Accounting (Basics) - Lecture 3
Property, plant and equipment


Contents
nRecognition
nInitial and subsequent measurement
nDepreciation
nImpairment
nDerecognition
nDisclosures
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Recognition
nAn entity shall recognize the cost of an item of property, plant and equipment as an asset if, and
only if:
a)it is probable that future economic benefits associated with the item will flow to the entity,
and
b)the cost of the item can be measured reliably.
nSpare parts and servicing equipment are usually carried as inventory and recognized in profit or
loss as consumed. However, major spare parts and stand-by equipment are property, plant and
equipment when an entity expects to use them during more than one period. Similarly, if the spare
parts and servicing equipment can be used only in connection with an item of property, plant and
equipment, they are considered property, plant and equipment.
nParts of some items of property, plant and equipment may require replacement at regular intervals
(e.g. the roof of a building). An entity shall add to the carrying amount of an item of property,
plant and equipment the cost of replacing part of such an item when that
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Recognition
ncost is incurred if the replacement part is expected to provide incremental future benefits to the
entity. If the major components of an item of property, plant and equipment have significantly
different patterns of consumption of economic benefits, an entity shall allocate the initial cost
of the asset to its major components and depreciate each such component separately over its useful
life.
nA condition of continuing to operate an item of property, plant and equipment may be performing
regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognized in the carrying amount of the item of
property, plant and equipment as a replacement if the recognition criteria are satisfied. Any
remaining carrying amount of the cost of the previous major inspection (as distinct from physical
parts) is derecognized.
nLand and buildings are separable assets, and an entity shall account for them separately, even
when they are acquired together.
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Initial and subsequent measurement
nAn entity shall measure an item of property, plant and equipment at initial recognition at its
cost.
nThe cost of an item of property, plant and equipment comprises all of the following:
a)its purchase price, including legal and brokerage fees, import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates.
b)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. These can include the costs of
site preparation, initial delivery and handling, installation and assembly, and testing of
functionality.
c)initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located
d)
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Initial and subsequent measurement
nThe following costs are not costs of an item of property, plant and equipment, and an entity shall
recognize them as an expense when they are incurred:
a)costs of opening a new facility.
b)costs of introducing a new product or service (including costs of advertising and promotional
activities).
c)costs of conducting business in a new location or with a new class of customer (including costs
of staff training).
d)administration and other general overhead costs.
e)borrowing costs.
nThe income and related expenses of incidental operations during construction or development of an
item of property, plant and equipment are recognized in profit or loss if those operations are not
necessary to bring the item to its intended location and operating condition.
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Initial and subsequent measurement
nThe cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the cost is the present value
of all future payments.
nAn item of property, plant or equipment may be acquired in exchange for a non-monetary asset or
assets, or a combination of monetary and non-monetary assets. An entity shall measure the cost of
the acquired asset at fair value unless (a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. In
that case, the asset’s cost is measured at the carrying amount of the asset given up.
nAn entity shall measure all items of property, plant and equipment after initial recognition at
cost less any accumulated depreciation and any accumulated impairment losses. An entity shall
recognize the costs of day-to-day servicing of an item of property, plant and equipment in profit
or loss in the period when the costs are incurred.
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Depreciation
nIf the major components of an item of property, plant and equipment have significantly different
patterns of consumption of economic benefits, an entity shall allocate the initial cost of the
asset to its major components and depreciate each such component separately over its useful life.
Land has an unlimited useful life and therefore is not depreciated.
nThe depreciation charge for each period shall be recognized in profit or loss unless another
section of IFRS for SMEs requires the cost to be recognized as part of the cost of an asset.
nAn entity shall allocate the depreciable amount of an asset on a systematic basis over its useful
life.
nFactors such as a change in how an asset is used, significant unexpected wear and tear,
technological advancement, and changes in market prices may indicate that the residual value or
useful life of an asset has changed since the most recent annual reporting date. If such indicators
are present, an entity shall review
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Depreciation
nits previous estimates and, if current expectations differ, amend the residual value, depreciation
method or useful life. The entity shall account for the change in residual value, depreciation
method or useful life as a change in an accounting estimate.
nDepreciation of an asset begins when it is available for use. Depreciation of an asset ceases when
the asset is derecognized. Depreciation does not cease when the asset becomes idle or is retired
from active use unless the asset is fully depreciated. However, under usage methods of depreciation
the depreciation charge can be zero while there is no production.
nAn entity shall consider all the following factors in determining the useful life of an asset:
a)the expected usage of the asset.
b)expected physical wear and tear.
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Depreciation
c)technical or commercial obsolescence arising from changes or improvements in production, or from
a change in the market demand for the product or service output of the asset.
d)legal or similar limits on the use of the asset, such as the expiry dates of related leases.
nAn entity shall select a depreciation method that reflects the pattern in which it expects to
consume the asset’s future economic benefits. The possible depreciation methods include the
straight-line method, the diminishing balance method and a method based on usage such as the units
of production method. If there is an indication that there has been a significant change since the
last annual reporting date in the pattern by which an entity expects to consume an asset’s future
economic benefits, the entity shall review its present depreciation method and, if current
expectations differ, change the depreciation method to reflect the new pattern. The entity shall
account for the change as a change in an accounting estimate.
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Impairment
nAt each reporting date, an entity shall apply Section “Impairment of Assets” of IFRS for SMEs to
determine whether an item or group of items of property, plant and equipment is impaired and, if
so, how to recognize and measure the impairment loss. That section explains when and how an entity
reviews the carrying amount of its assets, how it determines the recoverable amount of an asset,
and when it recognizes or reverses an impairment loss.
nAn entity shall include in profit or loss compensation from third parties for items of property,
plant and equipment that were impaired, lost or given up only when the compensation becomes
receivable.
nA plan to dispose of an asset before the previously expected date is an indicator of impairment
that triggers the calculation of the asset’s recoverable amount for the purpose of determining
whether the asset is impaired.
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Derecognition
nAn entity shall derecognize an item of property, plant and equipment:
a)on disposal, or
b)when no future economic benefits are expected from its use or disposal.
nAn entity shall recognize the gain or loss on the derecognition of an item of property, plant and
equipment in profit or loss when the item is derecognized. The entity shall not classify such gains
as revenue.
nIn determining the date of disposal of an item, an entity shall apply the criteria in Section
“Revenue” of IFRS for SMEs for recognizing revenue from the sale of goods. Section “Revenue”
applies to disposal by a sale and leaseback.
nAn entity shall determine the gain or loss arising from the derecognition of an item of property,
plant and equipment as the difference between the net disposal proceeds, if any, and the carrying
amount of the item.
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Disclosures
nAn entity shall disclose the following for each class of property, plant and equipment:
a)the measurement bases used for determining the gross carrying amount.
b)the depreciation methods used.
c)the useful lives or the depreciation rates used.
d)the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the reporting period.
e)a reconciliation of the carrying amount at the beginning and end of the reporting period showing
separately:
i.additions
ii.disposals
iii.acquisitions through business combinations
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Disclosures
iv.transfers to investment property if a reliable measure of fair value becomes available
v.impairment losses recognized or reversed in profit or loss
vi.depreciation.
vii.other changes.
nThis reconciliation need not be presented for prior periods.
nThe entity shall also disclose the following:
a)the existence and carrying amounts of property, plant and equipment to which the entity has
restricted title or that is pledged as security for liabilities.
b)the amount of contractual commitments for the acquisition of property, plant and equipment.
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