Chapter 16 Ppe (part 2)_for Distribution.pdf

Chapter 16 PPE (Part 2) Learning Objectives

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State the subsequent measurement of items of

PPE.

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Define depreciation and state when depreciation commences and when it ceases.

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Account for the revaluation of items of PPE.

Subsequent measurement

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Subsequent to initial recognition, an entity shall choose either: (a) the cost model or

(b) the revaluation model as its accounting policy and shall apply that policy to an entire class of PPE.

Cost Model

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After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated impairment losses.

Depreciation

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Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life.

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When computing for depreciation, each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

Depreciation - continuation

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Depreciation begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner

intended by management.

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Depreciation ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS 5,

whichever comes earlier.

Selection of depreciation method

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There are various methods of depreciation. The entity shall select the method that most closely reflects the

expected pattern of consumption of the future economic benefits embodied in the asset.

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However, a depreciation method that is based on

revenue that is generated by an activity that includes the use of an asset is not appropriate.

Common types of depreciation methods 1. Straight line method – depreciation is recognized evenly over the life of the asset by dividing the depreciable

amount by the estimated useful life. Depreciation = (Historical cost – Residual value) ÷

Estimated useful life

Common types of depreciation methods 2. Sum-of-the-years’ digits (SYD) depreciation – depreciation is computed by applying a series of fractions

to the depreciable amount of the asset. Depreciation = (Historical cost – Residual value) x Fraction

SYD denominator

= Life x

Life + 1 2

Common types of depreciation methods 3. Double declining balance method – depreciation is computed by applying a fixed rate on the carrying amount

of the asset at the end of each period. Unlike for other depreciation methods, the residual value is initially ignored when computing depreciation under the double

declining method. Depreciation = Carrying amount x Rate Double declining rate

=

2 Life

Common types of depreciation methods Units of production method (Activity method or Variable-charge method)

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The units-of-production method relates depreciation to the estimated production capability of an asset and is expressed in a rate per unit of output or per hour of

input. Depreciation = (Historical cost – Residual value) x

Rate

Leasehold improvements

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Leasehold improvements are depreciated over the useful life of the improvements or the remaining lease term,

whichever is shorter.

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An option to renew the lease is considered when

determining the shorter between the useful life and the remaining lease term if it is probable that the renewal option will be exercised.

Changes in depreciation method, useful life, and residual value

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A change in depreciation method, useful life, or residual

value is a change in accounting estimate accounted for prospectively.

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Prospective accounting means the change affects only the current period and/or future periods. The change does not affect past periods.

Accounting for replacements of major parts

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The cost of the replacement part is recognized while the carrying

amount of the replaced part is derecognized.

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If the carrying amount of the replaced part is indeterminable, the

entity may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or

constructed.

Revaluation Model

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After recognition as an asset, an item of PPE whose fair value can be measured reliably shall 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.

Revaluation surplus Fair value* Less: Carrying amount

xx (xx)

Revaluation surplus – gross of tax

xx

*The fair value is determined using an appropriate valuation technique,

taking into account the principles set forth under PFRS 13.

The Cost Approach of fair value measurement

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Total economic life = Effective life + Remaining eco. life

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Percentage depreciation = Effective life ÷ Total eco. life

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Depreciation = Percentage dep’n. x Replacement cost

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Fair value = Replacement cost - Depreciation

Methods of recording revaluation

1. Proportional method - The gross carrying amount is adjusted proportionately to the change in the carrying amount. 2. Elimination method - The accumulated depreciation is eliminated against the gross carrying amount of the asset.

Frequency of revaluation

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For items with significant and volatile changes in fair

value, annual revaluation is necessary. For items with insignificant changes in fair value, revaluation may be made every 3 or 5 years.

Revaluation applied to all assets in a class

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If an item of PPE is revalued, the entire class of PPE to

which that asset belongs shall be revalued.

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The items within a class of PPE are revalued

simultaneously to avoid selective revaluation of assets and the reporting of amounts in the financial statements that are a

mixture of costs and values as at different dates.

Subsequent accounting for revaluation surplus •

Revaluation is initially recognized in other comprehensive income

unless the revaluation represents impairment loss or reversal of impairment loss, in which case it is recognized in profit or loss.

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Subsequently, the revaluation surplus is accounted for as follows: 1.

If the revalued asset is non-depreciable, the revaluation surplus accumulated in equity is transferred directly to retained

earnings when the asset is derecognized. 2.

If the revalued asset is depreciable, a portion of the revaluation

surplus may be transferred periodically to retained earnings as the asset is being used.

Derecognition

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The carrying amount of an item or PPE shall be derecognized:

a. on disposal; or b. when no future economic benefits are expected from its use or disposal