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Ias 16 Presentation Document Final..

The document outlines the objectives, scope, definitions, recognition, measurement criteria, and disclosure requirements of IAS 16 regarding Property, Plant, and Equipment (PPE). It details the accounting treatment for PPE, including initial and subsequent measurement, as well as practical examples and tax implications. Additionally, it specifies the criteria for derecognition of PPE and mandates disclosures related to accounting policies and impairment losses.

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2 views7 pages

Ias 16 Presentation Document Final..

The document outlines the objectives, scope, definitions, recognition, measurement criteria, and disclosure requirements of IAS 16 regarding Property, Plant, and Equipment (PPE). It details the accounting treatment for PPE, including initial and subsequent measurement, as well as practical examples and tax implications. Additionally, it specifies the criteria for derecognition of PPE and mandates disclosures related to accounting policies and impairment losses.

Uploaded by

spencerstrasmo
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module name: APPLIED CORPORATE REPORTING

ACC450

Level: 4.1

Program; Applied Accounting

Group 3

NAME REG NUMBER


EMMANUEL DUMBA R214970G
LIZZIE MAHLAHLA R2115962R
BRENDON NYATONDO R218392H
TAKUNDA H MARUMURE R2113584G
FARAI SIBANDA R219849B
TARISAI NYIKADZINO R2118385Z
TAPIWANASHE CHINGWE R2110469X
EBENEZER MUTENNGA R219866N
CALISTUS DZUMBIRA R211699X
TALENT M MAZIYOKWENYU R217033F
ABRAHAM NYAGUME R217687Y
RUVIMBO B MAMBONDIYANI R1912242W
TATENDA M CHAITWA R216771M
RUVARASHE H GARDEN R2110604N
IAS 16: PROPERTY PLANT AND EQUIPMENT (PPE)

PART 1: OBJECTIVES
IAS 16 prescribes the accounting treatment for property, plant, and equipment (PPE),
ensuring that financial statements provide relevant and reliable information about an entity's
investment in such assets and the changes therein.

PART 2: SCOPE AND EXCLUSIONS OF THE STANDARD


The accounting for property, plant and equipment is applicable for all, except where another
standard requires or permits differing accounting treatments, within these parameters:

 The standard does apply to property, plant, and equipment used to develop or
maintain the last three categories of assets.
 The cost model in IAS 16 also applies to investment property accounted for using the
cost model under IAS 40 Investment Property.
 The standard does apply to property, plant, and equipment used to develop or
maintain the last three categories of assets.
 biological assets related to agricultural activity accounted for under IAS 41
Agriculture
 exploration and evaluation assets recognised in accordance with IFRS 6 Exploration
for and Evaluation of Mineral Resources
 Mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.
 The standard does apply to bearer plants but it does not apply to the produce on bearer
plants.

PART 3: DEFINITION OF KEY TERMS


Property, Plant, and Equipment (PPE):
Tangible or fixed assets that:
 are held for use in the production of goods or for the supply of services; or
 for rental to others; or
 for administrative purposes; and
 Are expected to be used during more than one financial period. The intention is clearly
to use these assets to generate revenue rather than to sell them.

Cost:
Amount in consideration paid or Fair Value incurred in exchange for non current assets
including the direct cost related to bringing the asset in condition or usable state.
Fair Value:
Amount at which the asset could be exchanged between knowledgeable and willing parties
in arm’s length.
Carrying Amount /Net Book Value:
Cost of an asset less accumulated depreciation and any impairment losses
Value in use /Entity Specific Value:
It is the present value of expected cash flows that is generated by an entity through
continuous use of the asset
Residual Value/Scrap Value:
Value at which the asset is sold at end of its useful life
Impairment losses:
Amount at which the carrying amount or NBV exceeds the recoverable amount (Carrying
Amount –Recoverable amount)
Depreciation:
Value of an asset due to tear, Obsolesce and wear of an asset calculated as:
Cost-Residual Value/Estimated useful life
Revaluation Model:
- Asset carried at fair value (revalued amount) less subsequent depreciation/impairment.
NB: Decreases are first offset against any existing revaluation surplus, then recognized in
profit or loss.

PART 4: RECOGNITION AND MEASUREMENT CRITERIA


Recognition
An item is recognized as PPE if:
 Future economic benefits are probable.
 Cost can be measured reliably.

Initial Measurement
PPE is initially measured at cost, which includes:
 Purchase price less trade discounts
 Import duties plus any direct taxes in bringing the asset in useful condition eg
testing the asset
 Directly attributable costs (e.g., transport, installation, legal fees)
 Estimated dismantling & restoration costs (if obligated)

Subsequent Measurement
 An entity will, after initial recognition, make a choice between the cost model and the
revaluation model.
 In terms of the cost model, an item of PPE will, after initial recognition as an asset, be
carried at its cost less any accumulated depreciation and accumulated impairment losses
 In terms of the revaluation model, an item of PPE will, after initial recognition, be
carried at the revalued amount, provided its fair value can be measured reliably.
 Revaluations must be done on a regular basis to ensure that the carrying amount of the
asset at end of the reporting period does not differ substantially from the fair value at end
of the reporting period.

MODEL TREATMENT IMPACT ON FINANCIAL


STATEMENT
Cost Model Asset carried at cost – accumulated Lower volatility in balance sheet
depreciation – impairment

Revaluation Model Asset carried at fair value (with regular Higher asset values (if fair value > cost)
revaluations)

PART 5 PRACTICAL /WORKED/SOLVED EXAMPLES


ABC Ltd. buys machinery for $100,000 on Jan 1, 2023. Additional costs:
 Installation: $5,000
 Delivery: $2,000
 Administration cost $2500
 Expected useful life: 10 years
 Residual value: $10,000
 Depreciation method: Straight-line

Required
What is the cost of the assets to be recognised in the PPE register of ABC and calculate
the amount to be charged in the Income Statement relating to the consumption of
economic benefits embodied in the asset for the period 2023

Therefore the cost of the PPE is calculated as


Purchase price ($100000) +Installation cost ($5000) +Delivery cost ($2000) =$107 000.
a) The cost of the PPE is calculated as
Purchase price ($100000) +Installation cost ($5000) +Delivery cost ($2000) =$107 000
JOURNAL ENTRY
Account Debit ($) Credit ($)

Machinery (PPE) 107 000

Bank/Cash 107 0

b) Amount Charged in the Income Statement for the consumption of economic benefits
(DEPRECITION CALCULATION)

Depreciable amount = Cost – Residual value = $107,000 – $10,000 = $97,000


Annual depreciation = $97,000 / 10 years = $9,700 (NB if the asset was during the
accounting period a Monthly Ownership was to be adopted)

Account Debit ($) Credit ($)

Depreciation expense 9 700

Accumulated 9 700
depreciation/Income
Statement

PART 6: DERECOGNITION CRITERIA

PPE is removed from the books when:


- Sold
- Scrapped
- No future economic benefits expected

PART 7: DISCLOSURE REQUIREMENTS


IAS 16 mandates disclosures, including:
- Accounting policy (Cost or Revaluation model).
- Gross carrying amount and accumulated depreciation.
- Depreciation method and useful lives.
- Revaluation details (if applicable).
- Impairment losses (if any).
- Restrictions on title (e.g., pledged assets).

PART 8: TAX EFFECTS/ASPECTS


Deferred tax implications may therefore arise because of differences in:
 the dates from which depreciation and wear-and-tear are calculated (date
ready for intended use versus date brought into use);
 the use of different methods and rates to calculate depreciation, wear-
and-tear and building allowances, and the effect of subsequent changes
due to the annual reassessment of accounting allocations;
 the use of residual values and subsequent changes (e.g. revaluations) to
the values which are not recognised for taxation purposes;
 Revaluations may have an impact on the deferred tax balance hence
when an asset is revalued, the carrying amount of the asset
increases/decreases but the tax base of the asset remains the same.
 Deferred tax on PPE using the cost model is calculated on the difference
between the historical cost carrying amount and the tax base of an asset.
 The capital gain tax is calculated as the difference between the proceeds
on disposal of an asset and the ‘base cost’ of the asset as defined in the
Income Tax Act.
REFENCES
Alexander, D. Britton, A. and Jorissen, A. (2020). International Financial
Reporting and Analysis. Cengage Learning.
Epstein, B.J. Jermakowics, E.K. (2020). Wiley IFRS 2020 Interpretation and
Application of IFRS Standards. John Wiley and Sons.
Ernst and Young. (2023). International GAAP 2023. John Wiley and Sons
International Accounting Standards Board (IASB). (2023). IAS 16 Property
Plant and Equipment. IFRS Foundation.

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