ias 16 practical examples ias 16 practical examples

QUESTION TWO: A plant and machinery was bought for $ 215,000. revaluation. Definition 1. Therefore, the consolidated group accounts for the building as an item of property, plant, and equipment. 1120 0 obj What is the carrying amount of the right-of-use asset and the lease liability at the end of year 4? Any gain or loss on the disposal of asset will be charged to the statement of profit or loss which will be the difference between carrying value and disposal proceeds. In January of year 1, an entity acquires land worth 30,000. <>/Filter/FlateDecode/ID[<7C33DA225C7B0D36EDE13F463FA69E20><5F5B91C7EDB0B2110A00A0D5B854FF7F>]/Index[1117 28]/Info 1116 0 R/Length 82/Prev 164649/Root 1118 0 R/Size 1145/Type/XRef/W[1 2 1]>>stream Revaluation Model - The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be measured reliably. The change in (a) and (b) above is material. Required (j) The entity should disclose the date of revaluation, involvement of the expert and the revaluation surplus in respect of the assets which are revalued in the current period. Dep. the initial estimate of the costs of dismantling and removing the asset and restoring the site on which it is located to its original condition (ie to the extent that it is recognised as a provision per IAS 37. borrowing costs in accordance with IAS 23, Cost less residual value divided by useful life. Theequity methodis used in international financial reporting standards to recognize an investment when a company hassignificant influenceover another entity. However, now that the asset has been revalued the depreciable amount has changed. Required Explain whether the additional expenditure should be capitalised as part of PPE or expensed to the statement of profit or loss for the year ended 28 February 20X3. AB Ltd. is a private limited company that operates an aircraft. The property originally cost $10m ($2m of which related to land) 10 years ago. Are specialized in nature and can only be used with the specific asset; Their economic benefits are expected to be for more than one accounting period. In this episode, we are joined by Dorit Aharonov, a professor at the Hebr Additionally AB Ltd. has also paid $5 million along with the land. Once entered, they are only It is the estimated net disposal proceeds that an entity would currently obtain from disposal of the asset, if the asset were already in the condition and situation which is expected to be at the end of its useful life. Such financial statements present the controlling entity and its subsidiary as a single entity. (c) Revaluation should be performed regularly enough, so that the carrying value of asset should not be materially different from its revalued amount. (f) Any compensation received from the third parties in respect of any impairment related to the asset. [IAS 16.3], Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]. More information about IFRS COURSE (CLICK), An investment property is also an asset held for, However, if an entity holds properties for sale in the short term, In this way, if the entity subsequently decides that the asset is connected to housing construction, it must reclassify this asset to an, However, from the perspective of the entity that owns it, the property is, Therefore, the lessor treats the property as investment property in its, Thus, the building is not classified as an investment property item in the parent companys, Such financial statements present the controlling entity and its, Therefore, the consolidated group accounts for the building as an item of, On the other hand, in the parents separate financial statements, the building is classified as an, In other words, it is a property held for, In this example, entity B must recognize a, This is why the definition of investment property of paragraph 5 of, In that case, it must use the cost model of, How the impairment of assets held for sale is calculated. Note - IFRS 16 is Ind AS-116 and IFRS-9 is Ind AS 109. endstream Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. [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. 5. IAS 16 A436IASCF Measurement at recognition: asset dismantlement, removal and restoration costs IN7 The cost of an item of property, plant and equipment includes the costs of its dismantlement, removal or restoration, the obligation for which an entity incurs as a consequence of installing the item. Property, Plant & Equipment (See 'Related links' for the solution to Example 1.). (a) The measurement model, (b) Method of depreciation However, entity will not charge any depreciation if the residual value of the asset exceeds its carrying value. However, this transfer is optional and if opted by the entity then it will be applicable annually till the disposal of related asset. 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. (b) Their economic benefits are for more than one accounting period. An entity will de-recognize the asset from statement of financial position when: Title: Slide 1 Author: Ahsan Abbas Last modified by: shoaib ahmed . However, IAS 16 is dedicated to treating non-current assets used for business operations whereas IAS 40 is predominantly concerned with non-current assets held for rental, capital appreciation or . [IAS 16.62A], 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. Required (a) To the property, plant and equipment which are classified as held for sale and are covered under IFRS 5 [IAS 16.51], 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. The property does not qualify as investment property in the consolidated financial statements because the property is owner-occupied from the groups perspective. If the asset requires an inspection after a specified interval as per industry laws (such as airline industry) then the entity will recognize the cost of such inspection in the carrying value of related asset, if its economic benefits are for more than one accounting period. (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 11.). 100 penalty for late delivery on a Rs. Paragraph 15 of IAS 40 establishes, In some cases, an entity owns property that is leased to and occupied by its parent or another subsidiary. IAS 28 Investments in Associates and Joint Ventures Study Text 2022 1 86 downloads. Definition : Property, plant & Equipment (PPE)Definition : Property, plant & Equipment (PPE) Property Plant and Equipment defines Property Plant and Equipment as tangible assets that- 1) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and 2) are expected to be utilized in . IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing accounting treatments, for example: assets classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations [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. xUQ;n09RIR DB.gb)^J33gY]:Je0(DU@Ws}wm{Z@xoAZ0M^y3?k798up5BzBRM (Ma_ h 4umM}&aF.%"zD,Rd_,o*J$$|Bv>a gzrJBrJLR_ In June of this year, 170 computers were sold for $1,500 per unit. 0 Cost of Plant, Property and Equipment (PPE) shall be . It does not prescribe the unit of measurement but states that judgement isneeded in applying the recognition criteria to an entity's particular circumstances [IAS 16.9]. At the year-end of 31 March 20X6, the company revalued the building to its fair value of $98,000. (b) The frequency of revaluation depends upon the volatility of the market related to the asset. However, the entity uses the cost model for the subsequent measurement of this asset and uses IAS 16 instead of IAS 40. 2. Where this is the case, each of those parts must be depreciated separately over their own individual useful lives. (a) Prepare any necessary journal entries to account for this building during the year ended 31 March 20X2. (d) When the asset is revalued, its depreciation charge to the date of revaluation will be reset to zero, as it will be reflected in the revalued amount. Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. All the work on the aircraft can be assumed to have been completed on 1 January 2009. if the management have intention to build a Building in 2018 so the company incur expenses on geotechnical assesment of land however at the end of the year the construction of building has not yet started . When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. They are as follows: In the scope of IAS 40. In this way, if the entity subsequently decides that the asset is connected to housing construction, it must reclassify this asset to an inventory account. The methodology presented is subdivided in a theoretical analysis, with a literature review, and in an empirical analysis, with a case study (Yin, 2018). On 1 April 20X2, the residual value was reassessed as being only $15,000 and the remaining useful life was considered to be only five years. learn at your own pace and on your own schedule. A Practical Guide (Stephen Pete) Digital Fundamentals (Thomas L. Floyd) Commercial Law (Samantha J. Traves) . Otherwise, we would be talking about property, plants, and equipment. (b) No economic benefits are expected either from use or from sale of asset, For each class of property, plant and equipment, the entity is required to disclose the following: Transition methods for IFRS 16 EXAMPLE 9 hbbd``b` M@H2c)$8Aj 8HRADk$#,#i] e % The carrying amount of Zen Cos property at the end of the year amounted to $108,000 (cost/value $125,000 and accumulated depreciation $17,000). The global body for professional accountants, Can't find your location/region listed? [IAS 16.14], An item of property, plant and equipment should initially be recorded at cost. (i) Any remaining revaluation surplus in the statement of changes in equity will be transferred as whole to the retained earnings when the asset is de-recognized from the statement of financial position. (h) Any depreciation charges which are recognized as part of cost of other assets. - If an asset contains different components and these components are different in nature with each component having different useful life, then each component will be recognized as property, plant and equipment separately. hb```%``B-BP Yf\lx9rrOb?>w?\@]>2E+3c>@a,y$K6Qg gross carrying amount and accumulated depreciation and impairment losses. Even though the asset has not yet been brought into use, IAS 16 states depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. But for subsequent recognition, IAS 16 gives an option to record the PPE either as per cost model. IAS 16 requires that estimates of useful life and residual value be reviewed at the end of each reporting period. reconciliation of the carrying amount at the beginning and the end of the period, showing: acquisitions through business combinations, net foreign exchange differences on translation, 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. * [IAS 16.79], If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS 16.77]. The remaining useful life was reassessed at the time of valuation and is considered to be 40 years at this date. An entity leases a building for 5 years with payments of 20,000 per year and an implicit interest rate of 9%. If you are looking for a practical overview of IFRS 16, or just a refresher, you've come to the right place. If this were to happen the carrying amount would need to be found at the date of revaluation, and therefore the asset would be depreciated based on the original depreciation for the period up until revaluation. If either changes significantly, the change should be accounted for over the useful life remaining. This is referred to as a prospective adjustment rather than a retrospective adjustment. It was estimated that the asset had a residual value of $20,000 and a useful life of 10 years at this date. The separate components of the property are made up as follows: Required These adjustments are indicated below. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. endobj 1122 0 obj to others, or use in administration and These, Employee costs arising directly from the installation or construction of the asset. which means carry the asset at its cost less depreciation OR as per revaluation model which means Fair. A company purchased a building on 1 April 20X1 for $100,000. If an item is revalued, the entire class of assets to which that asset belongs should be revalued. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Paragraph 16(b) of IAS 16 states that the cost of an item of property, plant and equipment (PPE) includes costs directly attributable to bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management1. Required Required This concludes our high-level overview of IFRS 16. If an entity acquires an item of property, plant and equipment in exchange for a non-monetary asset, then the cost of the asset acquired in exchange will be determined as follows: The transaction of exchange will deem to have commercial substance if: In such circumstances the entity will determine the cost of the asset acquired in exchange as: (a) The fair value of asset transferred cash. ifrs 16 illustrative examples. <>stream revalue. 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 recognised as an expense, in which case it should be recognised in profit or loss. The cost of day to day or ongoing repair and maintenance will be charged to the statement of profit or loss as expense. A practical guide to implementing . This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent Assets). IAS-16: Property, Plant and Equipment with Practical Examples in Bangla: For each class of property, plant, and equipment, disclose: [IAS 16.73]: - basis fo. Any additions and disposals during the year, Any assets acquired as part of a business combination, Any impairment loss recognized in the current year, Assets classified as held for sale under IFRS 5. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. EXAMPLE 2 Dr Accumulated depreciation [eliminate any accumulated depreciation] As an example, if a private company elects not to restate comparative periods, then all lessee leases would have a lease liability and right of use (ROU) asset established as of January 2022, and the comparative periods would be unchanged. This can be found by comparing the difference between: When the disposal proceeds are greater than the carrying amount there is a gain on disposal and when the disposal proceeds are less than the carrying amount there is a loss on disposal. Calculate the annual depreciation charge for the property for the year ended 31 March 20X2. Here are the steps to calculate this: a) Calculate the opening balance of the right of use asset and divide by the total number of days the asset will be used. Subsequent costs (c) For the accounting treatment of exploration and evaluation assets and mineral rights and reserves such as oil and gas and other non-regenerative resources which are covered under IFRS 6. Let us remember that IFRS 16 practically does not present changes from the point of view of the lessor. not reflected in period end financial statements). Elements of the cost of an item of PPE include: EXAMPLE 1 On the other hand, in the parents separate financial statements, the building is classified as an investment property. In other words, depreciation applies the accruals concept to the capitalised cost of a non-current asset and matches this cost to the period that it relates to. At this point, two elements in the analysis must be kept in mind. xUMo0 Practical example 1 - changes in accounting policies. Each word should be on a separate line. If you want to know more, see our detailed publications on lease accounting available at home.kpmg/ifrs16. Property held for intended sale in the ordinary course of business or in the process of construction or development . DrRevaluation surplus 2.2 Reporting date (IAS 21.23 - .26) Refer to the following definitions in IAS 21.8: Monetary items If an item does not meet the definition of a monetary item, it is a non-monetary item Refer to IAS 21.16 for a further explanation and . AB Ltd. paid for the plant within four weeks of the order, therefore, obtained an early settlement discount of 3%. Cash discount will not affect the value of asset; it will be recorded as income separately. Out of the scope of IAS 40. [IAS 16.65], 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. - This Standard is not applicable: ?}^wrmTJck An investment property is a land or a building or part of a building or both held by the owner or by the lessee as a right-of-use asset to earn rentals or capital appreciation or both and not for: Its use is in the production or supply of goods or services, administrative purposes, or sale in the ordinary course of operations. However, if an entity holds properties for sale in the short term in the ordinary course of business and thus obtains a profit, we would not be talking about an investment property but the sale of inventory. If the asset is sold on extended credit period or on deferred installment basis, then the disposal proceeds will be taken as cash price equivalent and any excess over the cash price will be treated as Interest Income which will be recognized over the period of credit. (See 'Related links' for the solution to Example 6.). (b) Prepare extracts from the following financial statements for the year ended 31 March 20X2: (See 'Related links' for the solution to Example 9.). The cost of rectifying this error of $12,000 is included in the above figure of $28,000. The item which meets the following criteria will be treated as property plant and equipment as the standard prescribes: (a)These are tangible items; AB Ltd. had wrongly specified the power loading of the original electrical cable to be installed by the contractor. Plant & Equipment Practical Example - 2 Practical Example Solution Measurement after recognition Revaluation model Practical Example - 3 . In March, the entity acquired 150 units at 750 dollars. 1124 0 obj 1118 0 obj The risk, timing and amount of cash flows related to the asset acquired are different from the asset transferred; The exchange has resulted in the change in the entity specific value of that operational portion of the entity.