LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT Disclaimer The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam. RECOGNITION INITIAL COST Elements of cost: Purchase price, import duties and nonrefundable purchase taxes etc Costs directly attributable to bringing the asset to location and condition to be capable to operate in manner intended by management Initial estimated costs of dismantling and removing item and restoring the site on which it is located. SUBSEQUENT COST Servicing costs: Normal day-to-day servicing (maintenance) costs are not recognised in the CA of the item. Replacement at regular intervals Recognise in CA of PPE item the cost of the replacing part when the cost is incurred if the recognition criteria are met. The remaining CA of the replaced part is derecognised. MEASUREMENT AT RECOGNITION ABNORMAL CREDIT TERMS Cost of PPE is cash price equivalent at recognition date. If payment is deferred beyond normal credit terms. Difference between cash price and total payment is recognised as interest over the period of credit. EXCHANGE OF PPE ITEMS PPE items may be acquired in exchange for monetary or non-monetary assets or both: The cost of acquired item is measured at FV unless: Exchange transaction lacks commercial substance, OR FV of neither asset received or given up is reliably measured Else asset acquired is measured at carrying value of asset given up. Determine commercial substance by considering the extent to which its future cash flows (CF) (after tax) are expected to change as a result of the transaction. Exchange transaction has commercial substance if:
COST MODEL Calculation of CA: Cost price Less accumulated depreciation Less accumulated impairment losses Formula to restate NRV from end of the year to beginning of the year: [(NRV at beginning Residual value)/remaining useful life at end of the year x remaining useful life at beginning of the year] + Residual value Configuration of the CF of asset received differs from the configuration of CF of asset transferred, OR Entity-specific value of the portion of entity s operations affected by the transaction changes as result of exchange, AND Difference in the 2 above is significant relative to the FV of the assets exchanged. When FV of both acquired asset and asset given up can be measured reliably, then FV of asset given up is used to measure cost of the asset received, UNLESS FV of asset received is more evident. MEASUREMENT AFTER RECOGNITION Remember: Revaluations should always take place at REVALUATION MODEL the BEGINNING of Calculation of CA: the financial year FV on date of revaluation Less accumulated depreciation Less accumulated impairment losses Gross replacement value: The replacement cost (market value/cost price) of a similar new asset You have to determine the CA at the beginning of the current year in order to compare it to your existing CA on the same date and calculate the revaluation surplus/deficit Net replacement value Regarded as the cost to replace the asset currently with a similar asset of the same age and condition The value given (normally at the end of the financial year) is the CA of that asset AFTER revaluation and depreciation for the period You need to calculate the NRV at the BEGINNING of the period Only then can you calculate the revaluation surplus and depreciation for the year Revaluation surplus/deficit: INCREASE in asset s CA: Recognised in other comprehensive income (OCI) in equity BUT, increase recognised in profit or loss to the extent it reverses a revaluation decrease of the same asset DECREASE in asset s CA: Recognised in profit or loss BUT, recognised in OCI to the extent it reverses a revaluation surplus of the same asset
Transfers from RS to retained earnings are not made through profit or loss, but directly on the face of the statement of changes in equity. Transfer of revaluation surplus: Transferred annually to retained earnings (accounting policy is to realise the RS through use of the asset) Transferred when the asset is fully depreciated Transferred upon disposal of the asset DEPRECIATION Each part of PPE-item with a cost that is significant in relation to total cost of the item must be depreciated separately. Entity allocates amount initially recognised in respect of a PPE-item to its significant parts and depreciates separately each part Significant part of PPE-item with same useful life and depreciation methods may be grouped together in order to determine depreciation Depreciation of an asset begins when it is available for use as intended by management. Depreciation ceases at the earlier of the date that asset is classified as held for sale and the date the asset is derecognised. Depreciation method: Depreciation method used must reflect the pattern in which the asset s future economic benefits are expected to be consumed by the entity. Depreciation method applied shall be reviewed at least at each financial year end 3 depreciation methods: Straight-line method adopted where income produced by the asset is a function of time, rather than usage. Diminishing balance method method is usually used where there is unvertainty as to the amount of income that will be derived from the asset Units of production method (or sum of units method) depreciation is charged over the expected use or output of the asset Depreciation charge is accounted for in profit and loss, unless it is capitalised as part of the cost of another asset. IMPAIRMENT Impairment loss is the amount by which CA of an asset EXCEEDS its recoverable amount Refer to learning unit 3 for information on impairment of assets
DISCLOSURE Below are illustrations of what the disclosure for Property, plant and equipment MUST look like. Land and buildings must be shown separately. Even if you have more than one property, you can ONLY disclose ONE column for Land and ONE column for building. You are NOT allowed to disclose a column for land and a column for buildings for each of the properties. You will be penalised in the exam and we will deduct marks. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED (DAY) (MONTH) (YEAR) Property plant and Equipment Land Buildings Vehicles Total Carrying amount at the beginning of the year Cost Accumulated depreciation Must have a separate column for each class of asset, eg. Vehicles, machine, land, buildings Additions Depreciation Revaluation/(Devaluation) Impairment Derecognition These are the movements for the CURRENT financial year. Only include if it is applicable. Carrying amount at the beginning of the year Gross carrying amount/cost Accumulated depreciation Valuations were performed on [DATE] by an independent sworn appraiser. The carrying amount of land and buildings if it was carried at cost minus accumulated depreciation would have amounted to R[TOTAL] (Land: [Rvalue]; Buildings [Rvalue]). This narrative disclosure MUST be included in the note for PPE. A lot of students forget to include this note and miss out on important marks. Deferred tax note Revaluation surplus (deficit): Land Revaluation surplus (deficit): Building Accelerated tax allowance: Building Accelerated tax allowance: Machine Accelerated tax allowance: Vehicle Deferred tax asset/liability Remember that you have to indicate if it is a deferred tax asset or liability. R Rvalue Rvalue Rvalue Rvalue Rvalue Rtotal
DEFERRED TAX Capital Gains tax (CGT) general rules CGT is applicable to assets acquired after 1 October 21. Summary of CGT implications page 38 of study guide. Proceeds Base cost Tax base Proceeds above cost is taxed at 66.6% x 28% (CGT rate) Proceeds below cost = recoupment of tax allowance at 28% Non - depreciable assets Eg land Scenario: Assume land was purchased at a cost of R1. Cost model No tax implications - IAS 12.15 Exempt CA TB TD DT Cost 1 1 Exempt
Revaluation model Tax implications of a revaluation surplus are as follows: CA TB Base cost difference difference CA above cost is taxed at 66.6% x 28% (CGT rate) no tax implications = IAS 12.15 Exempt Scenario: Assume land was purchased at a cost of R1. The NRV of the land was R12. R12 R1 R1 R2 R CA above cost is taxed at 66.6% x 28% (CGT rate) no tax implications = IAS 12.15 Exempt CA RS TB TD DT Cost 1 1 Exempt Revaluation 2 2 2 (3 73) 2 x 66.6% x 28% = 3 73 12 2 1 2 (3 73)
Property, Plant and Equipment Deferred tax principles Depreciable assets and SARS grants an allowance Eg Manufacturing buildings, Machinery, vehicles, etc The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale. Recovery through use Cost model Deferred tax at 28% Revaluation model Deferred tax at 28% even for the revaluation surplus Scenario: Year 1: Assume a machine was purchased at a cost of R1. The machine is depreciated over 2 years. Beginning of year 2 NRV = R12. Tax allowance = 1% not apportioned CA RS TB TD DT CA RS TB TD DT Cost 1 1 Cost 1 1 Dep/T all (5 ) (1 ) 5 (1 4) Dep/T all (5 ) (1 ) 5 (1 4) 95 9 5 (1 4) 95 9 5 (1 4) Dep/T all (5 ) (1 ) 5 (1 4) RS 25 25 25 (7 ) 95 8 1 (2 8) 12 25 9 3 (8 4) Dep/T all (6 316) (1 316) (1 ) 3 684 (1 32) 113 684 23 684 8 32 (9 432)
Recovery through sale Tax implications of a sale are as follows: carrying amount Base cost Tax base difference difference CA above cost is taxed at 66.6% x 28% (CGT rate) Recoupment of previous wear and tear Cost model Revaluation model Assume now management sold the machine at its carrying value CA RS TB TD DT CA RS TB TD DT Cost 1 1 Cost 1 1 Dep/T all (5 ) (1 ) 5 (1 4) Dep/T all (5 ) (1 ) 5 (1 4) 95 9 5 (1 4) 95 9 5 (1 4) Dep/T all (5 ) (1 ) 5 (1 4) RS 25 25 25 (7 ) 9 8 1 (2 8) 12 25 9 3 (8 4) sale (9 ) (8 ) (1 ) 2 8 Dep/T all (6 316) (1 316) (1 ) 3 684 (1 32) 113 684 23 684 8 33 684 (9 432) Any excess of the CA above the TB is a recoupment of previous wear and tear. CA < Cost adjustment 1 28 (113 (23 sale 684) 684) (8 ) (33 684) 8 152
Cost model Revaluation model cost CA TB CA 13 684 13 684 x 66.6% x 28% = 2 552 cost 1 1 x 28% = 2 8 2 2 x 28% = 5 6 TB total tax implication = R2 797 + R5 6 = R8 152 deferred tax currently = R9 432 therefore adjustment = R1 28
Depreciable assets and SARS does not grant an allowance Eg Office/Admin building The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale. Recovery through use Cost model Deferred tax at 28% Revaluation model Deferred tax at 28% even for the revaluation surplus Year 1: ABC purchased an office block for R12 (land - R18, buildings R ). Buildings are depreciated over 2 years. SARS does not allow a tax allowance on the building. Year 2: Assume the revaluation surplus for the year for the land is R2 and for buildings it is R1. CA RS TB TD DT CA RS TB TD DT Cost Cost Dep/T all (51 ) (51 ) exempt Dep/T all (51 ) (51 ) exempt 969 (51 ) 969 (51 ) Dep/T all (51 ) (51 ) exempt RS 1 1 1 (28 ) 918 (12 ) 1 69 1 49 (28 ) Dep/T all (56 263) (5 263) (56 263) 112 737 94 737 (7 263) (28 )
Tax implications of a sale are as follows: Recovery through sale carrying amount Base cost Tax base difference difference CA above cost is taxed at 66.6% x 28% (CGT rate) Recoupment of previous wear and tear
Cost model Revaluation model Assume now management sold the machine at its carrying value CA RS TB TD DT CA RS TB TD DT Cost Cost Dep/T all (51 ) (51 ) exempt Dep/T all (51 ) (51 ) exempt 969 (51 ) 969 (51 ) Dep/T all (51 ) (51 ) exempt RS 1 1 1 (28 ) 969 (12 ) 1 69 1 49 (28 ) sale (969 ) (12 ) Dep/T all (56 263) (5 263) (56 263) 1 12 737 94 737 (7 263) (28 ) Any excess of the CA above the TB is a recoupment of previous adjustment 26 646 wear and tear. CA < Cost (1 12 ( sale 737) (94 737) ) 7 263 1 354
Cost model Revaluation model cost CA 7263 7 263 x 66.6% x 28% = 1 354 CA cost TB TB total tax implication = R1 354 + R = R1 354 deferred tax currently = R28 therefore adjustment = R26 646
HINTS AND TIPS Remember that all revaluations have to take place at the beginning of the financial year. o If the NRV is given at the end of the financial year you need to work it back to the NRV at the beginning of the financial year. Depreciation for the current year must be calculated using the NRV at the beginning of the year and the remaining useful life at the beginning of the year. Remember the narrative information underneath the PPE note (this information counts a lot of marks). Read through the question carefully, make sure you do not miss any information. Draw a timeline of events and clearly mark the events occurring. This will assist you in determining when and how the events occur and assist in presenting a logical solution. Tax allowances must not be calculated proportionately for a part of the year.