Accounting for Property, Plant and

Equipment (Acquisition, Depreciation

and Revaluation)
Readings (BEFORE the lecture!)

 Additional resources (available on

iLearn):
 AASB 116, AASB 123

Please note:
The lectures will not strictly follow these slides. It is expected and required
that you know the contents of the readings BEFORE the lecture. Consider
these slides as a summary and guideline for the lectures (and later for your
revision) where we will have more examples and discussions around the
topics.
Also, this week’s slides have blanks within certain examples. It is a good
exercise to try to fill the blanks BEFORE the lecture and compare your
attempts with the solutions discussed in the lecture.
Learning objectives
1. Understand the nature of property, plant and equipment (PPE);
2. understand the criteria for initial recognition of PPE;
3. understand how to measure PPE on initial recognition;
4. explain the alternative ways, in which PPE can be measured
subsequent to initial recognition;
5. understand the nature and calculation of depreciation;
6. explain the cost model of measurement;
7. explain the revaluation model of measurement;
8. understand the factors to consider when choosing which
measurement model to apply;

9. account for derecognition;

10. implement the disclosure requirements of AASB 116.
 Conceptual framework: general principles about
 definition,
 recognition and
 measurement
of assets and liabilities.
 Now we look at specific accounting standards relation to a
in
particular type of assets:
 property, plant and equipment (PPE) (AASB 116).
 Including tax implications (AASB 112).
Overview AASB 116:
Property, Plant and Equipment (PPE)
 Definition
 Initial recognition of an asset
 Subsequent measurement:
 Depreciation:
- allocating the depreciable amount of a non-current asset over the
asset’s expected useful life;
- factors that must be considered in determining the useful life of a
depreciable asset;
- various approaches (straight-line, sum-of-digits, declining balance,
production basis) for this allocation;
 Cost Model
 Revaluation Model
 Derecognition
 Disclosure requirements
The nature of PPE

 AASB 116 defines PPE as:

 tangible items;
 with a specific use within the entity;
 that are expected to be used during more than one period (ie. they
are non-current in nature).
 AASB 116 specifically excludes: also special rules
 assets held for sale – AASB 5 for investment
 biological assets – AASB 141 property –
AASB 140
 mineral rights/reserves – AASB 6
 For some purposes, PPE is divided into classes, e.g.
 land, buildings, machinery, ships, aircraft, motor vehicles, furniture
and fixtures, office equipment.
Initial recognition of PPE

 Cost 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:
 for example, an aircraft:
- the engine, frame and fittings of an aircraft are likely to have
different useful lives.
Initial measurement of PPE

 PPE is initially measured at cost, which includes:

 purchase price (at fair value);
includes duties and taxes but excludes rebates and discounts

 directly attributable costs required to bring the asset to the

location and condition necessary for it to operate;
more details on next slide

 borrowing costs (AASB 123);

interest paid to finance acquisition, construction or production until ready for
use, if for a substantial period of time

 Initial estimate of costs of dismantling, removing the item or

restoring the site.
for example, an offshore oil platform
Directly attributable costs

 „Directly attributable costs‟

include
a) costs of employee benefits arising from the construction or
acquisition of the item of property, and equipment;
plant
b)
c) costs of site preparation;
d) initial delivery and handling costs;
e) installation and assembly costs;
costs of testing whether asset is functioning properly, after
deducting the net proceeds from selling any items
produced while bringing the asset to that location and
condition (e.g. samples);
f) professional fees.
Measurement subsequent to initial
recognition
 AASB 116 allows a choice of two possible measurement models:
 cost model; Each model will be discussed in detail
later
 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. Refer to section 7.6 of text for examples of what constitutes a class of assets

 May change policy, but only if it results in reliable and more relevant
information.
 Under both models, PPE with a limited useful life need to be
depreciated.
Depreciation – fundamentals

AASB 116 includes 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 less its residual value (or other
appropriate amounts substituted for cost – eg. fair value).
 Residual value:
 the estimated value of the asset at the end of its useful life to
the entity.
 Useful life:
 the period over which an asset is expected to be used by an
entity/the number of production (or similar) units expected to
be obtained by the entity.
Depreciation – fundamentals
(cont‟d)
 Depreciation is an allocation process designed to reflect the
decline 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 slides.
 Please note that depreciation applies to both the cost and the
revaluation model!
In all cases, depreciation expense is
recognised with the following journal:
DR Depreciation expense
CR Accumulated depreciation
 Depreciation – common methods

 Straight-line method:
 assumption: asset used evenly throughout its life;
 this method is appropriate when benefits to be from
derived
the asset are expected to be evenly received throughout the
asset’s useful life;
 annual depreciation amount:

cost (or revalued amount) - (salvage) value

residual useful life


Depreciation – common methods
(cont‟d)
 Diminishing balance method:
 assumption: more benefits received in earlier years of the
life of asset;
 depreciation expense is calculated on the asset’s opening
written-down value x depreciation rate;
 written-down value:
- cost (or revalued amount) less accumulated depreciation;
 depreciation rate:

residual value
1  useful life
cost or revalued amount
 Depreciation – common methods
(cont‟d)
 Units of production method:
 based on expected use or output of
asset;
 depreciation expense for the period is calculated as:

units produced in current period

total expected production
 cost or revalued amt - residual value 


Depreciation – common methods
(cont‟d)
 Sum-of-digits method:
 this method is appropriate where useful life might be related
more to production output than time and when economic
benefits expected to be derived are greater in the early
years than later years
 depreciation expense:
- (cost - residual value) is multiplied by successively smaller
fractions to calculate depreciation expense;
- numerator in fraction - changes each year, and is the years
remaining of the asset’s useful life at the beginning of the
period;
- example for the 2nd year if useful life = 5 years:
4
(cost or revalued amt  residual value) 
15 (=1+ 2 + 3 + 4 + 5)
Depreciation – useful life

 Management should consider the following factors when

estimating the useful life of an asset:
 expected use;
 physical wear and tear;
 technical or commercial obsolescence;
 legal or similar limits.
 Useful life is subject to periodic review.
 Land is not subject to depreciation as it does have a limited
not
useful life.
The cost model

 AASB 116 requires that assets are carried at cost less any
accumulated:
 depreciation;
 impairment losses. discussed in week 6

 Repair and maintenance costs are expensed as incurred, not

capitalised.
 Capitalisation requires (at time of expenditure) increased
probable future economic benefit:
 for example, replacement of car engine.
The revaluation model - fundamentals

 As an alternative to the cost model AASB 116 allows the

revaluation model to be used for classes of assets.
 Revaluation: adjustment of PPE’s carrying amount so that it
reflects its current fair value.
 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 a class basis.
 Accounting performed on an asset-by-asset basis.
The revaluation model – accounting on
an asset-by-asset basis
 A Ltd has decided to change from the cost model to the
revaluation model to account for plant. class of
assets
 At 30 June 2013 A Ltd owned the following plants:

Accumulate
d Carrying Increment/(d
Cost Fair value
depreciation value ecrement)

Plant A 200,000 100,000 100,000 150,000 50,000

Plant B 140,000 40,000 100,000 80,000 (20,000)

TOTAL 340,000 140,000 200,000 230,000 30,000

 A revaluation increment will be recorded for Plant A and a

revaluation decrement will be recorded for Plant B.
 The revaluation model:
revaluation increments
 Increments are
 credited to equity: “asset revaluation surplus” (ARS)
account;
 through other comprehensive income (OCI);
 not part of profit/loss (P&L) for the year.
 The revaluation of plant A would be recorded as follows:
Dr Accum. depreciation 100,000 *
Cr Plant 50,000 **
Cr Gain on revaluation (OCI) 50,000 ***

* Removal of existing ** Cost - FV

(200,000 – 150,000) = 50,000 *** Amount of increment
accumulated depreciation
The revaluation model:
revaluation increments
(cont‟d)
 AASB 116 requires the tax effects of the revaluation to be considered
and the ARS account to be recognised net of the resulting tax effect.
 This is achieved by debiting a special type of income tax expense as
part of other comprehensive income (OCI) and crediting a deferred tax
liability (DTL).
 An upwards revaluation of an asset creates a taxable temporary
difference (TTD) leading to a deferred tax liability (DTL).
 For plant A this would be calculated as:
CA – TB = TTD x 30% = DTL Assumes that tax
and acct. depn. rates
150,000 – 100,000 = 50,000 x 30% = 15,000 are the same
Based on new FV of asset
The revaluation model:
revaluation increments
(cont‟d)
 The tax effect for plant A would be recorded as follows:
Dr Income Tax Expense (OCI) 15,000
Cr Deferred tax liability 15,000
 Combined entry:
Dr Accum. depreciation 100,000
Dr Income tax expense (OCI) 15,000
Cr Plant 50,000
Cr Deferred tax liability 15,000
Cr Gain on revaluation (OCI) 50,000
 At year end the OCI accounts are closed against the ARS:
Dr Gain on revaluation (OCI) 50,000
Cr Income tax expense (OCI) 15,000
Cr Asset revaluation surplus (ARS) 35,000
 The revaluation model:
revaluation decrements
 The accounting treatment of a revaluation decrement is as
follows:
 immediate recognition of an expense;
 no extra tax-effect entries beyond the tax-effect worksheet.
 The revaluation of Plant B would be recorded as follows:
Dr Accum. depreciation 40,000 *
Dr Loss on revaluation (P&L) 20,000 **
Cr Plant 60,000***
*Removal of existing **Amount of decrement ***Cost - FV
accumulated depreciation (140,000 – 80,000) = 60,000

Please note: The loss on revaluation (P&L) leads to a temporary difference and deferred
taxes as well. However, since it is part of the accounting profit (P&L) we deal with it together
with
all other differences between accounting profit and taxable income (see week 3 topic).
The revaluation model:
reversing previous increments

 A decrement reversing a previous increment

eliminates any ARS before recognising an expense.
 In relation to plant B, assume that a gross revaluation
increment of $10,000 had been made in 2011.
The revaluation model:
reversing previous increments
(cont‟d)
 The revaluation of plant B would be recorded as
follows:
Dr Accum. depreciation 40,000
Dr Deferred tax liability 3,000
Dr Loss on revaluation (OCI) 10,000
Dr Loss on revaluation (P&L) 10,000
Cr Income tax expense (OCI) 3,000
Cr Plant 60,000
Workings for journal
Gross decrement 20,000
Reversal of prev. increment (10,000) – tax effect 3,000
DR to P&L 10,000

Please note: Here again, the loss on revaluation (P&L) leads also to a temporary
difference and deferred taxes. We would deal with it together with all other
differences between accounting profit and taxable income. What would the
journal entry for this effect be?
The revaluation model:
reversing previous increments
(cont‟d)
 At year end the OCI accounts are closed against
ARS:
Dr Income tax expense (OCI) 3,000
Dr Asset revaluation surplus (ARS) 7,000
Cr Loss on revaluation (OCI) 10,000
The revaluation model:
reversing previous decrements

 An increment reversing a previous decrement is

recognised through profit/loss (P&L).
 Any excess is recorded as other
comprehensive income (OCI) and tax
increases ARS (net of related
effects).

In relation to plant A, assume that a revaluation
decrement of $15,000 had been made in 2011.
 The revaluation model: reversing
previous decrements (cont‟d)

 The revaluation of plant A would be recorded as

follows:
Dr Accum. depreciation 100,000
Dr Income tax expense 10,500
(OCI)Plant
Cr 50,000
Cr Gain 15,000
Cr on 35,000
Cr reval 10,500
Working for journal uatio Please note: The P&L part of the gain on
Gross increment n 50,000 revaluation is a reversal of a previous loss on
Reversal prev. decrement (15,000) revaluation (P&L). It reverses also the
(P&L
(P&L) Gain on revaluation (OCI) 35,000 associated temporary difference and deferred
Less: tax effect (30%) ) (10,500) taxes when we account for differences
CR to ARS 24,500 between accounting profit and taxable income.
Gain
on
reval
The revaluation model: reversing
previous decrements (cont‟d)

 At year end the OCI accounts are closed against

ARS:
Dr Gain on revaluation (OCI) 35,000
Cr Income tax expense (OCI) 10,500
Cr Asset revaluation surplus (ARS) 24,500
The revaluation model:
depreciation of revalued assets

 When an asset is revalued, the depreciation charge

to be recorded over the remaining useful life of the
asset is recalculated by reference to the fair value of
the asset.
The revaluation model:
comprehensive example
 On 30 June 2011 the statement of financial position of A LTD showed
the following non-current assets after charging depreciation:

Description $
Building 300,000
Accumulated depreciation - Building (100,000)

Plant 120,000
Accumulated depreciation - Plant (40,000)
The revaluation model:
comprehensive example
(cont‟d)
 The company has adopted the revaluation model for the measurement
of all property, plant and equipment. This has resulted in the
recognition in previous periods of an asset revaluation surplus for the
building of $ 14,000. The plant consists of a machine purchased on the
1 July, 2010. On 30 June 2011, an independent valuer assessed the
fair value of the building to be $160,000 and the plant to be $ 90,000.
The income tax rate is 30%.
 Required:
1. Prepare the journal entries to revalue the building and the plant as at
30 June 2011.
2. Assume that the building and plant had remaining useful lives of 5 years
and 4 years respectively, with zero residual value. Prepare the journal
entries to record depreciation expense for the year ended 30 June 2012
using the straight line method.
The revaluation model:
comprehensive example (cont‟d
)
1. 30/06/2011
Dr Accumulated depreciation – building 100 000
Dr Loss on revaluation (OCI) 20 000
Dr Deferred tax liability 6 000
Dr Loss on revaluation (P&L) 20 000
Cr Income tax expense (OCI) 6 000
Cr Building 140 000

Dr Income tax expense (OCI) 6 000

Dr Asset revaluation surplus (ARS) – building 14 000
Cr Loss on revaluation (OCI) 20 000

Please note: If we did the journal entry for the tax effect of the loss on revaluation
(P&L) right away it would look like
Dr DTA 6,000
Cr Income Tax expense 6,000
The revaluation model:
comprehensive example (cont‟d
)
1. 30/06/2011 (cont‟d)
Dr Accumulated depreciation – plant 40 000
Dr Income tax expense (OCI) 3 000
Cr Plant 30 000
Cr Gain on revaluation (OCI) 10 000
Cr Deferred tax liability 3 000

Dr Gain on revaluation (OCI) 10 000

Cr Income tax expense (OCI) 3 000
Cr Asset revaluation surplus (ARS) – plant 7 000
The revaluation model:
comprehensive example
(cont‟d)
2. 30/06/2012
Dr Depreciation expense – building 32 000
Cr Accumulated depreciation – building 32 000
($160 000/5)

Dr Depreciation expense – plant 22 500

Cr Accumulated depreciation – plant 22 500
($90 000/ 4)
The revaluation model:
transfers from ARS

 Transfers may be made from the ARS in the following

circumstances:
 When a revalued asset is derecognised (ie scrapped or
sold) → the balance in the ARS may be transferred to
retained earnings. DR ARS
CR Retained earnings

 When a revalued asset is being depreciated → the ARS

may be progressively transferred to retained earnings over
the useful life of the asset.
 Bonus share issues may be made from the ARS
DR ARS
CR Share capital
Choosing between the models

 There is a cost disincentive to adopt the revaluation

model (Australian experience).
 Cost model harmonises with U.S. GAAP.
 Revaluation model provides increased relevance &
reliability.
Accounting for gains/losses from
derecognition
 Note: Assets classified ‘held for sale’ are treated according to AASB 5
→ the following applies only to PPE which has not been classified as
‘held for sale’.
 Gain or loss from derecognition of an item of property, plant and
equipment is to be calculated as the difference between (AASB 116):
 net disposal proceeds (if any); and
 the asset’s carrying amount.
 Derecognition
 the point in time when an asset is removed from the statement of financial
position (balance sheet):
- when an asset is sold; or
- when no future economic benefits are expected from an asset’s use or
disposal.
Accounting for gains/losses from
derecognition (cont‟d)
 Example:
 A Ltd acquired a machine on 1 July 2007 for $50,000;
 Useful life = 4 years; residual value = $10,000;
 On 1 July 2009 the machine was sold for $45,000.
 The journal entries to account for the sale are:
Dr Cash 45,000
Cr Proceeds on sale 45,000

Dr Carrying amount of asset 30,000

Dr Accumulated depreciation 20,000
Cr Machine 50,000
It is common to
The gain on sale is $45,000 - $30,000 = $15,000 show this gain
on sale net in
the income
statement
Accounting for gains/losses from
derecognition (cont‟d)

 When an revalued asset is sold, any resulting

balance in the revaluation surplus (AASB 116)
 may be transferred directly to retained earnings;
 cannot be transferred to profit/loss (i.e. the so-called
‘recycling’ is not allowed);
 hence, for non-current assets under the revaluation
model any gain on sale shown in profit/loss will be
less than for assets under the cost model.
Disclosure requirements

 For each class of property, plant and equipment the

following must be disclosed (AASB 116):
 measurement basis used for gross carrying amount;
 depreciation methods used;
 useful lives or depreciation rates used;
 gross carrying amount and accumulated depreciation
at beginning and end of period;
 reconciliation of carrying amount at beginning and
end
of period.
Disclosure requirements
(cont‟d)
 The required disclosures regarding asset revaluations
(AASB 116) are:
 effective date of revaluation;
 whether an independent valuer was involved;
 methods and assumptions applied;
 extent to which fair values were determined, with to
reference
observable prices in active markets or recent market transactions;
 for each revalued class, the carrying amount if the cost model was
used;
 the revaluation surplus, indicating the change for the period and
any restrictions on distribution of the balance to shareholders.
 Thank You
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