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FFQA 5

IAS 16
PROPERTY, PLANT AND EQUIPMENT

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FFQA 6

IAS 16
Why Standard Required
To ensure that: a) consistent principles are applied to the initial measurement of tangible Non-current Assets and any subsequent expenditure. b) where an entity chooses to revalue tangible Non-current Assets the valuation is performed on a consistent basis and kept up-to-date and gains and losses on revaluation are recognised on a consistent basis. c) depreciation is calculated in a consistent manner and recognised as the economic benefits are consumed over the assets useful economic lives. d) sufficient information is disclosed in the financial statements to enable users to understand the impact of the entitys accounting policies regarding initial measurement, valuation and depreciation on the financial position and performance of the entity.

Some useful definitions

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost , less its residual value. Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and (b) are expected to be used during more than one period. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and any accumulated impairment losses

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

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FFQA 7

Key principles
IAS 16 codifies existing popular practice with regard to Non-current Assets. It also introduces new rules that promote transparency. Initial cost Purchase price after trade but before settlement discounts, and includes transport and handling costs and non-refundable tax such as import duties, etc If self-constructed, labour costs of own employees (but abnormal costs such as wastage and errors are excluded). Also written off to IS immediately are staff training costs these must not be capitalised. Includes site-preparation and installation costs and professional fees (such as legal and architects fees) Two more special points: also included can be borrowing costs during construction phase only (for self-constructed assets) and removing and dismantling and restoration costs which qualify as a liability under IAS 37 (Provisions and Contingencies), after discounting to present value. Incidentally if discounted, it must be unwound. The entry through the Journal into the accounts is slightly surprising: Dr Non-current Assets Cr Provision for restoration

Subsequent expenditure
Where it enhances the economic benefits in excess of its current standard of performance through any of: o Increase/extension of assets life o Production capacity (energy saving) o Improved quality of output Where a component of an asset is treated separately and is replaced or restored e.g. new engine for an aircraft A major overhaul that restores its previous life and the consumption of previous economic benefits have been reflected in past depreciation charges. All other subsequent expenditure must be written off to the Income Statement.

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

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FFQA 8

Methods of calculating Depreciation

There are 2 key methods that you must know, as these are frequently examined: 1) Straight line (or fixed instalment) method which results in a constant charge over the assets useful life. 2) Reducing balance basis which results in a decreasing charge over its useful life. This is especially appropriate for assets such as motor vehicles, where loss in value in its early years is significantly greater than in the later years. Special point A change in method is not a change in accounting policy.

Revaluations
The problem that existed before IAS 16 was that there was too much flexibility and inconsistency making for sometimes misleading financial statements. Creative accounting was rife.
Revaluing non-tangible assets is optional. The case for revaluing is obvious: if an asset is, say, 15 years older than when it was first purchased as a new asset with a 50 year life, the charge for depreciation is still based on the original cost. Revenues generated through the use of the asset are however being earned in current-day terms, so there is a need to correct this mis-match by revaluing, and charging more depreciation.
Where an entity does revalue, it should apply the same valuation policy to all tangible Non-current Assets of the same class, and should keep the valuations shown in the Statement of Financial Position up-to-date this will preclude the habit (as was common at the time) of only revaluing those assets that had appreciated, what Sir David Tweedie, Chairman of the IASB, described as cherry-picking.
The idea is that carrying amounts of revalued assets should not differ materially from their fair values at Statement of Financial Position date.
There are detailed rules on the basis and frequency of valuation. Where an asset has been written down due to impairment, this is not classed as being a policy of revaluation.
When revaluing a previously depreciated asset, first reverse the accumulated depreciation provision, and any difference between the revaluation surplus and this depreciation is then added to the asset at cost

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

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FFQA 9

FFQA EDUCATIONAL SERVICES

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FFQA 10

Surpluses and deficits

These are measured as the difference between the revalued amounts and the book (carrying) values at the date of the valuation. Increases (gains) are taken to equity under the heading of revaluation surplus (this may be via a Statement of Recognised Income and Expenses unless, and to the extent that, they reverse a previous loss (on the same asset) that has been charged to the income statement. In which case they should be recognised as income. Decreases in valuations (revaluation losses) should normally be charged to the income statement. However, where they relate to an asset that has previously been revalued upwards, then to the extent that the losses do not exceed the amount standing to the credit of the asset in the revaluation reserve, they should be charged directly to that reserve (again this may pass through a statement of recognised income and expense). Any impairment loss on revalued property, plant or equipment, recognisable under IAS 36 Impairment of Assets, is treated as a revaluation loss under IAS 16.

Gains and losses on disposal

The gain or loss on disposal is measured as the difference between the net sale proceeds and the carrying value of the asset at the date of sale. In the past some companies reverted to historic cost values to calculate a gain on disposal thus inflating the gain (assuming assets had increased in value). All gains and losses should be recognised in the income statement in the period of the disposal. Any revaluation surplus standing to the credit of a disposal asset should be transferred to retained earnings (as a movement on reserves).

Prepared by: Mohammad Faizan Farooq Qadri Attari ACCA (Finalist)

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FFQA 11

Question Acca F7 Dec 2001

Broad has recently purchases an item of plant from plantco, the details of this are as follows, List price 240,000 Trade Discount 12.5% Shipping and Handling Costs 2750 Estimated pre-handling costs 12500 Maintenance contract for 3 years 24000 Site preparation costs Electrical cable installation 14000 Concrete reinforcement 4500 Own labour costs 7500 Boardoak paid for the plant within four weeks of order, thereby obtaining an early settlement discount of 3%. Brodoak had in correctly specified the power loading of the original electrical cable to b e installed by the contractor. The cost of correcting this error of 6000 is included in the above figure of 140000. The plant is expected to last for 10 years,. At the end of this period there will be ompulsory costs of 15000 to dismantle the plant and 3000 to restore this site to its original conditions. Required Calculate the amount at which the plant will be measured at recognistion (5 Marks)

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FFQA 12

Question Acca F7 Dec 2005

Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was acquired on 1 October 1996. Details of the cost of the ships components and their estimated useful lives are: component original cost ($million) depreciation basis ships fabric (hull, decks etc) 300 25 years straight-line cabins and entertainment area fittings 150 12 years straight-line propulsion system 100 useful life of 40,000 hours At 30 September 2004 no further capital expenditure had been incurred on the ship. In the year ended 30 September 2004 the ship had experienced a high level of engine trouble which had cost the company considerable lost revenue and compensation costs. The measured expired life of the propulsion system at 30 September 2004 was 30,000 hours. Due to the unreliability of the engines, a decision was taken in early October 2004 to replace the whole of the propulsion system at a cost of $140 million. The expected life of the new propulsion system was 50,000 hours and in the year ended 30 September 2005 the ship had used its engines for 5,000 hours. At the same time as the propulsion system replacement, the company took the opportunity to do a limited upgrade to the cabin and entertainment facilities at a cost of $60 million and repaint the ships fabric at a cost of $20 million. After the upgrade of the cabin and entertainment area fittings it was estimated that their remaining life was five years (from the date of the upgrade). For the purpose of calculating depreciation, all the work on the ship can be assumed to have been completed on 1 October 2004. All residual values can be taken as nil. Required: Calculate the carrying amount of Elite Leisures cruise ship at 30 September 2005 and its related expenditure in the income statement for the year ended 30 September 2005. Your answer should explain the treatment of each item. (12 marks)

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FFQA 13

QUESTION Acca F7 Dec 2009

Flightline is an airline which treats its aircraft as complex non-current assets. The cost and other details of one of its aircraft are: $000 estimated life Exterior structure purchase date 1 April 1995 120,000 20 years Interior cabin fittings replaced 1 April 2005 25,000 5 years Engines (2 at $9 million each) replaced 1 April 2005 18,000 36,000 flying hours No residual values are attributed to any of the component parts. At 1 April 2008 the aircraft log showed it had flown 10,800 hours since 1 April 2005. In the year ended 31 March 2009, the aircraft flew for 1,200 hours for the six months to 30 September 2008 and a further 1,000 hours in the six months to 31 March 2009. On 1 October 2008 the aircraft suffered a bird strike accident which damaged one of the engines beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $108 million. The other engine was also damaged, but was repaired at a cost of $3 million; however, its remaining estimated life was shortened to 15,000 hours. The accident also caused cosmetic damage to the exterior of the aircraft which required repainting at a cost of $2 million. As the aircraft was out of service for some weeks due to the accident, Flightline took the opportunity to upgrade its cabin facilities at a cost of $45 million. This did not increase the estimated remaining life of the cabin fittings, but the improved facilities enabled Flightline to substantially increase the air fares on this aircraft Required: Calculate the charges to the income statement in respect of the aircraft for the year ended 31 March 2009 and its carrying amount in the statement of financial position as at that date. Note: the post accident changes are deemed effective from 1 October 2008. (10 marks)

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