Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the seller-lessee. This is done in the following table: At the end of year one, the carrying amount of the right of use asset will be $895,470 ($942,600 less $47,130 depreciation). Accounting for assets, impairments and grants. Free IFRS Quizzes IAS 16 – Property Plant and Equipment Quiz ) , () ) Previous Lesson. 1 Non-current Assets Till now we understand that non-current asset is a resource used by an asset for more than one accounting period. IAS 23 Borrowing Costs. Please visit our global website instead. In these circumstances the seller does not ‘transfer’ the asset and continues to reconise it, without adjustment. The total lease liability at the end of year one will be $892,656. IAS 16 – Depreciation – ACCA (SBR) lectures. However, C does not have the right to control the use of the truck because C does not have the right to direct its use. A lease that contains a purchase option cannot be a short-term lease. IAS 16 does not include any reference to renewals accounting and, therefore, does not allow any departure from the principle that the depreciation expense is determined by reference to an asset's depreciable amount. Depreciation is over the shorter of the useful life of the asset and the lease term, unless the title to the asset transfers at the end of the lease term, in which case depreciation is over the useful life. Accounting for non-current assets. Where relevant, these costs should include borrowing costs and directly attributable overhead costs. Any initial direct costs incurred by the lessee. Under IAS 17, the impact on profit or loss in the year 1 was CU 10 000, as we recognized the full rental payment in profit or loss.. For an asset to be recorded in the financial statements should meet this definition laid by IASB Framework under IAS 16; “IAS 16 Asset is a resource which is controlled by the entity, as a result of past event and from which economic benefit are expected to flow to the entity” The trucks, which are owned by P, are specified in the contract. It was for this reason that IFRS 16 was introduced. The assessment of whether an underlying asset is of low value is performed on an absolute basis. Compensation may be received in the form of reimbursements and is recorded in the income statement when the compensation becomes receivable. An item of PPE should be recognised as an asset, if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the item can be measured reliably. To find out more, see our Cookies Policy Terms & Conditions Articles. Summary of IAS 16 Property, Plant and Equipment - there is a nice long discussion in the comments below this summary; Fully Depreciated Assets Still in Use - what to do? 4.3 – Transaction not constituting a ‘sale’. As the lease is being paid off over 20 years, some of this liability will be paid off within a year and should therefore be classed as a current liability. The election needs to be made for relevant leased assets on a ‘class-by-class’ basis. This site uses cookies. The treatment of sale and leaseback transactions depends on whether or not the ‘sale’ constitutes the satisfaction of a relevant performance obligation under IFRS 15 – Revenue from Contracts with Customers. [IAS 16.48.] It might take a little while to load so be patient. However, productive assets held by entities in the extractive industries are subject to the same recognition and measurement rules as other PPE. This Standard deals with the accounting treatment of Property, Plant & Equipmentincluding the guidance for the main issues related to the recognition & measurement, determination of carrying value, depreciation charges, any impairment loss and de-recognition aspects for the property, plant & equipment in the financial statements of an entity. The objective of this standard is to prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its property, plant and equipment and the changes in such investments. 9. There is an identified asset. A lease of an underlying asset does not qualify as a lease of a low-value asset if the nature of the asset is such that, when new, the asset is typically not of low value. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. IAS 16 is applied in accounting for property, plant and equipment. C does have the right to obtain substantially all of the economic benefits from use of the truck over the contract period. Donate. … Obtaining this qualification will raise your professionalism in IFRS to the next level. Because the consideration for the sale of the building is not at fair value, X and Y make adjustments to measure the sale proceeds at fair value. The depreciable amount (cost less prior depreciation, impairment and residual value) should be allocated on a systematic basis over the asset's useful life. Archived from the original on 2013-09-27; International Accounting Standards Board (2011). The transfer to retained earnings should not be made through the income statement so as to prevent 'recycling'. The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them. This article was first published in the April 2009 edition of Accounting and Business magazine. L has the right to use the 20 trucks for six years which are identified and explicitly specified in the contract. ACCA DipIFR - Diploma in International Financial Reporting Standards Complete Self Study Success Pack with Tutor Support. September 16 MCQ 16-20 Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and package pharmaceuticals. Please visit our global website instead. IAS 8, Accounting policies, changes in accounting estimates and errors. Lessees can elect to treat short-term leases by recognising the lease rentals as an expense over the lease term rather than recognising a ‘right of use asset’ and a lease liability. We'd suggest that you use this as a guide when allocating yourself CPD units. The present value of the annual payments (20 payments of $200,000, discounted at 5%) amounts to $2,492,400, of which $500,000 relates to the additional financing and $1,992,400 ($2,492,200 - $500,000) relates to the lease (as adjusted for the fair value difference already identified). IAS 2 Inventories; IAS 7 Statement of Cash Flows; IAS 8 - Accounting Policies, Changes in Accounting, Estimates and Errors; IAS 12 - Income Taxes; IAS 16 – Property, Plant and Equipment; IAS 23 Borrowing costs; IAS 27 - Separate financial statements; IAS 36 Impairment of assets; IAS 37 - Provisions, contingent liabilities and contingent assets Temporary idle activity does not preclude depreciating the asset, as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence. Accounting for assets, impairments and grants. The greater recognition of leased assets and lease liabilities on the statement of financial position will reduce return on capital employed and increase gearing. Please visit our global website instead, Can't find your location listed? September 17, 2013 Oxford Brooks University BSc. The latest guidance on revenue recognition, such as telecom industry. Impairments should be accounted for in accordance with IAS 36, Impairment of Assets. If a revaluation results in an increase in value it should be credited to equity, unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income. The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years. February 17, 2020 at 8:21 pm. The amount capitalised as part of the asset's cost will be the amount estimated to be paid, discounted to the date of initial recognition. Residual values are not based on prices prevailing at the date of acquisition (or revaluation) of an asset, but take account of subsequent price changes. International Financial Reporting Standard (IFRS®) 16 – Leases -  was issued in January 2016 and, in comparison to its predecessor International Accounting Standard (IAS®) 17 makes significant changes to the way in which leasing transactions are reported in the financial statements of lessees (although not in the financial statements of lessors). IAS 16 Property, Plant and Equipment. Initial measures of profit are likely to be reduced, as in the early years of a lease the combination of depreciation of the right of use asset and the finance charge associated with the lease liability will exceed the lease rentals (normally charged on a straight-line basis). The requirements of IFRS 16 will have significant impacts on key accounting ratios of lessees. Depreciation ceases at the earlier of its derecognition (sale or scrapping) or its reclassification as 'held for sale' and should be reviewed at least at each year end. These assets are called PP&E, that is property, plant and equipment. The recruitment process comprises 2 steps- Prelims (Written Test) and Mains (Interview). Conclusion: This contract does not contain a lease. Costs of this nature are recognised only when an entity incurs an obligation for them. Reader Interactions. IAS 16, ‘Property, plant and equipment’ includes guidance on how to account for property carried at cost. Any below-market terms shall be accounted for as a prepayment of lease payments; and. 5. IFRS 16 leases. International Accounting Standard 16 Property, Plant and Equipment or IAS 16 is an international financial reporting standard adopted by the International Accounting Standards Board (IASB). After that IAS 17 will no longer be applicable. The approach of IAS 17 was to distinguish between two types of lease. IAS 16 – Property, plant and equipment. All other leases were classified as operating leases. The same rule for revaluation of property applies to plant and equipment. IAS 16 - Tangible Non-Current Assets (79:42) Start; 11. Interest of CU 1 167, plus; Depreciation of CU 7 780, plus ; Expense for cleaning services of CU 1 429. IAS 16 Property, Plant and Equipment requires im­pair­ment testing and, if necessary, recog­ni­tion for property, plant, and equipment. Si Claro hombre/mujer - It´’s still an IAS 40 Investment property if the supply is small and insignificant. If part of an asset is replaced, then the part it replaces is derecognised, regardless of whether it has been depreciated separately or not. Comments. Hi. The present value of the lease payments is $917,600. The truck is explicitly specified in the contract and H does not have the right to substitute that specified truck. Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. The carrying amount of the right of use asset after these entries is $942,600 ($917,600 + $25,000) and consequently the annual depreciation charge will be $47,130 ($942,600 x 1/20). Under IFRS 16, the impact on profit or loss in the year 1 was:. At the same time, X enters into a contract with Y for the right to use the building for 20 years, with annual payments of $200,000 payable at the end of each year. The purpose of this article is to summarise the key changes introduced by IFRS 16 from the perspective of the lessee and how these impact on their financial reporting. In this case, fair value must be reliably measurable. This will represent the non-current liability, being the amount of the $892,656 which will still be outstanding in over a year. IAS 16 Property, Plant and Equipment. Hello Sir, First question is about having a legal obligation. The residual value of an item of PPE is based on the estimated amount that an entity would currently obtain from the asset's disposal… IAS 16 capitalises subsequent expenditure on an asset using the same criteria as the initial spend; that is, when it is probable that the future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably. For instance, there could be cancelled sales orders. Where consideration is deferred beyond normal credit terms, it should be discounted to present value. Revaluations must be made with sufficient regularity to ensure that the carrying amount is not materially different from fair value. The relevant performance obligation would be the effective ‘transfer’ of the asset to the lessor by the previous owner (now the lessee). View 4 IAS 16.pdf from ACCA 123 at Finance University under the Government of the Russian Federation. When an entity purchases or constructs an asset, it may take on a contractual or statutory obligation to decommission the asset or restore the asset site. IAS 40 Investment Property. February 17, 2020 at 8:21 pm. Accordingly, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value. Impairment must be considered at both interim and annual reporting dates. at cost less any accumulated depreciation and impairment losses). The manufacturing sector is likely to be severely affected. A short-term lease is a lease that, at the date of commencement, has a term of 12 months or less. Lessees will recognise a right of use asset and an associated liability at the inception of the lease. This Standard deals with the accounting treatment of Property, Plant & Equipmentincluding the guidance for the main issues related to the recognition & measurement, determination of carrying value, depreciation charges, any impairment loss and de-recognition aspects for the property, plant & equipment in the financial statements of an entity. A lease is an agreement whereby the lessor (the legal owner of an asset) conveys to the lessee (the user of the asset) the right to use an asset for an agreed period of time in return for a payment or series of payments. The principal issues are the recog­ni­tion of assets, the de­ter­mi­na­tion of their carrying amounts, and the de­pre­ci­a­tion charges and im­pair­ment losses to be recog­nised in relation to them. The recruitment process comprises 2 steps- Prelims (Written Test) and Mains (Interview). With a very few exceptions (see section 3.4 for further details) IFRS 16 abolishes the distinction between an operating lease and a finance lease in the financial statements of lessees. 12 May 2014: IASB publishes amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets Project update released on 12 May 2014 announcing a clarification of acceptable methods of depreciation and amortisation. Once delivered to L, the trucks can be substituted only when they need to be serviced or repaired. The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 16 applies to property (that is, buildings) held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, if the property is … The ‘right of use asset’ would include the following amounts, where relevant: The right of use asset is subsequently depreciated. C has the same rights regarding the use of the truck as if it were one of many customers transporting goods using the truck. Bearer plants will fall under the scope of IAS 16 while the produce grown on the plants will remain under IAS 41. Therefore the residual would be regarded as a ‘lease rental’ at an amount of $159,878 ($200,000 – $40,122). TOTAL of CU 10 376. Any payments made to the lessor at, or before, the commencement date of the lease, less any lease incentives received. . IAS 16 and IAS 38 allow a policy choice when measuring PP&E or intangible assets subsequently to their initial recognition – cost model or revaluation model (IAS 16.29; IAS 38.72).. Early application of the IFRS 16 Leases is only allowed with IFRS 15. These costs should be capitalised at the date on which the entity becomes obligated to incur them. The fair value of the building at the date of sale is $4.5 million. The amount of the excess sale price of $500,000 ($5 million - $4.5 million) is recognised as additional financing provided by Y to X. Thomas says. IAS 16 PPE - Basics from ACCA F3 (104:58) Start; 10. Disclosure should be made whether the revaluation was performed by an independent valuer or not. Archived from the original on 2013-09-27; International Accounting Standards Board (2011). C does not have the right to direct how and for what purpose the truck is used. An impairment loss under the revaluation model is treated as a revaluation decrease to the extent of previous revaluation surpluses. And an associated liability at the remaining balance is $ 917,600 to plant and that... 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