代写ACCG224 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

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ACCG224 – Session 2, 2016 – Week 4

ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

Readings (BEFORE the lecture!)

ACCG224 textbook:

Øpp. 103-147

qAdditional resources (available on iLearn):

ØTechnical summary of IAS 16

Please note:
The lectures will not strictly follow these slides. It is expected and required that you know the contents of the readings BEFORE the lecture. Consider these slides as a summary and guideline for the lectures (and later for your revision) where we will have more examples and discussions around the topics.
Also, this week’s slides have blanks within certain examples. It is a good exercise to try to fill the blanks BEFORE the lecture and compare your attempts with the solutions discussed in the lecture.

qLearning objectives

1.Understand the nature of property, plant and equipment (PPE);

2.understand the criteria for the initial recognition of PPE;

3.understand how to measure PPE on initial recognition;

4.explain the alternative ways, in which PPE can be measured subsequent to initial recognition;

5.understand the nature and calculation of depreciation;

6.explain and apply the cost model of measurement;

7.explain and apply the revaluation model of measurement;

8.understand the factors to consider when choosing which measurement model to apply;

9.account for derecognition.

qRelation to weeks 1, 2 and 3

qConceptual framework (week 1): general principles about

Ødefinition,

Ørecognition and

Ømeasurement

of assets and liabilities.

qNow we look at specific accounting standards in relation to a particular type of assets:

Øproperty, plant and equipment (PPE) (AASB 116).

qIncluding tax implications (AASB 112; see week 3).

qOverview AASB 116:
Property, Plant and Equipment (PPE)

qDefinition

qInitial recognition of an asset

qSubsequent measurement:

ØDepreciation:

allocating the depreciable amount of a non-current asset over the asset’s expected useful life;

factors that must be considered in determining the useful life of a depreciable asset;

various approaches (straight-line, sum-of-digits, declining balance, production basis) for this allocation;

ØCost Model

ØRevaluation Model

qDerecognition

qDisclosure requirements

qThe nature of PPE

qAASB 116 defines PPE as:

Øtangible items;

Øwith a specific use within the entity;

Øthat are expected to be used during more than one period (ie. they are non-current in nature).

qAASB 116 specifically excludes:

Øassets held for sale – AASB 5

Øbiological assets – AASB 141

Ømineral rights/reserves – AASB 6

qFor some purposes, PPE is divided into classes, e.g.

Øland, buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office equipment.

qInitial recognition of PPE

qCost recognised as an asset if:

Øit is probable that economic benefits will flow to the entity, and

Øthe cost can be reliably measured.

qWhere future economic benefits are not expected to flow to the entity, costs incurred should be expensed.

qComponent parts (with different useful lives) are required to be separately accounted for:

Øfor example, an aircraft:

the engine, frame and fittings of an aircraft are likely to have different useful lives.

qInitial measurement of PPE

qPPE is initially measured at cost, which includes:

Øpurchase price (at fair value);

Ødirectly attributable costs required to bring the asset to the location and condition necessary for it to operate;

Øborrowing costs (AASB 123);

ØInitial estimate of costs of dismantling, removing the item or restoring the site.

qDirectly attributable costs

q‘Directly attributable costs’ include

a)costs of employee benefits arising from the construction or acquisition of the item of property, plant and equipment;

b)costs of site preparation;

c)initial delivery and handling costs;

d)installation and assembly costs;

e)costs of testing whether asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (e.g. samples);

f)professional fees

qMeasurement subsequent to initial recognition

qAASB 116 allows a choice of two possible measurement models:

Øcost model;

Ørevaluation model.

qAccounting policy choice of this decision based primarily on relevance of information.

qThe policy that is chosen must be applied to a whole class of assets.

qMay change policy, but only if it results in reliable and more relevant information.

qUnder both models, PPE with a limited useful life need to be depreciated.

qDepreciation – fundamentals

AASB 116 includes the following definitions:

qDepreciation:

Øthe systematic allocation of the depreciable amount of an asset over its useful life.

qDepreciable amount:

Øthe cost of an asset less its residual value (or other appropriate amounts substituted for cost – eg. fair value).

qResidual value:

Øthe estimated value of the asset at the end of its useful life to the entity.

qUseful life:

Øthe period over which an asset is expected to be used by an entity/the number of production (or similar) units expected to be obtained by the entity.

qDepreciation – fundamentals (cont’d)

qDepreciation is an allocation process designed to reflect the decline in the value of the asset in a pattern consistent with the consumption of economic benefits by the entity.

qAASB 116 does not specify how this allocation process should be undertaken.

qVarious depreciation methods are used in practice. Common methods are discussed on the following slides.

qPlease note that depreciation applies to both the cost and the revaluation model!

qDepreciation – common methods

qStraight-line method:

Øassumption: asset used evenly throughout its life;

Øthis method is appropriate when benefits to be derived from the asset are expected to be evenly received throughout the asset’s useful life;

Øannual depreciation amount:

qDepreciation – common methods (cont’d)

qDiminishing balance method:

Øassumption: more benefits received in earlier years of the life of asset;

Ødepreciation expense is calculated on the asset’s opening written-down value x depreciation rate;

Øwritten-down value:

qDepreciation – common methods (cont’d)

qUnits of production method:

Øbased on expected use or output of asset;

Ødepreciation expense for the period is calculated as:

qDepreciation – common methods (cont’d)

qSum-of-digits method:

Øthis method is appropriate where useful life might be related more to production output than time and when economic benefits expected to be derived are greater in the early years than later years

Ødepreciation expense:

(cost - residual value) is multiplied by successively smaller fractions to calculate depreciation expense;

numerator in fraction - changes each year, and is the years remaining of the asset’s useful life at the beginning of the period;

example for the 2nd year if useful life = 5 years:

qDepreciation – useful life

qManagement should consider the following factors when estimating the useful life of an asset:

Øexpected use;

Øphysical wear and tear;

Øtechnical or commercial obsolescence;

Ølegal or similar limits.

qUseful life is subject to periodic review.

qLand is not subject to depreciation as it does not have a limited useful life.

qThe cost model

qAASB 116 requires that assets are carried at cost less any accumulated:

Ødepreciation;

Øimpairment losses.

qRepair and maintenance costs are expensed as incurred, not capitalised.

qCapitalisation requires (at time of expenditure) increased probable future economic benefit:

Øfor example, replacement of car engine.

qThe revaluation model - fundamentals

qAs an alternative to the cost model AASB 116 allows the revaluation model to be used for classes of assets.

qRevaluation: adjustment of PPE’s carrying amount so that it reflects its current fair value.

qMeasurement basis is fair value (FV).

qFrequency of revaluations is not specified, but must be performed with sufficient regularity such that the carrying amount of assets is not materially different from their FV.

qRevaluation performed on a class basis.

qThe revaluation model – accounting on an asset-by-asset basis

qThe revaluation model:
revaluation increments

qIncrements are

Øcredited to equity: “asset revaluation surplus” (ARS) account;

Øthrough other comprehensive income (OCI);

Ønot part of profit/loss (P&L) for the year.

qThe revaluation of plant A would be recorded as follows (30/6/2015):

Dr Accum. depreciation 100,000 *
Cr Plant 50,000 **
Cr Gain on revaluation (OCI) 50,000 ***

qThe revaluation model:
revaluation increments (cont’d)

qAASB 116 requires the tax effects of the revaluation to be considered and the ARS account to be recognised net of the resulting tax effect.

qThis is achieved by debiting a special type of income tax expense as part of other comprehensive income (OCI) and crediting a deferred tax liability (DTL).

qAn upwards revaluation of an asset creates a taxable temporary difference (TTD) leading to a deferred tax liability (DTL).

qFor plant A this would be calculated as:

CA – TB = TTD x 30% = DTL
150,000 – 100,000 = 50,000 x 30% = 15,000

qThe revaluation model:
revaluation increments (cont’d)

qThe tax effect for plant A would be recorded as follows (30/6/2015):

Dr Income Tax Expense (OCI) 15,000
Cr Deferred tax liability 15,000

qCombined entry:

Dr Accum. depreciation 100,000
Dr Income tax expense (OCI) 15,000
Cr Plant 50,000
Cr Deferred tax liability 15,000
Cr Gain on revaluation (OCI) 50,000

qThe OCI accounts are then closed to establish the ARS (net of tax):

Dr Gain on revaluation (OCI) 50,000
Cr Income tax expense (OCI) 15,000
Cr Asset revaluation surplus (ARS) 35,000

qThe revaluation model:
revaluation decrements

qThe accounting treatment of a revaluation decrement is as follows:

Øimmediate recognition of an expense (through P&L);

Øthe tax-effect entry is done later together with all other differences between accounting profit and taxable income (see week 4 topic).

qThe revaluation of Plant B would be recorded as follows (30/6/2015):

Dr Accum. depreciation 40,000 *
Dr Loss on revaluation (P&L) 20,000 **
Cr Plant 60,000 ***

qThe revaluation model:
reversing previous increments

qA decrement reversing a previous increment eliminates any ARS before recognising an expense.

qIn relation to plant B, assume that a gross revaluation increment of $10,000 had been made back in the financial year 2013/14.

qThe revaluation model:
reversing previous increments (cont’d)

qThe revaluation of plant B would be recorded as follows (30/6/2016):

Dr Accum. depreciation 40,000
Dr Deferred tax liability 3,000
Dr Loss on revaluation (OCI) 10,000
Dr Loss on revaluation (P&L) 10,000
Cr Income tax expense (OCI) 3,000
Cr Plant 60,000

qThe revaluation model:
reversing previous increments (cont’d)

qThe OCI accounts are then closed to adjust ARS (after tax) for the decrement (30/6/2015):

Dr Income tax expense (OCI) 3,000
Dr Asset revaluation surplus (ARS) 7,000
Cr Loss on revaluation (OCI) 10,000

qThe revaluation model:
reversing previous decrements

qAn increment reversing a previous decrement is recognised through profit/loss (P&L).

qAny excess is recorded as other comprehensive income (OCI) and increases ARS (net of related tax effects).

qIn relation to plant A, assume that a revaluation decrement of $15,000 had been made in the financial year 2013/14.

qThe revaluation model: reversing previous decrements (cont’d)

qThe revaluation of plant A would be recorded as follows (30/6/2015):

Dr Accum. depreciation 100,000
Dr Income tax expense (OCI) 10,500
Cr Plant 50,000
Cr Gain on revaluation (P&L) 15,000
Cr Gain on revaluation (OCI) 35,000
Cr Deferred tax liability 10,500

qThe revaluation model: reversing previous decrements (cont’d)

qThe OCI accounts are the closed to establish the ARS (net of tax; 30/6/2015):

Dr Gain on revaluation (OCI) 35,000
Cr Income tax expense (OCI) 10,500
Cr Asset revaluation surplus (ARS) 24,500

qThe revaluation model:
depreciation of revalued assets

qWhen an asset is revalued, the depreciation charge to be recorded over the remaining useful life of the asset is recalculated by reference to the fair value of the asset.

qThe revaluation model:
comprehensive example

qViborg Ltd purchased a new machine on 1 July 2013 for $79,600 cash. Transport and installation costs of $8,400 were paid on 5 July 2013. Useful life and residual value were estimated to be 10 years and $3,600, respectively. Viborg Ltd depreciates machines using the straight-line method to the nearest month, and reports annually on 30 June. The company tax rate is 30%.

qOn 30 June 2014, the company adopted the revaluation model to account for the machine. An expert valuation was obtained showing that the machine had a fair value of $76,000 at that date. Remaining useful life and residual value were estimated to be 8 years and $2,400, respectively.

qThe revaluation model:
comprehensive example (cont’d)

qOn 30 June 2015, the machine's carrying amount was remeasured to its fair value of $72,000. Remaining useful life and residual value were estimated to be 8 years and $4,000, respectively.

qRequired

ØPrepare general journal entries to record the transactions and events for the period 1 July 2013 to 30 June 2015 according to AASB 116, including the journal entries required to account for all future tax consequences (deferred taxes) according to AASB 112.

qThe revaluation model:
comprehensive example (cont’d)

01/07/2013
Dr Machinery 79,600
Cr Cash 79,600
05/07/2013
Dr Machinery 8,400
Cr Cash 8,400
30/06/2014
Dr Depreciation expense 8,440
Cr Acc./Depr. - Machinery 8,440

Dr Acc./Depr. – Machinery 8,440
Cr Machinery 8,440

qThe revaluation model:
comprehensive example (cont’d)

30/06/2014 (cont’d)
Dr Loss on revaluation (P&L) 3,560
Cr Machinery 3,560

30/06/2015
Dr Depreciation expense 9,200
Cr Acc./Depr. - Machinery 9,200

Dr Acc./Depr. – Machinery 9,200
Cr Machinery 9,200

qThe revaluation model:
comprehensive example (cont’d)

30/06/2015 (cont’d)
Dr Machinery 5,200
Cr Gain on revaluation (P&L) 3,560
Cr Gain on revaluation (OCI) 1,640

Dr Income tax expense (OCI) 492
Cr DTL 492

Dr Gain on revaluation (OCI) 1,640
Cr Income tax expense (OCI) 492
Cr Asset revaluation surplus - Machinery 1,148

qThe revaluation model:
transfers from ARS

qTransfers may be made from the ARS in the following circumstances:

ØWhen a revalued asset is derecognised (ie scrapped or sold) → the balance in the ARS may be transferred to retained earnings.

ØWhen a revalued asset is being depreciated → the ARS may be progressively transferred to retained earnings over the useful life of the asset.

ØBonus share issues may be made from the ARS

qChoosing between the models

qThere is a cost disincentive to adopt the revaluation model (Australian experience).

qCost model harmonises with U.S. GAAP.

qRevaluation model provides increased relevance & reliability.

qAccounting for gains/losses from derecognition

qNote: Assets classified ‘held for sale’ are treated according to AASB 5 → the following applies only to PPE which has not been classified as ‘held for sale’.

qGain or loss from derecognition of an item of property, plant and equipment is to be calculated as the difference between (AASB 116):

Ønet disposal proceeds (if any); and

Øthe asset’s carrying amount.

qDerecognition

Øthe point in time when an asset is removed from the statement of financial position (balance sheet):

when an asset is sold; or

when no future economic benefits are expected from an asset’s use or disposal.

qAccounting for gains/losses from derecognition (cont’d)

qExample:

ØA Ltd acquired a machine on 1 July 2012 for $50,000;

ØUseful life = 4 years; residual value = $10,000;

ØOn 1 July 2014 the machine was sold for $45,000.

qThe journal entries to account for the sale are:

Dr Cash 45,000
Cr Proceeds on sale 45,000

Dr Carrying amount of asset 30,000
Dr Accumulated depreciation 20,000
Cr Machine 50,000

The gain on sale is

qAccounting for gains/losses from derecognition (cont’d)

qWhen an revalued asset is sold, any resulting balance in the revaluation surplus (AASB 116)

Ømay be transferred directly to retained earnings;

Øcannot be transferred to profit/loss (i.e. the so-called ‘recycling’ is not allowed);

Øhence, for non-current assets under the revaluation model any gain on sale shown in profit/loss will be less than for assets under the cost model.

qDisclosure requirements

qFor each class of property, plant and equipment the following must be disclosed (AASB 116):

Ømeasurement basis used for gross carrying amount;

Ødepreciation methods used;

Øuseful lives or depreciation rates used;

Øgross carrying amount and accumulated depreciation at beginning and end of period;

Øreconciliation of carrying amount at beginning and end of period.

qDisclosure requirements (cont’d)

qThe required disclosures regarding asset revaluations
(AASB 116) are:

Øeffective date of revaluation;

Øwhether an independent valuer was involved;

Ømethods and assumptions applied;

Øextent to which fair values were determined, with reference to observable prices in active markets or recent market transactions;

Øfor each revalued class, the carrying amount if the cost model was used;

Øthe revaluation surplus, indicating the change for the period and any restrictions on distribution of the balance to shareholders.

代写ACCG224 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT