Replace grey

area with
image or
colour design

Replace grey
area with
image or
colour design
2.5cm wide

2.5cm wide

200400: COMPANY ACCOUNTING

TOPIC 4: ASSETS AND REVALUATION
Chapter 6: Property, plant and equipment

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Introduction

This topic covers the following areas:

Definition, recognition and measurement of
property plant and equipment assets (PPE)
Measurement after initial recognition:
cost model
revaluation model

Derecognition of PPE assets

Disclosure requirements

2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Definition, Recognition and

Measurement of PPE assets

Accounting Standard AASB116 Property, Plant

and Equipment prescribes accounting rules for
PPE assets as follows:
Definition
Recognition
Determination of carrying amount
Depreciation
Impairment losses to be recognised

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Definition, Recognition and

Measurement of PPE assets

Definition:
Tangible items which are:
Held for use in the production or supply of goods and services,
for rental to others or for administrative purposes
Expected to be used during more than one accounting period,
i.e. non-current assets.

Recognition of PPE assets requires that:

It is probable that future economic benefit (FEB) associated with
the item will flow to the entity
The cost of the item can be reliably measured.

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Definition, Recognition and

Measurement of PPE assets

Measurement of PPE assets at point of

recognition:
PPE assets are to be measured at cost.
Cost is made up of:
Purchase price
Costs directly attributed to bringing the asset to
operating capability
Estimate of costs of dismantling and removing the
item and restoring the site on which it is located.

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Definition, Recognition and

Measurement of PPE assets

Fair Value
In determining the cost of PPE assets where the
purchase consideration is not cash, the fair value of
consideration given should be used.
Fair Value is the amount for which an asset could be
exchanged between knowledgeable, willing parties
in an arms length transaction (market value or an
estimate of market value).

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Measurement after initial

recognition

After the initial recognition at cost of PPE assets

an entity may choose between the following
valuation models:
Cost model
PPE assets are to be carried at cost less any accumulated
depreciation and accumulated impairment losses.

Revaluation model
PPE assets are to be carried at revalued amount (i.e. assets fair
value at date of revaluation less any subsequent accumulated
depreciation and accumulated impairment losses).
Revaluations undertaken when fair value of an asset differs materially
from its carrying amount.

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Asset impairment
(Short summary of Chapter 10)

Definition:
When something is impaired it no longer operates at its full
potential, it could be damaged, or not as valuable any more.
Impairment of an asset means that the item is no longer worth
as much as its carrying amount showing in the accounts.
This most normally occurs when the asset is not subject to
revaluation, but has been recorded at cost. Changed market
conditions may mean that the value of the asset has fallen
faster than expected, say through depreciation, and this loss
of value needs to be accounted for.
Impairment losses can apply to both tangible assets (like land
and equipment) and to intangible assets (like goodwill).

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Asset impairment

Impairment testing:
AASB136 requires annual impairment testing of assets to
ensure that they are NOT over-valued i.e. they are not being
shown at a greater value than their expected future economic
benefits. (This is a conservative accounting approach). We
must compare the carrying amount at year end with the
assets recoverable amount.
If the recoverable amount is lower, then we need to bring the
carrying amount down to the recoverable amount and
recognise an impairment loss expense and record an
accumulated impairment loss that is deducted from the asset
in the financial reports (just like accumulated depreciation).
If the recoverable amount is the same or is higher, then we
dont need to make any adjustment to the carrying amount.

2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Asset impairment

2.5cm wide

Recoverable amount:
The recoverable amount is the higher of two amounts:
(1) The assets value in use the value to us if we keep it
and use it to produce future economic benefits. This is
calculated as the Present Value of the estimated future net
cash flows from the asset; and
(2) The assets value in exchange the value to us if we
exchanged it for cash now. This is the expected net value
we would receive if we sold it.
Carrying Amount

lower

Recoverable Amount
higher

Value in use

Value in exchange

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Asset Impairment

For the purposes of this unit, we just need to understand the

impact on carrying amount of an impairment loss and how to
record and report an impairment loss.

Example 1:
A building is recorded at cost and its carrying amount is
$500,000. Its value in use has been calculated to be
$480,000 and its value in exchange is considered to be
$470,000.
Determine the amount of any impairment loss
Record the journals for the loss and show how it would be
recorded in the financial statements

2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Measurement after initial

recognition

Revaluation Model
Revaluations can be either upward (increment) or downward
(decrement).
Revaluation increments
Credited directly to the
revaluation surplus account (an
equity account)

Revaluation decrements
Recognised as an expense.

The effect of income taxes arising from the revaluation must

be recorded.
Any difference between the carrying amount of a revalued asset and its
tax base represents a temporary difference that gives rise to a deferred
tax asset or liability.

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Measurement after initial

recognition

Revaluation increments and decrements

For assets previously subject to an upward revaluation the
decrement is first offset against any credit balance existing
in the revaluation surplus (equity), with the remainder then
recorded as a revaluation decrement (expense).
For assets previously subject to a downward revaluation the
increment is first offset against any previous decrement
(expense), with any balance then recorded as revaluation
surplus (equity).

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Increment for a non-depreciable

asset, previous decrement
recorded

Example 2:
Land is acquired on 1 July 2012 for $400,000
Fair values at: 30 June 2013 $360,000
30 June 2014 $410,000
Assume a nil tax rate
Record the journals at (i) 30 June 2013
and (ii) 30 June 2014

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Measurement after initial

recognition

Revaluation of a depreciable asset

Before recording a revaluation increment or decrement for a
depreciable asset, any accumulated depreciation must be
first written back to the asset account.
The asset account then shows a balance equal to the carrying
amount of the asset at the date of revaluation and accumulated
depreciation is nil.

Immediately after the revaluation, the asset will show a

balance equal to the revalued amount. Depreciation over the
remaining useful life of the asset will now need to be
recalculated using the revalued amount.

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Upward revaluation of a
depreciable asset

Example 3:
Equipment which cost $200,000 and has a carrying amount of
$110,000 is to be revalued to $160,000 (assume a nil tax rate)

Record the journals for the revaluation

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Downward revaluation of
depreciable asset from cost

Example 4:
Plant which cost $240,000 and has a carrying amount of
$168,000 is written down to fair value of $120,000 (assume a
nil tax rate).

Record the journals for the revaluation

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Downward revaluation of
previously revalued asset

Example 5:
Equipment which cost $100,000 and has a carrying amount of
$85,000 was revalued to $90,000.
One year later when the carrying amount is $76,500 the asset
is revalued to fair value of $65,000.
Assume a nil tax rate.

Record the journals for the revaluation

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Recording tax effect of

revaluation increment

Example 6:
Equipment which cost $200,000 and has a carrying amount of
$125,000 was revalued to $160,000.
Assume a 30% tax rate.

Record the journals for the revaluation

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Recording tax effect of

revaluation increment

Example 7:
Land which cost $1,000,000 was revalued to $1,200,000.
Assume a 30% tax rate.

Record the journals for the revaluation

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Derecognition

Definition:
Derecognition of a PPE asset means that the item is no longer
to be recognised in the statement of financial position.
This occurs when the asset is sold or otherwise disposed of,
or where no future economic benefit is expected from its use
or disposal.
Any gain or loss on derecognition is to be included in profit or
loss when the item is derecognised.

2.5cm wide

Replace grey
area with
image or
colour design
2.5cm wide

Replace grey
area with
image or
colour design

Derecognition

Example 8:
A motor vehicle with a carrying amount of $20,000 (cost
$60,000 less accumulated depreciation $40,000) is sold for
$15,000.
Determine the gain or loss on sale of the asset
Record the journals for the disposal

2.5cm wide