PROPERTY, PLANT & EQUIPMENT

1. PROPERTY, PLANT & EQUIPMENT Recognition of property, plant & equipment Measurement at recognition Depreciation expense Reassessment of useful life and residual value Disposals Measurement after recognition

2. OUTCOMES • Explain the recognition criteria for property, plant and equipment • Measure property, plant and equipment at recognition • Calculate depreciation • Record the reassessment of useful life and residual value • Record the disposal of property, plant and equipment • Measure property, plant and equipment after recognition and process the accounting entries for a revaluation and impairment

3. RECOGNITION OF PROPERTY, PLANT & EQUIPMENT • Accounting framework definition of an asset • IAS 16, ‘Property, plant and equipment’ • Property, plant and equipment are tangible (physical substance) assets that • are held by an enterprise • for use in production or supply of goods or services • for rental to others • for administration purposes • are expected to be used during more than one period 

4. Asset definition • Resource (benefit) • Control – risk and rewards of ownership - economic substance over legal form • Past event – purchase of PPE • Probable future economic benefit – held by business for (see previous slide)

5. Recognition of property, plant & equipment . . . • Item of P, P & E recognised as an asset if • probable future economic benefits • cost measured reliably • Entity evaluates all costs associated with items of P, P & E at the time they are incurred. Includes costs incurred • Initially to acquire item • Subsequently to replace part of it or service it • Costs of day to day servicing recognised as an expense when incurred 

6. Trade discount Cost of P, P & E Purchase price Nonrecover-able purchasetaxes Other costs - = + + • Site preparation • Delivery & handling • Installation costs • Net costs of testing • Professional fees MEASUREMENT AT RECOGNITION - Elements of cost • An item of property, plant and equipment should be measured initially at cost + Import duties • Recognition of costs in carrying amount ceases when item is in location and condition necessary for it to be operated in the manner intended management

7. Interestexpense Total payments Cash priceequivalentP, P & E = - MEASUREMENT AT RECOGNITION - Measurement of cost • Cost of item of P, P & E is cash price equivalent at recognition date • If payment deferred beyond normal credit terms,

8. DEPRECIATION EXPENSE • The use of an item of P, P & E represents a consumption of the benefits inherent in the asset • Relevant terminology • Depreciation • Depreciable amount • Useful life • Residual value • Carrying amount

9. Depreciable amount, depreciation period, useful life and carrying amount • Example • Cost : R120 000 • Residual value : R15 000 • Estimated useful life : 4 years • Straight line method • Purchased 01/04/X5 • Available for use from 01/05/X5 • Used from 01/06/X5 • Year end 31/12/X5

10. Depreciable amount, depreciation period, useful life and carrying amount . . . • Depreciable amount • Allocated on systematic basis over useful life • Depreciation period • Begins when asset is available for use (location and condition capable of operating in manner intended by management) • Ceases when asset is derecognised

11. Depreciable amount, depreciation period, useful life and carrying amount . . . • Useful life • Future economic benefits consumed through use of the asset • Other factors to take into account to determine useful life • Carrying amount • As economic benefits are consumed, carrying amount is reduced by charging depreciation expense • Carrying amount represents future benefits yet to be consumed as depreciation • Depreciation charge is made even if fair value exceeds carrying amount

12. Methods of depreciation • Straight-line method • Depreciation expense = Cost - residual value Useful life • Diminishing balance method • Depreciation expense = Carrying amount x % rate • % rate = (1 - nr/c) • Units of production method • Depreciation = Depreciable X Output in periodexpense amount Total estimated output

13. Accounting entries • For presentation, the original cost and related accumulated depreciation are shown separately on the SOFP Dr Depreciation expenseCr Accumulated depreciation • Accounting equation expanded to accommodate accumulated depreciation A = Provisions + L + OENoncurrent + Current = Accumulatedassets assets Depreciation

14. Depreciation of components • Each part of an item of P, P & E with a cost significant in relation to the total cost is depreciated separately • Separate but significant parts may have same useful life and depreciation method – grouped together for depreciation purposes • After significant parts identified, remainder of the non-significant parts are grouped as a depreciable component

15. REASSESSMENT OF USEFUL LIFE • Useful life of property, plant and equipment needs to be reviewed periodically • if expectations are significantly different from original estimates • depreciation charge for current and future periods is adjusted • Revised depreciation expense calculated as Carrying amount - residual value Remaining useful life

16. DISPOSALS • Four steps to follow when accounting for disposal of a non-current asset • cost eliminated as an asset • accumulated depreciation eliminated as a provision • proceeds on disposal recorded • profit or loss recorded Proceeds on disposal - Carrying amount = Profit / loss

17. MEASUREMENT AFTER RECOGNITION • Initially measured at cost • IAS 16 provides two possible measurement treatments • Cost model • Revaluation model

18. Cost model • Property, plant and equipment is carried at • Costless • Accumulated depreciation

19. Revaluation model • Property, plant and equipment is carried at revalued amount (Fair value at revaluation date - subsequent accumulated depreciation) • Fair value is amount for which an asset can be exchanged between knowledgeable willing parties in an arms length transaction • On revaluation • accumulated depreciation eliminated against cost • asset restated to revalued amount • surplus credited directly to equity in a revaluation surplus a/c

20. Impairment of assets • IAS 36, ‘Impairment of assets’ • Objective of IAS 36 is to ensure that an enterprise’s assets are not overstated • If carrying amount > recoverable amount, • carrying amount will not be recovered • asset is impaired, and an impairment loss must be recognised

21. Impairment of assets . . . • Recoverable amount is greater of • Fair value less costs to sell • Value in use • Fair value less costs to sell • Amount obtainable from sale of asset in arms length transaction less costs of disposal • Value in use • PV of estimated cash flows from continuing use of asset and from disposal

22. Impairment of assets ... • Enterprise assesses external and internal factors that may indicate impairment • Accounting treatment • Dr Impairment expenseCr Accumulated impairment • Cost model • CostlessAccumulated depreciationlessAccumulated impairment • Revaluation model • Revalued amountlessSubsequent accumulated depreciationlessSubsequent accumulated impairment