1 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. Contents IAS 16 PROPERTY PLANT & EQUIPMENT ............................................................................................................................................................

2 HOW TO JOURNALISE SALE OF PPE , REALISATION ACCOUNT ETC. .............................................................................................................. 2 SPECIAL NOTES ........................................................................................................................................................................................................ 3 SCOPE: ....................................................................................................................................................................................................................... 5 DEFINITIONS: ........................................................................................................................................................................................................... 5 NATURE OF PPE ....................................................................................................................................................................................................... 6 RECOGNITION:........................................................................................................................................................................................................................... 7 MEASUREMENT: .................................................................................................................................................................................................................... 11 INITIAL MEASUREMENT: ............................................................................................................................................................................................................11 SUBSEQUENT MEASUREMENT: ...............................................................................................................................................................................................18 c. COST MODEL:........................................................................................................................................................................................................................18 d. REVALUATION MODEL ....................................................................................................................................................................................................18 REVALUATION SURPLUS RESERVE: ........................................................................................................................................................................................21 DEPRECIATION: ...................................................................................................................................................................................................................... 25 IMPAIRMENT LOSSES AND COMPANSATION FOR LOSS: ........................................................................................................................................... 28 DERECOGNITION: .................................................................................................................................................................................................................. 29 TAX IMPLICATIONS:............................................................................................................................................................................................................... 30 DISCLOSURE: ........................................................................................................................................................................................................................... 32

2 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. IAS Property Plant & Equipment

Scan it in : Note: see the 1 page summary at back of GAAP book, pg184 - it is very good and perfect for this IAS 16 Property Plant & Equipment

1-REDO: see PPE chapter, redo income tax section in PPE chapter - not done yet!! 2-DO THE TABLE OF PPE IN NOTES AND AN FULL EXAMPLE COMPLETE NOTES: not done yet in DISCLOSURE 3- quickly shoot through ias 16 to see if you missed any points in there that are not maybe in textbook or something.

How to Journalise Sale of PPE , Realisation Account etc. a.

3 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

Special Notes 1. When you transfer any depreciation attributable(difference) to revaluation from REVALUATION SURPLUS ACCOUNT to RETAINED EARNINGS ACCOUNT at each years depreciation , you do not have to . the company can have a policy of only transferring this on sale/disposal ., BUT REMEMBER, what happens is the ret earn acc is higher because the depr. was never transferred to it in P&L rather it went to revl acc. which is also an equity account. So all you are doing is making reval acc more ( by taking out depr. and making ret earn less (by putting depr in) so equity stays at the same level its just a book entry. 2. SHORTENED NOTES : PPE: a. IFRIC 1 : IF DISMANTLING or DECOMMISIONING OR SIMILAR COSTS ARE RE-ASSESED: different for each cost model type: i. UNDER COST MODEL :per IFRIC 1 you just re-work out the Present Value of the changed dismantling costs, and if the amount in you books is different you change it by capitalizing the difference : so Building asset account CONTRA Provsion for dismantling etc account add/subtract the change in costs to the asset. Do NOT book this change as interstest expense , that is completely sepatarate- just keep the 2 apart and treat this change as capital, and the interest has nothing to do with it , it is a separate charge each year calculated from the balance of the Provision liability account. (If the interest rate changes and PV of dismantling costs also change what do you do?) yThese changes are disclosed as changes in estimate ALSO see IFRIC 1 for there should be testing of impairment when cost estimates go down due to higher discount rate or declining costs. ii. UNDER REVALUATION MODEL: increases in provision are set off against any revaluation surplus left in reval account: because this change is seen as just another REVALUATION - so debit other comprehensive income./decreases by crediting it. If it increases, you first Dr Reval.Acc, then when assets balance in reval.acc. is used up, only then do you take the REST to SCI profit&loss. See example 11.17 scanned in long notes. Then the interest each year is divided up between Reval Acc portion and Asset Account portion of the actual dismantling costs transferred to any of the 2. b. GROSS AND NET METHOD OF DOING A REVALUATION: REDO THIS FROM NOTES BELOW THIS IS OLD. i. GROSS METHOD: you adjust acc.depr. so that the CARRYING amount of the asset is equal to the new revaluated amount. 1. The Acc.Depr. must be adjusted by bring it to the level of : by recalculating depreciation from scratch for the asset, as if it was bought at the new revaluated amount when it was bought many years ago, and using the EXACT same depreciation rate as used from then till now(old rate) up to now. (as if it was always depreciated at that level.) (If you wish to change depreciation rate you must do it from now onwards , not in the past. )This method is normally used where you do not want to do a revaluation for some reason, so you take the current replacement value of the

4 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. asset, and make that your cost(bring the asset book cost to that level) .then you also adjust depreciation so your carrying amount is the new depreciated revalued rate a. Depreciation & Acc Depr & Reval. : this method never affects the depreciation line item in the SCI. Funny thing: for Acc Dep. You just add/less from acc dep account, and the CONTRA is the PPE asset account that will always be on the opposite side. It is a natural contra just make these 2 opposing entries in 1 journal entry. Then the reval. Account ONLY gets the balance of what the 2 entries (reval + acc dep) on one side need to balance out the PPE entry on other side: it is just some weird method they work out somehow notice acc dep is a CR and reval .acc. is also Cr. (can you say [acc dep. Contra depreciation in P/L for year] why must [acc dep & reval surp. CONTRA asset], why cant [reval.surp. CONTRA PPE asset account] alone. How does this funny method work?not sure.) 2. The PPE /asset account historical cost price in the books must be adjusted up/To get the new PPE level for asset account : if useful life = 10yr , used so far = 4 yr , then say 10/4 x (new revalued amount wanted) = what your Cost in asset account must be . So the asset account must be brought to this level by dr/cr CONTRA [ acc dep +balance use reval.acc), So the asset account and acc dep together will equal the revalued amount you want as CARRYING AMOUNT. You do this by [Dr/Cr Asset account CONTRA needed Acc Dep+ balance Revaluation Surpluss account ] , Reval.Surpluss.Acc. is a Other Comprehensive Income Account that is part of equity. (Revaluation Surplus) and shows as its VERY own column in the StChEq. a. Unisa does the PPE account by 1-writing out old ppe asset named Asset at Cost AFTER the old Acc.Dep. is reversed INTO it. Then 2- they write out the balance after .acc. dep. Reversal left in old asset account and write it into a new asset account called Asset at Revaluated Amount They ALSO do all the journal entries in ONE GO for this so add all the entries to PPE account into 1 line item, and do the same for other items in entry. (first do them singly on scrap paper, then combine them into a single entry afterwards- it should save some time too , only 1 narration!) This method is NOT used for the Gross method, because there the old asset account is just adjusted to the new level, not closed off like here.I dont think it is compulsory, you probly can keep old asset account in both cases, but this is UNISAS chosen way. ii. NET METHOD: 1. Acc Depr. :here you just write out the Acc. depreciation account into the PPE/asset account to get rid of it, back to 0, So Acc.Depr. starts again from scratch at zero with this method. 2. Adjust the PPE/ Asset account after writing Acc.Dep. into the Assets Account , bring the book value of the asset to the level of new revalued amount by : [Dr/Cr Asset account CONTRA Revaluation Surpluss account ] , which is a Other Comprehensive Income Account that is part of equity. (Revaluation Surplus) and shows as its VERY own column in the StChEq. a. Unisa does the PPE account by 1-writing out old ppe asset named Asset at Cost AFTER the old Acc.Dep. is reversed INTO it. Then 2- they write out the balance after .acc. dep. Reversal left in old asset account and write it into a new asset account called Asset at Revaluated Amount They ALSO do all the journal entries in ONE GO for this so add all the entries to PPE account into 1 line item, and do the same for other items in entry. (first do them singly on scrap paper, then combine them into a single entry afterwards- it should save some time too , only 1 narration!) This method is NOT used for the Gross method, because there the old asset account is just adjusted to the new level, not closed off like here.I dont think it is compulsory, you probly can keep old asset account in both cases, but this is UNISAS chosen way. iii. TIMING OF REVALUATIONS :(used for Net & Gross method both) a. If you revalue something at end of year, then depreciation for that year is calculated using the old value before revaluation of the asset.Only in the next year would depreciation be calc. using the new revalued value. Simple b. If you revalue at end of year, but wish to account fior revaluation as if done at begimning of year, then you must ADD afull years DEPRECIATION to the REVALUED amount at REVALUED amount s rate, not old rate of depreciation or anything. Eg 1200 = revalued

5 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. amount , useful life = 10 yrs, revalued at end yr 4, residual value =200. So to bring it back to begin yr 4, add back one yrs depreciation ( dont forget to minus the residual first]: [1200 -200] /10 = 100 = 1 yrs depreciation.So at begin yr 4 revalued amount is 1200+100=1300 . Now you can carry on with rest of revaluation calculations. c. If you specially decide to roll back a revaluation by using depreciation to begin of year for a revaluation done at end of ,so amounts can be depreciated & used from that date, it must be disclosed in the notes under accounting policy for revaluatuons for that asset class/etc. 1. COMPENSATION/insurance payout FOR IMPAIRMENT: a. If you get compensation for impairment or a insurance payout, it must be : i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed). ii. Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in profit/loss for the year. (I dont know if it goes to asset realsiation account or if it goes separately by itself ?) iii. Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats : 1. Notes to fin stats : a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in Disposals, or in own separate heading called PPE destroyed in hail storm any new ssset bough to replace it goes as per normal in Additions b. Profit Before Tax note: in the normal note called profit before tax : disclose i. 1: Amount of loss to item in hailstorm or whatever it was in own line i. 2: Amount of compensation received from insurance or wherever in own line Scope: 3 This Standard does not apply to: (a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; (b) biological assets related to agricultural activity (see IAS 41 Agriculture); (c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources); or (d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources. However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (b) (d). Definitions: 1. AN IMPAIRMENT LOSS is the amount by which the carrying amount of an asset exceeds its recoverable amount. 2. RECOVERABLE AMOUNT is the higher of an assets fair value less costs to sell and its value in use. 3. ENTITY-SPECIFIC VALUE is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.(does this incl repairs& maintenance ie cash outflows as well and can you set-off liabilities vs positive- what does it mean expects to incur when settling a liability?) 4. FAIR VALUE is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction. 5. RESIDUAL VALUE : amount entity would CURRENTLY (today, not in future! Note funny method here) obtain from disposal of the asset, after deducting estimated costs of disposal, if asset were today already at the age & condition expected at end of its useful life. (Ie: at todays prices not future prices) 1. ASSET: Definition : An Asset of an Entity is : i. A resource ii. that is under the control of the entity (control=restrict access to asset&power to obtain future economic benefits from it) iii. that will result in future economic benefits flowing to the entity iv. that originated as a result of past events

6 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. 6. Carrying amount: is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. 7. Useful life is: 8. (a) the period over which an asset is expected to be available for use by an entity; or 9. (b) the number of production or similar units expected to be obtained from the asset by an entity. 10. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. 11. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. (what is a residual value fair value or what its worthy at end of useful life) 12. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition orconstruction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment. 13. PROPERTY, PLANT AND EQUIPMENT are tangible items that: (a) are held for use in the 1- production or 2- supply of goods or services, for3- rental to others, or for 4administrative purposes; and (b) are expected to be used during more than one period. (the intention is clearly to generate revenue from these assets rather than to sell them.) Nature of PPE 2. PROPERTY, PLANT AND EQUIPMENT are tangible items that: (a) are held for use in the 1- production or 2- supply of goods or services, for3- rental to others, or for 4administrative purposes; and (b) are expected to be used during more than one period. (the intention is clearly to generate revenue from these assets rather than to sell them.) 3. ASSETS: Definition : An Asset of an Entity is : i. A resource ii. that is under the control of the entity (control=restrict access to asset&power to obtain future economic benefits from it) iii. that will result in future economic benefits flowing to the entity iv. that originated as a result of past events. 4. PROPERTY: normally land & buildings, although normally purchased as a unit, they are required to be recorded separately because of the difference in their nature. a. LAND: normally does not have a limited life and thus it is normally not depreciated. b. BUILDINGS: by contrast have a limited life and thus are depreciated. 5. PLANT: machinery & production line etc . 6. EQUIPMENT: generic term for all other categories of this nature which do not fall into plant or property.

7 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

RECOGNITION: 1. THIS is the ONLY MAIN RECOGNITION CRITERIA :PPE IS RECOGNISED AS AN ASSET IF : IAS 12. 7 The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: 1) IT SATISFIES THE DEFINITION OF AN ASSET 2) and IT SATISFIES THE GENERAL RECOGNITION CRITERIA FOR ALL ASSET/LIAB/EXPENSE/INCOME/EVENTS: (a) it is PROBABLE THAT FUTURE ECONOMIC BENEFITS associated with the item will flow to the entity; and ( it is not unsaleable and useless as well) (b) the cost of the item can be RELIABLY MEASURED 2. INITIAL & SUBSEQUENT COSTS: : 10 An entity evaluates under this recognition principle all its property, plant and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. a. After initial recognition: an asset is reflected at cost less: i. Acc. Depreciation and ii. Acc. Impairment losses. b. The same recognition rules below are applied in determining the costs at INITIAL recognition as well as SUBSEQUENT capitalization 3. RECOGNITION RULES a. COMPONENTS : THE IDENTIFICATION OF : forms the basis for the RECOGNITION and DERECOGNITION of the PPE. One should identify the different components of any asset( must identify significant parts of an asset ) upon recognition and depreciate each part separately if this is necessary.( eg helicopter engine/ rest of body ) Any components which depreciate at different rates can be treated as separate parts(assets) but one weighs up the economic benefit cost/vs/time of overdoing it with some minor parts it may just be a waste of time to overdo it too much per textbook..one could rather just derecognize them and capitalize the new parts when they are replaced. b. COMPONENT created by OPERATING LEASE: if a company aquires an ASSET which is already leased out in a Business combination it may be appropriate to depreciate the depreciate the favourable or unfavourable terms relative to current market price. see txtbk pg 164 redo the whole thing. i. What one does is : ONLY when you ACTUALLY buy an asset which is ALREADY leased out : ii. Calc. contract mnthly lease cost less current market mnthly lease cost : take the difference and get PV from PMT as the difference, I as interest and N as remaining yrs of lease.

8 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. iii. Then this PV is treated as a Component of the PPE and depreciated separately over life of lease- in EXACT same way as any other component : it is just subtracted from price paid for asset same as any other component eg helicopter engine . and treated the same way. iv. The logic is : You buy the asset thinking of Value of lease + Residual value after lease is over : and that is the value you are prepared to buy it for.. So you depreciate the 2 separatelyc. When you separate a item of PPE into its components, the [item + component ] still appears under the machines name in PPE table, ie there is not a separate column for separate components. I think, per lecturer, in the books it is also not shown separate, it is all under the main assets name. all you do is work out the depreciation as if the 2 were separate assets- then add it together and use it from there. The Acc Depr. :Helicopter account only gets 1 entry for TOTAL depr. , but can probably have 2 sub-accounts if you want.

d.

UNIT OF MEASURE : you can group things(all tools & dies) or take them individually one by one whichever you want.IAS 12 SPECIALLY SAYS IT DOES NOT specify this thus it is a matter of judgement which is best per group. e. ADDITIONS / REPLACEMENTS OF PARTS / SPECIAL MAINTENANCE (???how big/how much etc ) TO AN ASSET : these costs can be capitalized. f. DAY- TO DAY MAINTENANCE: general maintenance (even a service etc) is is not capitalized but written off as an expense in the Profit/Loss. This includes any small parts that replaced etc : This cost consists mainly of labour, consumables & small spare parts. g. REPLACEMENT OF COMPONENTS AT REGULAR INTERVALS: eg relining a furnace,seats&galley of aircraft&interior walls of a building eg office block. i. Depreciate major components separately : You depreciate each major component like these separately from the rest ii. In PPE table :only have 1 column for total asset, not a separate column per component part at all! you accumulate them in there. iii. Capitalize the replacement cost : When you replace a component, you can capitalize the replacement cost(just add new cost to old asset account so helicopter is now 200 not 150 since add new engine of 50) .(as long as the recognition criteria of it are met) and depreciate it separately from there on. The remaining carrying amount of the old component that was replaced shall be derecognized at this stage.(old one ).. note : (derecognition is the same process as a sale of an asset :treat it as a sale where you got paid 0 :ie transfer asset + acc.depr.+price=0 to Asset Realisation account, then get profit/loss and transfer to profit/loss on derecognition/sale of asset account-should be 0 if acc depr&asset balance) iv. If not initially recognized : If it is not possible to estimate the cost of the replaced component to derecognize it, (eg where the component has not been depreciated separately) then the cost of the new component (less pro-rata depreciation) may be used as an indication of what the cost of the replaced component would have been.(IAS 16.70) YOU MUST take off deemed depreciation to date from that new replacement cost before you derecognise that amount. The depreciation you take off the DEEMED COST must be at the rate you depreciated THE REST OF THE ASSET SO FAR AT not at the new rate( for a DEEMED COST) you are going to start depreciating the new replacement part at . (if seats life = 5 yrs,and bus life = 20 yrs, but you did not depreciate separately, now you relace seats, you first deduct depreciation at old rate (rate you used so far on rest of bus) over 20 yrs, but if the seats were replace 5 yrs after buying bus then only for 5 yrs of course but at 20yr rate ie cost/20 * 5 yrs= depreciation, from deemed cost of old seats to get their derecognition value-NOTE that the deemed depreciation is already in the books it need not be suddenly now

9 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. added to acc depr since the full cost was depreciated at this old rate all the yrs anyway you see!instead you just take out the deemed depre. Out of acc depr and put it in asset realisation acc!) see example below .Also note, from now on the new asset gets depreciated at its OWN rate, dont use the buss old rate for it anymore. Rem-??does it y/n - derecognition of componnents gets its own line in the PPE table in notes or can you include it with normal disposals, and capitalization? Must it also get its own line or can you include it with additions. ??? v. (derecognition is the same process as a sale of an asset :treat it as a sale where you got paid 0 :ie transfer asset + acc.depr. to Asset Realisation account, then get profit/loss and transfer to profit/loss on sales of asset account : so if you use the price of new components to derecognise a component that was not deprecoiated separately: 1. Dr Acc.Depr. CONTRA Cr Asset Realisation account (with depreciation at big asset rate on new component price 2. Dr Asset Realsiation Account CONTRA Cr Asset account ( with full price of new component) 3. Do a profit/loss on Reasiation Account.

h. MAJOR INSPECTIONS: certain assets need inspections for faults so the asset operation can continue efficiently. Eg aircraft every 5000hrs. i. Capitalized: once the inspection occours the cost is capitalized to the assets and depreciated separately to the next inspection. ii. De-recognised: the cost of last inspection is derecognized once the new inspection happens. (derecognition is the same process as a sale of an asset :treat it as a sale where you got paid 0 :ie transfer asset + acc.depr. to Asset Realisation account, then get profit/loss and transfer to profit/loss on sales of asset account) iii. Initial recognition estimate cost : the cost of an inspection is estimated at initial recognition of the asset and capitalised to the asset(long before it even happens- when still newly bought).this is depreciated over to the next inspection date, then derecognized) NOTE : you do not ADD this estimated cost of inspection that will only be happening in 5 years to the price you paid for the asset , rather you imagine you have a inspection thing as a part of the asset ( like a engine is part of a helicopter) and that inspection was brand new when asset was purchased , or only 2 yrs old since last inspection by previous owner etc. (so it does not need to be done right then) but will be depreciated over x years till the new inspection must be done. iv. ???How do you do this in the books?raise a new asset from scratch at current date and acc .depr and depr. For year , all in one go , and then sell it ie derecognize it? Or what . Also, must this depreciation show in P&L SCI ? or does it not show???ANS: it seems no, youony have 1 asset account, but you have many acc.depr. accounts,one for each component.Also , in eg Pastel, one can have sub accounts of a main asset account- so the sub accounts could each be a component , but the system accumulates them into the main single asset account auto. v. If last inspection not depreciated / or initially not estimated : use same method as for major component separate depreciations: If not initially recognized : If it is not possible to estimate the cost of the replaced inspection to derecognize it, (eg where the inspection has not been depreciated separately or it was not initially at purchase recognized as a separate component ) then the cost of the new inspection (less pro-rata depreciation) may be used as an indication of what the cost of the replaced inspection would have been.(IAS 16.70) YOU MUST take off deemed depreciation to date from the inspection cost before you derecognise that amount. The depreciation you take off the deemed cost must be at the rate you depreciated THE REST OF THE ASSET SO FAR AT not at a special new faster rate . (if inspection life = 5 yrs,and plane life = 20 yrs, but you did not depreciate separately, now you do inspection after first 5 yrs of life, you deduct depreciation at old rate (rate you used so far on rest of plane- NOTE that the deemed depreciation is already in the books it need not be suddenly now added to acc depr since the full cost was depreciated

10 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. at this old rate all the yrs anyway you see!instead you just take out the deemed depre. Out of acc depr and put it in asset realisation acc!)) so Inspection/20 * 5= depreciation, from deemed cost of old inspection to get its derecognition value) This answer amount must now be derecognised before the new inspection is capitalized (derecognition can get its own line in the PPE table in notes in fin stats it seems ) 1. NOTE: do NOT add this extra depreciation to the depreciation for the yr/ PPE table- you SUBTRACT IT : since we see it as having already been incl. each each year as part of depr. of original cost of machine-( rem you are derecognizing an already depreciated imaginary cost of servicing, at old rate of machine) vi. If inspection done at 18 mnths instead of original estimate of 2 yrs, and at a higher/lesser cost: 1. Wrong inspection cost estimate: :you just DE-Recognise any remaining portion of the initial wrong estimate of inspection costs not yet depreciatiated yet by date of new inspection. (for whichever reason any part is not yet depreciated at date of new inspection eg wrong initial estimate) -this gets rid of whats left of the old estimate.YOU DO NOT TRY AND CORRECT THIS OLD WRONG ESTIMATE/DEPRECIATION IN RESTROSPECTION just forget it. Then of course capitalize the new (different) inspection costs at new inspection date AND DONT FORGET to start depreciating them from the date of new inspection 2. Wrong estimate of time between inspections: if this is found out at date of new inspection(maybe a bit early etc) you do not change your method or time frame or useful life of old inspection estimate at all JUST CONTINUE DEPRECIATING it at the old usual rate you were using , then you just DE-RECOGNISE any part of the old undepreciated value of last inspection left at date of new inspection. If it is found out long eg 1 year before next inspection just use change in accounting estimate (IAS something) method. If it is all depreciated gone before next inspection alreadyjust forget it and leave it alone preferably, then of course capitalize the cost of the new inspection(like a fully depreciated asset)or use your Prof.judgement to decide. .( if old one was not depreciated fully, it will show as a cost in the P&L for bad management ( why did service not get performed later- waste of 2/3/4 yrs depreciation in one go!, etc.) vii. Method Of Showing Capitalised Costs In The PPE Table In The Notes : 1. Just add it in its own separate line under depreciation/derecognition/capitalization/revaluation etc Section of table (in the middle part of table) 2. Asset is NOT divided into components all components are in 1 machinery column as 1 figure not 2 columns and 2 figures. 3. IN PPE TABLE Must have a SEPARATE LINE FOR : a. DERECOGNITION (under disposals) b. CAPITALISATION OF INSPECTION COST/COMPONENTS: (under additions) c. Can probably put them together in 1 line for a company, but in exam keep them separate for marks I think.

i.

SMALL SPARE PARTS AND SERVICING EQUIPMENT: IAS 12. 8 Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment.[so if only used for 1 certain PPE thing , then you create a whole new asset class called specific spares and treat it as an asset.

11 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. j. SAFETY & ENVIRONMENTAL COSTS : i. If entity is OBLIGED to buy them (MUST) : SUCH ASSETS bought for safety & environmental purposes are not used to produce income, but entity is obliged to invest in them by eg law so entity can get economic benefit from other assets. BECAUSE OF THIS they do qualify as capitalisable as part of the PPE asset they get added to. (like a catalytic converter added to a chimney etc) ii. IF bought VOLUNTARILY : cost should be expensed unless either one of the following: 1. Increases the economic life of related asset that does bring in economic benefit OR 2. OR a constructive obligation due to eg industry practices (ie : NOT A LAW , BUT VERY CLOSE) 3. OR it increases the safety & environmental standards of a related PPE asset that MUST by law have special safety & environmental stuff. iii. Impairment : the original asset + this extra related environmental asset (presumabley in total and thus a cash generating unit) must in terms of IAS 36 be evaluated for impairment (higher carrying amount but still generates same cash flow) AS SOON AS IT IS CAPITALISED : AS A CASH GENERATING UNIT- due to whether air treatment plant of 500 can make a machine of 200 now be 700 as capitalised , OR if it must be impaired after this capitalisation down to eg 220 etc. iv. Capitalise costs to another asset : it seems you add the cost of these to the economically productive asset they go with if at all possible, unless somehow they cannot really be capitalized to another asset then they probably have to go alone

MEASUREMENT: 1. THE GENERAL MEASUREMENT RULE : 2. IAS 16. 15 An item of property, plant and equipment that qualifies for recognition as an asset SHALL BE MEASURED AT ITS COST. INITIAL MEASUREMENT: (1)COST OF PPE : Cost of PPE is cash /cash equivalent paid, or fair value of other consideration given at time of acquisition or completion of construction. (Capitalisation of costs CEASES as soon as asset is in condition and location to be capable of operating as mngmnt intends.) a. ITEMS TO BE INCLUDED IN COST: i. Purchase price incl. import duties +non-refundable purchase taxes AFTER deduction of trade discounts and rebates. If input vat cannot be claimed back ( if unregistered) it DOES form part of the cost. ii. Directly attributable costs for bring asset to location & condition to operate as intended eg: 1. Employee benefits (ANY and ALL) arising directly from construction or acquisition of item of PPE this INCLUDES any current employees who worked on the asset in this state at all- even for normal time they would have worked anyway (not just overtime etc, but all employee costs are included)

12 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. 2. Depreciation ; if any depreciation/amortization/impairment somehow qualifies to be Capitalised, if is minused from the depreciation in the SCI, and also minused from depreciation in the Profit before tax note , but it still shows in the depreciation line item in the PPE table, it is not minused there. Problem is, depr. only starts when asset is available for use. 3. Finance Costs/ Abnormal credit terms: if there are borrowing costs, or if supplier offers2 yrs to pay no interest, the interest portion must be separated from the price paid, and EITHER: capitalized if satisfies IAS Borrowing Costs , or else expensed. 4. Site preparation 5. Initial delivery & handling costs 6. Installation & assembly 7. Testing costs :ONLY IF TEST COSTS CAN BE SEPARATED FROM OPERATING COSTS , otherwise NO! But you MAY capitalize costs To see if functioning correctly AFTER DEDUCTING net proceeds (net means eg revenue less expenses like sales commission etc) of sale of samples from testing phase. They are eg : testing costs eg electricity , or raw material costs for products used to do testing etc; LESS revenue from sale of any samples made if at all.(INITIAL OPERATING LOSSES MAY NOT BE CAPITALISED-) If the testing phase is not quite JUST a test : ie if it is that the machine is to sink an operational shaft over 2 years and in this time we will see if it works properly- this is NOT incl. as capitalized costs-UNLESS one can say the test costs are separable eg 10% of operating costs over these 2 years ,then you could add it (per Descriptive book vertabim pg 212) If the first production run costs much more than normal for technical reasons this is also NOT capitalized.( Initial Operating Losses May Not Be Capitalisedthough) [very tricky and mixed up in all references need a lot seeing how accounting industry does it generally as well] 8. Import duties 9. Non-refundable taxes 10. Professional fees 11. Initial estimate of dismantling , removing, restoring site on which asset is located- IAS16.16 (c) & IFRIC1 and bais for Conclusions BC 13-16 of IFRIC 1 ) initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired OR as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

a. They are allowed to be capitalized ONLY if they SATISFY THE RECOGNITION REQUIREMENTS FOR A PROVISION if a provision may be raised per recognition criteria for a provision else they for part of the residual value calculation of item and are expensed when incurred. If NOT satisfy this requirement, then it auto gets SUBTRACTED from residual value of asset ,this will increase depreciation . So txtbk says : so whichever way is used, it will increase the yrly depreciation amount of the asset. b. If the law to restore site is passed after asset is in use already then this provision must be done as soon as possible after the law is passed. c. Residual value : see above sentence. d. Journals: Only the initial PV of future costs goes to capitalised : Asset CONTRA Provision for Dismantling . All finance chanrges every year to bring to FV do NOT get capitalised- they go ONLY to Finance Costs CONTRA Provision for Dismantling. As per textbook example below. e. FUTURE VALUE to be brought down to PV : if future value is given, say in 10 yrs, then it must be brought down to PV using a suitable discount rate: IF THEY GIVE YOU DISCOUNT RATE AFTER TAX: this yearly interest payment is an expense, so they mean the rate after

13 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. tax has been deducted due to this expense. BUT when you journalise the entry you have not got to the tax part yet, so you must journalise it at a rate BEFORE TAX. So if the tax rate is say 30% , take the rate after tax multiply by 100/70 = rate before tax that you must use. (?Ie original rate is 20%after tax, so100/70 X 20/100= +/-28% rate of interest before tax?) IF THEY GIVE YOU DISCOUNT RATE BEFORE TAX: this is the rate you use (not rate after tax) to work out the interest on the PV value that you must add to the PV value each year. f. DEPRECIATION ON PROVISION: The PV must be depreciated each year separate from asset Useful life ,over the PERIOD ECONOMIC BENEFITS ARE EXPECTED TO BE DERIVED FROM HAVING INCURRED THE RESTORATION COSTS (not necessarily time left till decommissioning). g. INTEREST on PV : The interest does not get capitalized, it is charged as an expense each year to Finance Costs : The INTEREST IS NEVER capitaised to inventory /cost of sales either ! So on purchase the structure you bought costs the company a discounted lump sum extra , on top of the purchase price, booked as a liability, for future dismantling costs and then every year after that it costs the company X rands of interest on this PV discounted value to keep the structure for another year .So every year you make a journal entry to charge interest to the company for that year,CONTRA Provision for dismantling liability account. The interest does not get capitalized, it is charged as an expense each year to Finance Costs in P&L , because it is seen as INTEREST like borrowing costs, but does not satisfy IAS borrowing costs. h. CAPITALISE TO INVENTORY or ZERO PRODUCTION PERIOD i. The PV must be depreciated each year separate from asset Useful life ,over the time left till decommissioning. This goes to depreciation account each year , but for a machine that makes inventory it goes to cost of sales/capitalized to inventory. ii. In any period where inventory is not produced this goes to depreciation and is not capitalised to inventory of course. i. IFRIC 1: DEALS WITH CHANGES IN DECOMMISSIONING / RESTORATION AND SIMILAR COSTS.: i. Note: IMPAIRMENT IAS: any change here esp. upwards is seen as an indication of impairment testing since the asset may not itself be worth that much after if you capitalize things to it. Also an interest rate change here even if down is also an indication of impairment so a test gets done with every change. ii. This is a change in estimate that must be accounted for prospectively from the date of the change : if estimate OR interest rate changes AND it must go in the Change in Estimate Note. iii. If interest rate changes (then you need to work out a new PV for TODAY and that capitalise any difference +/- to Asset CONTRA Provision for Dismantling iv. If estimate of dismantling/restoring itself changes you do the same thing as above. v. UNDER COST MODEL :per IFRIC 1 : 1. You just re-work out the Present Value of the changed dismantling costs, and if the amount in you books is different you change it by capitalizing the difference : so Building Asset account CONTRA Provsion for dismantling account 2. IF the asset value falls below ZERO the balance goes to P&L as an expense Change in Decommissioning Costs line heading since asset cannot become negative. vi. UNDER REVALUATION MODEL: per IFRIC 1 : 1. A change in the Reval Value may be an indication that asset should be revalued(& all assets in that class) at reporting date so it does not differ materially from fair value per txbk (so a change means impairment & revaluation must both be done) 2. ANY NORMAL REVALUATION OF ASSET (not provision) AFFECTS PROVISION AS FOLLOWS: an asset which includes such a provision : the depreciated value(carrying amount) of the Provision must be ADDED to the NRV -the new revaluation amount : so if the NRV revaluation of an asset is 1000 from old 800,

14 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. then any depreciated provision must be added to this : eg 1000 + 200 depreciated dismantling provision = 1200 new asset value.. All movements to OCI MUST be shown separately as a change in provision to OCI in their own line item in OCI Face of SFP and in OCI note. Increases in Provision : THIS WORKS LOGICALLY OPPOSITE BUT TO SAME SIDE AS COST MODEL : since asset is DR to incr. and Reval Res. Is Dr to DECREASE ( it is an equity account!) any increases in the provision go to Reval Res in OCI never to asset account. BUT they will decrease it by increasing the Reserve on the CR side! . Journal entry is still same sides ie: DR Reval.Acc CR Provision Acc : BUT the logic is just different since the Reval is a equity(CR) account just to note for why an . a. Note: for Increases in a Provision for restoration/Decomissioning an Asset funny thing to be remembered! : there is a rule that says if there is a zero balance on the CR side of the Reval Res then the Increase here must go to P&L: Decrease in Decomissioning Costs line item. This is somehow to make sure all amouts that go to P&L are the same for cost & reval methods both per book. So you can only get a CR balance in the Reval Acc if there was a DOWNWARDS REVALUATION or a DECREASE in the provision sometime before. So any increase in the provision may ONLY go to OCI if there was a DOWNWARDS REVALUATION/PROVISION before and there is a cr balance left in OCI Decreases in Provision: First Goes to P&L to balance out any PRIOR increase in the provision that went to P&L, the balance goes to REVAL RES where it will INCREASE the reval reserve on the CR side ( (works opposite to cost model- see Increases above) Note: IF the decrease in Provision falls below asset CARRYING AMOUNT OF ASSET AFTER Acc. Depr is added to asset value- : the excess goes immediately to P&L Decrease in Decomissioning Costs line item and not in OCI Reval Acc. so asset does not fall below zero balance.

3. 4.

5.

6.

7.

8.

9.

15 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

b. ITEMS TO BE EXCLUDED FROM COST 1. INITIAL OPERATING LOSSES MAY NOT BE CAPITALISED- eg losses incurred while demand is growing is NOT capitalised. 2. Costs of opening a new facility (new factory for machine? Or what) 3. Costs of introducing a new product : eg advertising & promotional costs 4. Costs of conducting business in a new location or new class of customer : eg staff training 5. Admin & general overhead costs ( ?/electricity used in testing phase?yes or no) 6. Costs incurred after capable of being brought into operation as intended by mngmnt: eg has yet to be brought into use or is used at less than full capacity. (say it cannot go at full capacity because it is not working properly, so they run at half capacity for both testing&profit ie trying to get it to go properly and it is loss/profit what about electricity because it is being tested and fixed still etc??) 7. Costs of re-organising /relocating part or all of entities operations. 8. If the testing phase not quite JUST a test : ie if it is that the machine is to sink an operational shaft over 2 years and in this time we will see if it works properly- this is NOT incl. as capitalized costs.But where it is a bit confusing , like in this example ,book says if it is possible to apportion the testing costsand say 10% of costs sre testing, then one can capitalize that part only, that is allowed. c. INCIDENTAL OPERATIONS i. 1-Income + 2-Expenditure from Operations relating to 1-construction or 2-development of PPE item, but that ARE NOT NEEDED (are extra )for bringing item to condition&location needed for (eventual/final/main) operation as intended by mngmnt, are not capitalized. Eg if land is rented out as a parking lot while waiting for construction, 1-the rent income & 2- related costs are not capitalized but sent to SCI as profit/loss. The difference to profit from a testing phase is that it is CALLED a testing phase NOT just that income was generated somehow. d. SELF CONSTRUCTED ASSETS i. Principles of IAS2 relating to capitalization of mnftring costs should be followed ii. Internal profits are eliminated in arriving at costs-even if you normally make & sell these assets you still cannot put own markup profit extra on say a sub-assembly from another factory division- on top of original cost and capitalize it. iii. Abnormal wastage of labour/materials/etc are not capitalized iv. See IAS23 borrowing costs for how interest may be added or not.

(2)DEFERRED SETTLEMENT 1. IAS 16. 23 :The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized in Finance Costs over the period of credit unless such interest is capitalised in accordance with IAS 23 Borrowing costs. 2. Means :So you can choose to either capitalize the interest costs as per IAS 23 , or you can treat it as a separate finance charge over the period of credit( there are certain conditions before you may capitalize interest per IAS 23 borrowing costs though eg: it may not be capitalized AFTER the asset has been brought into use +many more conditions, not easy to just choose this option).

16 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. 3. To calculate the interest part of the payment: you DO NOT SAY PRICE X interest rate = interest part NO, because what you want to get is a part of the purchase price which if X by interest rate = other part of purchase price, not if PRICE*interest rate but CAPITAL part*interest rate : 2 different things. So you say PRICE = CAPITAL + INTEREST RATE , so PRICE= 100% + interest rate(say 10%) so price = 110% and you want the interest part which is 10% , so you say 10/110 * PRICE = interest portion NOT 10/100*Price BUT 10/110 * price !!! not funny method here ( old story this method) 4. This means assets works the same as inventory purchased on credit terms. The credit interest charge component must be taken out of the Purchase price paid by you for the building , unless it already has been taken out and is treated separately anyway in the sale agreement. So if they give you 1 year to pay, it means YOU MUST TREAT IT as if they charged you interest at the current standard rate, and separate this interest from the price of the asset. 5. This is necessary since : the creditor must initially be accounted for at its fair value. Fair value is calculated by discounting all future cash flows at a market related interest rate, back to transaction date. Then interest charges are booked each month/year separately. 6. See example below for method(:In this example 11.8 in descriptive book, may one capitalize the interest payments?yes or no) this is where the price of a building has to be paid in 6 mnths, and deemed interest is exctracted etc from price.

(4)BARTER / EXCHANGE OF ASSETS (PPE ITEMS ) 1) Note: This is all simple below except: even if 1 machine is twice the price of the other = if cash flows from both are the same then there is no commercial substance and thus transaction must be measured at carrying amout of asset given up- NOT fair value of it even if it is very evident . per textbook- is this true? Pg. 16 own notes 2) It seems from the discussion below in IAS 16 , that the fair value (not carrying amount)of asset given up is used to measure But if fair value is not known or if the fair value of the asset received is more evident , then use that value instead. If no fair values are known, then use carrying amount of asset given up. If you have a problem with this because you say you made more of a profit/loss here than what comes out from this process, then you can have the new asset revalued in your books, AFTER you have booked it /initial recognition in the manner prescribed . 3) Per IAS 16 : VERTABIM AS PER IAS 16.24-28: 24 (what does whole last part here mean? Very mixed up)One or more items of property, plant and equipment may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The following discussion refers simply to an exchange of one non-monetary asset for another, but it also applies to all

17 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. exchanges described in the preceding sentence. The cost of such an item of property, plant and equipment is measured at fair value (using asset given up as guideline) unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. 25 An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if: (a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the assettransferred; or (b) the entity-specific value of the portion of the entitys operations affected by the transaction changes as a result of the exchange; and(ask why is transaction 4 in example pg 216 textbook not commercial- value is significant 5020=30000 difference, and fair value is higher so entty-specific is higher you can sell it for more if you want! ) (c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged. For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the entitys operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without an entity having to perform detailed calculations. 26 The fair value of an asset for which comparable market transactions do not exist is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that asset or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value. If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. 27 The cost of an item of property, plant and equipment held by a lessee under a finance lease is determined in accordance with IAS 17. 28 The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. 1. If CASH IS PART PAYMENT: if any cash exchanges hands as well in transaction , you just increase or decrease the relevant assets value by this amount as you go along ( so you journalise cash to bank & asset given in 2 lines s against CONTRA cash from bank & asset received in another 2 lines a. A GAIN OR LOSS (capital gains) is recognized as difference between fair value and carrying amount of asset given up, where applicable. b. EXCEPTIONS TO THE RULE :There are only 2 exceptions( below), in both cases the asset that is acquired is measured at the carrying amount of the asset given up, and no gain or loss is recognized. i. Exception 1: exchange transaction lacks commercial value-very tricky!( see IAS 16.25 for definition of ) ii. Exception 2:if fair values of both asset given-up & asset received cannot be measured reliably. c. NOTE : if receiving asset is more clearly/readily measurable than given asset, but given asset is still reliably measurable per IAS16.26 YOU STILL ONLY USE THE MORE CLEARLY EVIDENT ONE ie the one receiveds value is now used as cost price.( MORE CLEARLY goes before/above STILL RELIABLY MEASURABLE

18 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

SUBSEQUENT MEASUREMENT: a. An Entity cam choose to have PPE under either the cost or revaluation model. Whichever is chosen , one may only choose 1 method for every class of assets eg aircraft , one class can have cost model and another class can have revaluation model. b. The method chosen must be stated in the Measurement section of Accounting policy notes. c. COST MODEL: this is just the normal way as usual Cost less [Accumulated Depr. and Accumulated Impairment]- no weird ways of showing it in the books- just as usual the machine stays at cost value in its own account and the Acc.Depr. account & Acc Impairment account acts as ASSET CONTRA accounts to it- as per normal way of doing it nothing special. You just never do a revaluation for this method though- the cost can only go down or reverse up to original level with reverse impairments it can never go up above cost. d. REVALUATION MODEL: i. this method works exactly the same as the one above except for the the asset gets revalued regularly. ie it gets revalued. ii. Ias says can be up to 3-5 yrs between valuations. iii. There are 3 methods of valuation: , and for FAIR VALUE: use IFRS 13 Fair Value at highest and best use. 1. MARKET APPROACH: The current market value . 2. COST APPROACH: GRV and NRV methods = replacement cost 3. INCOME APPROACH: PV of future cash flows iv. INITIAL MEASUREMENT OF PPE: all initial measurement MUST be done at cost, ONLY THEREAFTER one can choose to either use the REVALUATION MODEL or COST MODEL v. Remember if the revaluation is done at year end- then depreciation is calculated using the OLD carrying amount at begin of year NOT the new revaluation- else the new reval must be moved back to begin of yr.(see heading below on this) vi. SIC 21: (land) the revaluation of non-depreciable assets is covered by SIC 21. vii. Rem: revaluation gets its own line in the PPE table in notes.under Revaluations : all Revaluations + Devaluations + Impairment up/down that went to Reval Reserve go in her . Only impairments that went to or were reversed in P&L get their own separate line . Revaluations that went to or were reversed in P&L still go in this line . You can block off these subheadings under this line to show them, but dont put them in their own lines . viii. REVALUATION MODEL MAY ONLY BE USED IF: if the Fair Value of the asset CAN be measured reliably. ix. PERIODIC REVALUATION RECOMMENDED FOR: 1. Ensure equity in Fin STATS is not understated (limiting ability to get loans) 2. Align amount of depreciation written off with fair value so bal sheet expenses are not way off. 3. Prevent take over of entity shareholders might think shares are worth less than they really are assets are undervalued. x. There are just 2 special rules: if you ever use this method for any asset: 1. All Assets In Same Category Get Same Treatment: all the assets in the same category eg: machines/boats/buildings etc, must get treated in the same way ie they must all be revalued or all done at cost you can have different classes use different methods.. 2. Done Again On Regular Basis: all these assets using this method must be revalued regularly.there are certain rules as to how soon after each other all assets in one class must get revalued etc see IAS 16.31-42 for details.3-5 yrs / all of 1 class done within short time period or on a rolling basis/main rule is : must not differ materially from fair value at reporting date- so 3-5 yrs for some / maybe every 1 yr for others etc. xi. GENERAL REVALUATION RULES 1. HOW TO JOURNAISE A REVALUATION ( OCI : ) a. IAS16.39 If an assets carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. b. 40 If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset . The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.

19 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. c. JOURNALs: see GRV and NRV below for JOURNALS. 2. DEPRECIATION: i. One can choose whether to Transfer the Depreciation on the Amount left Reval Acc to Ret Earn each year OR to only transfer it when asset is sold. 1. WHEN ASSET IS SOLD METHOD JOURNAL: here no Depr. is done on Reval Acc- it stays the same until it is sold, then the following entry: a. DR Reval Res 500 i. CR Retained Earnings 500 ii. Plus all the Realisation account Journals for any Asset. 2. TRANSFER DEPR EACH YEAR TO RET EARN: a. DR Reval Res 500 i. CR Retained Earnings 500 b. ii. If an asset is sold /depreciated one can transfer its balance from Reval. Acc. to retained earnings. This has no effect on Profit/loss on sale of asset account or Acc.Depr. account or any other account at all. It is merely a cosmetic type change from one reserve to another. It does not balance out against any leg of the sale as a contra entry at all. Rem: it is in equity like as if profit got transferred to retained earnings- then before next profit/loss comes into retained earnings account you move half the ret.earn. to some other reserve. But that reserve can just be transferred back anytime- it means nothing, it all falls in the class of owners equity, you are just moving between reserves in owners equity to show where funds came from/keep track of things basicly.

THE GRV (or RESTATEMENT): and NRV (or ELIMINATION) METHODS 1. GRV: GROSS REPLACEMENT VALUE a. The GRV method is the gross revaluation method comes from where revaluers use the current replacement price of a similar machine to revalue a old machine. All that need to be done then is to adjust the Acc.Depr. to bring that value down to what it would be for a machine in the condition and age of the old machine . So Cost of Asset is adjusted to cost of a new machine, and acc.depr. is adjusted up/down by depreciating new machine to current age of old machine, and just adjusting the acc. depr. account for it. b. PPE Table :Thus in this method in PPE table AccDep will be ABOVE zero and Cost will be at VALUE OF A NEW MACHINE . In this method the valuer must provide you with the New Cost of new machine. c. Thats why the journal entries are tailored to record it from these figures. d. Note: Watch out for residual value when calc all this: it must first be subtracted whenever a new depreciation is worked out. e. Remember : if NRV is 1000 after you have done 4 yrs depreciation already from a 10 yrs useful life with 100 residual value then Old Cross- calc method: (1000-100=900)- = 6yrs left ? = 10 yrs (100% or GRV) Therefore 10 x 900 / 6 =GRV will be 10/6 * NRV900= GRV1500 : you are saying you want to know the 100% of what the 6 yrs left amount (1000) still to be depreciated is.NOT 10/4 4 is gone , it is not the 1000 figure, the 6 is . AND DONT FORGET RESIDUAL IS ALLWAYS FIRST REMOVED IN A DEPR. CALC.. JOURNALS: Note: Important : The Reval Res is NOT old asset cost new asset cost! : it is old asset cost (new asset cost + NEW ACC DEPR.) i. SEE Scanned example from GAAP handbook below it is very clear and used unisa method (was pg 169.) ii. PPE (125000 -100000) DR 25000 1. ACCUMULATED DEPRECIATION: (50000-40000) CR10000 2. REVALUATION SURPLUS CR15000 2. NRV : NET REPALCEMENT VALUE: f.

20 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. a. Note: Watch out for residual value when calc all this: it must first be subtracted whenever a new depreciation is worked out. b. he NRV method is where the Valuer gives you the price of the asset in its current already depreciated condition - so it has need not be depreciated at all Acc.Depr should be zero.. c. Note that the PPE table will be different for both methods: Since you eliminate Acc Depr in NRV and the COST price is also lower- now at its depreciated value- in NRV. d. Acc.Depr is adjusted to zero first by moving it into Asset Account. Then Asset Account is adjusted +/- to show the NRV . e. PPE Table : Thus in this method in PPE table AccDep will be zero and Cost will be at revalued lower amount. f. If you use this method, valuer must provide you with the net replacement value. Thats why they made these type of easy journal entries below to record it from these figures in example in book. g. JOURNALS :SEE Scanned example from GAAP handbook below it is very clear and used unisa method 169.) h. JOURNALS: one can either just journalise the difference in each account to these accounts, OR , like UNISA do CLEAR OUT the Acc Depr and CLEAR OUT the Asset account completely against each other , then journalise the new figures into FRESH new clean accounts in 4 leg line entry.(this clean out method is only used for NRV by unisa, the top-up method is used for GRV does not matter which you use where will still get same result. But do it unisas way for easy marks- no mix ups! 3. A COMPANY BUYS PPE 4 YRS AGO AT 100 000.They depreciate it OVER 10 YRS ON STRAIGHT LINE BASIS. AT ENDOF YR THEY DECIDE TO REVALUE IT :

21 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

NRV one:

i)

REVALUATION SURPLUS RESERVE: b) The revaluation surpluss account is a funny thing- it does not come into equity via profit nor owners contributions,and once it is in equity cannot get out of equity by a transfer of loss to equity(retained earnings) , but only by issue of capitalization shares or specially going and writing out the portion of each asset in there due to depreciation or selling the asset. So this account must be handled specially and separately, and a record kept of all the things which make up a part of it and a record next to each asset which ever got revalued as to the portions involved- so you can control it . it is a absolute cow- so note c) Note : the Reval. Reserve does not need to be transferred on sale NOR for depreciation, it can be kept as is as a Capital replace ment reseve ,or even transferred to another reserve as asset replacement reserve when sold /depreciated etc. i) P.S movements between reval.surpl.and ret.earn for depreciation DO NOT SHOW in the OCI. They only show in the StChEq- so the only thing about revaluations that shows in the OCI is a current years revaluation ,A disposal DOES not SHOW and a derecognition does not show. d) It is viewed as part of equity.,AND It is shown as perhaps a non-distributable reserve in the StCHEQ in its own column. e) It is always unrealized and unused and once it gets realised it is gone and becomes something else . It can only either be 1-USED up or 2-REALISED, or it just stays there and does nothing. i) It may be USED only for:

22 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. (1) Capitalisation issues(how do you do this?? And how do youtake it out agin for sale/depreciation? If asset gets depreciated , how do you know which assets stuff was used for shaeres/ so which asset may you not write off depreciation throuhh thos account?) (2) OR to absorb subsequent revaluation deficits ( if reval. Of some asset goes down) (i) REVALUATION DEFICIT : THIS IS IF A REVALUATION is downward/less, then YOU MAY ONLY DECREASE THE REVALUATION ACCOUNT BY THE PORTION OF THAT ASSET THAT IS IN THE REVALUATION ACCOUNT FROM A PREVIOUS REVALUATION upwards. Any excess over whats left of a previous revaluation surplus for that one asset , or if that particular asset has no positive revaluation balance in this account at all , then that part goes directly to profit/loss account as a loss for the year- period cost/expense- YOU CANNOT MAKE A REVALUATION SURPLUSS ACCOUNT NEGATIVE EVER! (ii) Deficits of one item can not be set off against surplusses of another item, even if such items are from the same category (iii) IF AN ASSET IS REVALUED UPWARDS(a impairment reversal works same way), you first have to go check if that asset ever had a deficit revaluation that resulted in a loss going direct to the profit/loss section of SCI ( NOT Other Comprehensive Income decrease but a normal loss) due to the reasons in (i) above. Then you must first add a profit to the exact same value as that previous loss to the normal profit/loss in SCI so profit /loss account-(even if its 10 years later) , then only the balance may be credited as REVALUATION SURPLUS-this is some funny rule to stop cockeyed things happening with these matters! ii) It may be REALISED only by: (1) Disposal Immediatly (you sell the asset and (where / how do you keep a record of the revalued part of each asset so you can go back and revese this part of it in the books it once it gets sold?) (a) JOURNAL ENTRIES: once sold you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings Acc.. It SEEMS YOU ARE SAYING THE REVALUATION COULD HAVE BEEN A OWNER S CONTRIBUTION, LIKE HE GAVE AN ASSET EG: CAR, TO THE ENTITY- as if he did a CR owners equity AND DR asset account!. How that work I dont know Now you have a extra amount in here that comes from nowhere! (tax/profit/sale at aloss etc etc) but thats it- ANSW= see last sentence before this yellow.. (b) For De-Recognition: same, you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings Acc (c) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line! (2) Usage Gradually :Depreciation : this is before you sell the asset while its still yours, you say: (a) ONLY the difference in depreciation between what the old depreciation amount that year would have been and the new depreciation amount that year is allowed to be deducted from Revaluation Surplass Account from the amount that particular asset caused to be in there of course- no more. See example below. (b) Journal Entries: do your normal depreciation entries for the year- and include both amounts in it it is just You still write the full amount both amounts here- off to depreciation account and accumulated depreciation/. This funny transfer thing is a second entry completely unrelated entry(just equity movement thing !) (c) : lessen DR Reval Surplus. Acc. And move it into CR Retained Earnings. These 2 accounts are both equity accounts.so both increase on the CR side. You just move it out SURPLUS.. and into RETAINED.. (so it does not get used as an expense depreciation?? OR go through tax , I mean depreciation is an expense so it should decrease retained earnings.THIS NORMALLY HAPPENS BY IT BEING WRITTEN AS AN EXPENSE THEN GOING TO RETAINED EANINGS THROUGH PROFIT/LOSS ACCOUNT. But What happens here? ANSWER :no it is all goes through depreciation account, not just half.) (d) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line! (e) ALSO ;what s this mean?: see textbook page 225 yellow- must still transfer this to notes but cannot understand it. (f) What do ou do when you have a sale- what happens to the reval.surpluss then?? (g) When you transfer any depreciation attributable(difference) to revaluation from REVALUATION SURPLUS ACCOUNT to RETAINED EARNINGS ACCOUNT at each years depreciation , you do not have to . the company can have a policy of only transferring this on sale/disposal ., or of transferring for depreciation as well. (h) P.S movements between reval.surpl.and ret.earn for depreciation DO NOT SHOW in the OCI. They only show in the StChEq- so the only thing about revaluations that shows in the OCI is a current years revaluation ,A disposal DOES not SHOW and a derecognition does not show.

23 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. (i) When you transfer the extra portion of depreciation difference beteen cost and revalued amounts depreciaytion each year, from reval surplus to retained earnoings, YOU MUST STILL WRITE UP THE FULL AMOUNT AS AN EXPENSE IN THE RPOFIT/LOSS SECTION. So this does not mean ypou leave that part out of the yearly depreciation written out through profit / loss- . This transfer is a second entry completely unrelated entry(just equity movement thing !)so there are 4 legs. (j)

2) TIMING OF REVALUATION: a) Normally revaluations are done at end of yr. b) An alternative approach is to bring that reval back to being of yr so that Depr. can be calculated on the New Revaluation amount using fresher values. c) If this method is used: it must be disclosed in Acc Policy Note- and used consistently for all revaluations, not just some of them. d) Method: i) NRV method:Move Revalued Amount back 1 year :1: work out deemed depreciation for the previous year if new revaluation figures were used. (Str Line Method : eg 100 new Reval , in Yr 4 of 10 : Say 100 = 6/10 ie 4/10 must be already gone, only 6/10 is left = 100 , so 6=100, 1= 100/6=15. So ADD this deemed depreciation to 100 to get 115 begin Yr figure. (DONT SUBTRACT IT!) ii) GRV Method: note : if given new valuation at NRV 100 ,useful life 10 , now in yr 4, to get GRV you say 100-10 residual=90*4/6 OR 90/6 then * 4 = deemed depreciation from yr1 to 4 . OR just work out 1 yr depr, then * 4 yrs of it and add to NRV to get GRV. Just Rem to always minus residual before working out any depreciation. iii) Residual Value: Rem to subtract the residual value from the new Valuation when you work out deemed depreciation for last yr dont forget! iv) Work out Reval Surpl and Acc Depr as if 1 year back: Now work out WHAT the Reval Surplus should be for begin of Yr: so work out what the old price carrying amount then would have been and what the old Acc Depr Account would have been same as above method. Now just do your whole JOURNAL ENTRY for NRV or GRV using these new figures. v) The New Depreciation for the year is recorded out using these new figures. vi)

24 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

4. REVALUATION RESERVE: a. This rserve can also never be moved to ret earn at all, even after sale. It can be kept as a cpital maintenance reserve or move to an asset purchase reserve if you wish. b. One might want to do the Yearly Depr. movement to Ret Earn in order to always know how much money you can draw from the company without thinking you can draw money that is already gone with depreciation. So The ret. Earn. acc. is a level meter . 5. DEPRECIATION AND PROFIT AND LOSS a. REMEMBER always if something is revalued at year end, you always treat it as from end of year, not like with changes in Acc depreciation method stuff where it is then taken as from beginning of that year. b. An asset should not be revalued shortly before disposal in order to manipulate the gain/loss unless the revaluaton forms part of a systematic revaluation program. c. An item held for sale will seldom be revalued because of cost of revaluation.& bookkeeping needed eg updating asset register. d. PPE items must be evaluated as a class/group. To bear in mind requirement that fin stats should not be misleading, if it is not possible to revalue all items in a group simultaneously for all items in a group, then do some internal valuations which should be supported by external valuations from time to time. e. Watch out for subtracting the residual value when moving depr. back and forwards. f. It is better to revalue at begin or end of a period (not middle cause then there are 2 depreciation amounts that year , one to halfway the next from halfway onwards), so the user can compare depreciation to the carrying amount more plainly and clearly. g. A full record in the asset register of all revaluations and transfers in/out to reval.surp.acc. eg depreciation etc and the historical cost must be kept very well so that one can comply with the disclosure requirements eg you must show carrying amount at cost method + reval method every time. h. Depreciation on Revaluation Reserve Moved to Ret Earn each year : i. Note : 1. IS 16 says the amount of depr. to be moved from Reval Res to Ret Earn , MUST BE THE DIFFERENCE BETWEEN DEPRECIATION ON THE OLD VALUE AND DEPR. ON THE NEW VALUE. So this is how one works it out you first get the old depr., then minus it from the new : YOU ARE NOT ALLOWED TO JUST MULTIPLY THE RATE BY THE REV RES LEFT OVERS. See next point for why. ( you probably could get away by dividing the residual between the 2 as a fraction and then doing rate X Reval Res, but only in a pinch: see why below.

25 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. 2. YOU CANNOT work out the Reval Res. Depr. by X Rate by the Reval Reserve . The reason is that if item has a residual value then it can happen that the old depr would have been zero if the residual was above the carrying amount. So ALL the depreciation for the year must be moved from reval res to Ret Earn not just a fraction. (that is also why one cannot just say Reval Res / Asset Carrying Amount * Total Depr. ie just use a fraction to divide up the Depreciation between the 2, since the above could happen so one cannot divide it up evenly between the reval res and other.

6. DEFERRED TAX: a. When a item is sold- the deferred tax on the reval reserve is NOT re-moved in or out or anywhere. It is gone- the Defrred Tax account will balance itself out automaticly , and anything that would have moved through P&L into Ret Earn had there not been a Rev Res . would have lost the tax part anyway on the wayso now it already has the tax out . So forget it. Same for if Depr. is moved from Rev Res to Ret Earn. b. If a machine is revalued up and down often, it does not matter if machine carrying amount is below cost doe to depr. already as soon as anything goes in to Reval Acc it must have deferred tax removed . If any part goes toP&L for any reason at all it does NOT get deferred tax the tax gets sorted in P&L. Only when it goes to OCI the tax must be screened to make up for a lack of tax screening that should have happened in P&L but was circumvented now. c. Residual Value is DEEMED to be recovered through sale ALLWAYS.(so if residual is > carrying amount = can then be Recovered through Sale only. d. DEPRECIATION: 1. SPECIAL NOTES : a. Changes in Depreciation Method OR Residual value OR Useful Life at the END OF A YEAR are all accounted for from the BEGINNING OF THE YEAR , SINCE you mos work out depr. for the past year at end of yr. So if they say Useful life changed to 3 yrs- it means since you are using the carrying amount at BEGIN of this yr to apply this to that useful life from begin of yr = 3+1=4 yrs NOT 3 Yrs ! These are regarded as a normal change in estimate. So if residual value was 100 when bought in July, then in Dec at year end it changes to 50 ,you use 50 for the whole year incl. July period when you do the depreciation at YR end .(per Tx Bk see example at bottom!) b. If the Remaining useful life changes allways remember to add all years used already to whats left to get the TOTAL useful life that goes in the Accounting Policy Notes c. P.S movements between reval.surpl.and ret.earn for depreciation DO NOT SHOW in the OCI. They only show in the StChEq- so the only thing about revaluations that shows in the OCI is a current years revaluation or a change in Provision for Disposal Costs . A disposal DOES not SHOW and a derecognition does not show. d. The transfer of depreciation from Reval Surpl to Ret.Earn. must take place AFTER tax:, because the Reval Surpl. Account is AFTER TAX already : keep it simple : all you do is first work out depreciation to be transferred : ie [Reval.Surpl. OVER Carrying Amount] X depreciation for year , AFTER THAT just deduct tax from it at approriate rate before you transfer : ie 28% or CGT 18.65% or a mixture of the 2. e. DISCLOSURE IN NOTES: changes in estimate: Per IAS changes , one must disclose in Estimate Changes Note: i. For each change separately eg residual value change : ii. the current year effect : this yrs old version LESS this yrs actual version. iii. The future cumulative effect: first deduct this yrs actual !!!! : then using balance : ALL future old LESS all future new. 2. ALLOCATION OF COST: a. The AIM is: to allocate depreciation costs to income generated by asset for matching principle each year. MAINLY! The aim. 3. COMPONENTS: a. Separate components of an asset are depreciated separately, but all go to same acc depr. account b. Favourable Component of a lease contract where entity is lessor: c. COMPONENT created by OPERATING LEASE: if a company aquires an ASSET which is already leased out in a Business combination it may be appropriate to depreciate the depreciate the favourable or unfavourable terms relative to current market price. see txtbk pg 164 redo the whole thing. i. What one does is : ONLY when you ACTUALLY buy an asset which is ALREADY leased out :

26 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. ii. Calc. contract mnthly lease cost less current market mnthly lease cost : take the difference and get PV from PMT as the difference, I as interest and N as remaining yrs of lease. iii. Then this PV is treated as a Component of the PPE and depreciated separately over life of lease- in EXACT same way as any other component : it is just subtracted from price paid for asset same as any other component eg helicopter engine . and treated the same way. iv. The logic is : You buy the asset thinking of Value of lease + Residual value after lease is over : and that is the value you are prepared to buy it for.. So you depreciate the 2 separately4. THERE ARE 3 ASPECTS TO WORK OUT DEPRECIATION: 1- useful life 2- residual value 3-method of depreciation. a. DEPRECIATION METHODS: i. IAS 16 . 55 Depreciation of an asset: says ii. REVIEW OF DEPRECIATION METHOD: the depreciation method shall be reviewed at least once per year (End FinYear). It should reflect the pattern of consumption of economic benefit of the asset. Any changes get accounted for as changes in accounting estimate per ias8. NEVER retrospective, ALLWAYS prospective. iii. COMMENCEMENT OF DEPRECIATION BEGINS when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. ( not when it is commissioned or brought into use but AVAILABLE and not before iv. DEPRECIATION CEASES at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is disposed. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. v. A variety of methods can be used eg diminishing balance, straight line , units of production, sum of the digits . It should reflect the manner the asset is consumed eg most in first year etc vi. Sum of digits method : Useful life : 5yr Yr1 : 5/[1+2+3+4+5] = 5/15=1/3 =30% depreciation a. Yr 2 :4/15=xxx% depreciation and carry on like that to yr5. b. So the denominator is sum of digits, and numerator is start in yr1 with last years number ie 5 , and go down each year.! vii. Diminishing Balance method: you say 10% per year : so first yrs will be more depr. than last yrs. 1. Backwards : 2. 20% = 20% : backwards = 100-20=80% left 3. 20% * (100 20* 80%) = 16 % + 20% = 36%: backwards = 100-36=64% left 4. 20%* (100- 36%=64%) = 12.8% + 36 % = 48.8% : : backwards = 100-48.8% = 51.2% left 5. 20 * 20 * 20 * 80= viii. Units of production: say asset has useful life of 1000 units : so if 100 were made this year= 100/1000 depr.

b. USEFUL LIFE:

27 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. i. IAS16.51 REVIEW ANNUALLY: ias16.51 requires every useful life to be reviewed AT LEAST annually at Fin Yr End , by using one(or another type) of the methods specified in IAS 16.56.
(a) expected usage of the asset. Usage is assessed by reference to the assets expected capacity or ph ysical output. (b) expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance programme, and the care and maintenance of the asset while idle. (c) technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset. (d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.

ii. The Useful life can be different to the economic life since useful life means the entity only has a use for it for s specific number of production units etc , but the economic life may be more since another owner may have other uses for it way past the useful life of current owner.Factors influencing: wear & tear, capacity , etc , commercial or technical obsolescence , changes in demand for product, legal factors eg leases maturity dates, iii. Change in estimate of useful life: 1. this can happen a lot, it is to be treated as a Change in Accounting Estimate per IAS8 and if size/nature warrants it must be disclosed separately in the notes. It forms part of normal operating expense items. You do not adjust retrospectively You do not restate comparatives 2. IF THEY CHANGE USEFUL LIFE AT 2001 YR END TO 3 YRS FROM 2 YRS- it is applied from BEGIN OF THAT YR since you work out the depr at yr end for the yr- so IT WILL BE 3+1=4 YRS USEFUL LIFE , and the carrying amount this depreciation is applied to WILL BE THE BEGIN OF YR CARRYING AMOUNT SO END OF LAST YRS CARRYING AMOUNT. See example below for funny method of doing this ( if they give you the amount end yr 2 you start the new change from beginning yr 2- see below!

iv. Useful life of land & buildings 1. Treated as separate units even if on same place. 2. An increase in the value of the land should not cause useful life of a building to change nor its depreciation. 3. Land is not depreciated except special circumstances eg dumping site. v. Impairment loss: if you have to write down the value of land due to an adverse location etc. c. RESIDUAL VALUE: i. Per IAS16 the residual value (as well as usefull life & depr.method used) must be reviewed each year (at year end).This rule applies to both cost and revaluation model. ii. ANY CHANGE IN RESIDUAL VALUE must be accounted for as a change in accounting estimate per ias8. 1. In terms oas IAS8 for any change in residual value you disclose the nature of change, amount,& effect on future periods if significant. 2. To do this you make a excel table with all the assets and rework the whole thing out. Last Fin Years Ends depreciation you keep and leave it as is. Just take the CARRYING AMOUNT from end last Fin Yr and minus the old residual value and ADD the new residual value to supplant the old one.Then rework out your new depreciation for the current year end. a. Even if you revalue the residual value at year end , you still use that new residual value for the whole fin yr up to that yr end date .(vertabim in book)So use end last yrs carry amount +old residual new residual b. You must as per IAS8 show the effect on future periods. To do this you must work out from beginning of next fin year (future!) 1- depreciation to end of life as per old residual value.. and 2- depreciation to end life per new residual value. Then get the difference between the 2 and Disclose this . see example below.

28 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. iii. The residual value is the value entity would obtain AFTER deducting disposal costs at end of its USEFUL life(not economic life) ..must be at its CURRENT value- ie at todays prices and rates ,as if sale happened today in condition & wear you could expect at end of useful life.

IMPAIRMENT LOSSES AND COMPANSATION FOR LOSS: 1. IAS 36 is about If an item or group of irems is impaired by technological obsolescence or other economis factors, the carrying amount is written down to the recoverable amount. 2. Impairment means a permanent diminuition in value of an asset on a once off basis. 3. IAS 16.65-66 gives guidance on how to account for compensation received for impairment/loss of items of PPE from 3rd parties who are responsible, to restore/purchase /replace. Eg insurance, expropriation by Gov. etc. 4. The 3 things that form this matter are separate parts and must get accounted for separately as per iAS16: You deals with these things as follows: a. Impairments or losses of PPE : Impair: deal with by using IAS 36 Impairments Loss: recognize in terms of IAS 16 ie normal way. b. Compensation from 3rd parties : must be included in profit/loss when receivable. c. Subsequent purchase or construction of assets. : account in terms of IAS 16 2. COMPENSATION/ insurance payout FOR IMPAIRMENT or LOSS / DAMAGE etc.: a. If you get compensation for impairment or a insurance payout, it must be : i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed). ii. Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in profit/loss for the year. (does not go to asset reaisation- goes separately by itself as Other Income: insurance payout received ) iii. Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats : 1. Notes to fin stats : a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in Disposals, or in own separate heading called PPE destroyed in hail storm any new ssset bough to replace it goes as per normal in Additions b. Profit Before Tax note: in the normal note called profit before tax : disclose i. Significant Income: k there should be a line here somewhere for insurance payout for items destroyed in hailstorm R xxx- and maybe short description below ie: destroyed in hailstorm etc ii. 1: Significant Expenses : Amount of loss to item in hailstorm or whatever it was in own line

29 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. i. Sentence In terms of IAS 1 the nature and amount of such items must be disclosed separately,so put a sentence in profit before tax under significant expenses: and uwrite description of event etc

DERECOGNITION: 1. AN ITEM OF PPE IS DERECOGNISED IN THE SFP : a. On DISPOSAL b. When no FUTURE ECONOMIC BENEFITS are expected from its use or disposal.(withdrawal from use does not result in derecognition only when no future economic benefits are expected from its use or disposal. 2. This does not mean just withdrawing an asset from use- it means when it can no longer ever be used to produce economic benefits . 3. HOW TO DERECOGNISE : redo very fast here no time.: a. Journals: it works the same as a sale of an asset, except the loss/profit is called loss on derecognition (there can never be a profit on derecognition) b. PPE-table in notes: I think not sure it gets its own line in the PPE table in notes. BUT lecturer says all goes under DISPOSALS : so just block it under disposals so one can see ! 4. RECOGNOSED AS A GAIN on disposal : . Gain is not treated the same as Revenue Profit that is IAS 16. Gains on disposal are different as per ias18 and go in own line in SFP . Gains are treated in normal way of asset disposal except for IAS17 sale&leaseback where gain is deferred . THERE IS ONE EXCEPTIONS: where entity routinely sells items of PPE that it rented out to others at end of rent contract . These should be reclassified as INVENTORY at this date ready for sale- not as Held for Sale! Per txbk 5. TO DETERMINE DATE OF GAIN/SALE/etc It says here you can use the criteria in IAS 18 revenue to determine date of saleBUT IAS 18 Revenue does NOT cover the INCOME treatment REVENUE and GAINS are 2 separate things (ALL OF AT ONCE :risks&rewards,managerial involvemet,revenue measured reliably,probable economic benefits flow,costs measure reliably) 6. DEPRECIATION CEASES: at the earlier of date asset is classified as held for sale or date asset is derecognized. 7. HELD FOR SALE: per IFRS 5 Non-current items held for sale no longer fall under IAS16 but under IFRS5. After classified as held for sale it is classified as a CURRENT asset at lower of carrying amount and fair value ,less cost to sell. Then depreciation is discontinued as well .The gains and losses recognized in IFRS 5 are similar to IAS16. (read about the same) a. IFRS 5 REQUIRES SPECIFIC DISCLOSURE : of N_C assets earmarked for disposal within 12 mnths after taking decision to dispose of asset.

8.

30 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. TAX IMPLICATIONS: 1. CHANGE IN TAX RATE: a. IF THERE IS a change in tax rate, anything in the revaluations surpluss after depreciation on it- must get separately calc. for the tax rate change so if there is a tax rate change you do 3 things: i. 1st calculate the tax rate change effect on the revaluation surplus left from last year. REMEMBER that revaluations are NOT granted any tax allowance from SARS so their tax base is allways ZERO. So the Carrying Amount is the Reval. Surplus. And the Tax Base = 0 future deductions allowed. Only say 29%-28% = 1 % difference. So add 1% of Rev Surpl. To itself by a journal entry.Journal : Reval Reserve CONTRA Deferred tax Account. ii. Adjust the Deferred Tax account left from last year to fall in line with new tax base : Journal : Deferred Tax CONTRA Income Tax iii. Line In Reconcilliation : add effect of 1)Revaluation + 2)Old Deferred Tax Account to give you a 1 total. For all. iv. Line in Major Componenets of Income Tax: Journal is Deferred Tax CONTRA Income Tax so this Note must also a have a line. 2. PPE with/without REVALUATIONS Deferred Tax : a. Rem : Revaluations do not get any Tax Allowance from SARS so as a component of the Temp. Diff. they have a zero Tax Base. This does not make much of a differnce exept for some special calculations eg : change in tax rate stuff. b. Splitting Defrred Tax Between Reval Surplus & Deferred Tax Account : i. Allways Split up the Movement in Temp Diffs Between Reval. Surplus and Deferred Tax Account. ii. Amount of Deferred Tax to Transfer to Reval Surpl. : simple : just the balance left in reval surpl. X Tax Rate = Deferred Tax to transfer to reval. Surpl. Account. This deferred tax must get minused from the MOVEMENT IN TEMPORARY DIFFERENCES to split it between the 2. Note:(it is a very easy calc. per unisa.) 1. TAX RATE : you can have 2 tax rates here : If residual value crowds into Reval. Surplus space it will be at 18.65%., otherwise at 28%. (look at if residual is above COST to see if it crowds into Reval. Surpl. Space not at above carrying amount or something else just if above cost . 2. (Rem if it got revalued down , the if it gets reval. up again it must first go to P&L up to cost level, before it goes to a new reval. surpl. again .- so you allways compare against plain old cost here to see if residual infringes on Reval. Surpl.) iii. Revaluation Depreciation : Only if they say part of reval surplus goes to retained earnings each year does the reval surplus change after a revaluation . Other wise it stays the same until asset is sold. iv. The transfer of depreciation from Reval Surpl to Ret.Earn. must take place AFTER tax:, because the Reval Surpl. Account is AFTER TAX already : keep it simple : all you do is first work out depreciation to be transferred : ie [Reval.Surpl. OVER Carrying Amount] X depreciation for year , AFTER THAT just deduct tax from it at approriate rate before you transfer : ie 28% or 18.65% or a mixture of the 2. Eg : 50* 72% = answer.[where 72 % is 100-28%] v. P.S movements between reval.surpl.and ret.earn : for depreciation DO NOT SHOW in the OCI. They only show in the StChEq- so the only thing about revaluations that shows in the OCI is a current years revaluation ,A disposal DOES not SHOW and a derecognition does not show. c. Deemed For Sale : Certain non-Depreciable Assets are ALLWAYS DEEMED for SALE. d. Held-For Sale Assets: i. are all deemed for sale, so calc @18.65% on ABOVE cost amount. ii. From Tax Base up to Below Cost is a recoupment @ 28%. iii. The full deferred tax for all held for sale ALL goes to Reval. Surplus account Zero goes to Deferred Tax Account. e. Rem: i. From Ta Base up to Cost : either 1)deemed use(depreciation) OR 2)Recoupment , both @ 28 % . ii. Up to Residual Value = ALLWAYS deemed SALE , so at 18.65% . iii. Above Cost : USE : @28 % for depreciation, SALE : @ 18.65% iv. Revaluations part : any tax relating to this portion goes to Reval.Surplus. f. See below for method:

31 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. ASSETS TAX BASES : Revalued PPE WITH a RESIDUAL VALUE ,: meant for USE or SALE compared against USE .
NOTE:

1.1. .........LAND : CARRYING VALUE RECOVERED THROUGH USE or SALE

: Land of 7000 000 is bought :

The carrying amount of non-depreciable property, plant and equipment that is measured using the cost model in IAS 16 is recovered through sale (as explained below). The carrying amount of a non-depreciable property, plant and equipment that is measured using revaluation model in IAS 16, is recovered through sale (IAS 12.51B). The carrying amounts of depreciable property, plant and equipment that is measured using the cost model IAS 16, is recovered through use. If the asset has a residual value the manner of recovery will be through use and sale. The carrying amount of depreciable property, plant and equipment that is measured using the revaluation model in IAS 16 is recovered through sale and use.

CARRYING AMOUNT Cost=7000 000 Revalued =9000 000

No Residual Value this column below

USE Yes Residual Value

If residual is above tax base , do as at left. ignore it.

Say Residual is above tax base = 3000 000

SALE From Below Cost ABOVE COST up to RECOUPMENT

9000 000 (revalued up in books ) Less: TAX BASE 2800 000 (The tax
base will be what is left of SARS wear and tear allowance )

Carry Residual 9000 000 / 3000 000

9000 000 (revalued up in books) 2800 000 (The tax

base will be what is left of SARS wear and tear allowance )

2800 000

=Temp.Diff

6200 000

Carry
9-3=6000000 @ 28% (depr.)

Residual
above tax base = 1)recoupment + 2) sale profit. Below tax base not taxed at all.

7-2800 000@28% =4200 000@28%

(9-7) = 2 mil CGT [@ 66.6*28%]

200000@66.6%*28% (From 3 - 2.8 )

DEFERRED TAX

6200 000@ 28%

1680 000

37296 Note: if it was revalued below cost then it is only done in one part(the below cost to recoupment part, at 28%

32 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

DISCLOSURE: 1) ACCOUNTING POLICY : a) Measurement Basis: Revaluation or cost method used per class of assets , manner of gross or Net method of revaluation etc. Reval Res deprec. moved to Ret Earn yrly or at on disposal. b) All details possible. Depreciation Method, Useful life etc.,manner of cost/revaluation . c) NRV or GRV d) If Entity has a policy of taking end Yr reval. And working it backwards to begin yr so that all depr. can be done on fresher more relevant figures then this must be disclosed here as policy. 2) PROFIT BEFORE TAX Note To Fin Stats :(used by many IASs) :in SCI : a) Income : i) Significant Items (1) Insurance Compensation for (2) Gains on Disposals of PPE ii) Revaluations Recognised in Profit & Loss : Revaluations part Recognised in P&L instead of Reval. Reserve. to equalize prior years revaluations recognized in P&L Because all Reval Surplus used up in that year. iii) Decrease in Provision for Dismantling Costs recognized in P&L .(Rule : provision in reval res may not exceed Cr Balance must be a prior Devaluation) iv) Reversal of Former Increase in Provision for Dismantling Costs recognized in P&L up to level of former reversal. v) b) Expenses: i) Significant Items : (1) Loss on Disposal of PPE: ii) Depreciation (Not needed if Nature of Expenses method is used to prepare SCI) iii) Revaluation Recognised in P&L : instead of in Reval. Reserve. Because all Reval Surplus used up (below zero) ie: PPE Revaluations Downward(less) after first removing Reval.Surpluss. left of that asset. iv) Increase in Provision for Dismantling Costs recognized in P&L v) Reversal of Former Decrease in Provision for Dismantling Costs recognized in P&L up to level of former reversal.(Rule : provision in reval res may not exceed Cr Balance must be a prior Devaluation)

33 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. vi)

3) PPE TABLE 4) PER IAS 16 : REDO: a) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and b) (e) a reconciliation of the carrying amount at the beginning and end of the period showing: c) (i) additions; d) (ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; e) (iii) acquisitions through business combinations; f) (iv) increases or decreases resulting from revaluations under paragraphs 31, 39 and 40 and from impairment losses 33easuremen or reversed in other comprehensive income in accordance with IAS 36; g) (v) impairment losses 33easuremen in profit or loss in accordance with IAS 36; h) (vi) impairment losses reversed in profit or loss in accordance with IAS 36; i) (vii) depreciation; j) (viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and k) (ix) other changes.

Property Plant & Equipment: Land&Buildings Vehicles Machinary TOTAL Carrying amount: Beginning of the xxx xxxx xxx xx year: ( cost acc.depreciation) Cost Accumulated depreciation ------------------- (Brackets) (Brackets) (Brackets)
impairment losses 33easuremen in profit or loss impairment losses reversed in profit or loss

Held for Sale? where Additions (include all costs of : installation etc as COST price!) Disposals (Cost price (Brackets) (Brackets) (Brackets) (Brackets) Accumulated depreciation ONLY ) Revaluation Reserve.: inpairments (Brackets for if & revaluations &decommission Downward) cost change Depreciation (One Year's including --------------(Brackets) (Brackets) (Brackets) Pro rata for Disposals +Additions)
the net exchange differences arising on the translation of the financial statements

Cost Accumulated Depreciation(remember to add/minus extra mnths to date sold and minus any disposals)

--------------------------------- (Brackets) (Brackets) (Brackets)

34 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

Carrying Amount: End of year: ( cost acc.depreciation)

l) Devaluations separate ? no I think- some textbooks do allthese different to show- do we?

m) UNDER PPE TABLE: in writing (1) Fair Value Disclosures IFRS 13 :The extra disclosures required by IFRS 13 relating to assets measured at fair value see IFRS 13 (2) Security : 1- Asset details pledged as security, 1-Carrying Amount 2-Address etc 3- Amount of Security pledged for (3) Revaluations: : (a) Revaluation Details :Date of the revaluation; details of each thing OR as a class revalued ,whether an independent valuer or not, methods & assumptions,techniques eg active market priceOR recent similar transactions , (no reval amount is needed- that is elsewhere in fin stats) (b) A Table of : At Cost less Acc Depr. Method Carrying Amount : the Carrying Amount less Accumulated depreciation of each Class if that class had not been revalued but carried at cost . (4) Devaluations separate???yes or no? (5) Insurance / indemnity payouts of any sort.???? Here or in Profit before tax note? (6) Contractual commirtments to buy any PPE

(7) Address of land (8) Additions to / disposals of this land and date thereof.
5) DEFERRED TAXATION NOTE (used by all deferred tax) a) Wear & tear for tax purposes (accelerated or reduced) :Just the amount of Deferred tax b) Revaluations : :Just the Amount of Deferred tax. (Totaled at bottom of list) c) UNDER DEFERRED TAXATION NOTE IN WRITING i) Under This list , in writing : if any assumptions were made on use : eg : benefits come from Sale or Use so 29% tax or 14% CGT, then you make a table with : (1)-details ,(2) both possible rates of tax , and (3) amount that was included in the line item eg in REVALUATIONS or wherever. 6) COMPONENTS OF OTHER COMPREHENSIVE INCOME: a) All items separate excluding tax b) At end , tax relating to (brackets ) c) Total at bottom 7) TAX EFFECT RELATING TO EACH COMPONENT OF OTHER COMPREHENSIVE INCOME: (used by all deferred tax a) Revaluation Gains or Losses : on Property Revaluation (1- Before Tax , 2- Tax , 3-After Tax ) ( same as other kinds of line item for all deferred tax here) ( just put a separate note here for property alone) b) Under restrictions on the distribution of the balance of Reval.Surpluss to shareholders 8) INCOME TAX EXPENSE(used by all tax) a) Deferred & Normal Tax of course. 9) DONT FORGET ; a) IMPAIRMENTS NOTE : if relevant b) CHANGES IN ACCOUNTING ESTIMATE NOTE if relevant. c) WHERE DOES THIS GO?????Under RESTRICTIONS ON THE DISTRIBUTION OF THE BALANCE OF REVAL.SURPLUSS TO SHAREHOLDERS d)

1. DO THE TABLE OF PPE IN NOTES AND AN FULL EXAMPLE COMPLETE NOTES: not done yet in DISCLOSURE

35 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.

2. This below is as per IAS16 vertabim. Just below that is a scan from textbook which shows in which part of the FIN STATS each of the items below must go(all jumbled up in ias16) Disclosure 73 The financial statements shall disclose, for each class of property, plant and equipment: (a) the measurement bases used for determining the gross carrying amount;(see ias 16 eg revl/cost depr. method etc?) (b) the depreciation methods used; I the useful lives or the depreciation rates used; (d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (e) a reconciliation of the carrying amount at the beginning and end of the period showing: (i) additions; (ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (iii) acquisitions through business combinations; (iv) increases or decreases resulting from revaluations under paragraphs 31, 39 and 40 and from impairment losses 35easuremen or reversed in other comprehensive income in accordance with IAS 36; (v) impairment losses 35easuremen in profit or loss in accordance with IAS 36; (vi) impairment losses reversed in profit or loss in accordance with IAS 36; (vii) depreciation; (viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and (ix) other changes. 74 The financial statements shall also disclose: (a) the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities; (b) the amount of expenditures 35easuremen in the carrying amount of an item of property, plant and equipment in the course of its construction; (c) I the amount of contractual commitments for the acquisition of property, plant and equipment; and (d) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in profit or loss. 75 Selection of the depreciation method and estimation of the useful life of assets are matters of judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or depreciation rates provides users of financial statements with information that allows them to review the policies selected by management and enables comparisons to be made with other entities. For similar reasons, it is necessary to disclose: (a) depreciation, whether 35easuremen in profit or loss or as a part of the cost of other assets, during a period; and (b) accumulated depreciation at the end of the period. 76 In accordance with IAS 8 an entity discloses the nature and effect of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in subsequent periods. For property, plant and equipment, such disclosure may arise from changes in estimates with respect to: (a) residual values; (b) the estimated costs of dismantling, removing or restoring items of property, plant and equipment; I useful lives; and (d) depreciation methods. 77 If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed: (a) the effective (b) whether an independent valuer was involved; I the methods and significant assumptions applied in estimating the items fair values; (d) the extent to which the items fair values were determined directly by reference to observable prices in an active market or recent market transactions on arms length terms or were estimated using other valuation techniques; (e) for each revalued class of property, plant and equipment, the carrying amount that would have been 35easuremen had the

36 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE. assets been carried under the cost model; and (f) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders. 78 In accordance with IAS 36 an entity discloses information on impaired property, plant and equipment in addition to the information required by paragraph 73(e)(iv)(vi). 79 Users of financial statements may also find the following information relevant to their needs: (a) the carrying amount of temporarily idle property, plant and equipment; (b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use; I the carrying amount of property, plant and equipment retired from active use and not classified as held for sale in accordance with IFRS 5; and (d) when the cost model is used, the fair value of property, plant and equipment when this is materially different from the carrying amount. Therefore, entities are encouraged to disclose these amounts.

37 | P a g e DIPAC ACCOUNTING Tut. Letter ? : Notes: PPE.