FAC 3702 FASSET CLASS 1 MARCH 2018 FIRST

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FAC 3702 FASSET CLASS 1 MARCH 2018 FIRST SESSION

FAC 3702 FASSET CLASS 1 MARCH 2018 FIRST SESSION

IMPORTANT FASSET INFO • • Remember to sign and to submit your contract Remember

IMPORTANT FASSET INFO • • Remember to sign and to submit your contract Remember to complete the survey Sign the attendance register Complete the evaluation/feedback form

OBJECTIVE AND SCOPE Class 1: • Property, plant and equipment – IAS 16 •

OBJECTIVE AND SCOPE Class 1: • Property, plant and equipment – IAS 16 • Investment property – IAS 40 • Deferred tax – IAS 12

DEFINITION OF PROPERTY, PLANT AND EQUIPMENT PPE are tangible assets that: • are held

DEFINITION OF PROPERTY, PLANT AND EQUIPMENT PPE are tangible assets that: • are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; AND • are expected to be used during more than one period.

RECOGNITION - INITIAL COST Elements of cost: • Purchase price, import duties and non-refundable

RECOGNITION - INITIAL COST Elements of cost: • Purchase price, import duties and non-refundable purchase taxes etc. • Costs directly attributable to bringing the asset to location and condition to be capable to operate in manner intended by management. • Initial estimated costs of dismantling and removing item and restoring the site on which it is located.

Example: Recognition of initial cost (extract from a previous assignment question) Paper Mate Ltd,

Example: Recognition of initial cost (extract from a previous assignment question) Paper Mate Ltd, a Gauteng based company, is involved in the paper industry. The following information relates to the pulp mill machine of the company: Acquisition date: 1 April 2013 Cost price: R 600 000 The following costs were incurred on acquisition of the pulp mill machine: Delivery costs R 30 000 Installation fees R 90 000 Administration costs R 8 000 Testing fees R 25 000 The units that were produced during the testing stage were sold for an amount of R 20 000.

Example: Recognition of initial cost (extract from a previous assignment question) Answer: Capitalised costs

Example: Recognition of initial cost (extract from a previous assignment question) Answer: Capitalised costs of pulp mill machine 1 April 2013: = R 600 000 + R 30 000 + R 90 000 + (R 25 000 – R 20 000) = 725 000 Take note that administration costs is not a element of cost and will not be capitalised towards the cost of the machinery. The amount received from selling the test products will reduce the cost price of the machinery.

RECOGNITION - SUBSEQUENT COST Servicing costs: • Normal day-to-day servicing (maintenance) costs are not

RECOGNITION - SUBSEQUENT COST Servicing costs: • Normal day-to-day servicing (maintenance) costs are not recognised in the CA of the item. Replacement at regular intervals • Recognise in CA of PPE item the cost of the replacing part when the cost is incurred if the recognition criteria are met. • The remaining CA of the replaced part is derecognised.

Example: Replacement at regular intervals (extract from a previous assignment question) On 15 June

Example: Replacement at regular intervals (extract from a previous assignment question) On 15 June 2014, Zelton Ltd placed an order for a new electronic machine for R 380 000. Zelton Ltd paid an installation fee of R 12 800 as well as a delivery fee of R 10 000 in cash. The machine was installed and ready for use, as intended by management, on 1 July 2014. On acquisition date an expected useful life of 6 years and a residual value of Rnil were allocated to the machine. The machine needs a major inspection every 24 months. On acquisition date the total cost of the inspection of the machine was estimated to be R 20 000. On 1 March 2015, the computer processing unit (CPU) of the machine was infected by a virus, which required the major inspection to be immediately performed on that date at a total cost of R 24 000. The remaining useful life and residual value of the machine remained unchanged throughout the period. Zelton Ltd is a company with a 31 March 2015 year-end.

Example: Replacement at regular intervals - Answer Available for use 1 July 2014 Actual

Example: Replacement at regular intervals - Answer Available for use 1 July 2014 Actual inspection 1 March 2015 = 8 months Machine excluding inspection Inspection component R R 382 800 20 000 Cost 1 July 2014 380 000 + 12 800 + 10 000 = R 402 800 (including the estimated inspection component) Depreciation for the 2015 financial year Machine (excl inspection) [402 800 – 20 000) / 6 x 9/12]; (47 850) Inspection component (20 000 / 24 x 8) (6 667) For the Carrying amount on date of inspection 334 950 13 333 month of Derecognise inspection cost 1 March 2015 (13 333) Capitalise new inspection cost 24 000 Carrying amount of estimated Depreciate new inspection cost (24 000 / 24 x 1) (1 000) inspection component on date of actual inspection

MEASUREMENT AT RECOGNITION - ABNORMAL CREDIT TERMS • Cost of PPE is cash price

MEASUREMENT AT RECOGNITION - ABNORMAL CREDIT TERMS • Cost of PPE is cash price equivalent at recognition date. • If payment is deferred beyond normal credit terms. • Difference between cash price and total payment is recognised as interest over the period of credit.

Example: Abnormal credit terms (extract from a previous assignment question) On 1 July 2010,

Example: Abnormal credit terms (extract from a previous assignment question) On 1 July 2010, Ster-Metro Ltd purchased new cinema equipment at a cost of R 480 000. Special payment terms were negotiated with the supplier and payment for the cinema equipment were only made on 1 January 2011, while normal credit terms of the supplier are strictly 30 days from invoice date. A pre-tax discount rate of 6, 5% per annum is considered to be appropriate. Answer: Cost price of equipment: FV = R 480 000 For period: 1 July 2010 until I = 6, 5% 1 January 2011 n = 6 months PV = R 464 692

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS PPE items may be acquired in

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS PPE items may be acquired in exchange for monetary or non-monetary assets or both: • The cost of acquired item is measured at FV unless: 1. Exchange transaction lacks commercial substance, OR 2. FV of neither asset received or given up is reliably measured. • If 1 OR 2: asset acquired is measured at carrying value of asset given up.

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS • Determine commercial substance by considering

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS • Determine commercial substance by considering the extent to which its future cash flows (CF) (after tax) are expected to change as a result of the transaction. Exchange transaction has commercial substance if: • Configuration of the CF of asset received differs from the configuration of CF of asset transferred, OR • Entity-specific value of the portion of entity’s operations affected by the transaction changes as result of exchange, AND

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS • When FV of both acquired

MEASUREMENT AT RECOGNITION - EXCHANGE OF PPE ITEMS • When FV of both acquired asset and asset given up can be measured reliably, then FV of asset given up is used to measure cost of the asset received, UNLESS FV of asset received is more evident.

MEASUREMENT AFTER RECOGNITION - COST MODEL Calculation of CA: • Cost price • Less

MEASUREMENT AFTER RECOGNITION - COST MODEL Calculation of CA: • Cost price • Less accumulated depreciation • Less accumulated impairment losses

DEPRECIATION • Each part of PPE-item with a cost that is significant in relation

DEPRECIATION • Each part of PPE-item with a cost that is significant in relation to total cost of the item must be depreciated separately. • Significant part of PPE-item with same useful life and depreciation methods may be grouped together in order to determine depreciation.

DEPRECIATION • Depreciation of an asset begins when it is available for use as

DEPRECIATION • Depreciation of an asset begins when it is available for use as intended by management. • Depreciation ceases at the earlier of the date that asset is classified as held for sale and the date the asset is derecognised.

DEPRECIATION Depreciation method: • Depreciation method used must reflect the pattern in which the

DEPRECIATION Depreciation method: • Depreciation method used must reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. • Depreciation method applied shall be reviewed at least at each financial year end.

DEPRECIATION 3 depreciation methods: • Straight-line method – adopted where income produced by the

DEPRECIATION 3 depreciation methods: • Straight-line method – adopted where income produced by the asset is a function of time, rather than usage. • Diminishing balance method – method is usually used where there is uncertainty as to the amount of income that will be derived from the asset. • Units of production method (or sum of units method) – depreciation is charged over the expected use or output of the asset.

DEPRECIATION • Depreciation charge is accounted for in profit or loss, unless it is

DEPRECIATION • Depreciation charge is accounted for in profit or loss, unless it is capitalised as part of the cost of another asset.

Example – Depreciation: Straight-line method (extract from previous assignment question) Deeman Ltd imported new

Example – Depreciation: Straight-line method (extract from previous assignment question) Deeman Ltd imported new specialised machinery from a German company to assemble the buses. The machinery was purchased on 1 April 2013 at a cost of R 7 500 000. Transport and installation costs of the specialised machinery amounted to R 650 000 and R 110 000 respectively. The machinery was available for use, as intended by management on 1 May 2014. A useful life of 10 years was allocated to the machinery. The company estimated that it will be able to sell the machinery for R 850 000 at the end of its useful life. Machinery is accounted for in accordance with the cost model. Depreciation on machinery is accounted for in accordance with the straightline method over the estimated useful lives of the asset. The estimated useful life and residual value remained unchanged through-out the period. The company has a 31 December 2015 year-end.

Example – Depreciation: Straight-line method (extract from previous assignment question) ANSWER: Residual value should

Example – Depreciation: Straight-line method (extract from previous assignment question) ANSWER: Residual value should be subtracted from the cost price in order to calculate the depreciable amount. (Residual value will be reassessed at each Carrying amount year-end) Cost (7 500 000 + 650 000 + 110 000) Accumulated depreciation [(8 260 000 – 850 000) / 120 x 20 ] Carrying amount 31 December 2015 Depreciation [(8 260 000 – 850 000) / 10] Carrying amount 31 December 2016 Total useful life of 10 years (will be reassessed at each year-end) R 8 260 000 (1 235 000) 7 025 000 (741 000) 6 284 000 Period from available for use until previous yearend 1 May 2014 – 31 December 2015 (8 months + 12 months)

Example – Depreciation: Units of production method (extract from question 3, tutorial letter 102)

Example – Depreciation: Units of production method (extract from question 3, tutorial letter 102) Prop-Invest Ltd is a property investment company situated in Johannesburg, with property investments in Gauteng and the Western Cape. The company has a 30 June year-end. On 31 March 20. 11, Prop-Invest Ltd purchased a motor vehicle for R 150 000 to be used by its courier. The motor vehicle was available for use as intended by management on acquisition date. The motor vehicle has an estimated useful life of 120 000 kilometres and a residual value of R 10 000 was allocated to the motor vehicle. The motor vehicle travelled a total distance of 7 000 kilometres during the 20. 11 financial year. Depreciation on motor vehicles is provided according to the units of production method.

Example – Depreciation: Units of production method (extract from question 3, tutorial letter 102)

Example – Depreciation: Units of production method (extract from question 3, tutorial letter 102) ANSWER: Depreciation for the 20. 11 financial year: = (R 150 000 – R 10 000) / 120 000 km x 7 000 km = R 8 167 Total km’s that will be travelled (useful life) Kilometres' travelled during the 20. 11 financial year

IMPAIRMENT • Impairment loss is the amount by which CA of an asset EXCEEDS

IMPAIRMENT • Impairment loss is the amount by which CA of an asset EXCEEDS its recoverable amount. • Refer to learning unit 3 for information on impairment of assets.

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Calculation of CA: • Fair value at the

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Calculation of CA: • Fair value at the date of the revaluation • Less subsequent accumulated depreciation • Less subsequent accumulated impairment losses

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Gross replacement value: • The replacement cost (market

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Gross replacement value: • The replacement cost (market value/cost price) of a similar NEW asset Calculation of revaluation surplus: • Determine the NRV at the BEGINNING of the current year. • Revaluation surplus = NRV at beginning of the year – CA at the beginning of the year

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question 14, tutorial letter 102) Khona Ltd is a manufacturing company based in Polokwane, South Africa. The company’s financial year-end is 31 October 20. 13. Manufacturing property - Polokwane Khona Ltd operates from a building that the company purchased on 1 July 20. 10 for R 9 000 (Land: R 2 000; Building: R 7 000). The property was available for use, as intended by management, on acquisition date. The building has an estimated useful life of 40 years with a residual value of R 3 000. After an independent sworn appraiser performed a valuation of the property as at 31 October 20. 13, he provided the management of Khona Ltd with the following gross replacement values for this property: Land R 2 050 000 Building R 7 100 000 The residual value and remaining useful life of the building remained unchanged throughout the period. It is the accounting policy of Khona Ltd to account for owner-occupied land buildings using the revaluation model. On revaluation, the accumulated depreciation is eliminated against the gross carrying amount of the asset.

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question 14, tutorial letter 102) ANSWER: Revaluation surplus: Land = R 2 050 000 – R 2 000 = R 50 000 Available for use: 1 July 20. 10 Previous year-end: 31 October 20. 13 (4 months + 12 months) Revaluation surplus: Building (1 November 20. 12) Step 1: Carrying amount on 1 November 20. 12: Cost: R 7 000 Accumulated depreciation: R 233 333 [(R 7 000 - R 3 000) / 480] x 28 = R 233 333 [40 years x 12 months in a year= 480 months] Carrying amount: R 6 766 667

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where gross replacement value was provided (extract from question 14, tutorial letter 102) Remember: Step 2: NRV on 1 November 20. 12: GRV = NEW asset NRV = [(Given GRV – Residual value) / Total useful life x Remaining useful life at beginning of the year] + Residual value = [(R 7 100 000 – R 3 000) / 480 x 452] + R 3 000 = R 6 860 833 [480 months (total useful life in months) – 28 months in previous financial periods = 452 months (remaining useful life in months at beginning of year) Step 3: Revaluation surplus Difference between NRV on 1 November 20. 12 and CA on 1 November 20. 12 = R 6 860 833 – R 6 766 667 = R 94 166

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Net replacement value • Regarded as the cost

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Net replacement value • Regarded as the cost to replace the asset with a similar asset of the same age and condition. Calculation of revaluation surplus: • Determine the NRV at the BEGINNING of the period. • Revaluation surplus = NRV at beginning of the year – CA at the beginning of the year

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question 5, tutorial letter 102) Choco. Coffee Ltd is a company situated on the North Coast of Kwazulu Natal. The company has a 31 December 20. 11 year-end. Processing plant Choco. Coffee Ltd owns a processing plant used for the roasting, grinding and packaging of the coffee beans. The property was purchased on 30 September 20. 10 for R 3 000 (land: R 1 000; building: R 2 000). The property was available for use, as intended by management, on acquisition date and was also brought into use on this date. A residual value of R 500 000 was allocated to the building. The useful life of the building was estimated to be 25 years. On 31 December 20. 11, the property was revalued for the first time. The net replacement value of this property was determined to be R 3 550 000 (land: R 1 250 000; building: R 2 300 000). The residual value and remaining useful life of the property remained unchanged. No decision has been made by the company to sell this property.

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question 5, tutorial letter 102) It is the accounting policy of Choco. Coffee Ltd to account for owner-occupied land buildings using the revaluation model. On revaluation, the accumulated depreciation is eliminated against the gross carrying amount of the asset. ANSWER: Revaluation surplus: Land = R 1 250 000 – R 1 000 = R 50 000

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question 5, tutorial letter 102) Revaluation surplus: Building (1 January 20. 11) Step 1: Carrying amount on 1 January 20. 11: Cost: R 2 000 Accumulated depreciation: R 15 000 [(R 2 000 – R 500 000) / 25] x 3/12 = R 15 000 Carrying amount: R 1 985 000 Available for use: 30 September 20. 10 Previous year-end: 31 December 20. 10 (3 months)

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question 5, tutorial letter 102) Step 2: NRV on 1 January 20. 11: = R 2 300 000 – R 500 000) / 285 x 297] + R 500 000 = R 2 375 789 [300 months (total useful life in months) – 3 months in previous financial periods = 297 months (remaining useful life in months at beginning of year) 297 months – 12 months in current year = remaining useful life of 285 months at the end of the year

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question

EXAMPLE: Calculation of revaluation surplus where net replacement value was provided (extract from question 5, tutorial letter 102) Step 3: Revaluation surplus Difference between NRV on 1 January 20. 11 and CA on 1 January 20. 11 = R 2 375 789 – R 1 985 000 = R 390 789

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Journal entry to account for the revaluation surplus

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Journal entry to account for the revaluation surplus of a building: [Journal entry will be recorded on the first day of the financial year] Debit: Building at revalued amount (given/calculated NRV at beginning of the year) (SFP) Credit: Building at cost amount (SFP) Debit: Accumulated depreciation (balance at beginning of the year) (SFP) Credit: Revaluation surplus (OCI)

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Revaluation surplus: INCREASE in asset’s CA: • Recognised

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Revaluation surplus: INCREASE in asset’s CA: • Recognised in other comprehensive income (OCI). • BUT, increase recognised in profit or loss to the extent it reverses a previous revaluation deficit of the same asset. Revaluation deficit: DECREASE in asset’s CA: • Recognised in profit or loss. • BUT, recognised in OCI to the extent it reverses a previous revaluation surplus of the same asset.

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Transfer of revaluation surplus is dependent on the

MEASUREMENT AFTER RECOGNITION - REVALUATION MODEL Transfer of revaluation surplus is dependent on the accounting policy of the company. 2 Choices exist: • Realise the revaluation surplus as the asset is used = Transfer annually a portion of the revaluation surplus to retained earnings • Realise the revaluation surplus upon disposal of the asset = Realise the total revaluation surplus to retained earnings upon disposal of the asset

DISCLOSURE • Below are illustrations of Property, plant and equipment disclosure. • Land buildings

DISCLOSURE • Below are illustrations of Property, plant and equipment disclosure. • Land buildings must be shown as separate assets. • You should ONLY disclose ONE column for land ONE column for buildings, even if you have more than one property.

DISCLOSURE Must have a separate column for each class of asset, eg. Vehicles, machine,

DISCLOSURE Must have a separate column for each class of asset, eg. Vehicles, machine, land, buildings These are the movements for the CURRENT financial year. Only include if it is applicable. This narrative disclosure MUST be included in the note for PPE. A lot of students forget to include this note and miss out on easy marks.

HINTS AND TIPS • Remember that all revaluations have to take place at the

HINTS AND TIPS • Remember that all revaluations have to take place at the beginning of the financial year. • If the NRV is given at the end of the financial year – you need to work it back to the NRV at the beginning of the financial year. • Depreciation for the current year must be calculated using the NRV at the beginning of the year and the remaining useful life at the beginning of the year. • Remember the narrative information underneath the PPE note (this is easy marks). • Draw a timeline of events and clearly mark the events occurring. This will assist you in determining when and how the events occur and assist in presenting a logical solution.

FAC 3702 FASSET CLASS 1 MARCH 2018 SECOND SESSION

FAC 3702 FASSET CLASS 1 MARCH 2018 SECOND SESSION

DEFINITION OF INVESTMENT PROPERTY Is property (land or a building – or part of

DEFINITION OF INVESTMENT PROPERTY Is property (land or a building – or part of a building – or both held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; OR (b) sale in the ordinary course of business.

RECOGNITION • It is probable that future economic benefits will flow to the entity;

RECOGNITION • It is probable that future economic benefits will flow to the entity; and • The cost of the investment property can be measured reliably • Definition and recognition criteria must be met.

INITIAL MEASUREMENT • Measured @ cost price including transaction costs and directly attributable costs.

INITIAL MEASUREMENT • Measured @ cost price including transaction costs and directly attributable costs. • Including: any directly attributable expenditure such as legal services, property transfer taxes and other transaction costs. • Excluding: start-up costs, initial operating losses, wasted material, or unproductive labour costs.

SUBSEQUENT MEASUREMENT A choice of two models exist: • Cost model (IAS 16 PPE)

SUBSEQUENT MEASUREMENT A choice of two models exist: • Cost model (IAS 16 PPE) OR • Fair value model (IAS 40)

COST MODEL • Measure all IP at cost price minus accumulated depreciation and impairment

COST MODEL • Measure all IP at cost price minus accumulated depreciation and impairment losses (as for PPE).

FAIR VALUE MODEL • Measure all IP at fair value. • Fair value =

FAIR VALUE MODEL • Measure all IP at fair value. • Fair value = price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. • The fair value of IP reflects market conditions at the END of the reporting period. • Fair value is time specific at a given date. • No depreciation. • Changes in fair value are recognised in profit or loss i. e. through the statement of profit or loss and other comprehensive income.

SUBSEQUENT COSTS • Capitalise any subsequent costs only if recognition criteria are met.

SUBSEQUENT COSTS • Capitalise any subsequent costs only if recognition criteria are met.

Example: Investment property in accordance with the fair value model (extracted from previous assignment

Example: Investment property in accordance with the fair value model (extracted from previous assignment question) Deeman Ltd is a company with an interest in property development. The company has a 31 December 2016 year-end. Residential apartments On 2 January 2015 the company acquired a vacant piece of land for R 3 900 000 from the local municipality and immediately commenced with the construction of eighteen apartments which will be rented out. The construction of the apartments were completed on 1 April 2016 at a cost of R 12 000. On 1 April 2016 the apartments were available for use, as intended by management, and from this date it was rented out. The fair value of the property on 31 December 2016, when it was revalued for the first time, was determined to be R 16 550 000 (land: R 4 250 000; building: R 12 300 000). Investment property is accounted for in accordance with the fair value model.

Example: Investment property in accordance with the fair value model (extracted from previous assignment

Example: Investment property in accordance with the fair value model (extracted from previous assignment question) ANSWER: Fair value adjustment 31 December 2016: Land = R 4 250 000 - R 3 900 000 = R 350 000 Fair value adjustment 31 December 2016: Building = R 12 300 000 – R 12 000 = R 300 000

TRANSFERS

TRANSFERS

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination question) The primary business of Bari Ltd, a media company based in Cape Town, is to print, distribute and sell newspapers. The company has a 30 April reporting date. Investment property Property - Bellville On 1 July 2010, Bari Ltd acquired an administrative property in Bellville at a cost of R 6 900 000 (land: R 2 000; building: R 4 900 000). Bari Ltd rented this property to tenants since acquisition date. Due to the decline in business in the printed newspaper industry, the management of Bari Ltd decided to start up their own digital division and to use this property for this purpose. After notice was given to the tenants, the tenants vacated the building on 31 January 2016. Bari Ltd immediately took occupation of the property. On 31 January 2016, the useful life of the building was estimated to be 22 years and a residual value of R 2 000 was allocated to the building. At year-end on 30 April 2016, the remaining useful life and residual value of the building remained unchanged. Change in intention: IP to become PPE

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination question) An independent sworn appraiser, who holds a recognised and relevant professional qualification and has recent experience in the location and category of the property being valued, determined the fair values and net replacement values of the property as follow: Land Building 30 April 2015 31 January 2016 R R 1 900 000 1 950 000 4 650 000 4 750 000 The directors decided that this property will not be revalued on 30 April 2016, due to the fact that the property was already revalued on 31 January 2016. However, both properties will be revalued during the 2017 financial year.

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination question) Accounting policies The following is an extract from the accounting policies of Bari Ltd: • Owner-occupied land buildings are accounted for in accordance with the revaluation model. • Investment property is accounted for in accordance with the fair value model.

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination question) Answer: Land The company follows the fair value model on investment property. Investment property will therefore be fair valued every year-end. Fair value adjustments will be accounted for in P/L. Cost 31 July 2010 Fair value adjustment 30 April 2015 (1 900 000 – 2 000) Carrying amount 30 April 2015 Fair value adjustment 31 January 2016 (1 950 000 – 1 900 000) Carrying amount 30 April 2016 Fair valued in IP in order to transfer the FV of land to PPE Carrying amount R 2 000 (100 000) 1 900 000 50 000 1 950 000

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination

Example: Transfer of Investment property to Property, plant and equipment (extract from previous examination question) Answer: Building The company follows the fair value model on investment property. Investment property will therefore be fair valued every year-end. Fair value adjustments will be accounted for in P/L. Remember Carrying that buildings of investment property carried under amount the fair value model will not be depreciated. Cost 31 July 2010 Fair value adjustment (4 650 000 – 4 900 000) Carrying amount 30 April 2015 Fair value adjustment (4 750 000 – 4 650 000) Carrying amount 31 January 2016 (deemed cost for PPE) Depreciation [(4 750 000 – 2 000) / 22 x 3/12] Carrying amount 30 April 2016 Fair valued in IP in From 31 January 2016 = PPE Follow PPE rules Depreciate, Revaluate order to transfer the FV of the building to PPE R 4 900 000 (250 000) 4 650 000 100 000 4 750 000 (31 250) 4 718 750

TRANSFERS

TRANSFERS

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7,

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7, tutorial letter 102) Logo Logic Ltd is a printing company situated in Pretoria, Gauteng. The financial year-end of the company is 30 June 20. 12. Office building Owner occupied = PPE! Logo Logic Ltd owns an office building which is used as their administrative headquarters. The property was purchased on 1 July 20. 11 for R 2 850 000 (Land: R 400 000; Building: R 2 450 000). The building has a useful life of 25 years and no residual value. The building was available for use, as intended by management, on acquisition date.

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7,

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7, tutorial letter 102) During the 20. 12 financial year, the directors of the company decided to move their administrative headquarters to the manufacturing building, as there was sufficient vacant space available for this purpose and to increase profitability. On 1 May 20. 12, Logo Logic Ltd evacuated the office building and relocated its administrative headquarters to the manufacturing building. Subsequently, on 1 May 20. 12 a lease contract was signed with Blue Bell Ltd to rent the office building for a 10 year period, effective from 1 July 20. 12. Change in intention – From 1 May 20. 12 the property should be classified as investment property. TRANSFER FROM PPE TO IP

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7,

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7, tutorial letter 102) The properties were revalued by Mr Mabula, an independent sworn appraiser, who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the property being valued. Values were determined on the net replacement value basis with reference to current market evidence. The remaining useful life of the buildings remained unchanged throughout. The values applicable to the property is as follows: Office building: Fair value on 1 May 20. 12 Land: R 480 000 Building: R 2 600 000 Fair value on 30 June 20. 12 Land: R 490 000 Building: R 2 650 000

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7,

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7, tutorial letter 102) Answer: Land Revaluated in PPE in order to transfer the FV of land to IP. Carrying amount R Carrying amount 1 May 20. 12 (Transfer from PPE to IP) 00 000 80 000 480 00 Fair value adjustment 30 June 20. 12 (490 000 – 480 000) 10 000 Cost 1 July 20. 11 Revaluation 1 May 20. 12 (480 000 – 400 000) Carrying amount 30 June 20. 12 The company follows the fair value model 490 000 for investment property, therefore needs to adjust the value of the IP on year-end to fair value

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7,

Example: Transfer of Property, plant and equipment to Investment Property (extract from question 7, tutorial letter 102) Answer: Building Revaluated in PPE in order to transfer the FV of building to IP. Revaluation on transfer date = Difference between the fair Cost 1 July 20. 11 value on transfer date and the Depreciation (2 450 000 / 25 x 10/12) carrying amount on transfer date. Carrying amount R 2 450 000 (81 667) Carrying amount 1 May 20. 12 2 368 333 Revaluation 1 May 20. 12 [2 600 000 – (2 450 000 – 81 667)] Carrying amount 1 May 20. 12 (Transfer from PPE to IP) 231 667 2 600 000 Fair value adjustment 30 June 20. 12 (2 650 000 – 2 600 000) The company follows the fair value Carrying amount 30 June 20. 12 50 000 2 650 000 model for investment property, therefore needs to adjust the value of the IP on year-end to fair value

TRANSFERS

TRANSFERS

DISPOSALS AND ADDITIONS • Same rules as for PPE as per IAS 16

DISPOSALS AND ADDITIONS • Same rules as for PPE as per IAS 16

DISCLOSURE Statement of profit or loss and other comprehensive income: • Rental income from

DISCLOSURE Statement of profit or loss and other comprehensive income: • Rental income from IP. • Direct operating expenses from IP that generated rental income during the period. • Direct operating expenses from IP that did not generate rental income during the period. • Fair value adjustment.

DISCLOSURE Statement of Financial Position if cost model is applied: Disclosure according to IAS

DISCLOSURE Statement of Financial Position if cost model is applied: Disclosure according to IAS 16 PPE

DISCLOSURE Statement of Financial Position if FV model is applied: IAS 40 requires you

DISCLOSURE Statement of Financial Position if FV model is applied: IAS 40 requires you to disclose land buildings as a total, but you need to show the marker how you calculated the total in order to obtain your marks. Please note that there is no depreciation for IP carried at FV model.

DEFERRED TAX IAS 12 follows the statement of financial position approach for calculating deferred

DEFERRED TAX IAS 12 follows the statement of financial position approach for calculating deferred tax. This approach entails the following: • Calculate the carrying amounts of all assets and liabilities evident from the information available. • Determine the relevant tax base for each asset and liability identified. • Calculating the temporary differences by taking into account the difference between the carrying amount and tax base of each asset and liability. • Determine whether each temporary difference results in a deferred tax asset or liability. • Multiplying each temporary difference with the applicable tax rate. • Calculating the net deferred tax liability or asset for the current year. • Calculate the deferred tax movement in the statement of profit or loss and other comprehensive income as the difference between the opening and closing balance of the deferred tax liability or asset.

DEFERRED TAX Statement of Financial Position Approach At year-end: Carrying amount – Tax base

DEFERRED TAX Statement of Financial Position Approach At year-end: Carrying amount – Tax base = Temporary difference x Applicable tax rate = Deferred tax asset / liability

DEFERRED TAX

DEFERRED TAX

Example: Deferred tax calculation

Example: Deferred tax calculation

Example: Deferred tax disclosure

Example: Deferred tax disclosure

Example: Deferred tax on Investment property (extract from previous assignment question) Uzalo Ltd is

Example: Deferred tax on Investment property (extract from previous assignment question) Uzalo Ltd is a platinum smelter company located in the North West province and has a 31 December year-end. Property B was acquired on 1 April 2016 at a cost of R 6 000 (Land: R 2 500 000; Building: R 3 500 000). After acquisition the building was rented to Invictor Mineral Ltd to be used as an administrative building at a market related rent. On 31 December 2016, the fair value of property B, was determined to be: Land: R 2 550 000 Building: R 4 000 Investment property is accounted for in accordance with the fair value model.

Example: Deferred tax on Investment property (extract from previous assignment question) Deferred tax is

Example: Deferred tax on Investment property (extract from previous assignment question) Deferred tax is provided for on all temporary differences in accordance with the statement of financial position approach. There are no other items causing temporary or exempt differences except those identified in the question. The company will have sufficient taxable profit in the future, against which any unused tax losses can be utilised. The South African Revenue Service allows a 5% annual building allowance on the building according to section 13 quin of the Income Tax Act, on the straight-line method, not apportioned for part of the year. Required: Prepare the deferred tax note to the annual financial statements of Uzalo Ltd for the year ended 31 December 2016.

Example: Deferred tax on Investment property (extract from previous assignment question) ANSWER: The carrying

Example: Deferred tax on Investment property (extract from previous assignment question) ANSWER: The carrying amount of land will be recovered through a sales transaction. Deferred tax will for this reason be calculated by including the CGT rate of 80% Deferred tax note Fair value adjustment - Investment property – Land (50 000 x 80% x 28%) Fair value adjustment - Investment property – Building (500 000 x 80% x 28%) R 11 200 112 000 49 000 Accelerated tax allowances – Investment property - Building [(3 500 000 x 5%) x 28%] Above base cost portion: A fair value Below cost portion: Tax allowances increases the temporary differences by reducing the tax base of the asset below the original base cost. Deferred tax on accelerated tax allowances will be calculated at 28% adjustment increases the temporary differences by increasing the carrying amount above the original base cost of the asset. Deferred tax on fair value adjustments will be calculated on this portion by including the CGT rate of 80%

Example: Deferred tax on owner occupied property (extract from previous assignment question) Zelton Ltd

Example: Deferred tax on owner occupied property (extract from previous assignment question) Zelton Ltd is a company with a 31 March year-end. Administration property On 1 November 2007, Zelton Ltd purchased a property with a cost price of R 750 000 (land: R 150 000; building: R 600 000) to be used for administrative purposes. On acquisition date the building was available for use, as intended by management. On this date an expected useful life of 25 years and a residual value of R 50 000 was allocated to the building. During the current financial year the directors of Zelton Ltd decided to rather apply the revaluation model in future to land buildings, due to the significant increase in the market values of property during the past 5 years. On 31 March 2015, the fair value of the land the net replacement value of the building was determined to be R 650 000 and R 1 215 000 respectively. On the date of the revaluation the property had an estimated remaining useful life of 15 years and a residual value of Rnil.

Example: Deferred tax on owner occupied property (extract from previous assignment question) The accounting

Example: Deferred tax on owner occupied property (extract from previous assignment question) The accounting policy of owner-occupied land buildings changed during the current financial year from the cost model to the revaluation model. On revaluation, accumulated depreciation is eliminated against the gross carrying amount of the asset. Any revaluation surplus will realise upon disposal of the underlying assets. The South African Revenue Service allows a 5% building allowance according to the straight-line method, not apportioned for part of a year, according to section 13 quin of the Income Tax Act. Deferred tax is provided for on all temporary differences using the statement of financial position approach. There are no other items causing temporary or exempt differences except those identified in the question. The company will have sufficient taxable profit in future against which any unused tax losses can be utilised.

Example: Deferred tax on owner occupied property (extract from previous assignment question) Required: Calculate

Example: Deferred tax on owner occupied property (extract from previous assignment question) Required: Calculate the deferred tax balance relating to the administration property of Zelton Ltd on 31 March 2015. The carrying amount of land will be recovered ANSWER: through a sales transaction. Deferred tax will for this reason be calculated by including the CGT rate of 80% Deferred tax calculation Land: [(650 000 – 150 000) x 80% x 28%] Building: [(1 215 000 – 360 000) x 28%] Carrying amount at year-end (given in the question) Tax base of the building at year-end: 600 000 – (600 000 x 5% x 8 years) = R 360 000 [2008 – 2015 = 8 years] R (112 000) (239 400) The carrying amount of the building will be recovered through use. Deferred tax will be calculated on a flat 28%.

Contact details (012) 429 8606 Mrs M Evans Mrs M de Wet (012) 429

Contact details (012) 429 8606 Mrs M Evans Mrs M de Wet (012) 429 4844 Mr DO Khumalo (012) 429 4408 Mr J van Rooyen (012) 429 2538 FAC 3702 -18 -S [email protected] ac. za Log on to my. Unisa and post your questions on the discussion forum