Materiële Vaste Activa. 27 September 2005 Pearl Couvreur

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Nathaniel Wilcox
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1 Materiële Vaste Activa 27 September 2005 Pearl Couvreur P w C

2 Contents 1. Principle 2. Acquisition cost 3. Subsequent costs 4. Borrowing costs 5. Assets acquired in a business combination 6. Revaluation of PP&E 7. Depreciation 8. Derecognition 9. Impairment of assets 10. Assets held for sale 11. Investment property 12. Leased assets 13. Government grants 14. First time adoption of IFRS 15. Case studies

3 Principle IAS 16 Property, Plant and Equipment Property,Plant & Equipment (PP&E) are tangible assets that: Are expected to be used during more than one year; Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes Materiality should be also be considered Recognition criteria : the cost of an item of PP&E shall be recognised as an asset if: It is probable that future economic benefits associated with the item will flow to the entity, and The cost of the item can be measured reliably Page 3

4 Acquisition cost The acquisition cost should include: The purchase price Any directly attributable costs to bring the asset to the location and working condition necessary for it to be capable of operation in the manner intended by management The initial estimate of costs for dismantling and removing the item and restoring the site on which it is located (obligation incurred either when the item is acquired or as a consequence of having used the item for purposes other than producing inventories Page 4

5 Acquisition cost Examples of directly attributable costs are: Costs of employee benefits arising directly from the construction or the acquisition of the item of PP&E Costs of site preparation Initial delivery and handling costs Installation and assembly costs Costs of testing whether the assets is functioning properly Professional fees Page 5

6 Acquisition cost Examples of costs that are not costs of an item of PP&E: Costs of opening a new facility Costs of introducing a new product or service (advertising costs) Costs of staff training Administration or other general overheads Initial operating losses Costs of relocating or reorganising operations Costs incurred while an item is operated at less than full capacity or is not yet used (although it is capable of operating in the manner intended by management Page 6

7 Acquisition cost Spare parts and servicing equipment are usually carried as inventory and recognised in expense as incurred. However, major space parts and stand-by equipment qualify as PP&E when an entity expects to use them during more than one year The cost of an asset is the cash price equivalent at the recognition date. If payment of the price of an asset is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment, is recognised as interest expense of the period of credit Items of PP&E acquired in exchange for a non-monetary asset is measured at fair value unless The transaction lacks commercial substance The fair values cannot be reliably measured Then the cost is measured at the carrying value of the asset given up Page 7

8 Subsequent costs Subsequent costs of day-to-day servicing of an item of PP&E (may include cost of small parts) are recognised in loss as incurred Parts of items of PP&E that require replacement at regular intervals (seats in an aircraft) or parts that are acquired to make less frequently recurring replacement (replacing the interior walls of a building) are recognised as an asset if the recognition criteria are met (see above: future benefits are probable and cost is measured reliably). Such components of items of PP&E should be accounted for as separate assets and depreciated over their own useful life (see example 1) The cost of a major inspection (regardless of whether parts of the item are replaced) is included in the carrying amount of the item of PP&E as a replacement if the recognition criteria are satisfied. The replaced asset is written off Page 8

9 Borrowing costs Borrowing costs: IAS 23 "Borrowing Costs" Measurement Benchmark treatment: to be expensed as incurred Allowed alternative treatment: borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset (= an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset both costs of specific borrowings and costs of funds that are borrowed generally should be capitalised the capitalisation rate in respect of general borrowings is the weighted average of the borrowings costs applicable to the borrowings of the enterprise that are outstanding during the period, other than specific borrowings Page 9

10 Borrowing costs Capitalisation should be suspended during extended periods in which active development is interrupted Capitalisation should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete Page 10

11 Assets acquired in a business combination Tangible assets acquired as part of a business combination (acquisition of a subsidiary) should be accounted for at their fair value (IFRS 3): Land and buildings: market value Other tangible assets: market value determined by an expert. For assets of a specialised nature or for assets for which no market exists, the fair value would be the depreciated replacement cost (see example 2) First-time adoption (IFRS 1): option not to restate acquisitions that arose before the transition date (=1 st day of the 1 st period presented) Page 11

12 Revaluation of PP&E Possibility of revaluation of property, plant and equipment. If this option is selected: Revaluations should be made as frequently as necessary (revaluations should be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date market value or, for specialised assets or assets for which no market exists, depreciated replacement cost). A policy should be adopted and applied consistently year on year All assets of the same class should be revalued (example of classes are land, buildings, motorvehicles) If the assets value is increased as a result of a revaluation, the increase shall be credited to the equity account revaluation surplus Page 12

13 Depreciation Depreciable amount = acquisition cost less residual value at the end of its useful life. Residual value is the estimated amount that an entity would currently obtain from disposal of the asset (less disposal costs) if the asset were already of age and in the condition expected at the end of its useful life In practice the residual life of an asset is often insignificant Page 13

14 Depreciation The useful life is: The period over which an asset is expected to be available for use to the entity, (the useful life of the asset can thus be shorter than its economic life if it is management s policy to dispose of the asset after a specified period of time) or, The number of production units expected to be obtained from the asset by the entity The useful life takes into account: Expected usage Expected physical wear and tear Technical or commercial obsolescence Legal limits such as expiry of a related leases Page 14

15 Depreciation Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in a manner intended by management Depreciation does not cease when the asset becomes idle If there is a change in the remaining useful life of an asset or an impairment loss has been accounted for (extraordinary amortisation under Belgian accounting law), the net book value should be spread over the remaining useful life of the asset Page 15

16 Depreciation The depreciation method used shall reflect the pattern in which the asset s future economic benefits are expected to be consumed by the entity. Methods included in the IAS are : straight-line method, diminishing balance method and the units of production method The depreciation method used is applied consistently from year to year, unless there is a change in the expected pattern of consumption of the economic benefits (see example 3) Page 16

17 Depreciation Components approach: each part of PP&E that is significant in relation to the total cost of the item shall be depreciated separately over its own useful life (see example 1) An entity allocates the amount initially recognised to its significant parts and depreciates separately each such part Significant parts that have useful lives that are the same may be grouped in determining the depreciation charge Page 17

18 Derecognition The carrying value of the asset is derecognised : On disposal or When no future economic benefits are expected from its use or disposal Page 18

19 Impairment of assets IAS 36 : Impairment of Assets General principles: The carrying amount of an asset may not be higher than its recoverable amount (i.e. the higher of its fair value less costs to sell and value in use) Compare the carrying amount of the asset to its recoverable amount Recognize an impairment loss if the carrying amount exceeds the recoverable amount Page 19

20 Impairment of assets Example: impairment loss of 30 to recognize (= 80 carrying amount before impairment test - 50 recoverable amount) Carrying amount Lower of Depreciated cost Say 80 Recoverable amount Higher of NSP Say 50 Value in use Say 30 Page 20

21 Impairment of assets An enterprise should assess at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should estimate the recoverable amount of the asset External sources of information such as: significant decline in market values adverse changes in the technological, market, economic or legal environment Internal sources of information obsolescence or physical damage significant changes with an adverse effect on the enterprise, including plans to discontinue or restructure the operation to which an asset belongs evidence from internal reporting that the economic performance of an asset is, or will be, worse than expected Page 21

22 Impairment of assets Often, it is not possible to estimate the recoverable amount of the individual asset do it at the level of the cashgenerating unit (CGU) and determine the recoverable amount of the CGU to which the asset belongs CGU = the smallest group of assets that includes the asset and that generates cash inflows from continuing use and that are largely independent of the cash inflows from other assets or groups of assets Examples: a production line, a production plant, a business unit, a subdivision, a division or the enterprise Page 22

23 Assets held for sale IFRS 5: Non-current assets will be classified as held for sale when their carrying amount will be recovered principally through a sale rather than through continuing use Conditions to satisfy for such a classification, including: Management commits itself to a plan to sell The asset is available for immediate sale in its present condition Actions to complete the plan are initiated The sale is highly probable Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell and are not depreciated Presentation should be made on a separate line in the balance sheet and information should be disclosed in the notes Page 23

24 Investment property IAS 40 Investment property Property (land or building or part of a building or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business generate cash inflows largely independently from the other assets held by an enterprise ( owner-occupied property) If a property is partly used by the owner and partly rented: If the portions could be sold separately, to be accounted for separately If the portions could not be sold separately, the property is an investment property only if an insignificant portion is used by the owner Page 24

25 Investment property Measurement Benchmark treatment: at fair value with all changes in fair value recorded in the income statement detailed guidance is given on how to determine fair value there is a rebuttable presumption that fair value can be determined reliably highly unlikely that a change from the fair value model to the cost model will result in a more appropriate presentation Allowed alternative treatment: same accounting treatment as for tangible fixed assets + disclosure of the fair value in the notes Page 25

26 Leased assets IAS 17 Leases If substantially all of the risks and rewards incident to ownership are transferred from the lessor to the lessee, it is a finance lease. The lessee should recognize finance leases as assets and liabilities in the balance sheet at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. If substantially all of the risks and rewards incident to ownership are not transferred from the lessor to the lessee, it is an operating lease: the financed assets remain on the lessor s balance sheet and the lease payments should be recognized in the income statement Page 26

27 Leased assets No mathematical thresholds are used to determine whether the contract should be classified as finance or operating lease. An overall analysis of the transaction needs to be performed, at inception of the contract, to determine whether substantially all of the risks and rewards are transferred from the lessor to the lessee. To conclude on it, it is required to focus on the substance of the transaction rather than on the legal form of the contract The leased asset is depreciated in a manner consistent with similar assets. If there is not reasonable assurance that the lessee will acquire the leased asset at the end of the lease contract, it should be amortized over the length of the lease if shorter than the useful live of the leased asset Page 27

28 Leased assets Examples of situations which would normally lead to a lease being classified as a finance lease: (a) (b) (c) The lessor transfers ownership of the asset to the lessee at the end of the lease term The lessee has the option to purchase the asset at a price, which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised (bargain purchase option) The lease term is for the major part of the economic life of the asset even if title is not transferred (e.g. US GAAP: 75%) Page 28

29 Leased assets (d) (e) At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset (e.g. US GAAP, UK GAAP: 90%). The leased assets are of a specialised nature such that only the lessee can use them without major modifications being made The leased asset is depreciated in a manner consistent with similar assets. If there is not reasonable assurance that the lessee will acquire the leased asset at the end of the lease contract, it should be amortized over the length of the contract Page 29

30 Government grants IAS 20 Accounting for Government Grants and Disclosure of Government Assistance Capital grants are : Either deducted from the acquisition cost of the related asset Or recorded in deferred income In both cases, they are recognised in the income statement based on the amortisation of the related asset Grants related to income are recognised on the income statement Information should be disclosed in the notes to the financial statements Page 30

31 First-time adoption of IFRS IFRS 1: upon transition to IFRS an entity can : either adopt a cost-based measurement or measure those items at fair value and use those fair values as their deemed cost at the date of transition (will serve as the basis for depreciation in future years) (cherry-picking possible) or keep a one-time revaluation made under previous GAAP if the revalued amount approximated fair value (cherry-picking possible) Page 31

32 Case studies See handouts 1 to 4 Page 32

33 Questions QUESTION TIME Page 33

IAS 16 Property, Plant and Equipment. Uphold public interest

IAS 16 Property, Plant and Equipment Uphold public interest Background IAS 16 became operational in 1983 Major amendments have been made several times including 1998, 2003, 2008, 2012, 2013, 2014 The objective