Tangible fixed assets International Standards IAS 16 property

Tangible fixed assets • International Standards – IAS 16 – property, plant and equipment – (value and depreciation) – IAS 23 – borrowing costs – (capitalisation of interest costs) – IAS 36 - impairment

Fixed Asset Valuation • Value in exchange – output value • net realisable value (NRV) – input value • historic cost (HC) • adjusted historic cost (CPP) • Replacement cost (RC) • Value in use – net present value (NPV or VIU)

Asset Definitions (1) Canning an asset is any future service in money, or any future service convertible into money, the beneficial interest in which is legally or equitably secured to some person or set of persons: such a service is an asset only to that person or set of persons to whom it runs

Asset Definitions (2) Sprouse and Moonitz assets represent expected future economic benefits, rights to which have been acquired by the enterprise as a result of some current or past transaction

Characteristics of Assets • There must exist some specific right to future benefits or service potentials • The rights must accrue to a specific person or entity • There must be a legally enforceable claim to the rights or services • There must be a recognisable transaction

Why Value Assets ? • A means of measuring income • Presentation of the entity’s financial position to investors, actual or potential • For use by other outside interested parties • For use by management

Deprival Value • • • When NPV > NRV > RC - use RC When NRV > NPV > RC - use RC When NPV > RC > NRV - use RC When NRV > RC > NPV - use RC When RC > NRV > NPV - use NRV When RC > NPV > NRV - use NPV

Depreciation The measure of the wearing out, consumption, or other reduction in the useful economic life of a fixed assets whether arising from use, effluxion of time or obsolescence through technology or market changes

Depreciation Value Revenues Costs Economic life Time

Factors affecting the assessment of depreciation • • The original cost or valuation of the asset The residual value of the asset The asset’s useful economic life The method of depreciation employed

Tangible fixed assets the main issues • • Initial measurement Valuation Revaluation Depreciation

INITIAL MEASUREMENT • Should be costs directly attributable to bringing the asset into working condition for its intended use • Capitalisation of finance costs, including interest, may be appropriate • Subsequent expenditure which enhances an asset's performance may be capitalised

VALUATION • Non-specialised properties - Existing Use Value (EUV) • Specialised properties - depreciated replacement cost • Properties surplus to an entity's requirements - Open Market Value (OMV) • Other tangible fixed assets - market value or depreciated replacement cost

REVALUATION • Tangible fixed assets should be revalued only where the entity adopts a policy of revaluation. • Where such a policy is adopted then it should be applied to individual classes of tangible fixed assets. • It need not be applied to all classes of tangible fixed assets held by the entity • Revaluations need to be carried out on a regular basis

REVALUATION GAINS • Revaluation gains will normally be recognised in the STRGL except when they represent a reversal of a previous revaluation loss • Any revaluation gain which is taken to the Profit and Loss Account (income statement) should be adjusted for notional depreciation

REVALUATION LOSSES • Revaluation losses will normally be recognised in the Profit and Loss Account (income statement) • Revaluation losses may be recognised in the STRGL until the carrying cost of the asset reaches its depreciated historical cost

DEPRECIATION • The fundamental objective of depreciation is to reflect in the operating profit the amount of economic benefit consumed in the period • Even if an asset is revalued and the revalued amount is an increase on the carrying amount there will still need to be a depreciation charge

DEPRECIATION • Split depreciation is not acceptable • All assets should be depreciated with the exception of land • Impairment reviews should be carried out on a regular basis