Property Plants and Equipment LKAS 16 RANGAJEWA HERATH

Property, Plants and Equipment (LKAS 16) RANGAJEWA HERATH B. SC. ACCOUNTANCY AND FINANCIAL MANAGEMENT(SP. ) (HONS. ) (USJ) , MASTER OF BUSINESS ADMINISTRATION -PIM(USJ) SENIOR LECTURER, UNIVERSITY OF SRI JAYEWARDENEPURA

Definitions 2 �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. Rangajeewa Herath

Definitions 3 �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. Rangajeewa Herath

Definitions 4 �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 or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other Standards. Rangajeewa Herath

Definitions 5 �Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Rangajeewa Herath

Definitions 6 �Useful life is: (a) the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity. Rangajeewa Herath

Measurement at Recognition 7 �An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. Rangajeewa Herath

Examples of directly attributable costs 8 a) Costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; (b) Cost of site preparation; (c) Initial delivery and handling costs; (d) Installation and assembly costs; (e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) Professional fees. Rangajeewa Herath

Exercise 1 9 � A business imported a plant for its manufacturing factory. Purchase price of the machine is Rs. 1, 500, 000 and 5% trade discount was received from the buyer. Fright and insurance cost of bring the machine to Sri Lanka was Rs. 450, 000. Import duties and other taxes paid at the port was Rs. 350, 000. Local transport cost of Rs. 50, 000 was incurred to bring the plant to the factory. Rs. 5, 000 wages for laborers and Rs. 15, 000 professional fee for engineer was paid at the installation of the plant. Fire insurance policy is obtained for the plant and annual insurance premium paid is Rs. 55, 000. Prior to commence the commercial production, a test run was made by incurring Rs. 120, 000 cost. Items produced in this test run were sold for Rs. 45, 000 after incurring Rs. 5, 000 selling expenses. � Required: Calculate Cost of Plant which should be recognized in the financial statements. Rangajeewa Herath

Measurement after Recognition 10 Cost Model After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation. � Revaluation Model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Rangajeewa Herath

Results of Revaluation 11 Revalued Amount > Carrying Amount = Revaluation Surplus Revalued Amount < Carrying Amount = Revaluation Deficit Rangajeewa Herath

Exercise 2 12 � The following balances were extracted from ABC PLC. as at 31. 03. 2015. � Land � Buildings � Motor vehicles Cost 600, 000 400, 000 800, 000 Acc. Depn. 100, 000 250, 000 These assets were revalued as follows � Land – 750, 000 Buildings - 450, 000 MV- 425, 000 Required: Prepare the necessary accounts to record the revelation and show income statement and statement of financial position extracts. Rangajeewa Herath

Exercise 3 13 �A business purchased a plant for Rs. 3, 000 on 01. 04. 2012 and estimated a useful life of 8 years with a residual value of Rs. 600, 000. On 01. 04. 2014 this plant was revalued for Rs. 2, 520, 000. �Required: Prepare the necessary accounts to record the revelation and show income statement and statement of financial position extracts Rangajeewa Herath

Depreciation Adjustment at the date of revaluation 14 Either: Eliminate against the gross carrying value of the asset and the net value is restated to the revalued amount of the asset. Restate proportionately with the change in the gross carrying value of the asset so that carrying value after revaluation equals its revaluation amount. Rangajeewa Herath

Exercise 4 15 �A business purchased a plant for Rs. 5, 000 on 01. 04. 2012 and estimated a useful life of 10 years. On 01. 04. 2016 the company decided to revalue this plant and the market price of this type of new plant was Rs. 7 million. �Required: Prepare the necessary accounts to record the revelation and show income statement and statement of financial position extracts Rangajeewa Herath

Revaluation Increase/Decrease 16 � Increase – Recognize in other comprehensive income and accumulated in equity under the heading revaluation surplus. However, is recognized in profit or loss to the extent it reverses a revaluation decrease of the same asset previously recognized in profit or loss. � Decrease – Recognize in profit or loss. However, it recognized in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. Rangajeewa Herath

Revaluation of Revalued PPE 17 First Time Second Time Accounting Treatment Surplus Recognized under Other Comprehensive Income and Accumulated in Revaluation Reserve Deficit Recognized as an expense in the Profit/ (loss) Surplus Deficit Reverse the previously recognized Surplus. Any excess over it , Recognized as an expense in the Profit/ (loss) Deficit Surplus Reverse the previously recognized Deficit. Any excess over it , recoded under Other Comprehensive Income and Accumulated in Revaluation Reserve. Rangajeewa Herath

Depreciation Period and Depreciation Method 18 � Depreciable amount should allocate systematic basis over its useful life. on a � Depreciation should begin when asset is available for use. � Depreciation method should reflect the pattern in which the asset’s economic benefits are consumed by the entity. If that pattern cannot be determined reliably, use straight line method. � Depreciation charge should be recognized in P/L unless it is included in the carrying value of another asset. Rangajeewa Herath

Review of Deprecition Period and Depreciation Method 19 � Should review at least at each financial year- end. � If the expected useful life is different from previous estimates, depreciation period should be changed. � If there is a significant change in the expected pattern of consumption of economic benefits from the asset, depreciation method should be changed. Rangajeewa Herath

20 �Tutorial Exercises Rangajeewa Herath