MFRS116 – PROPERTY, PLANT

AND EQUIPMENT
MFRS 116
Property,
Plant and
Equipment
 Property, Plant and Equipment
Objective of Mr A is a potential investor and
Providing considering to buy shares in Axis Bhd.
Information

Information about He will assess the amount, timing and

PPE is useful to uncertainty of the future net cash
primary users inflows in terms of revenue generated
when they make from the use of the PPE. He is also
decision whether
to buy or sell the
interested to know the current value of
shares. the PPE. He will buy the shares in Axis
Bhd if the estimated amount, timing
and the uncertainty of the future net
cash inflows meet his own expectation.
 Definition and Classification of PPE
An item of PPE is Focus Eye Bhd acquired an advanced optical lens-making
classified as PPE if it is machine to produce lenses. The machine is expected to be
identified as asset and used for five years before being scrapped.
meets the definition of
PPE. Question: Is the machine an asset?

PPE are tangible items The machine is an asset of Focus Eye Bhd because it is a
that are held tor use in physical resource (a steel and concrete structure) purchased
the production or supply by Focus Eye Bhd (past event) and used at the entity’s
of goods or services, for discretion (control) to produce lenses. The sale is expected to
rental to others, or for result in the flow of cash (future economic benefits) to the
administration company.
purposes; and are
expected to be used for Question: Is the machine an item of property, plant and
more than one period. equipment?

It has physical form (tangible), it is used to convert glasses

into lenses (held for use in production) and it is expected to
be used for about five years (in more than one period).
Therefore, the machine is an item of property, plant and
equipment.
Identification
• Large assets - component accounting
 Items or parts of a piece of property,
plant and equipment that have a different
economic life or maintenance are
identified and depreciated accordingly –
eg ships

• Numerous small assets

 Combine as a single asset.
 Initial Recognition of PPE
PPE are Focus Eye Bhd acquired an optical equipment to monitor and determine the
recognized as quality of visions of its customers. The equipment was paid in cash for
assets when it is RM52,000 on delivery.
probable that Question: Is the item a PPE?
future economic The equipment is considered as an asset because it is a physical resource (a
benefits steel and concrete structure), purchased by Focus Eye Bhd (past event), and
associated with used at the entity’s discretion (control) to monitor and determine the quality of
the item will flow visions of its customers.
to the entity; and Question: Is it probable that future economic benefit will flow to the entity?
the cost of the Focus Eye Bhd acquired the equipment to be used in monitoring and
item can be determining the quality of the customers’ vision. The entity will gain income
measured reliably. when the customers pay for the service provided. Therefore, it is probable
that future economic benefits will flow to the business from the use of the
equipment.

Question: Can the item be measured with reliability?

The value of the item can be measured reliably because the equipment is
exchanged for a cash payment of RM52,000, which was paid at the time the
entity received the equipment.
 Initial Measurement of PPE
PPE are initially measured at cost Focus Eye Bhd purchased imported vision testers.
that comprises: The related costs incurred in relation to the testers
(a) The purchase price, including were as follows:
import duties and non- Invoice price RM50,000
refundable purchase taxes, Trade discount (10%)
after deducting trade Import duties RM3,500
discounts and rebates. Transportation cost RM1,500
(b) Any cost directly attributable to Installation cost RM1,500
bringing the asset to the Administrative cost RM6,000
location and condition
necessary for it to be capable The cost of the testers:
of operating in the manner as Invoice price (net) RM45,000
intended by the management. Import duties RM3,500
(c) The initial estimate of costs for Transportation cost RM1,500
dismantling and removing the Installation cost RM1,500
items and restoring the site on Cost of the testers RM51,000
which it is located.
Self-constructed Property, Plant and Equipment
– Cost recognised is determined by the same
principles as for assets purchased and
include all costs incurred such as material,
labour, overhead and other resources that
are directly attributable to complete the
construction of the asset.
– Borrowing costs (MFRS 123)
– Exclude: Internal profit and costs of
abnormal amounts wastage.
Deferred payment - difference between cash price
equivalent (ie present value of future payment)
and total payment is to be recognised as interest.

Asset Exchange Transaction

Item acquired in exchange for a non-monetary
asset or group of non-monetary assets is measured
at fair value.
If fair value is not determinable or exchange lacks
commercial substance then the ‘cost’ of the asset
acquired is equal to the carrying value of asset
given in exchange.
 Subsequent Costs
Additional costs that Focus Eye Bhd has a car which was acquired four years ago. Even
relate to services though the car is in working condition, several repair costs have been
and maintenance incurred to maintain its working condition. The carrying value of the car
are treated as is RM800,000.
expenses in the During the current year, the following expenditure are incurred:
statement of profit or Insurance and road tax RM3,000
loss. Repainting cost RM2,700
Rustproof treatment that will extend
Costs which relate the lifespan of the car for several years RM5,000
to additions and Replacement of timing belt RM800
improvements that
meet the asset How should the above cost be accounted for?
recognition criteria
are capitalized as The costs related to insurance and road tax, repainting and replacement
assets. of timing belt are considered as repair and maintenance costs that do
not result in future economic benefit to the entity. Therefore, the cost of
RM3,000 should be written off as expenses in the statement of profit or
loss.

Since the rustproof treatment extends the lifespan of the car, which
indicates it results in future economic benefits, the cost of RM5,000 is
capitalized and added to the carrying amount of the car.
Subsequent Costs
• Maintenance – write off
• Meet recognition criteria – add to the carrying
amount of the asset

Replacement of part/component
The carrying value of the part replaced is
derecognised.

Regular major inspection (e.g. Aircraft).

Cost recognised as replacement. Carrying
amount of previous inspection derecognised.
 Subsequent Measurement
After the initial recognition, PPE are measured Focus Eye Bhd acquired a piece of
using cost model or revaluation model as its freehold land on 1 January 20X4 for RM1
accounting policy and the policy should be million. On 31 December 20X4, the fair
applied to an entire class of PPE. value of the land was RM1.5 million. Show
the carrying amount of the land as at 31
Cost model December 20X4 if the company adopts:
PPE are carried at its cost less any accumulated (a) Cost model
depreciation and any accumulated impairment (b) Revaluation model
loss. The fair value of property, plant and
equipment is not taken into consideration. (a) Cost model
The carrying amount is the cost of the land
Revaluation model
which is RM1 million.
PPE are carried at a revalued amount (if the fair
value can be measured reliably) less any
(b) Revaluation model
subsequent accumulated depreciation and
The carrying amount is the fair value of
subsequent accumulated impairment loss.
the land which is RM1.5 million.
Adoption of revaluation model will produce more
relevant information for capital providers in
making useful decision.
 Accounting Treatment for
Surplus/Deficit on Revaluation
Surplus on revaluation Focus Eye Bhd adopts revaluation model for its
• arises when the carrying amount of a freehold land. On 31 Dec 20X4, the carrying amount
PPE is less than its fair value of the freehold land was RM500,000 and the fair
• recognizes in revaluation reserve or value was
SOPL (to the extent that it reverses a (a) RM600,000
previous deficit on revaluation of the (b) RM450,000
same PPE)
• discloses in the statement of profit or The entries as at 31 Dec 20X4 would be:
loss and other comprehensive income (a) Surplus on revaluation was RM100,000
Dr Freehold land RM100,000
Deficit on revaluation Cr Revaluation Reserve
• arises when the carrying amount of a RM100,000
PPE is more than its fair value. (The amount is also disclosed in the SOPL and other
• recognizes in SOPL or revaluation comprehensive income)
reserve (to the extent that it reverses a
previous surplus) on revaluation of the (b) Deficit on revaluation was RM50,000
same PPE. Dr SOPL RM50,000
Cr Freehold land
RM50,000
Accounting for Revaluation
Surplus/Deficits
Surplus on Revaluation: fair value exceeds the
carrying value
• disclosed in the ‘other comprehensive income’
• credit into equity, under the heading of
revaluation reserve
• the surplus is due to a deficit in the previous
revaluation – take to income statement
• revaluation reserve is transferred to retained
earnings when:
– Asset is disposed or
– Through use - an amount equal to the addition
depreciation is transferred to the retained earnings
Deficit on Revaluation
• charged in the current year’s income
statement
• the decrease can be debited to the
revaluation reserve (OCI) to the extent of any
credit balance existing in the revaluation
surplus in respect of that asset
EXAMPLE

Asset costing RM10 million was bought on 1.1.x4 and the

useful life was determined to be 10 years. On 31.12.x5 the
fair value was RM12 million.

On 31.12.x5 the difference between the fair value (RM12m)

and carrying amount (RM10m x 8/10) of RM4m is credited to
OCI/revaluation reserve.

Depreciation charge for x6 will be RM12/8 = RM1.5m.

There will be a transfer from revaluation reserve to

retained earnings of RM500,000 in x6.
Accumulated Depreciation
Two methods:
● The gross carrying amount is restated
proportionately, or
● The accumulated depreciation is eliminated
against the gross carrying value
Depreciation
• Depreciation commences when the asset is made
available for use and to continue depreciating till
derecognition, depreciating even during idle period.
• Residual value based on expected future circumstances
measured at current prices and no adjustment to be
made for changing price.
• Depreciation charge is determined separately for each
significant part of an item of property, plant and
equipment.
• Useful life and residual value to be reviewed annually.
Changes are considered as change in accounting
estimates.
Impairment
• Covered specifically under MFRS136.
• An asset is impaired when its recoverable
amount is less than its carrying amount.
• Recoverable amount is the higher of the fair
value less costs to sell and value in use.
• Value in use is the present value of future
cash flows expected to be derived from an
asset.
Derecognition
• An item of property, plant and equipment is
derecognised when it is disposed of or when no future
economic benefits are expected from its use.
• asset disposed should be removed (derecognised) from
the statement of financial position.
• Gain or loss on disposal is the difference between the
proceeds received on selling the asset and its carrying
amount.
• The gain or loss should be recognised in the income
statement but not treated as revenue.
• If the asset being sold had been revalued and there was
a surplus on revaluation then the surplus remaining will
be transferred to retained earnings.
Quiz
On 1.1.x4 an entity built an oil rig costing
RM100m. The rig will be in operation for 5 years
after which the structures have to be removed
and the area restored.
The cost of dismantling etc is estimated to be
RM10 million.
Assume current interest rate is 10%.
Present value factor of 10% is .62

Required:
Discuss the accounting treatment.