Property, Plant and Equipment

1
Property, Plant and Equipment

• IAS 16, IAS 23, IFRIC 1
• ARB 43, APB 21, APB 29, SFAS 34, SFAS 143, SFAS
  153, SFAS 154, FIN 30, FIN 47

2
Initial Recognition

• Comprises tangible assets held by an entity for
  use in productionexpected to be used for more
  than one period
• Initially recognized at cost directly
  attributable costs are included
• Interest on qualifying assets (building
  manufacturing plants, power generation facilities
  IAS 23) must be capitalized
• Training costs, start up and pre-operating costs
  are not included in the cost of the asset
• All of the above similarities between US GAAP
  and IFRS

3
Decommissioning Costs

• Cost of PPE includes estimated cost of
  dismantling and removing asset and restoring site
• Liability recognized as a provision (IFRS) asset
  retirement obligation ARO (US GAAP)
• AROs arising from inventory production added to
  PPE (US GAAP) added to cost of inventory (IFRS)

4
Decommissioning Costs

• Re-measurement of provision includes effect of
  changes in interest rates (IFRS provisions
  addressed in one standard IAS 37)
• Re-measurement of ARO includes effect of changes
  in interest rates only with respect to changes in
  estimates of future cash flows not all
  provisions require adjustments based on interest
  rates different standards address different
  provisions (US GAAP)

5
Depreciation

• Similarities between US GAAP and IFRS
• Depreciated in a systematic way over its useful
  life
• No specific method is required
• Depreciation charge included in statement of
  profit and loss
• Changes in useful life, residual value,
  depreciation method accounted for prospectively
  as changes in estimates

6
Depreciation

• Similarities between US GAAP and IFRS
• Greater disclosure requirements for change in
  depreciation method (US GAAP)
• Subsequent expenditures capitalized if it is
  probable economic benefits will flow to the
  entity
• Routine service charge is expensed

7
Depreciation

• Differences between US GAAP and IFRS
• Review all estimates and method used at each
  reporting date (IFRS)
• Review all estimates and method used whenever
  events or changes in circumstances indicate
  current estimates may not be appropriate (US
  GAAP)
• Component depreciation is required (IFRS)
• Component depreciation allowed but not required
  (US GAAP)

8
Revaluation

• Not permitted under US GAAP
• Revaluation of PPE allowed under IFRS
• All assets in the same class must be revalued
  selective revaluation not allowed
• Increase in carrying amount of asset
• If carrying amount increases, increase is
  recognized in comprehensive income under
  revaluation surplus
• Shall be recognized in profit or loss to the
  extent it reverses a revaluation decrease of the
  same asset previously recognized in profit or loss

9
Revaluation

• Decrease in carrying amount of asset
• If the carrying amount decreases, the decrease
  shall be recognized in profit or loss
• But first eliminate any revaluation surplus
  existing in equity, if any
• Revaluation surplus can be transferred to
  retained earnings when asset is derecognized
• Revaluation surplus can be transferred to
  retained earnings when asset is being used
  (difference in depreciation charge arising from
  using original cost versus revalued amount)

10
Impairment

• US GAAP
• Two part test Impairment exists if carrying
  value exceeds sum of future cash flows
  (undiscounted)
• Amount of impairment Difference between carrying
  amount and present value of future cash flows
• IFRS
• Impairment exists if carrying amount exceeds
  recoverable amount
• Recoverable amount is the higher of value in use
  (present value of future cash flows specific
  details addressed in IAS 36) and assets net
  selling price

11
Disposal

• Similarity between IFRS and US GAAP
• Difference between selling price and the
  carrying amount of the asset is gain or loss
• Potential difference if revaluation model is used
  in IFRS
• Attributable revaluation surplus can be
  transferred to retained earnings (IFRS)
• Not an issue under US GAAP

12
Revaluation exercise

• Clark Company owns a building that cost 800,000.
  The building has accumulated depreciation of
  200,000 at the end of 2 years when Clark
  revalues the building to its current fair value
  of 1,000,000.
• Ratio 600,000/800,000 0.75
• Question 1
• Provide the journal entry for revaluation of the
  asset and treatment of accumulated depreciation
  under the first method.
• Buildings 533,333
• Accumulated Depreciation- buildings 133,333
• Revaluation Surplus 400,000
• (Note 400,000/.75 533, 333)
• After this entry, ratio of carrying amount to
  gross amount is still 0.75 (1,333,333-333,333/1,33
  3, 333)
•  

13
Revaluation exercise

• Question 2
• Provide the journal entry for revaluation of the
  asset and treatment of accumulated depreciation
  under the second method.
• Accumulated depreciation 200,000
• Buildings 200,000
• Buildings 400,000
• Revaluation Surplus 400,000
• (After this entry Buildings 1,000,000
  accumulated depreciation 0)

14
Revaluation exercise

• Question 3
• Which method provides better information for
  financial reporting purposes and why? Your answer
  must be clear, concise and precise.
• First method can gauge ratio of carrying amount
  to gross amount can assess relative age of
  assets can estimate timing and amount of cash
  needed for asset replacements
• Second method significant reduction of
  information available for making decisions