PROPERTY, PLANT AND EQUIPTMENT (PPE)

1. PROPERTY, PLANT AND EQUIPTMENT (PPE) FRS 116/MASB 15: Property, Plant and Equipment FRS 104/MASB 14: Depreciation Accounting FRS 136/MASB 23: Impairment of Assets

2. REQUIREMENTS OF STATUTES AND ACCOUNTING STANDARDS • Companies Act, 1965 • Guidelines of the Securities Commission, 1995 • FRS 116,FRS 104 • In term of • Disclosure • Recognition, and • Measurement

3. Definitions (FRS 116/MASB 15) 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

4. RECOGNITION OF PPE • [11] 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

5. MEASUREMENT OF PPE • [18] 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

6. Example • Illustration 1 and 2 (page 205)

7. 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.

8. Example • Illustration 3 (page 207) • Illustration 4 (page 209) • Illustration 5 (page 209)

9. 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)

10. Example • Illustration 6 (page 211)

11. REVALUATION OF FIXED ASSETS (PPE)

12. When to revalued? • Depends upon the movements in the fair values of those items of PPE. • Annual basis; when the rate of price changes is very significant; or three or five years • When an item of PPE is revalued, then the entire class of PPE to which that asset belongs should be revalued

13. 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

14. 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. • This rule should be applied individually to each asset revalued. • No offsetting is allowed even within the same class of asset

15. 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

16. Example • Illustration 10 (page 223) • Illustration 11 (page 224)

17. 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 • Example; Illustration 12 (page 227)

18. IMPARMENT OF ASSETSFRS 136/MASB 23

19. 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

20. 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. • Where cash flow do not arise from the use of a single asset, impairment is measure for the smallest group of assets which generates income that is largely independent of the company’s other income. • The smallest group is referred to as a cash generating unit (CGU)

21. 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

22. 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

23. Treatment of impairment losses • Asset not previously revalued • An impairment loss should be recognised in the income statement in the year in which the impairment arises • 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)

24. example • Illustration 13 ( page 233) • Illustration 14 (page 236)- impairment test for cash generation unit (CGU)

25. Allocation of impairment losses • The loss should be set against the specific asset to which it relates • Where the loss cannot be identified as relating to specific asset, it should be apportioned within the CGU to reduce the most subjective value first, as follows: • First, to reduce any goodwill within the CGU • Then, to the unit’s other assets, allocated on a pro rata basis • However, no individual asset should be reduced below the higher of: • Its net selling price; or • Its value in use

26. Example • Illustration 15 ( page 238)

27. Task for Group 5 (Dam Dara Group) • You are to discuss what are the requirement of statues and accounting standards on construction contract in-term of recognition, measurement and disclosure. • The accounting for construction contract should accounted using the specific identification method. What do you understand by the method mentioned and in what circumstances do the enterprise activity could probably use the method. Task for Group 6 (Dare Group) To be presented in class on week 5 (Tuesday, 9 August)