Accounting For Property, Plant and Equipment in the implementation of Accrual Accouting

1. Accounting For Property, Plant and Equipment in the implementation of Accrual Accouting Seminar Kewangan dan Pengauditan Sektor Awam Pada 7 Ogos 2014 Di Hotel Avillion Legacy Melaka Anjuran UUM Unit Polisi dan Piawaian Pasukan Pelaksanaan Perakaunan Akruan Jabatan Akauntan Negara Malaysia

2. Content • Introduction • Recognition • Initial Measurement • Subsequent Measurement • Impairment • Derecognition • Challenges Property, Plant and Equipment

3. Introduction Property, Plant and Equipment

4. 1.1 COMPONENT OF Property, Plant and Equipment

5. Financial Position: Transition Accrual Acct. Modified Cash Acct. Current 2015 Current Assets Cash Non Current Assets Investments Current Liabilities Non Current Liabilities Consolidated Rev. A/C Net Assets / Equity Consolidated Loan A/C Consolidated Trust A/C

6. Statement of Changes in Net Assets/Equity and Notes to Accounts Accrual Accounting CRA CLA CTA Modified Cash Basis of Preparation Accounting Policies Statement of Changes in Net Assets/Equity Notes To The Financial Statements Current Note 1 Note 2 2015 Changes in Accounting Policies Reporting Period and Entity Statement of Changes in Net Asset/Equity (IPSAS1) Finance By: Standards that are not yet Effective and have not been Early Adopted Statement of Compliance Accumulated Surpluses / (Deficits) Reserves Judgments and Estimations Revaluation of Assets Summary of Significant Accounting Policies Available-for-Sale Financial Assets Trust Accounts

7. ACCOUNTING ENTITY and REPORTING PERIOD Federal Ministries Federal Departments Every Controlling Officer shall prepare its own Financial statements For the year ending 31 December Property, Plant and Equipment

8. Assets Property, Plant and Equipment

9. Definition of Asset How to determine control? Legal ownership The asset: (a) meets the definition of an asset (b) the amount can be measured reliably Assets are resourcescontrolled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity (MPSAS 1) Property, Plant and Equipment

10. Property, Plant and Equipment

11. PPE is tangible asset: Use for the production and rendering of goods and and for adminitrative purposes Use for more than one reporting period. (MPSAS 17) Property, Plant & Equipment (PPE) Property, Plant and Equipment

12. PPE • RECOGNITION • INITIAL MEASUREMENT • SUBSEQUENT MEASURUEMENT • DERECOGNITION Property, Plant and Equipment

13. RECOGNITION Property, Plant and Equipment

14. Property, Plant and Equipment

15. INITIAL MEASUREMENT When acquired Exchange transaction Measured at cost Non–Exchange Transaction measured at its fair value at date of acquisition e.g. Donation. Transitioning to A New Accounting Landscape

16. INITIAL MEASUREMENT Transitioning to A New Accounting Landscape

17. Property, Plant and Equipment

18. Property, Plant and Equipment

19. Accounting method • SUBSEQUENT MEASURUEMENT Property, Plant and Equipment

20. Accounting Method • SUBSEQUENT MEASURUEMENT Model PenilaianSemula Revaluation Model Surplus/Deficit Property, Plant and Equipment

21. Subsequent measurement of expenses Repair and maintenance (e.g. labor cost and consumables) • Increased in future benefits and service potential • Increased in useful life • Replacement of major component • SUBSEQUENT MEASURUEMENT • To be capitalized • To be Expensed Property, Plant and Equipment

22. RECOGNITION Property, Plant and Equipment

23. An asset under construction (‘AUC’) is an asset an entity is currently ‘constructing’, which is not yet being used for its final intended purpose • The cost of an AUC is determined using the same cost measurement principles above. AUC are not depreciated during the period of construction. • Asset under construction When the asset is ready for use, the AUC will need to be reclassified to its appropriate category of property, plant and equipment and commence depreciation. Property, Plant and Equipment

24. Depreciation is charged on a straight-line basis at rates calculated to allocate the cost of an item of property, plant and equipment measured at cost less any estimated residual value, over its remaining useful life. • For freehold land, it is not necessary to depreciate but for leasehold land, it shall be amortized over the lease period. The depreciation charge for the period is recognized in surplus or deficit. • Depreciation The depreciation charge for the period is recognized in surplus or deficit. Property, Plant and Equipment

25. Investment Property • Subsequent Measurement: • Fair Value Model • Measure at fair value unless the fair value is not reliably determinable on a continuous basis. • Gain or loss arising from the change in the fair value is recognized in the surplus or deficit for the period in which it arises. • ii. Cost Model (same as PPE) • Recognition criteria: • Initially recognized as an asset at cost when and only when: • it is probable that future economic benefits or service potential associated with the investment property will flow to the entity; and • the cost or fair value of the item can be measured reliably. • Initial Measurement: • At cost if acquired through exchange transaction or • At Fair Value if acquired through non-exchange transaction Property, Plant and Equipment

26. others • Impairment of assets shall be assessed at the end of each reporting period, • If, and only if, the recoverable amount/recoverable service amount of an asset is less than its carrying amount, • the carrying amount of the asset shall be reduced to its recoverable amount/recoverable service amount , • The impairment loss shall be recognized as expense, • Depreciation/amortization charge for the asset shall be adjusted in future periods to allocate the asset's revised carrying amount, less residual value, on a systematic basis over the remaining useful life.

27. others a. Cash-generating assets

28. Value in Use of a Cash-generating Asset the present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life others

29. Property, Plant and Equipment

30. others b. Non-Cash-generating assets

31. VALUE IN USE as the present value of the asset’s remaining service potential. present value of the asset’s remaining service potential is determined using any of the following three approaches, and depends on the availability of data and the nature of the impairment: Depreciated Replacement Cost Approach Restoration Cost Approach Service Units Approach

32. Depreciated Replacement Cost Approach In 1999, the City of Petaling Jaya purchased a new mainframe computer at a cost of RM10 million City of Petaling Jaya estimated that the useful life of the computer would be seven years, and that on average 80 percent of central processing unit (CPU) capacity would be used by the various departments. A buffer of excess CPU time of 20 percent was expected and needed to accommodate scheduling jobs to meet peak period deadlines. Within a few months after acquisition, CPU usage reached 80 percent, but declined to 20 percent in 2003 because many applications of the departments were converted to run on desktop computers or servers. A computer is available on the market at a price of RM500,000 that can provide the remaining service potential of the mainframe computer using the remaining applications. DEPRECIATED REPLACEMENT COST APPROACH a. Acquisition cost, 1999 10,000,000 Accumulated depreciation, 2003 (a × 4 ÷ 7 ) 5,714,286 b. Carrying amount, 2003 4,285,714 c. Replacement cost 500,000 Accumulated depreciation(c × 4 ÷ 7) 285,714 d. Recoverable Service Amount 214,286 Impairment loss (b - d) 4,071,428 Reduce to recoverable service amount

33. Restoration Cost Approach Physical Damage—School Bus Damaged in Road  In 1998, North District Primary School acquired a bus at the cost of RM200,000 to help students from a nearby village to commute free of charge. The school estimated a useful life of 10 years for the bus. In 2003, the bus sustained damage in a road accident, requiring RM40,000 to be restored to a usable condition. The restoration will not affect the useful life of the asset. The cost of a new bus to deliver a similar service is RM250,000 in 2003. Evaluation of Impairment  Impairment is indicated because the bus has sustained physical damage in the road accident. Impairment loss using the restoration cost approach would be determined as follows: DEPRECIATED REPLACEMENT COST APPROACH a Acquisition cost, 1998 200,000 Accumulated depreciation, 2003 (a × 5 ÷ 10) 100,000 b Carrying amount, 2003100,000 c Replacement cost 250,000 Accumulated depreciation (c × 5 ÷ 10) 125,000 d Depreciated replacement cost (undamaged state)125,000 Less: restoration cost 40,000 e Recoverable Service Amount85,000 Impairment loss (b - e)15,000 Reduce to recoverable service amount

34. Service Units Approach In 1988, Subang Jaya City Council constructed a 20-story office building for use by the Council in downtown Subang Jaya at the cost of RM80 million. The building was expected to have a useful life of 40 years. In 2003, National Safety Regulations required that the top four stories of high rise buildings should be left unoccupied for the foreseeable future. The building has a fair value less costs to sell of RM45 million in 2003 after regulations came into force. The current replacement cost of a similar 20-story building is RM85 million. DEPRECIATED REPLACEMENT COST APPROACH a. Acquisition cost, 1988 80,000,000 Accumulated depreciation, 2003 (a × 15 ÷ 40) 30,000,000 b. Carrying amount, 2003 50,000,000 c. Replacement cost (20-story building) 85,000,000 Accumulated depreciation (c × 15 ÷ 40) 31,875,000 d. Depreciated replacement cost before 53,125,000 service units adjustment for remaining e. Value in Use of the building after the regulation came into force (d × 16 ÷ 20) 42,500,000 f. Fair value less costs to sell of the building 45,000,000 after regulation came into force g. Recoverable service amount (higher of e and f) 45,000,000 Impairment loss (b - g) 5,000,000 Reduce to recoverable service amount Higher of

35. Derecognition occurs when: i. sale or ii. Write off • Gains or losses arising from disposal of property, plant and equipment and Investment Properties are recognized in the statement of financial performance in the period in which the transaction occurs. • DERECOGNITION Any balance attributable to the disposed asset in the asset revaluation reserve is transferred to accumulated surpluses or deficits. Transitioning to A New Accounting Landscape

36. Transitioning to A New Accounting Landscape

37. Transitioning to A New Accounting Landscape

38. Challenges Cash Basis Budget. When Federal government migrates to accrual accounting in the year 2015, Budget (Outcome Based Budgeting) will be prepared on cash basis.

39. Challenges Concept of Consolidated Fund – Is the concept of Consolidated Fund still relevant ? Yes/No ?

40. Challenges

41. Challenges • Determining Opening Balance of Balance Sheet Items. • a big challenge Actions need to be done include: a) engaged the services of Service provider to draw up the strategy and to design the methodology to determine the opening balances. b) To compile the detail listing of PPE c) For PPE where the cost cannot be obtained, using deemed cost. d) Not necessary to recognize Heritage Asset as IPSAS 17 and IPSAS 31 do not require heritage assets to be recognised e) Military asset to be disclosed as a single line items in the Statement of Financial Position f) Transitional Policy

42. Challenges • iv. Staff Competency • Most of the Public sector employee dealing with finance and accounting have little and no knowledge about accrual accounting. • To address this issue, we need to train and retrain public • sector employeein area of accrual accounting and IPSASs at • all levels of the organization including the top management, • middle management and operation level in order to enhance • their knowledge, skill and competency.

43. Challenges • v. Involvement of Auditors • One of critical success factor in the implementation of accrual accounting is the involvement and support of the Auditors. • Involvements: • Government Accounting Standards Advisory Committee Accrual • Accounting Development Committee. • Transitional Policy • Engagement with Auditor General

44. Transitioning to A New Accounting Landscape