ias 16 property, plant and equipment mr. barrya-level accounting year 12

A-level Accounting Year 12

IAS 16 Property, Plant and Equipment

Mr. Barry


IAS 16 PPE

Mr. Barry

• “The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.”


What is depreciation?• Depreciation is the means by which the loss in

value of a non-current asset is spread out over the useful life of the asset

• Depreciation is an expense• Depreciation is the loss in value of a non-

current asset over its useful economic life that is apportioned to financial periods

• It’s a non-cash expense

Mr. Barry


Accounting for Depreciation– Fixed assets other than land lose their ability over time to

provide services– Costs of equipment, buildings, and land improvements should

be transferred to expense accounts in a systematic manner during their expected useful lives.

• DEPRECIATION – Adjusting entry to record depreciation is usually made at the

end of each month or at the end of the year Fixed assets other than land lose their ability over time to provide services

Mr. Barry


Adjusting Entry

Account Debit CreditDepreciation expense £7,000

Accumulated depreciation - truck £7,000

Mr. Barry


Depreciation• Accumulated depreciation

– Shows the amount that the asset has lost in value since its purchase• Depreciation expense

– Shows the amount that the asset has lost in value this period.• Factors that cause a decline the ability of a fixed asset to

provide services may be identified as – Physical depreciation

• Occurs from the wear and tear while in use and from the action of the weather

– Functional depreciation• Occurs when a fixed asset is no longer able to provide services at the level

for which it was intended.

Mr. Barry


Factors in accounting for depreciation expense

–The fixed asset’s initial cost–Its expected useful life (UEL)–Its estimated value at the end of its useful

life (residual value)

Mr. Barry


Depreciation Methods

1. Straight line

2. Reducing balance

Mr. Barry


1. Straight line Method

• Provides for the same amount of depreciation expense for each year of the asset’s useful life

• Annual depreciation expense =

Cost – residual value UEL

Mr. Barry


Example 1

• A machine had a cost of £24,000, residual value of £2,000 and useful economic life of 5 years

• Annual depreciation expense =

Cost – Residual value Life

= £24,000 - £2,000 5 years

= £4,400 annual depreciation

Mr. Barry


Adjusting entry

Account Debit Credit

Depreciation expense £4,400

Accumulated depreciation - Machinery £4,400

Mr. Barry


Income Statement Entry

Less ExpensesDepreciation chargeRent

Mr. Barry

4,400

3,000


Statement of financial position (balance sheet) Entry

NON CURRENT ASSETS £ £

Machinery at Cost 24,000

Accumulated depreciation 4,400

Net Book Value 19,500

Mr. Barry


Example 2

• A machine had a cost of £30,000, residual value of £5,000 and useful life of 6 years. Calculate depreciation under the straight line method?

• What is depreciation expense in year 3?

ANSWER= = £30,000 - £5,000 6 years = £4,167 annual depreciationMr. Barry


Reducing Balance Method

• Provides for a declining periodic expense over the estimated useful life of the asset.

• Book value = Cost – Accumulated depreciation

Mr. Barry

2. Reducing Balance Method

• Using this method the depreciation charge is a fixed percentage of the cost of the asset in the first year.

• In the second and later years the same percentage is taken of the reduced balance or net book value (cost less depreciation already charged)

A-level Accounting Year 12Mr. Barry

Example

• If a machine is bought for £10,000 on 1/1/11 and depreciation is to be charged at 20% per annum using the reducing balance method

• The depreciation calculations for the first three years would be as follows:



AnswerYear 1 Year 2 Year 3

Cost= £10,000 X .202, 000 depreciation

Cost- Acc Dep= £10, 000- £2,000= £8,000 (NBV) X .201,600 depreciation

£8,000- £1,600= £6,400 (NBV) X .201,280 depreciation

Mr. Barry

Choice of Methods• A business can choose whichever method it prefers

• Straight Line Method – same depreciation charge is charged each year – suit assets where benefits are to be gained evenly over the years

• Reducing Balance Method – more depreciation is charged in the early years – suit assets where main value is to be obtained from the asset in the early years


Financial Accounting

Depreciation of Non current Assets II:Disposals, Impairments and Revaluations


Summary• Non current assets fall in value• Through consumption and use (wear & tear;

obsolescence; depletion etc.)• Financial accounts need to take account of this

factor • This is done through an annual charge for

depreciation (effectively reduces the original cost of an asset each year to reflect wear & tear/usage)


Summary• Annual depreciation charge calculated using

either the:– Straight Line Method (based on cost)– Reducing Balance (based on NBV at end of each

period)• Annual depreciation charge is charged as an

expense through the Income Statement


Summary• In Balance Sheet must show for each class of

fixed asset– Cost– Accumulated Depreciation (depreciation charged

to date i.e. from date of acquisition)– Net Book Value (NBV)

• Cost - Accumulated Depreciation = NBV (reduced value of the asset at the end of each accounting period)


Recording Depreciation• Non current Asset Accounts are always kept for

showing the assets at cost price (or revalued amount)

• Depreciation is shown accumulating in a separate “Accumulated Depreciation account or Provision for Depreciation Account”



Recording the Disposal of a non current Asset

1. Remove Asset @ Cost2. Calculate depreciation on disposed asset3. Remove disposed asset depreciation from

accumulated depreciation4. Calculate gain(profit) or loss on disposal

Mr. Barry

Double Entry• Depreciation Charge

– Dr.: Depreciation (I/S) (Expense)– Cr.: Accumulated Depreciationbeing charge for the year

• Disposal– Dr. : Disposal Account– Cr. : Non current Accountbeing cost of non current asset disposed of


Double Entry - Disposal

• Dr.: Accumulated Depreciation• Cr.: G/L on Disposal accountbeing accumulated depreciation on asset disposed of.• Dr. : Bank Account• Cr. : G/L on Disposal Accountbeing remittance received on disposal


Double Entry - Disposal• Transfer the balance on the disposal account to

the Income Statement account• If a profit is made on disposal the credit side will

be greater than the debit side• If a loss is made on disposal the debit side will be

greater than the credit side• NBV of Disposal (Cost - accumulated

Depreciation) > Proceeds = Loss (< Proceeds = Profit)



IAS 36 Impairment 1• Impairment exists where the carrying value of the

asset in the BS is greater than the recoverable amount.

• If an asset’s value in the accounts is greater than its realistic value (recoverable amount), then it can be said that the asset suffered an impairment loss.

• Treatment – If asset had been revalued then write off impairment loss against

revaluation surplus– Otherwise should write off that impairment loss to the IS immediately

(an expense).

Mr. Barry


RevaluationIAS 16 allows entities to show non current assets

at :– Cost

or– Revalued to their Fair value (only if fair value can be reliably

measured)

• Normally use market value for land, buildings, plant, equipment as the fair value

Mr. Barry


Revaluation

• If a company decides to revalue one of its Non Current Assets it must apply that policy to all of the assets in that Class. (IAS 16)

• Revalue all assets in that class at the same time• If a non current asset is revalued – must use a

Revaluation Reserve

Dr AssetCr Revaluation Reserve

Mr. Barry


REVALUATION• Depreciation should always be on the

revalued amount.

Will also result in entries to the following BS Accounts:

1. Non Current asset (cost)2. Accumulated Depreciation

Mr. Barry


Revaluation

• If Company adopts the policy, must have a full revaluation every 5 years

• Interim revaluation in Year 3• Revalue to Market value• Details disclosed in Note to the accounts,

Original cost, revalued amount, dates, valuers & qualifications etc

• Examples

Mr. Barry


IAS 16 NB Example of depreciation on revalued asset• Fixed asset cost €3m in Year 2000• Useful economic life = 10 years• Revalued at end of Year 2002 to €3.3m

How is this treated in the accounts ?Also show entries for Year 2003.

Mr. Barry


Capital Expenditure

Money spent on the:• acquisition of non current assets • alteration or improvement of existing

NCA for the purpose of increasing the profit earning capacity of the business.

• Added to NCA in the Balance Sheet.

Mr. Barry

ias 16 property, plant and equipment mr. barrya-level accounting year 12

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