KAS-3 PROPERTY, PLANT AND EQUIPMENT

EXPLANATORY NOTES
Explanatory Notes to Kosovo Accounting Standards are intended to provide
additional understanding of the Standards and technical guidance as to their use
and application. In case of any divergence between Explanatory Notes and
Standards, the Standards prevail.
1. Property, plant and equipment are defined as tangible assets with an
expected useful life to the enterprise of more than one year that are held for use
in the production or supply of goods and services, for rental to others, or for
administrative purposes (KAS 3.2).
Recognition of Property, Plant and Equipment
2. An item of property, plant, and equipment should be recognized as an asset
when (KAS 3.3):
It is probable that future economic benefits associated with the asset will
flow to the enterprise; and
The cost of the asset to the enterprise can be measured reliably.
Initial Measurement
3. An item of property, plant, and equipment that qualifies for recognition as an
asset should initially be measured at its cost (KAS 3.6).
Components of Costs
4. The cost of property, plant, and equipment is the amount of cash paid, or the
fair value of other consideration given, for the assets acquisition or construction.
Assets may be constructed by another party or be self-constructed by the
enterprise.
5. In addition to purchase price, the cost of an asset may include import duties,
non-refundable purchase taxes, other non-recoverable duties and any directly
attributable costs such as freight charges that bring the asset to its place and
state of use. The cost of an asset may also include installation costs.
6.

Excluded from property, plant and equipment costs are:

Trade discounts and other rebates;
Taxes paid on acquisition and subsequently recovered;
Administrative overheads and general overhead costs;
Start-up costs and pre-production expense;
Employee training costs; and
Excess costs such as repair of damage incurred during installation.

7. The carrying amount of property, plant, and equipment may be reduced by

applicable government grants (KAS 3.7). Refer to KAS 7, Accounting for
Government Grants and Disclosure of Government Assistance.

Illustration of Determining Acquisition Cost

8. Company A is a computer manufacturer. It purchased a new machine on
December 31 that will be used in production. The invoice received from the
vendor includes the following items:
Euros
Invoice price
150,000
Freight
20,000
Set-up fees
8,000
Training fees for production workers
5,000
One year maintenance contract
12,000
Total:
195,000
In addition, Company A paid an electrician 2,000 to install a new power outlet
that was required for the machine. However, Company A decided to change the
location of the machine after the electrician had begun work, so there was an
additional cost of 500 to repair an unnecessary hole drilled into the wall earlier.
The amounts that should be recorded in the financial records for each of the
following categories are as follows:
Prepaid
Euros Machinery Expenses Expense
Invoice price
150,000 150,000
Freight charges
20,000 20,000
Set-up fees
8,000
8,000
Staff training fees
5,000
5,000
One year maintenance contract
12,000
12,000
Subtotal
195,000
Electrical work:
2,500
2,000
500
Totals:
197,500 180,000
5,500
12,000
1. The amount of 180,000 will be recorded in the Machinery account.
2. Staff training costs, and the cost of repairing the damaged wall, must be
recognized as expenses in the income statement during the period that they
were incurred.
3. The 12,000 service contract will be initially recorded as a prepaid services
asset. These prepaid services will be recognized as an expense over the
one-year period that is covered by the service agreement.
As this example illustrates, in many cases the cost of an asset includes several
components. So, it is important for an enterprise to establish a system that
allows for tracking and reconciling property, plant, and equipment documentation
and the accounting records.
Due to differences between KAS and the tax code in the treatment of property,
plant, and equipment, it is highly recommended that enterprises establish

separate records for financial accounting and tax calculation purposes, and then
reconcile activity between the systems on a regular basis. Refer to the
Explanatory Notes to KAS 12, Profit Taxes, for further information on the
differences between financial accounting in compliance with KAS and tax code
requirements.
Exchanges of Property, Plant, and Equipment
Exchanges of similar assets
9. Property, plant, and equipment may be acquired in exchange for a similar
asset that has a similar use in the same line of business and which has a similar
fair value. An item of property, plant, and equipment may also be sold in
exchange for an equity interest in a similar asset. In both cases, no gain or loss
is recognized on the transaction because the earnings process is incomplete.
Instead, the cost of the new asset is the carrying amount of the asset given up,
adjusted for any cash or compensation given or received.
10. However, the fair value of the asset received may provide evidence of an
impairment in the asset given up. Under these circumstances, the asset given
up is written down and this written down value assigned to the new asset. If
other assets, such as cash, are included as part of the exchange transaction this
may indicate that the items exchanged do not have a similar value.
Illustrations of exchanges of similar assets
11. Company A has a copy-making machine, with a carrying amount of 13,000,
that includes many functions but does not operate fast enough for the companys
needs.
Company B has a copy-making machine, with a carrying amount of 15,000,
that is very fast but does not include the additional functions that the company
needs.
Company A and B agree to exchange their copy-making machines. If the
machines are exchanged without any other compensation involved, Company A
will record 13,000 as the cost of the copier obtained from Company B, while
Company B will record 15,000 as the cost for the copier obtained from
Company A.
If, however, Company A also pays 2,000 to Company B, Company A will record
15,000 as the cost for their new copier, as a result of giving up cash of 2,000
plus a copier with a carrying amount of 13,000. Company B, on the other hand,
will record 13,000 as the cost for their new copier as a result of receiving 2,000
in cash plus a copier in exchange for giving up a copier with a carrying amount of
15,000.

Exchanges of dissimilar assets

12. An item of property, plant, and equipment may be acquired in exchange or
part exchange for a dissimilar item of property, plant, and equipment or other
asset. The cost of such an item is measured at the fair value of the asset
received, which is equivalent to the fair value of the asset given up, adjusted by
the amount of any cash or cash equivalents transferred. When exchanges
involve dissimilar items, the earnings process is considered to be complete. The
general rule is to value the transaction at the fair value of the asset received,
unless the fair value of the asset given up is more clearly evident, and recognize
gains or losses on the transactions.
Illustrations of exchanges of dissimilar assets
13. Company A exchanges an automobile with a carrying amount of 10,000,
and an unknown fair value, with Company B for a production machine with a fair
value of 12,000. Company A will record the acquisition cost of the production
machine as 12,000 and a gain of 2,000 on the transaction. Company B will
record the acquisition cost of the automobile as 12,000 in the absence of
information about its fair value.
Expenditures Subsequent to Acquisition
14. Expenditures related to an item of property, plant, and equipment that are
made after acquisition should be added to the carrying amount of the asset when
it is probable that future economic benefits, in excess of the existing assets
originally assessed standard of performance, will flow to the enterprise. Other
subsequent expenditure that does not meet this criterion should be recognized
as an expense in the period in which it is incurred (KAS 3.9).
15. Various expenditures related to items of property, plant and equipment may
be incurred subsequent to acquisition and the type of expenditure made
determines its accounting treatment. Expenditures after purchase fall into one of
the following categories:
Additions, which include enlarging an asset or adding a new feature, are
capitalized;
Betterments, which include increasing operating efficiency or capacity, are
capitalized;
Repairs and maintenance to keep an asset in current working condition are
expensed; and
Extraordinary repairs that extend an assets service life are recorded as
reductions in the assets accumulated depreciation.
Illustrations of the accounting treatment of subsequent expenditures
16. For each of the following situations, the appropriate accounting method is
indicated.
1. Repainting the walls of an office: expense

2. Rebuilding a machine so that it will last 5 years longer than originally

estimated: this is a betterment and is capitalized.
3. Paying for a service to repair a nonworking computer: expense
4. Re-roofing a warehouse so that the building will last an additional
20 years: this is an extraordinary repair that extends the assets service life
and is recorded as a reduction in the assets accumulated depreciation.
5. Upgrading the hard drive on a computer to allow it to process work more
quickly: this is the addition of a new feature and is capitalized.
Measurement Subsequent to Initial Recognition
Cost basis
17. Subsequent to initial recognition as an asset, an item of property, plant, and
equipment should be carried at its cost, less any accumulated depreciation and
accumulated impairment losses (KAS 3.11).
Revaluation basis
18. Alternatively, an asset could 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. Revaluations
should be made with sufficient regularity that the carrying amount does not differ
materially from that which would be determined using fair value at the balance
sheet date (KAS 3.11).
19. To apply this accounting alternative, fixed asset balances are adjusted to
reflect fair value, which is normally determined by an appraiser. It is not
appropriate to revalue fixed assets using a general index because this does not
reflect the fair values of the individual assets.
20. When an item of property, plant, and equipment is revalued, the entire class
to which that asset belongs must be revalued (KAS 3.14).
21. When revaluing an asset for the first time, an increase in its carrying amount
due to fair value revaluation should be credited to an equity account, entitled
non-current asset revaluation surplus (KAS 3.15). A decrease, on the other hand,
should be recognized as an expense (KAS 3.16).
22. In subsequent revaluations, the accounting treatment varies, depending on
whether or not a revaluation surplus account has been previously established
and, if so, the amount of its balance.
Essentially:
1. When an assets carrying amount is decreased, and a revaluation surplus
account exists, the decrease in the carrying amount is charged against the
revaluation surplus account. Any excess over the balance in the revaluation
surplus account is recognized as an expense (KAS 3.16).

2. When an assets carrying amount is increased, the revaluation increase should

be recognized as income to the extent that it reverses a revaluation decrease of
the same asset that was previously recognized as an expense (KAS 3.15).
3. When an asset is disposed of, the balance in the revaluation surplus that is
related to that asset will be transferred directly to retained earnings. This transfer
will be disclosed in the statement of changes in equity and not in the income
statement (KAS 3.17).
Illustration of Revaluation
On 1 January 1976, Company A acquired a building at a cost of 400,000 and
depreciated it at 2.5 percent, on a straight-line basis, with no residual value. The
entry to record the acquisition was:
DR. Building
CR. Cash

400,000
400,000

Each year, for 20 years, Company A recorded depreciation of 10,000. On 1

January 1996, the asset was appraised as having a sound value (that is,
depreciated replacement cost) of 300,000. The following entry was made to
reflect the 50 percent increase in the buildings carrying amount:
DR. Building
CR. Accumulated Depreciation
CR. Revaluation Surplus

200,000
100,000
100,000

The relevant account balances before and after the revaluation are as follows:

Building
Accumulated depreciation
Revaluation surplus

Prior

After

400,000
200,000
-

600,000
300,000
100,000

The new annual depreciation charge, commencing in 1996, will be 15,000

(300,000/20). However, while the income statements in each year must absorb
greater depreciation expense, there will be an offsetting adjustment to transfer
the amount of extra depreciation expense (15,000 - 10,000 = 5,000) from
revaluation surplus to retained earnings. The relevant annual entries made
during the 5-year period 1996 through 2000 are as follows:
DR. Depreciation expense
CR. Accumulated depreciation
DR. Revaluation surplus
CR. Retained earnings

15,000
15,000
5,000
5,000

On 1 January 2001, the building was appraised at a sound value of 120,000.

The relevant account balances on that date were:
Building
Accumulated depreciation (62.5 percent)
Book value
Revaluation surplus
-

Before
600,000
375,000
225,000
75,000

As of 1 January 2001, the book value of the building was 225,000, or 37.5
percent of the gross replacement cost of 600,000 five years previously. The
new appraisal reveals that the fair value is only 120,000 at this time. That is, 30
percent of its original cost of 400,000. However, rather than charging the
105,000 decline in value (225,000 - 120,000) to income, the portion of the
decline that represents a retracing of the value increase previously recognized
(currently 75,000) should be accounted for as a reversal of the revaluation
surplus, not as a realized loss.
The gross asset should be written down to original cost and the related
accumulated depreciation should be adjusted to the 70 percent rate indicated by
the latest appraisal. The revised balances should be:
Building
Accumulated depreciation (70 percent)
Book value

400,000
280,000
120,000

The accounting entry that is required is as follows:

DR.
DR.
DR.
CR.

Accumulated depreciation (375,000-280,000)

Revaluation surplus
Loss from asset impairment
Building (600,000-400,000)

95,000
75,000
30,000
200,000

The loss from asset impairment of 30,000 is calculated as the historical cost of
400,000 multiplied by the difference between the depreciation of 70 percent,
indicated by the appraisal on 1 January 2001, versus the accumulated rate of
62.5 percent.
Depreciation
23. The depreciable amount of an item of plant, property, and equipment should
be allocated on a systematic basis over its useful life. The depreciation method
used should reflect the pattern in which the enterprise consumes the assets
economic benefits. The depreciation charge for each period should be
recognized as an expense unless it is included in the carrying amount of another
asset (KAS 3.18).
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24. The useful life of an asset is defined in terms of the assets expected utility to
the enterprise and the useful life estimate is a matter of judgment, based on the
enterprises experience with similar assets. The enterprises asset management
policy may involve the disposal of assets after a specified time or after
consumption of a certain proportion of the assets economic benefits. So the
useful life of an asset may be shorter than its economic life.
25. Land and buildings must be accounted for separately, even when acquired
together, because land normally has an unlimited life and is not, therefore,
depreciated. Buildings, on the other hand, do have a limited life and are
depreciable assets. When land and buildings are acquired jointly, the cost must
be allocated between them so that depreciation can be calculated on the building
(KAS 3.21). The cost allocation should reflect their relative fair values and is
normally based on an appraisal.
26. The depreciable amount of an asset, that is, its depreciation base, is
determined after deducting the assets residual value unless this amount is
insignificant (KAS 3.22).
27. A variety of depreciation methods can be used to allocate the assets
depreciable amount in a systematic way over its useful life. These include:

The straight-line, or linear, method that results in a constant charge over the
assets useful life;
The diminishing balance method that results in a decreasing charge over the
assets useful life; and
The sum-of-the-units method that results in a charge based on the assets
expected use or output.

Illustration of Depreciation Methods

(1) Company A owns a company car which cost 15,000, and is expected to
have a residual value of 3,000 and a useful life of four years. The depreciation
basis is 15,000 less 3,000 = 12,000
To calculate the depreciation for all years under the straight line method:
The depreciable value divided by the useful life equals the yearly depreciation.
12,000 = 3,000 per year
4 years
The annual rate of depreciation is 25 per cent.
[(3,000 / 12,000) = 25%]
(2) Company B owns a company car which cost 15,000, and is expected to
have a residual value of 3,000, and a useful life of 24,000 kilometers over a

three year period. The first year it is driven 8,000 kilometers, the second year
10,000 kilometers and the third year 6,000 kilometers.
To calculate depreciation under the sum of the units method:
Depreciation per kilometer is .5, calculated as the depreciation base of 12,000
divided by the anticipated 24,000 kilometers = 0.50.
The number of kilometers driven per year, times 0.50 per kilometer equals the
annual depreciation charge, as follows:
First year:
Second year:
Third year:
Total:

8000 x 0.50 = 4000

10000 x 0.50 = 5000
6000 x 0.50 = 3000
12000

(3) Company C owns a car which cost 15,000, and is expected to have a
residual value of 3,000 and a useful life of four years. The depreciation charge
will be calculated using the diminishing balance method.
Under the diminishing balance method: (1) the assets residual value is not taken
into consideration, and (2) depreciation is calculated as a multiple of the straight
line depreciation rate. In this case the useful life is 4 years so the straight line
rate is 25 percent. The multiples most commonly selected are 150% or 200% of
the straight line rate. In this illustration, assume that Company C selects the
150% multiple, which is 1.5 times the straight line rate. Therefore, the annual
percentage rate used in calculating depreciation is 37.5% [25% x 1.5].
To determine depreciation for the first year, the cost of the car is multiplied by the
depreciation rate: [15,000 x 37.5%] = 5,625.
To calculate depreciation for the second year, the book value of the car, that is:
the original cost less accumulated depreciation, is multiplied by the depreciation
rate. The book value of the car is, in this case [15,000-5,625] = 9,375 and the
depreciation charge for the second year is [9,375 x 37.5%]= 3,516.
Depreciation calculations for the remaining years continue to multiply the
remaining book value of the car by the depreciation rate of 37.5 percent. A
schedule of depreciation for the automobile is shown below.
Book
Annual
Year Value Depreciation
1
2
3

15,000
9,375
5,859

5,625
3,516
2,197

Accumulated
Depreciation

Remaining
Book Value

5,625
9,141
11,338

9,375
5,859
3,662

3,662

662*

12,000

3,000*

*The car cannot be depreciated below its residual value, so depreciation in the
fourth year is limited to 662.
Impairment
27. According to KAS, an enterprise must be aware of situations that could
cause a reduction of fixed asset value. Examples of this include damage or
obsolescence.
28. If a fixed asset loses value below its carrying amount on the accounting
records, the loss must be recognized and the carrying amount of the asset
reduced. The proper value should be the greater amount of net realizable value
or the amount which could be recovered through expected future cash generated
from the assets use. Net realizable value is the amount that can be received in
a fair market exchange minus any costs related to disposal of the asset such as
sales agent commissions or removal fees.
Example on Impairment
29. Company A has a delivery truck with an historical cost of 20,000 and
accumulated depreciation of 8,000. Therefore, the current carrying value of the
truck on the companys accounting records is 12,000. The truck is involved in an
accident and afterwards is appraised at a value of 3,000. This is the amount
expected to be received from selling the damaged truck. Company A will
immediately record the decrease in value by;
Increasing accumulated depreciation by 9,000
Recording a loss of 9,000
Note that the historical cost of the truck does not change. After adjustment, the
carrying value of the truck will be 3,000 (cost of 20,000 minus accumulated
depreciation of 17,000).
Sales
30. When an asset is sold, depreciation should be adjusted and recorded to the
date of disposal. The balance of accumulated depreciation and the recorded
cost of the fixed asset must be eliminated. Any amounts received that are
greater than the carrying value of the fixed asset result in a gain. Any amounts
received that are less than the carrying value of the fixed asset result in a loss.
Illustrations of Sales
1. Company A has a delivery truck with an historical cost of 20,000 on the
accounting records, and accumulated depreciation of 17,000. Therefore, the
carrying value of the truck on the companys accounting records is 3,000.
If Company A receives 3,500 when the truck is sold, Company A will:
Eliminate the 20,000 balance in the fixed asset account
Eliminate the 17,000 balance of accumulated depreciation
Record a gain of 500

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The accounting transaction is:

Debit Cash
Debit Accumulated depreciation
Credit Fixed asset
Credit Gain on sale of fixed asset

3500
17000
20000
500

2. Company B owns a copier with an historical cost of 12,300 on the accounting

records, and accumulated depreciation of 5,000. Therefore, the carrying value of
the copier on the companys accounting records is 7,300. If Company B receives
7,000 when the copier is sold, they will recognize a loss of 300.
3. Company B owns a copier with an historical cost of 12,300 on the accounting
records, and accumulated depreciation of 5,000. Therefore, the carrying value of
the copier on the companys accounting records is 7,300. However, at the time
of sale the companys accounting records are not yet adjusted for 1,000 of
unrecorded depreciation for the year. If Company B receives 7,000 when the
copier is sold, the adjustment amounts necessary to the following accounts and
the amount of gain they will recognize on the sale is as follows:
Accumulated depreciationbalance after 1,000 adjustment is 6,000.
Depreciation expense increase of 1,000 from adjustment.
Gain of 700 on sale. The carrying value of the fixed asset after
depreciation is adjusted is 12,300-6,000 = 6,300.

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