PROPERTY, PLANT AND EQUIPTMENT (PPE) FRS 116: Property, Plant and Equipment FRS 104: Depreciation Accounting FRS 136: Impairment of Assets
Definitions (FRS 116) para 10 • The term ‘fixed assets’ is not defined by Act neither by standard, but is mentioned to included lands, and buildings, plant and machinery. • FRS 116 only deals with accounting for PPE • FRS 116 defined PPE as tangible assets that: • Are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative or maintenance purposes; and • Are expected to be used during more than one reporting period
RECOGNITION OF PPE •  PPE should be recognised as asset when: • It is probable that future economic benefits associated with the asset will flow to the enterprise; and • The cost of the asset can be measured reliably
MEASUREMENT OF PPE •  item of PPE which qualifies for recognition as an asset should initially be measured at its cost • Components of cost; • Purchase price after deducting trade discounts and rebates • Import duties • Taxes • Any costs of bringing the asset to working condition for it intended use
EXCHANGES OF ASSETS • Exchange for dissimilar item • The cost is measured at the fair value of the asset received, which is equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred. • Recognised gain or loss. (if any) • Exchange for similar asset, similar use and similar fair value • No gain or no loss should be recognised . • The cost of the new asset is the carrying amount of the asset given up. • If other assets (ex. cash) are included as part of the transaction, this may indicate that the items exchanged do not have a similar value.
Subsequent Expenditure on Fixed Assets. • Identified and distinguish whether these subsequent expenditures are • to be regarded as capital in nature (capital expenditure); or • to be regarded as an expense (revenue expenditure)
SUBSEQUENT MEASUREMENT • Cost minus accumulated depreciation • The carrying value (net book value) may be different from its fair value and may not reflect the true value to the business • Thus for subsequent measurement FRS116 allows two models; • Cost model • Revaluation model
Cost model • PPE is carried at cost less depreciation less impairment losses. • Impairment of assets is discuss in FRS 136
Revaluation model When to revalue? • Depends upon the movements in the fair values of those items of PPE. • If it experience volatile changes in fair value, thus it needs frequent or even annual revaluation. • If the changes in fair value is insignificant, the assets may need to revalue every 3 or 5 years.
METHODS OF REVALUATION • Adjust both the gross carrying amount and the accumulated depreciation • Adjusted net carrying amount is equal to the net revalued amount • Eliminates the accumulated depreciation at the valuation date • The net revalued amount is treated as the new gross carrying amount
Example: • ACE Bhd acquired a plant for RM200,000 on 1.1.2004 and estimated economic life is 10 years. The entity has chosen the revaluation model and 0n 31.12.2006 the fair value was determined to be RM150,000. • Show the caring value of assets at 31.12.2007
Deficit and surpluses from revaluation • Any surplus should be credited to revaluation reserve and this reserve is a non-distributable reserve • Any deficit should be charged to income statement. • Asset previously revalued • Treated as revaluation deficit. • The loss on revaluation is charged against the revaluation surplus (the surplus must relate to the same asset) • This rule should be applied individually to each asset revalued. • No offsetting is allowed even within the same class of asset • Derecognition of surplus: • As asset is used a portion of the surplus is transferred to the retained earning
Subsequent revaluation • For subsequent revaluation, offsetting is required provided that the surplus or deficit relates to a previous deficit or surplus of the same asset revalued • Example: Extra Bhd acquired 3 pieces of land on 1.1x1. These lands were revalued every 5 years. The following data relate to the 3 land: Land cost1.1.x1 1.1.x6 1.1.x11 1.1.x16 A 400,000 500,000 650,000 480,000 B 400,000 300,000 285,000 485,000 C 300,000 450,000 350,000 sold for 370,000 Record the above transaction.
Retirement and Disposal of Fixed Assets • Fixed asset should be eliminated from the account when no further benefit is expected from its use and disposal. • Fully depreciated fixed assets which continue to be in use, should be retain in the accounts • Fixed assets held for disposal should be sated at the lower of net carrying amount and net realisable value, any loss should be recognised immediately • Gain or loss on disposal should be recognised in the income statement • For disposal of a previously revalued asset, gain or loss should be the difference between; • The net disposal proceeds and • The carrying amount • Any remaining revaluation reserve may be transferred to retained earning
Important terms to know • Depreciated replacement cost • The current acquisition cost of an asset substituted for cost in the balance sheet after deducting accumulated depreciation and accumulated impairment losses • Impairment loss • The amount by which the carrying amount of an asset exceeds its recoverable amount • Recoverable amount • The higher of an asset’s net selling price and its value in use • Value in use • The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life
Impairment of asset • Permanent diminution in value. • When an assets is impaired?? • When the carrying amount exceeds its recoverable amount • Impairment test should be carried out on individual non-current asset at each balance sheet date to indicate whether there is any indication that an asset may be impaired.
When impairment occurs, a revised carrying amount is calculated revised carrying amount The lower of Carrying amount Recoverable amount Higher of Net Selling Price Value in use
External indicator A fall in market value of the asset Material adverse changes in regulatory environment Material adverse changes in markets Material long-term increases in market rates of return used for discounting Internal indicators Material changes in operation Major reorganisation Evidence of obsolescence or physical damage of an asset Indicators of impairment
Treatment of impairment losses • An impairment loss should be recognised in the income statement in the year in which the impairment arises • The carrying amount of an asset should be increase to its new recoverable amount (reversal of impairment), but it should not exceed the original amount or depreciated carrying value had the impairment not taken place. • The reversal of impairment loss should be recognized as an income in the IS unless the asset is carried at revalued amount.
example • Obi Bhd. Rents out boats to customers. These boats were bought on 1.1.2003 at RM1,500,000 and were depreciated at 20%p.a. on cost. An accident took place in 2004 and the business was badly affected. On 31.12.2004 the net selling price of these boats was RM750,000 and the value in use was RM680,000. 1. Draft the balance sheet extracts at 31.12.2004; and 2. Draft the balance sheet extracts at 31.12.2005 if the demand for boats has increased and the boats now have a recoverable amount of: • a) RM650,000 • b) RM550,000