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MFRS 116

PROPERTY, PLANT AND EQUIPMENT


 This topic will help you to:
 Understand the principles and practices on
accounting for property, plant and
equipment (PPE)
 Deal with the recognition and measurement
bases for PPE
 Deal with revaluation of PPE
 Deal with impairment of PPE
What are Property, Plant & Equipment
(PPE)?
Property, plant and equipment are tangible items that:
are held by an entity
a. for use in the production or supply of goods or services,
b. for rental to others, or
c. for administrative or maintenance purposes; and
are expected to be used during more than one reporting
period.

Sometimes termed as operating long-term assets


 MFRS 116 Property, Plant and Equipment covers all
tangible non-current assets except assets held-for-
sale, completed investment properties, leases,
biological assets, exploration and evaluation assets,
and mineral rights and reserves.

 MFRS 116 defines property, plant and equipment as


‘assets that are held by an entity for use in the
production of goods and services, for rental to
others, or for administrative or maintenance
purposes; and are expected to be used during
more than one reporting period’.
Scope of MFRS 116
 Leasehold lands may be classified as PPE
under MFRS 116 of they meet the definition of
a finance lease. E.g leasehold lands with lease
periods of 50 years or more
 A property that is being constructed for future
use as an investment property is now within
the definition of investment property in MFRS
140 Investment Property
 a hotel property where the owner manages
the hotel is not an investment property and
shall be classified as PPE
Identification of PPE
 An entity has an item of PPE accounted under MFRS 116 only when the
answers to all of the following questions is YES.
 Q1: does the reporting entity have an asset?
 Q2: is the asset identified in Q1 an item of PPE?
 Q3: is that item of PPE within the scope of MFRS 116?

Example: Motor vehicles of a motor vehicle retailer


Company X owns a number of motor vehicles. The majority of the vehicles
are held to be sold to the public as part of the ordinary activities of the
company. The other vehicles are used for a period of 5 years by salesmen
employed by the entity to identify potential customers and to facilitate
sales.
Q1: Are the motor vehicles to be sold assets?
The motor vehicles to be sold are assets of Company X – physical
resources purchased by the entity (past event) to be sold at the
entity’s discretion (control). Sales are expected to result in the flow
of cash (future economic benefits) from the customers to Company
X.

Q2: Are the motor vehicles to be sold items of PPE?


The motor vehicles to be sold do not satisfy the definition of PPE –
they are tangible assets, but they are held to be sold in the ordinary
business activity (not held for use in the production or supply of
goods or services, administration or for rental)

Conclusion:
The motor vehicles to be sold are not items of PPE. The vehicles are
the company’s inventory.
Q1: are the motor vehicles used by the salesmen an asset?
The motor vehicles held for use by the salesmen are assets – physical
resources purchased (past event) to be used at the company’s
discretion (control) to assist in the business, which will result in the flow
of cash (future economic benefit) from the sales made.

Q2: Are the motor vehicles used by the company’s salesmen items of
PPE?
The motor vehicles held for use by the entity’s salesmen clearly satisfy
the definition of PPE – tangible items, used by entity’s salesmen to
source potential customers (held for use in the supply of goods) and
they are expected to be used for a period of 5 years (in more than
one period).

Conclusion:
The motor vehicles used by the salesmen are the company’s PPE.
Carrying amount ‘is the amount at which an asset is
recognised after deducting any accumulated depreciation
and accumulated impairment losses’.

Cost ‘is the amount of cash or cash equivalent paid or the


fair value of the other consideration given to acquire an
asset at the time of its acquisition or construction or, where
applicable, the amount attributed to that asset when initially
recognised in accordance with specific requirements of
other MFRSs, e.g. MFRS 2 Share-based Payment’.

Depreciable amount ‘is the cost of an asset, or other amount


substituted for cost, less its residual value’.

Depreciation ‘is the systematic allocation of the depreciable


amount of an asset over its useful life’.
Entity-specific value ‘is the present value of the cash flows an entity expects to arise
from continuing use of an asset and from its disposal at the end of its useful life or
expects to incur when settling a liability’.

Fair value ‘is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participation at the measurement
date’.

An impairment loss ‘is the amount by which the carrying amount of an asset exceeds its
recoverable amount’.

Recoverable amount ‘is the higher of an asset’s fair value less costs to sell and its value
in use’.

Residual value ‘of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if the
asset were already of the age and in the condition expected at the end of its useful
life’.

Useful life ‘is:


a. the period over which an asset is expected to be available for use by an entity; or
b. the number of production or similar units expected to be obtained from the asset
by an entity’.
What are the main accounting issues?

1. Recognition of PPE into various classes


2. Measurement of costs that can be capitalised
3. Allocating the capitalised costs to the relevant
accounting periods through depreciation
4. Accounting for revaluations of PPE
RECOGNITION CRITERIA

i. It is probable that future economic benefits associated


with the asset will flow to the entity; and
ii. The cost or value of the asset can be measured reliably

 The recognition criteria are applicable for both the initial


expenditure and for subsequent expenditure incurred on an
asset.
 In practice, companies specify the amount below which a
capital expenditure would be expensed. For eg any amount
below RM10,000 will be recognised as an expense
Presentation is by classes:
- Each item of PPE shall be recorded separately in the accounts
(usually in a fixed asset or PPE register)
- An entity may have hundreds of items of PPE in the accounts
- However, for presentation in the financial statements, they are
aggregated and presented by classes
- MFRS clarifies that a class of PPE is a grouping of assets of a
similar nature or use in the operations. Examples of separate
classes are:
- Land
- Land and buildings
- Machinery
- Ships
- Aircrafts
- Motor vehicles
- Furniture and fittings
- Office equipment
For each of the examples below, identify items
of PPE, if any, and then indicate whether that
PPE is accounted for in accordance with MFRS
116 or another MFRS
1. An entity owns a herd of cattle that forms the
breeding stock of its agricultural activities. The entity
also owns a tractor and trailer that are used to
transport feed to the cattle.
2. An entity owns and manages an apple orchard (the
fruit trees and the land on which they are growing).
1. A) Cattle – meet the definition of PPE – tangible, use for more than
1 year but cattle are living animals – considered as biological
assets under MFRS 141. so they are outside the scope of MFRS 116.
(B)tractor and trailer – physical asset used in the production
during more than 1 accounting period. Tractor and trailer are not
biological assets. They are within the scope of MFRS 116.

2. Even though the trees in the orchard (a biological asset


accounted for in accordance with MFRS 141) attached to
and growing on the land, the land is classified as an item of
PPE. It is a physical asset used in the supply of apples during
more than 1 accounting period. Land is neither a living plant nor
a living animal – not a biological assets.
2. INITIAL MEASUREMENT
At cost/Fair value
Assets purchased:
- purchase price (including import duties, taxes, after deducting
trade discounts and rebates)
- Other directly attributable costs to bringing the asset to location
and condition for intended use (eg installation, site preparation,
delivery and transport costs, professional fees, commissioning
costs excluding start-up and pre-production costs))
- Initial estimate of cost of dismantling and removing and restoring
the site.
Example 1: Assets Purchased

On 1 January 20x6, ABC Bhd places an order for a machine from a


company in Japan. The machinery is delivered on 31 January 20x6
and the invoice price is RM300,000 with a cash discount of 1% is paid
within 30 days. Import duties and taxes amount to RM15,000. The
following costs are also incurred:
RM
Delivery and transport costs from Klang to factory 2,500
Installation and commissioning costs 11,500
Administrative costs incurred in processing and inspection 5,000
Start-up and pre-production costs 10,000

Required:
Determine the initial costs of the machine that can be capitalised.
Solution 1

The component costs that can be included are:


Purchase price 300,000
less: 1% discount (irrespective of
whether the discount is taken) (3,000)
297,000
Import duties and taxes 15,000
Delivery and transport costs 2,500
Installation and commissioning 11,500
Cost of the machine 326,000

The administrative costs, start-up, pre-production costs


and exchange loss should not be capitalised because
they are NOT directly attributable to bringing the
machine to the location and condition of its intended
use (refer para 19 AND 21 of MFRS 116)
Dismantling, removal and restoration
costs

 Dismantling, removal and restoration costs are part of


cost of property, plant and equipment.
– the capitalised amount is the present value of the
dismantling, removal and restoration cost
– the capitalised amount are depreciated over the
period the property, plant and equipment is used.
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
 Exclude: Internal profit and costs of abnormal
amounts wastage.
Example 2: Self-constructed asset
DEF Bhd is a mini-conglomerate with many divisions. In 20x5 the
management of the company commissions its engineering and
construction division to build a plant for its manufacturing division.
The costs incurred for the construction of the plant are as follows:
RM’000
Contractors’ costs 10,500
Direct materials and labour 8,500
Engineering and technical overheads 2,500
Interest costs incurred to finance the construction 2,000
General administrative costs allocated 3,000
26,500
Of the direct materials and labour used, RM1.5mil is attributable to
cost inefficiencies caused by labour strike.

Required:
Determine the cost of the plant that can be capitalised.
Solution 2

The components costs that can be capitalised are:


RM’000 RM’000
Contractors’ cost 10,500
Direct materials and labour 8,500
Less: cost inefficiencies (1,500)
7,000
Engineering and technical overhead 2,500
Interest cost 2,000
Cost of the plant 22,000
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.
Example 3: Assets exchange
XYZ exchanged a 3-year old Honda City car, which was
acquired for RM70,000, for a newer model of fair value RM85,000.
XYZ also paid RM45,000 cash. The carrying amount of the old car
was RM35,000 while its fair value was RM48,000.

Required:
At what value should the asset received be recorded?
Solution 3:
The new car should be recorded at RM85,000 which is the
fair value of the new car. (the fair value of the new car is
evident).
On disposal of the old car, a gain of RM5,000 will be
recognised, being the difference between RM85,000 and
sum of RM45,000 and RM35,000. the fair value of the old car
is not relevant
Fair value 85,000
Carrying amount old car 35,000
Cash received 45,000
Carrying amount 80,000
Gain 5,000
Example 4: assets exchange

ABC exchanged a land with a carrying amount of RM1 mil for a


plant whose fair value was determined to be RM900,000. The
open market fair value of the value of the land was RM1.25 mil.
The plant is a specialised asset and is not traded openly.

Required:
At what value should the asset received be recorded?

Solution 4:
The fair value of the plant can be determined but it is not an
open market value. On the other hand, the land’s fair value is
clearly more evident and so the plant should be recognised at
RM1.25 mil being the fair value of the asset given up
Subsequent Costs

 After the initial purchase or construction, expenditure on PPE


will continue to be incurred over their useful lives to maintain
and repair the assets, to replace worn-out components, to
upgrade and/or improve their performances
 The accounting issue is whether subsequent costs are to be
capitalised or expense off.
 If the expenditure meets the recognition criteria, then the
costs incurred is capitalised and added to the carrying
amount of the asset. Costs that do not meet the recognition
criteria are expense off
–Maintenance – write off
 Meet recognition criteria – add to the carrying amount
of the asset

Replacement of part/component
 Replacement costs can be added to the carrying
amount of PPE if they meet the recognition criteria
 The carrying value of the part replaced should be
derecognised.

Regular major inspection (e.g. Aircraft).


Cost recognised as replacement. Carrying amount of
previous inspection should be derecognised.
Capitalise if:

 Inspection – regular/major
 Replacement – major component
 Increase useful life
 Increase quality/performance of asset
PART 2: Measurement after recognition

After initial recognition, an entity is required to choose


either of the following two models as its accounting
policy for an entire class of PPE:
a. Cost model, or
b. Revaluation Model
Subsequent Measurement
Cost Model:
Asset is carried at:
 Its cost;
 Less accumulated depreciation and
 Less any accumulated impairment losses

Impairment is a situation whereby the fair value less than its


expected selling costs is more than its carrying value (the asset is
less than what it is actually worth).
When impairment happens, the impairment loss is
immediately recognized in profit and loss. Also, the entity
needs to reduce the value of PPE recorded in Statement
of Financial Position. See Example 1.8: Subsequent
Measurement – Cost Model
Revaluation Model
Asset is carried at:
 A revalued amount, being its fair value at the date
revaluation date
 Less any subsequent accumulated depreciation and
 Less any subsequent accumulated impairment losses

Use of revaluation model depends on ability to measure


fair value reliably.
 If a PPE is revalued upwards, the gain shall be recorded as a
gain in other comprehensive income and as a revaluation
surplus in accumulated equity.
 If a PPE is revalued downwards, the loss shall be recorded as a
loss in other comprehensive income and it reduces
accumulated equity in revaluation surplus.
 See Example 1.9: Subsequent Measurement – Revaluation
Model.
Fair value

- Land and buildings – market value appraised by


professionally qualified valuers
- Plant and equipment – market value by appraisal
- Regular revaluation exercise
- Entire class of asset to be revalued
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:


 Asset is disposed or
 Through use - an amount equal to the addition
depreciation is transferred to the retained earnings

Deficit on Revaluation: fair value lower than the carrying value


 charged in the current year’s SOPL
 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 5

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 :
Fair value RM12
(-)Carrying amount (RM10m – Depr RM10m x 2 years) = RM 8 mil
10 years RM4mil surplus

Credited to Other comprehensive income/revaluation reserve.


On 31.12.x6:
Depreciation charge for x6 will be RM12m/8years = RM1.5m.
Carrying amount at 31.12.x6 = RM12mil – RM1.5mil =RM10.5mil

There will be a transfer from revaluation reserve to


retained earnings of RM500,000 (RM2 mil depr (old) – RM1.5m depr
(new) in x6) in x6. (**revaluation adjustment)
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.
Depreciation charge
Example 6
Tall Tree Bhd acquired a motor vehicle at a cost of RM85,000 on 1.1 x2
and its estimated useful life was determined to be 10 years and
residual value was RM5,000. However, on 1.1.x6, the company
reviewed the useful life and it was changed to 4 years. Its residual
value remained unchanged. The company’s year end is 31.12.
Required:
Calculate the depreciation for 31.12.x6

Solution 6:
Depreciation for x2- x5 = RM85,000 – RM5,000 = RM8,000 per year x 4
years
10 years
= RM32,000
Carrying amount at 1.1.x6 = RM85,000 – 32,000 = RM53,000

Depreciation for x6 = RM53,000 – 5,000= RM12,000


4 years
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. (Debit Revaluation Surplus;
Credit Retained Earnings)
Issues in accounting for PPE
 Shift of focus of fair value as the fair basis for asset
valuation
 Even if a company chooses the cost model, the
standard requires the asset to be periodically tested for
impairment
 Initial measurement – professional judgment should be
exercised to allocate for indirect costs which could not
be specifically traced to the asset
 For example, allocate indirect cost based on labour
hours
 Subsequent measurement – challenge to carry out steps
to determine fair value for PPE because the markets for
certain assets in Malaysia are limited or non-existent

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