Property Plant Equipment

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Topic 3 Property, Plant & Equipment

The nature of PP&E
• AASB 116 defines property, plant & equipment (PP&E) as: • tangible items • with a specific use within the entity • that are expected to be used during more than one period AASB 116 specifically excludes assets held for re-sale PP&E is normally divided into classes. Common classes include land, buildings, machinery, motor vehicles.

• •



Initial recognition of PP&E
• Cost of an item is recognised as an asset if: • it is probable that economic benefits will flow to the entity, and • the cost can be reliably measured Where future economic benefits are not expected to flow to the entity, costs incurred should be expensed. Component parts (with different useful lives) are required to be separately accounted for. • . Eg. An aircraft –

Initial measurement of PP&E
PP&E is initially measured at cost, which includes:
• Purchase price (at fair value) • Directly attributable costs required to bring the asset to

the location and condition necessary for it to operate
Refer section 7.3.2 of text for detailed lists of items specifically included and excluded from this component

• Initial estimate of costs of dismantling, removing the

item or restoring the site



Measurement subsequent to initial recognition
• • • • • • AASB 116 allows a choice of two possible measurement models: Cost model Revaluation model Accounting policy choice of this decision based primarily on relevance of information. The policy that is chosen must be applied to a whole class of assets May change policy, but only if results in more relevant/ reliable information

The cost model
• AASB 116 requires that assets are carried at cost less any accumulated • depreciation • impairment losses • Repair and maintenance costs are expensed as incurred, not capitalised – • Capitalisation requires (at time of expenditure) increased probable future economic benefit –



AASB 116 includes the following definitions: • Depreciation: • Depreciable amount:

• Residual value: • Useful life:

• Depreciation is an allocation process designed to reflect the fall in the value of the asset in a pattern consistent with the consumption of economic benefits by the entity. • AASB 116 does not specify how this allocation process should be undertaken. • Various depreciation methods are used in practice. Common methods are discussed on the following slide. In all cases, depreciation expense is recognised with the following journal:



Commonly used depreciation methods include: • Straight-line method – • Diminishing balance method – • Units of production method – • The method chosen should be the method which most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.

Useful life
• Management should consider the following factors when estimating the useful life of an asset: • • • • • Useful life is subject to periodic review • Land is not subject to depreciation as it does not have a limited useful life



The revaluation model
• As an alternative to the cost model AASB 116 allows

the revaluation model to be used for classes of assets
• Measurement basis is fair value (FV) • Frequency of revaluations is not specified, but must be

performed with sufficient regularity such that the carrying amount of assets is not materially different from their FV • Revaluation performed on • Accounting performed on

The revaluation model
Accounting on an asset-by-asset basis
• ABC Ltd has decided to change from the cost model to

the revaluation model to account for plant. • At 30 June 2012 ABC Ltd owned the following plants: Cost Plant A 200,000 Plant B 140,000 TOTAL 340,000 Accum dep’n 120,000 40,000 140,000 Carrying value 80,000 100,000 200,000 Fair value 150,000 80,000 230,000...
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