Académique Documents
Professionnel Documents
Culture Documents
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.
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.
400,000
400,000
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
15,000
15,000
5,000
5,000
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
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).
7
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.
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:
(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
10
Debit Cash
Debit Accumulated depreciation
Credit Fixed asset
Credit Gain on sale of fixed asset
3500
17000
20000
500
11