Financial Accounting 5 questions
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Topic6Slides-PropertyPlantandEquipment.pdf
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Workshop 6:
Accounting for property, plant & equipment
Prepared by Miranda Dyason
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Explain the recognition criteria for the initial recognition of property, plant and
equipment;
Account for property, plant and equipment using the cost model and revaluation
model of measurement;
Explain how to measure and account for property, plant and equipment on initial
recognition, and subsequently;
Account for de-recognition of property, plant and equipment; and
A
B
C
D
Learning Outcomes
1
E Specify the disclosures required by AASB 116.
Explain the recognition criteria for the initial recognition of property, plant and
equipment;
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Review questions:
2
Loftus et al (Chapter 5):
• Comprehension question 1:
What assets constitute property, plant and equipment?
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The entity acquires an
item of PP&E (see definition in AASB 116.6)
and meets recognition criteria (see AASB 116.7)
Measurement at initial
recognition:
- At cost
(see AASB 116.15-19)
Cost model:
Assets carried at cost less accum depreciation and impairment losses
Revaluation model:
Assets carried at fair value at date of revaluation less
subsequent accum depreciation and
impairment losses
Increases:
Recognised directly in OCI and accumulated in equity under the heading of Revaluation Surplus
(unless reversing a previous decrease of same asset
previously recognised in profit or loss).
Decreases:
Recognised in P&L(unless reversing a previous increase
of same asset previously recognised in OCI)
3
Subsequent measurement for each class of PP&E:
Accounting for PP&E
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Review question:
4
Loftus et al (Chapter 5):
• Comprehension question 6:
What factors should entities consider in choosing
alternative measurement models?
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Review question –
Costs of acquisition
5
Loftus et al (Chapter 5):
• Application and analysis exercise 5.6
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Cost model
6
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▸ AASB 116.30 requires that assets are carried at cost less any accumulated:
• Depreciation and
• Impairment losses (Impairment is covered in Topic 7).
▸ Repairs and maintenance costs are expensed as incurred, not capitalised – since capitalisation requires increased probable
future economic benefit (at the time of expenditure). (AASB
116.12)
The “cost model”
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▸ Depreciation is a process of allocation 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:
• Straight line method;
• Diminishing-balance method;
• Units-of-production method.
Depreciation
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Discussion question
9
Break up into groups of 2-3 students.
Share your thoughts on the following scenario:
“Surfers Ltd uses tractors as a part of its operating equipment, and it applies the
straight-line depreciation method to depreciate these assets. Surfers Ltd has just taken
over Paradise Ltd, which uses similar tractors in its operations. However, Paradise Ltd
has been using a diminishing balance method of depreciation for these tractors. The
accountant in Surfers Ltd is arguing that for both entities, the same depreciation method
should be used for tractors.”
Provide arguments for and against this proposal.
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Example – accounting using the cost model
10
▸ XYZ Ltd acquired a machine on 1 July 2015 for $80,000.
▸ Useful life = 4 years; Residual value = $20,000.
▸ XYZ Ltd uses the cost model for machinery, and depreciates
machinery on a straight-line basis.
Required:
Calculate the depreciation expense for the year ended 30 June
2016, and prepare journal entries to account for the acquisition of
the machine and depreciation for the year ended 30 June 2016.
Depreciation: ($80,000 - $20,000) / 4 = $15,000
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Example – accounting using the cost model
11
Journal entries:
1 July 2015:
DR Machinery $80,000
CR Cash at bank $80,000
(acquisition of machinery)
30 June 2016:
DR Depreciation expense $15,000
CR Accumulated depreciation – machinery $15,000
(annual depreciation)
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Example – accounting using the cost model
12
...Activity continued:
▸ XYZ Ltd sold the machine on 31 December 2016 for $60,000.
Required:
Prepare journal entries to account for depreciation of the machine
upto 31 December 2016, and the disposal of the machine.
Annual Depreciation: ($80,000 - $20,000) / 4 = $15,000
Depreciation for ½ year: $15,000 x 0.5 = $7,500
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Example – accounting using the cost model
13
Carrying amount at 31/12/16: $80,000 - $15,000 - $7,500 = $57,500
Profit/(loss) on sale: $60,000 - $57,500 = $2,500
Journal entries:
31 December 2016:
DR Depreciation expense $7,500
CR Accumulated depreciation – machinery $7,500
(depreciation on machine up until 31 December 2016)
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Example – accounting using the cost model
14
Journal entries - continued:
31 December 2016:
DR Cash $60,000
CR Machinery $80,000
DR Accum depreciation – machinery $22,500
CR Gain on sale of machine $2,500
(disposal of machine on 31 December 2016)
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Revaluation model
15
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▸ Measurement basis is Fair Value.
▸ 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 fair value.
▸ Accounting for assets using the revaluation model is done on an asset-
by-asset basis for each asset within the class of assets.
▸ As with the cost model, depreciation still needs to be accounted for.
The “revaluation model”
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Discussion Question
- Depreciation of revalued assets How do we determine depreciation if the amount that
the asset is measured at is continually changing?
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▸ From AASB 116.31 we can see that assets measured under the revaluation model do need to be depreciated.
▸ AASB 116.6 contains the following definitions:
• Depreciation – the systematic allocation of the depreciable amount of an
asset over its useful life;
• Depreciable amount – the cost of an asset, or other amount substituted
for cost, less its residual value;
• Residual value – the estimated value that an entity would currently obtain
from disposal if the asset were at the end of it’s useful life;
• Useful life – the period over which an asset is expected to be available for
use by an entity.
Depreciation of revalued assets
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▸ Depreciation for revalued assets will therefore be calculated as follows:
(Fair value of asset – Estimated residual value)
Estimated remaining useful life
▸ For example, if we have revalued an asset to $200,000 on 30th June 2016, and we estimate that the asset has a residual value of $50,000
and remaining useful life of 2 years, the annual depreciation for the
years ending 30th June 2017 and 30th June 2018 would be:
($200,000 – $50,000) = $75,000 depreciation p.a.
2
Depreciation of revalued assets
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Accounting for revaluation
increases and decreases
20
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Review questions:
21
Loftus et al (Chapter 5):
• Comprehension question 12 and 13:
12. Under the revaluation model, how is a revaluation
increase accounted for?
13. Under the revaluation model, how is a revaluation
decrease accounted for?
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▸ AASB 116 paragraph 39 states:
“If an asset's carrying amount is increased as a result of a revaluation,
the increase shall be recognised in other comprehensive income and
accumulated in equity under the heading of revaluation surplus.
However, the increase shall be recognised in profit or loss to the
extent that it reverses a revaluation decrease of the same asset
previously recognised in profit or loss.”
Applying the revaluation model: revaluation
increases
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▸ AASB 116 paragraph 40 states:
“If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be recognised in other comprehensive
income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset. The decrease recognised in other
comprehensive income reduces the amount accumulated in equity under
the heading of revaluation surplus.”
Applying the revaluation model: revaluation
decreases
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24
Revaluation increments, and subsequent
reversals Revaluation increment:
- “Gain on revaluation – OCI”
- Accumulates in ARS
Subsequent reversal:
- “Loss on revaluation – OCI”
- Reduce from balance in ARS.
If the decrease exceeds the
prior increment, the excess is
accounted for as per the next
slide.
REVALUATION REVALUATION
Carrying amount using
the cost model
OCI
P&L
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25
Revaluation decrements, and subsequent
reversals
Revaluation decrement:
- “Loss on revaluation – P&L”
Subsequent reversal:
- “Gain on revaluation – P&L”
If the increase exceeds the
prior decrement, the excess
is accounted for as per the
previous slide.
REVALUATION REVALUATION
Carrying amount using
the cost model
OCI
P&L
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1. Revaluation increase (that is not reversing prior decreases)
2. Reversal of previous increases
3. Revaluation decrease (that is not reversing prior increases)
4. Reversal of previous decreases
26
What are we accounting for?
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Application of the requirements in
AASB 116.39 and 40:
- Preparing journal entries
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• When accounting for depreciable assets under the revaluation
model:
o Any balance of accumulated depreciation is written back to the asset
account prior to recording the revaluation.
o This journal entry would be:
Dr. Accumulated depreciation [write-back accum depreciation to asset a/c]
Cr. Asset
Revaluation journal entries
28
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Example – writing back
accumulated depreciation
29
▸ XYZ Ltd acquired a machine on 1 July 2015 for $80,000.
▸ The carrying amount of the machine on 1 July 2016 was $60,000.
▸ XYZ Ltd decided to adopt the revaluation model from 1 July 2016.
Prior to writing the accumulated depreciation back to the ‘machine’
account, the machine would have been recorded as follows:
Machine – at cost $80,000
Less: accumulated depreciation ($20,000)
Carrying amount $60,000
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Example – writing back
accumulated depreciation
30
The journal entry to write back the accumulated depreciation to the
‘machine’ account would be:
Dr. Accumulated depreciation - machine $20,000
Cr. Machine $20,000
Prior to recording the first revaluation on 1 July 2016, the machine
would then be recorded as follows (rather than being recorded at cost
$80,000 less accumulated depreciation of $20,000):
Machine: $60,000
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1. Revaluation increases (not
reversing prior decreases)
31
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▸ The entries for a revaluation increase (with no reversal of prior decreases) would be:
Dr. Accumulated depreciation
Cr. Asset [write-back accum depreciation to asset a/c]
Dr. Asset
Cr. Gain from revaluation – OCI [revaluation of asset to fair value]
Dr. Gain from revaluation – OCI
Cr. Asset revaluation surplus [transfer gain to equity]
Revaluation journal entries
32
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▸ ABC Ltd acquires an item of equipment on 1/7/2014 for $25,000. The useful life and residual value are estimated to be 4 years, and $5,000
respectively. ABC Ltd measures equipment using the cost model.
▸ On 1/7/2015, ABC Ltd decides to adopt the revaluation model for equipment. At this date, the item of equipment above is determined to
have a fair value of $22,000. The useful life and residual value
estimates remain unchanged (remaining useful life of 3 years at 1/7/15).
Required:
Prepare journal entries to account for this item of equipment for the period
1/7/2014 – 30/6/2016.
Activity
33
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1/7/2014:
Dr. Equipment $25,000
Cr. Cash $25,000
30/6/2015:
Dr. Depreciation $5,000
Cr. Accumulated depreciation - equip $5,000
(Depreciation: (25,000 – 5,000) / 4)
1/7/2015:
Dr. Accumulated depreciation - equip $5,000
Cr. Equipment $5,000
Solution:
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Dr. Equipment $2,000
Cr. Gain from revaluation – OCI $2,000
Dr. Gain from revaluation – OCI $2,000
Cr. Asset revaluation surplus $2,000
30/6/2016:
Dr. Depreciation $5,667*
Cr. Accumulated depreciation - equip $5,667
(*Depreciation = ($22,000 - $5,000)/3)
Solution:
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2. Reversals of prior increases
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▸ For a revaluation decrease following a prior revaluation increase, the journal entries would be:
Dr. Accumulated depreciation
Cr. Asset [write-back accum depreciation to asset a/c]
Dr. Loss from revaluation – OCI
Cr. Asset [recognise decrease in OCI to the extent of
prior increases accumulated in equity]
Dr. Asset revaluation surplus
Cr. Loss on revaluation – OCI [reduce the amount accumulated in the ARS]
37
Revaluation journal entries
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Continuing on from the last activity:
▸ On 1/7/2016, the item of equipment is determined to have a fair value of $15,000. The useful life and residual value estimates remain unchanged
(remaining useful life of 2 years at 1/7/16).
Required:
Prepare journal entries to account for this item of equipment for the period
1/7/2016 – 30/6/2017.
Solution:
Carrying amount of equipment at 1/7/16: $16,333 ($22,000 - $5,667)
Fair value: $15,000
Revaluation decrease: ($1,333)
Activity - continued
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1/7/2016:
Dr. Accumulated depreciation - equip $5,667
Cr. Equipment $5,667
Dr. Loss from revaluation – OCI $1,333
Cr. Equipment $1,333
Solution:
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Dr. Asset revaluation surplus $1,333
Cr. Loss on revaluation – OCI $1,333
30/6/2017:
Dr. Depreciation $5,000
Cr. Accumulated depreciation - equip $5,000
(*Depreciation = ($15,000 - $5,000)/2
Solution:
40
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3. Revaluation decreases (not
reversing prior increases)
41
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▸ The accounting treatment of a revaluation decrement (with no reversal of prior increases) is that an expense is recognised immediately.
▸ So the entries for a revaluation decrease (with no reversal of prior increases) would be:
Dr. Accumulated depreciation
Cr. Asset [write-back accum depreciation to asset a/c]
Dr. Loss from revaluation – P&L
Cr. Asset [revaluation of asset to fair value]
42
Revaluation journal entries
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▸ ABC Ltd acquires an item of equipment on 1/7/2014 for $25,000. The useful life and residual value are estimated to be 4 years, and $5,000
respectively. ABC Ltd measures equipment using the cost model.
▸ On 1/7/2015, ABC Ltd decides to adopt the revaluation model for equipment. At this date, the item of equipment above is determined to
have a fair value of $18,000. The useful life and residual value
estimates remain unchanged (remaining useful life of 3 years at 1/7/15).
Required:
Prepare journal entries to account for this item of equipment for the period
1/7/2014 – 30/6/2016.
Activity
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1/7/2014:
Dr. Equipment $25,000
Cr. Cash $25,000
30/6/2015:
Dr. Depreciation $5,000
Cr. Accumulated depreciation - equip $5,000
1/7/2015:
Dr. Accumulated depreciation - equip $5,000
Cr. Equipment $5,000
Solution:
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Dr. Loss on revaluation – P&L $2,000
Cr. Equipment $2,000
30/6/2016:
Dr. Depreciation $4,333*
Cr. Accumulated depreciation - equip $4,333
(*Depreciation = ($18,000 - $5,000)/3
Solution:
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4. Reversals of prior decreases
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▸ For a revaluation increase that is reversing a prior revaluation decrease, the journal entries would be:
Dr. Accumulated depreciation
Cr. Asset [write-back accum depreciation to asset a/c]
Dr. Asset
Cr. Gain on revaluation – P&L [revaluation increase that is reversing
previous decreases recognised in profit or loss]
Revaluation journal entries
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Continuing on from the last activity:
▸ On 1/7/2016, the item of equipment is determined to have a fair value of $15,000. The useful life and residual value estimates remain unchanged
(remaining useful life of 2 years at 1/7/16).
Required:
Prepare journal entries to account for this item of equipment for the period
1/7/2016 – 30/6/2017.
Solution:
Carrying amount of equipment at 1/7/16: $13,667 ($18,000 - $4,333)
Fair value: $15,000
Revaluation increase: $1,333
Activity - continued
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1/7/2016:
Dr. Accumulated depreciation - equip $4,333
Cr. Equipment $4,333
Dr. Equipment $1,333
Cr. Gain from revaluation – P&L $1,333
30/6/2017:
Dr. Depreciation $5,000
Cr. Accumulated depreciation - equip $5,000
(*Depreciation = ($15,000 - $5,000)/2
Solution:
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Review questions –
Revaluation model
50
Loftus et al (Chapter 5):
• Application and analysis exercise 5.2, 5.11
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Derecognition of assets
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▸ The carrying amount of an item of P,P&E shall be derecognised:
a) On disposal, or
b) When no future economic benefits are expected from its use or
disposal.
[AASB 116.67]
▸ On disposal of an item of P,P&E, the entity must:
• Account for any depreciation from the beginning of the period
up to the point of sale.
• Account for the sale, including the recognition of a gain or loss.
Derecognition of assets
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▸ The revaluation surplus included in equity in respect of an item or property, plant and equipment may be transferred directly to
retained earnings when the asset is derecognised.
▸ Transfers from revaluation surplus to retained earnings are not made through profit or loss.
[AASB 116.41]
Derecognition of assets
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▸ A Ltd had a machine that was revalued $10,000 upwards for the first
time on 30 June 2015 to $50,000.
▸ The remaining useful life = 4 years; Residual value = $10,000.
▸ The machine was sold on 30 June 2016 for $45,000.
▸ A Ltd adopts the revaluation model, and recognises depreciation on a
straight-line basis.
Required:
Prepare the journal entries to account for depreciation for the year ended
30 June 2016, and the disposal of the machine.
Activity - Derecognition of assets
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▸ Depreciation for 2016 would be: ($50,000 - $10,000)/4 = $10,000. The
journal entry to account for depreciation for 2016 would be:
Dr Depreciation expense 10,000
Cr Accum. Depreciation - machine 10,000
▸ The journal entry to account for the sale would be:
Dr Cash 45,000
Dr Accum. Depreciation - machine 10,000
Cr Machine 50,000
Cr Gain on sale 5,000
Solution:
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▸ The journal entry to transfer the balance in the asset revaluation
surplus to retained earnings would be:
Dr Asset revaluation surplus 10,000
Cr Retained earnings 10,000
Solution:
56
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Activity:
The revaluation model over
multiple periods
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▸ ABC Ltd acquires an item of equipment on 1/7/2014 for $100,000. The useful life and residual value are estimated to be 8 years, and $20,000 respectively. ABC Ltd
measures equipment using the cost model.
▸ On 1/7/2015, ABC Ltd decides to adopt the revaluation model for equipment. At this date, the item of equipment has a fair value of $85,000. The useful life and residual
value estimates remain unchanged (remaining useful life of 7 years at 1/7/15).
▸ On 1/7/2016, the equipment has a fair value of $82,000. The remaining useful life is reassessed to 7 years (from 1/7/2016) and the residual value is revised to $18,000.
▸ The item was sold on 30/6/2017 for $75,000.
Required:
Prepare journal entries to account for this item of equipment for the period 1/7/2014 –
30/6/2017.
Activity
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▸ Depreciation for the year ended 30/6/2015: ($100,000 - $20,000) / 8 = $10,000
▸ Depreciation for the year ended 30/6/2016: ($85,000 - $20,000) / 7 = $9,286
▸ Depreciation for the year ended 30/6/2017: ($82,000 - $18,000) / 7 = $9,143
▸ Revaluation increments/decrements and profit/loss on sale can be calculated as follows:
At 1/7/2015 At 1/7/2016 At 30/6/2017
Equipment 100,000 85,000 82,000
Less: accumulated depreciation (10,000) (9,286) (9,143)
Carrying amount 90,000 75,714 72,857
Fair value 85,000 82,000
Revaluation increase/(decrease) (5,000) 6,286
Sale price 75,000
Profit / (Loss) on sale: 2,143
Solution - workings
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1/7/2014:
Dr. Equipment $100,000
Cr. Cash $100,000
30/6/2015:
Dr. Depreciation $10,000
Cr. Accumulated depreciation - equip $10,000
1/7/2015:
Dr. Accumulated depreciation - equip $10,000
Cr. Equipment $10,000
Solution:
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Dr. Loss on revaluation – P&L $5,000
Cr. Equipment $5,000
30/6/2016:
Dr. Depreciation $9,286*
Cr. Accumulated depreciation - equip $9,286
(*Depreciation = ($85,000 - $20,000)/7)
1/7/2016:
Dr. Accumulated depreciation - equip $9,286
Cr. Equipment $9,286
Solution:
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Dr. Equipment $6,286
Cr. Gain on revaluation – OCI $1,286
Cr. Gain on revaluation – P&L $5,000
(Reversing the $5,000 revaluation decreases previously recognised in P&L, and balance to OCI)
Dr. Gain on revaluation – OCI $1,286
Cr. Asset revaluation surplus $1,286
(Accumulate gain in OCI in the ARS)
Solution:
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30/6/2017:
Dr. Depreciation $9,143*
Cr. Accumulated depreciation - equip $9,143
(*Depreciation = ($82,000 - $18,000)/7)
30/6/2017:
Dr. Cash $75,000
Dr. Accumulated depreciation - equip $9,143
Cr. Gain on sale $2,143
Cr. Equipment $82,000
Dr. Asset revaluation surplus $1,286
Cr. Retained earnings $1,286
Solution:
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Review questions –
Revaluation model
64
Loftus et al (Chapter 5):
• Application and analysis exercise 5.13, 5.18
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▸ Understand what you are required to do – for example: account for PP&E using the cost or revaluation model.
▸ Understand what’s involved in the scenario presented – for example, do you need to account for:
• Acquisition of PP&E?
• Subsequent measurement using the cost or revaluation model?
• Depreciation (and impairment – covered in a later topic)?
• Derecognition of PP&E?
How to approach activities re property, plant
and equipment?
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▸ AASB 116 paragraph 73 - 79 outline the disclosure requirements.
Example of PP&E disclosures – from Woolworths Group Ltd 2016 financial reports:
Disclosures
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