N O T E O N A C C O U N T I N G F O R P R O P E R T Y , P LA N T , A N D E Q U I P M E N T

 Tangible items that are used in the production or supply of goods or services, for rental to others or for administrative
purposes
 Company must plan to use the item during more than one accounting period
 Accounted for as a long-term asset and often grouped under fixed assets
 To be considered an asset, it must be probable that future economic benefits associated with the item will flow to the
entity, and the cost must be measurable

INITIAL RECOGNITION AND MEASUREMENT

 Under ASPE and IFRS, after an item has qualified for recognition as an asset, it must be initially measured at its cost
 IFRS stipulates items that can and cannot be included as part of the cost of capital asset:
o The item’s purchase price + any directly attributable costs to the items set-up + initial estimate of the costs of
dismantling the item
 Purchase price: + import duties + non-refundable purchase taxes – trade discounts and rebates
 Directly attributable costs: + costs of employee benefits from acquisition + site preparation +
delivery and handling + installation and assembly + testing and professional fees
 Estimate of dismantling: + obligation entity incurs when item is acquired or when entity becomes
obligated to incur these costs

DEPRECIATION

 Fixed assets typically have limited lives and are acquired to generate future benefits over a specified period
 Depreciation is the cost recognized when the asset is put to use
 Managers must choose the depreciation method that best matches the estimated pattern in which the benefits are
expected to be consumed
 ASPE states the amount of depreciation that should be charged to income is the greater of:
o (asset’s cost – asset’s salvage value)/asset’s life
o (asset’s cost – asset’s residual value)/asset’s useful life
o Residual value: estimated net realizable value at the end of its useful life to an enterprise
o Salvage value: estimated net realizable value at the end of its life
o Useful life: period over which an asset, by itself or combined with other assets, is expected to contribute
directly or indirectly to FCF of an enterprise
o ASPE requires estimated residual values and lives be assessed only when circumstances have changes and
entity believes change in estimate is necessary
 IFRS depreciable amount
o (asset’s cost – asset’s residual value)/asset’s useful life
o Residual value = estimated amount entity would obtain from disposal of the asset after deducting estimated
costs of disposal, if the asset were already of the age and in condition expected at the end of its useful life
o Useful life of an asset is defined as:
 Period over which an asset is excepted to be available for use to an entity
 Number of production or similar units expected to be obtained from the asset by an entity
o IFRS requires estimates of useful life and residual value be reviewed at least at each annual reporting date

BORROWING COSTS

 Must be capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset
 IFRS, companies must demonstrate a commitment to the asset and be able to show they are completing activities
necessary to prepare asset for its intended use
  Under ASPE for self-constructed assets, entities can choose whether to capitalize financing costs; under IFRS all interest
would be capitalized
 Under ASPE and IFRS, once the asset is substantially complete, the capitalization of borrowing costs must end

MEASUREMENT SUBSEQUE NT TO INITIAL RECOGN ITION

 After an asset has been recorded at cost, a number of things can happen:
o Asset can increase in value rapidly
o Asset can decrease in value more rapidly than expected
 ASPE states an asset must continue to be carried at cost, less depreciation and cannot be written up
 IFRS allows for revaluation referring to an asset recorded at FV at the BS date – subsequent depreciation
o FV is usually determined by a professionally qualified valuator
o Valuation must take place as often as necessary to ensure net carrying value is as close to FV
o Can lead to book value changing significantly – if increases to value are recorded in income, statement users
will have a misunderstanding of the company’s performance because the market value of PP&E is
contributing to the bottom line
o Revaluation increases are realized in the “other comprehensive income” account under a heading of
“revaluation surplus”
o Revaluation decreases are first applied against revaluation surplus

Gain is Generation Loss is Generated

First Revaluation
Subsequent Revaluation: Does not
reverse previous deficit/surplus
Subsequent Revaluation: Reverses
previous deficit/surplus
Cr. equity (other comprehensive
income – revaluation surplus)
Cr. revaluation surplus
Cr. IS up to amount of previous deficit
with any remainder credited to
revaluation surplus
Dr. IS (profit and loss)
Charge to IS
Charge revaluation surplus up to
amount of previous surplus with
remainder charged to IS

REVALUATION METHOD A ND DEPRECIATION

 Can restate depreciation balance proportionately with change in gross carrying amount of the asset
o As a result, carrying amount of asset after revaluation = revalued amount
 When depreciation balance is eliminated against gross carrying amount of the asset, net amount of the asset is then
restated to the revalued amount

COMPONENT DEPRECIATI ON TECHNIQUES

 Originates from the idea that many PP&E items are made up of a variety of different parts, each with its own tangible
values, each potentially depreciating at a different rate
 Ex. in a bus, the engine may need to be replaced in 10 years, but the seats not for 15 years
 Each component that has “significant” value should be measured separately
 Professional judgement is required to make a determination regarding what is significant

DISPOSAL OF PP&E

 Must remove the asset from the books, which is most cases will trigger a loss or a gain
 Loss = carrying amount > net disposal proceeds
 Gain = carrying amount < net disposal proceeds
 In ASPE and IFRS, gain or loss is charged directly to the IS
 IMPAIRMENT OF PROPER TY, PLANT AND EQUIPMENT

 Impaired when item has weakened and is unlikely to ever return to its original state or status
o ASPE suggests assets are tested when events or changes in circumstances indicate asset’s carrying amount
might not be recoverable
o IFRS requires an assessment whether there is any indication an asset may be impaired at the end of each
reporting period
o Both ASPE and IFRS have a list of external and internal indicators in order to determine if impairment has
occurred
 ASPE impairs when carrying amount is no longer recoverable; when carrying amount > undiscounted cash flows
expected to result from use and disposal
 IFRS dictates impairment when carrying amount > recoverable amount
o Recoverable amount is = to the higher of:
 The fair value of the asset – costs to sell
 Value in use of the asset
 Fair value: amount that can be obtained from sale of an asset in an arm’s length transaction between knowledgeable,
willing parties, less incremental costs attributable to disposal excluding financing costs and income tax expense
 Value in use: some measurement of the PV of FCF that an asset will generate
 Under ASPE, future cash flows are undiscounted – dollar amount generated does not reflect time value of money
 Under IFRS, future cash flows are discounted – discount rate must be pre-tax rate that reflects current market
assessments of time value of money and risks specific to the asset for which FCF estimates have not been adjusted

RECOGNITION AND MEAS UREMENT

 Under ASPE, recognizing impairment loss and then measuring is a 2 step process
o If BV > recoverable amount, this first test establishes the asset is impaired
o Then it requires an investigation of the fair value of the asset
o The difference between the FV and net BV is the impairment loss
 Under IFRS, if the recoverable amount < carrying amount of the asset, the BV needs to be reduced to the recoverable
amount

REVERSAL OF AN IMPAIRMENT LOSS

 In some cases, the value of an impaired item of PP&E will return to a level consistent with what would have been true
prior to the impairment
 ASPE does not permit reversal of an impairment loss
 IFRS permits reversal of some or all of the previous impairment losses, but only if management believes the asset’s
service potential has increased

INVESTMENT PROPERTY

 ASPE does not distinguish between PP&E and investment property

 Under IFRS investment property: land and/or buildings an entity holds to either earn rental income or for capital
appreciation, or for both
 Most easily recognized if it is capable of generating cash flows without the involvement of other assets

MEASUREMENT OF INVES TMENT PROPERTY

 Upon initial recognition, investment property must be recorded as cost for ASPE and IFRS
 ASPE
o Continue to enforce measurement at cost
 IFRS
o Can continue to measure assets at cost or at fair value
 Under fair value, an entity must determine FV of the property at the end of each reporting period
 If a company wants to measure one item of investment property at FV, it must do so for all of its
investment property
 If a company is using the cost method, it must disclose the FV of investment property in the notes
o Gains and losses on investment property are charged to income every year in the same period in which they
are earned