Non-current assets

1 Property, plant and equipment (IAS 16)

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1.1 Measurement at recognition

At cost
- Purchase price
- Directly attributable costs in bringing asset to its location and condition
- Costs to dismantle/restore (@ present value)

Revaluations
Cost Model	Revaluation Model
Carried at cost less accumulated depreciation and impairment losses	Carried at revalued amount (fair value less accumulated depreciation and impairment losses)

Review periodically and keep revaluations up to date
Consistent policy for each class of asset (avoids cherry-picking of assets)
Revalue at open market value (i.e. value regardless of existing use)
Depreciate the revalued asset less residual value over its remaining useful life

Example Answer 1 – Revaluation increase

SFP		SPLOCI
	$’000		$’000
Property, plant and equipment	89,412	Depreciation	5,588
Revaluation reserve	25,412	Gain	27,000

	Historic cost ($’000)	Revaluation model ($’000)	Revaluation reserve ($’000)
Cost (1.1.12)
Acc. Depn. (80,000/20) x 3 years
Carrying value (31.12.14)
Depreciation (95,000/17)

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Example 2 – Revaluation decrease

On 1 January 2013, Panama purchased an item of property, plant and equipment for $12 million. Panama uses the revaluation model to value its non-current assets. The asset has zero residual value and is being depreciated over its estimated useful life of 10 years. At 31 December 2014, the asset was revalued to $14 million but at 31 December 2015, the value of the asset had fallen to $8 million. Panama has not taken the effect of the revaluation at 31 December 2015 in its financial statements.

Calculate the amounts to shown in the financial statements of Panama for the year-ended 31 December 2015.

Example Answer 2 – Revaluation decrease

SFP		SPLOCI
	$’000		$’000
Property, plant and equipment	8,000	Depreciation	1,750
		Impairment	400
		Impairment	3,850

	Historic cost ($’000)	Revaluation model ($’000)	Revaluation reserve ($’000)
Cost (1.1.13)
Acc. Depn. (12,000/10) x 2 years
Carrying value (31.12.14)
Depreciation (14,000/8)
Carrying value (before)
Impairment
Carrying value (after)			Nil

Specialised assets do not have a fair value as no market value is readily available as they are very rarely sold. In order to revalue a specialised asset, we need to use a depreciated replacement cost valuation.

Illustration – depreciated replacement cost

Peru owned a specialised item of PPE that had cost $10 million. Its original useful life was 10 years and after 5 years when its carrying amount was $5 million the replacement cost of the asset was $15 million.

The depreciated replacement cost at this date is $7.5 million, as the asset is halfway through it useful life ($15 million x 5 /10), and the asset is revalued from $5 million to $7.5 million to give a revaluation surplus in the year of $2.5 million.

2 Depreciation

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Straight line
Reducing balance

Depreciation starts when the asset is ready for its intended use and not from when it starts to be used.

Any change in estimate is applied prospectively by applying the new estimates to the carrying value of the PPE at the date of change.

Separate the cost into its component parts and depreciate separately if a complex asset.

Example Answer 3 – Change in estimate

SFP		SPLOCI
	$’000		$’000
Property, plant and equipment	14,000	Depreciation	3,500

	$’000
Cost (1.1.12)
Acc. Dep. (25,000/10) x 3 years
Carrying value (31.12.14)
Depreciation 17,500/5

3 Borrowing costs (IAS 23)

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Borrowing costs, net of income received from the investment of the money borrowed, on a qualifying asset must be capitalised over the period of construction.

Capitalisation starts when:

Expenditure on the asset commences
Borrowing costs are being incurred
Activities necessary to prepare the asset are in progress

Capitalisation must stop when the asset is ready for its use (whether or not it is being used) or when there is no active construction.

Capitalisation for specific borrowings is capitalised using the effective rate of interest.

Borrowing costs	=	$10 million x 5% x 9/12
	=	$375,000

4 Government grants (IAS 20)

Recognise the grant when the:

Entity will comply with the conditions attached to the grant
Entity will actually receive the grant

Grants should be recognised according to the deferred income approach, using a systematic basis. This spreads the income over the period in which the related expenditure is recognised.

If the grant is used to buy depreciating assets, the grant must be spread over the same life and using the same method.

Example Answer 5 – Grants and depreciable assets

The property, plant and equipment will be capitalised on the statement of financial position as a non-current asset at its cost of $10 million.

It will be depreciated over its 10 year useful life and therefore $1 million of depreciation will be charged through profit or loss each year. The carrying value of the PPE will be reduced by the same amount each year.

The government grant is for a depreciable asset and so the $2 million will be spread over the same life as the PPE.

As Tweddle has met the conditions for the grant the $2 million will be recognised as deferred income on the statement of financial position.

It will be spread/amortised over 10 years and therefore $0.2 million income will be shown in profit or loss each year, with the deferred income being reduced by the same amount each year.

Tweddle will also split the deferred income at the reporting date between current and non-current liabilities.

The statement of cash flows will show a payment to acquire PPE of $10 million and grant income of $2 million in investing activities.

The depreciation and amortisation of government grants are both non-cash items in profit or loss and will need adjusting in operating activities if using the indirect method.

Note: If a government grant becomes repayable, it is treated as a change in accounting estimate.

The payment is first shown against any remaining deferred income balance.

If the payment exceeds the deferred income balance then the excess payment is treated as an expense.

5 Investment properties (IAS 40)

Investment property is property (land or a building – or part of a building – or both) held) to earn rentals or for capital appreciation or both, rather than for:

Use in the production or supply of goods and services or for administrative purposes (IAS 16); or
Sale in the ordinary course of business (IAS 2)

Initial measurement

Investment properties should initially be measured at cost plus directly attributable costs.

Subsequent measurement

Fair value model	Cost model
The investment properties are revalued to fair value at each reporting date Gains or losses on revaluation are recognised directly through profit or loss The properties are not depreciated	The investment properties are held using the benchmark method in IAS 16 (cost) The properties are depreciated like any other asset

Transfers into and out of investment property should only be made when supported by a change of use of the property.

IP to owner occupied (IAS 16) – Fair value at date of change
IP to inventory (IAS 2) – Fair value at date of transfer
Owner occupied (IAS 16) to IP – Revalue under IAS 16 and then treat as IP
Inventory (IAS 2) to IP – Fair value on change and gain/loss to profit or loss

A change of use creates two dates, not one. Revalue under IAS 16 up to the date of transfer, with that gain in other comprehensive income, then apply the fair value model from that date, with later movements in profit or loss. Answers that discuss only the year end lose most of the marks.

Example 6– Investment property and change of use

Addlington owns a property that it is using as its head office. At 1 January 2015, its carrying value was $20 million and its remaining useful life was 20 years. On 1 July 2015 the business was reorganised cheaper premises were found for use as a head office. It was therefore decided to lease the property under an operating lease.

The property was valued by a qualified professional, who assessed the property’s value as $21 million on 1 July and $21.6 million on 31 December 2015.

Explain the accounting treatment of the property in the financial statements for the year-ended 31 December 2015.

Example Answer 6 – Investment property and change of use

Addlington will treat the property using IAS 16 for the first six-months of the year before applying IAS 40 once the change in use of the property took place.

The property will be depreciated for the first six-months of the year resulting in a depreciation expense through profit or loss of $0.5 million ($20 million/20 years x 6/12), thus reducing the carrying value to $19.5 million ($20 million - $0.5 million).

The property is revalued to its fair value of $21 million on 1 July 2015 under IAS 16, giving a gain through other comprehensive income of $1.5 million ($21 million - $19.5 million).

The property is now classified as investment property and no longer depreciated.

It is revalued to a fair value of $21.6 million at the reporting date with the gain of $0.6 million going through profit or loss.

5.1 Initial classification

Be careful with what is and is not an investment property. In particular:

Company owns property and lets it out at commercial rent – definitely investment property.
Company builds property with a view to selling it – this would be inventory.
Company owns property and uses it as hotel – this would be PPE (any services offered to tenants must be inconsequential if a building is classified as IP).
Company owns property and rents it out under a finance lease – the relevant asset in the SFP will be a lease receivable.

Non-current assets

1 Property, plant and equipment (IAS 16)

1.1 Measurement at recognition

Example 1 – Revaluation increase

Example Answer 1 – Revaluation increase

Example 2 – Revaluation decrease

Example Answer 2 – Revaluation decrease

Illustration – depreciated replacement cost

2 Depreciation

Example 3 – Change in estimate

Example Answer 3 – Change in estimate

3 Borrowing costs (IAS 23)

Example 4 – Specific borrowings

Example Answer 4 – Specific borrowings

4 Government grants (IAS 20)

Example 5 – Grants and depreciable assets

Example Answer 5 – Grants and depreciable assets

5 Investment properties (IAS 40)

Example 6– Investment property and change of use

Example Answer 6 – Investment property and change of use

5.1 Initial classification