ngc ar r y i ngamount depr ec i at i onmet hod( s )us ed us ef ul l i v esordepr ec i at i onr at es gr os sc ar r y i ngamountandac c umul at eddepr ec i at i onandi mpai r mentl os s es r ec onc i l i at i onoft hecar r y i ngamountatt hebegi nni ngandt heendoft heper i od, showi ng:addi t i ons , di s pos al s , ac qui s i t i onst hr oughbus i nes s combi nat i ons , r ev al uat i oni nc r eas esordec r eas es , i mpai r mentl os s es , r ev er s al sof i mpai r mentl os s es , depr ec i at i on, netf or ei gnex c hangedi ffer enc esont r ans l at i on andot hermov ement s

2.Additional disclosures The following disclosures are also required: [IAS 16.74] 

restrictions on title and items pledged as security for liabilities



expenditures to construct property, plant, and equipment during the period



contractual commitments to acquire property, plant, and equipment



compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.

IAS 16 also encourages, but does not required, a number of additional disclosures. [IAS 16.79] Revalued property, plant and equipment If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77] 

the effective date of the revaluation



whether an independent valuer was involved



for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model



the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.

Entities with property, plant and equipment stated at revalued amounts are also required to make disclosures under IFRS 13 Fair Value Measurement.

Acquisition on cash basis LOQUACIOUS TALKATIVE Co. acquired a factory equipment overseas on cash basis for ₱400,000. Additional costs incurred include the following: commissions paid to brokers for the purchase of the equipment, ₱20,000; import duties of ₱100,000; nonrefundable purchase taxes of ₱40,000; freight cost of transferring the equipment to LOQUACIOUS’ premises, ₱4,000; costs of assembling and installing the equipment, ₱8,000; costs of testing the equipment, ₱6,000; administration and other general overhead costs, ₱16,800; and advertisement and promotion costs of the new product to be produced by the equipment, ₱15,200. The samples generated from testing the equipment were sold at ₱2,000. How much is the initial cost of the equipment? a. 578,000 b. 594,800 c. 576,000 d. 592,800 C Solution: Purchase price (cash price equivalent) 400,000 Commissions to brokers 20,000 Import duties 100,000 Non-refundable purchase taxes 40,000 Transportation cost 4,000 Assembling and installation costs 8,000 Testing costs 6,000 Net proceeds from samples generated (2,000) Initial cost of equipment 576,000 Acquisition on account PRECLUDE PREVENT Co. acquired an equipment for ₱448,000 on account with a credit term of 2/15, n/30. Any discount is computed based on the purchase price. The purchase price is inclusive of 12% value added tax (VAT). PRECLUDE Co. is VATregistered and any input VAT paid is refundable through deduction from monthly output VAT remitted to the Bureau of Internal Revenue (BIR). Additional costs incurred include ₱40,000 cost of training staff who will be operating the equipment and ₱60,000 cost of relocating the equipment to a new location after it was installed in a location originally intended by management. How much is the initial cost of the equipment? a. 400,000 b. 391,040 c. 491,040 d. 392,000 B Solution: The initial cost of the equipment is computed as follows: Purchase price inclusive of VAT 448,000 Divide by: 112% Purchase price exclusive of VAT 400,000 Cash discount based on purchase price (2% x 448,000) (8,960) Cash price equivalent 391,040

Deferred settlement – with cash price equivalent On January 1, 20x1, SQUAMOUS SCALY Co. purchased furniture with an installment price of ₱520,000 and a cash price equivalent of ₱400,000 by paying ₱40,000 down payment and issuing a one-year noninterest-bearing note of ₱120,000 payable in equal

semi-annual installments on July 1 and December 31, 20x1. How much is the initial cost of the furniture? a. 520,000 b. 480,000 c. 400,000 d. 360,000 C 400,000 – the cash price equivalent.

Deferred settlement – no cash price equivalent On January 1, 20x1, REEDY SLENDER Co. purchased fixtures with an installment price of ₱520,000 by paying ₱40,000 down payment and issuing a three-year noninterest bearing note of ₱480,000 payable in three equal annual installments starting December 31, 20x1. The prevailing rate for the note as of January 1, 20...