代写ACCG224 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

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  • 代写ACCG224 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT
    ACCG224 – Session 2, 2016 – Week 4
    ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT
    Readings (BEFORE the lecture!)
    ACCG224 textbook:
    Øpp. 103-147
    qAdditional resources (available on iLearn):
    ØTechnical summary of IAS 16
    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.
    qLearning objectives
    1.Understand the nature of property, plant and equipment (PPE);
    2.understand the criteria for the 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 and apply the cost model of measurement;
    7.explain and apply the revaluation model of measurement;
    8.understand the factors to consider when choosing which measurement model to apply;
    9.account for derecognition.
    qRelation to weeks 1, 2 and 3
    qConceptual framework (week 1): general principles about
    Ødefinition,
    Ørecognition and
    Ømeasurement
       of assets and liabilities.
    qNow we look at specific accounting standards in relation to a particular type of assets:
    Øproperty, plant and equipment (PPE) (AASB 116).
    qIncluding tax implications (AASB 112; see week 3).
    qOverview AASB 116:
    Property, Plant and Equipment (PPE)
    qDefinition
    qInitial recognition of an asset
    qSubsequent measurement:
    ØDepreciation:
    ­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;
    ØCost Model
    ØRevaluation Model
    qDerecognition
    qDisclosure requirements
    qThe nature of PPE
    qAASB 116 defines PPE as:
    Øtangible items;
    Øwith a specific use within the entity;
    Øthat are expected to be used during more than one period (ie. they are non-current in nature).
    qAASB 116 specifically excludes:
    Øassets held for sale – AASB 5
    Øbiological assets – AASB 141
    Ømineral rights/reserves – AASB 6
    qFor some purposes, PPE is divided into classes, e.g.
    Øland, buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office equipment.
    qInitial recognition of PPE
    qCost recognised as an asset if:
    Øit is probable that economic benefits will flow to the entity, and
    Øthe cost can be reliably measured.
    qWhere future economic benefits are not expected to flow to the entity, costs incurred should be expensed.
    qComponent parts (with different useful lives) are required to be separately accounted for:
    Øfor example, an aircraft:
    ­the engine, frame and fittings of an aircraft are likely to have different useful lives.
    qInitial measurement of PPE
    qPPE is initially measured at cost, which includes:
    Øpurchase price (at fair value);

    Ødirectly attributable costs required to bring the asset to the location and condition necessary for it to operate;

    Øborrowing costs (AASB 123);
    Ø
    Ø
    ØInitial estimate of costs of dismantling, removing the item or restoring the site.
    qDirectly attributable costs
    q‘Directly attributable costs’ include
    a)costs of employee benefits arising from the construction or acquisition of the item of property, plant and equipment;
    b)costs of site preparation;
    c)initial delivery and handling costs;
    d)installation and assembly costs;
    e)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
    qMeasurement subsequent to initial recognition
    qAASB 116 allows a choice of two possible measurement models:
    Øcost model;
    Ørevaluation model.
    qAccounting policy choice of this decision based primarily on relevance of information.
    qThe policy that is chosen must be applied to a whole class of assets.
    q
    qMay change policy, but only if it results in reliable and more relevant information.
    qUnder both models, PPE with a limited useful life need to be depreciated.
    qDepreciation – fundamentals
    AASB 116 includes the following definitions:
    qDepreciation:
    Øthe systematic allocation of the depreciable amount of an asset over its useful life.
    qDepreciable amount:
    Øthe cost of an asset less its residual value (or other appropriate amounts substituted for cost – eg. fair value).
    qResidual value:
    Øthe estimated value of the asset at the end of its useful life to the entity.
    qUseful life:
    Øthe 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.
    qDepreciation – fundamentals (cont’d)
    qDepreciation 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.
    qAASB 116 does not specify how this allocation process should be undertaken.
    qVarious depreciation methods are used in practice. Common methods are discussed on the following slides.
    qPlease note that depreciation applies to both the cost and the revaluation model!
    qDepreciation – common methods
    qStraight-line method:
    Øassumption: asset used evenly throughout its life;
    Øthis method is appropriate when benefits to be derived from the asset are expected to be evenly received throughout the asset’s useful life;
    Øannual depreciation amount:
     
    qDepreciation – common methods (cont’d)
    qDiminishing balance method:
    Øassumption: more benefits received in earlier years of the life of asset;
    Ødepreciation expense is calculated on the asset’s opening written-down value x depreciation rate;
    Øwritten-down value:
    qDepreciation – common methods (cont’d)
    qUnits of production method:
    Øbased on expected use or output of asset;
    Ødepreciation expense for the period is calculated as:
    qDepreciation – common methods (cont’d)
    qSum-of-digits method:
    Øthis 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
    Ødepreciation 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:
    qDepreciation – useful life
    qManagement should consider the following factors when estimating the useful life of an asset:
    Øexpected use;
    Øphysical wear and tear;
    Øtechnical or commercial obsolescence;
    Ølegal or similar limits.
    qUseful life is subject to periodic review.
    qLand is not subject to depreciation as it does not have a limited useful life.
    qThe cost model
    qAASB 116 requires that assets are carried at cost less any accumulated:
    Ødepreciation;
    Øimpairment losses.
    qRepair and maintenance costs are expensed as incurred, not capitalised.
    qCapitalisation requires (at time of expenditure) increased probable future economic benefit:
    Øfor example, replacement of car engine.
    qThe revaluation model - fundamentals
    qAs an alternative to the cost model AASB 116 allows the revaluation model to be used for classes of assets.
    qRevaluation: adjustment of PPE’s carrying amount so that it reflects its current fair value.
    qMeasurement basis is fair value (FV).
    qFrequency 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.
    qRevaluation performed on a class basis.
    qThe revaluation model – accounting on an asset-by-asset basis
    qThe revaluation model:
    revaluation increments
    qIncrements are
    Øcredited to equity: “asset revaluation surplus” (ARS) account;
    Øthrough other comprehensive income (OCI);
    Ønot part of profit/loss (P&L) for the year.
    qThe revaluation of plant A would be recorded as follows (30/6/2015):
    Dr  Accum. depreciation         100,000 *
      Cr  Plant  50,000 **
      Cr  Gain on revaluation (OCI)  50,000 ***
     
    qThe revaluation model:
    revaluation increments (cont’d)
    qAASB 116 requires the tax effects of the revaluation to be considered and the ARS account to be recognised net of the resulting tax effect.
    qThis 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).
    qAn upwards revaluation of an asset creates a taxable temporary difference (TTD) leading to a deferred tax liability (DTL).
    qFor plant A this would be calculated as:
         CA    –     TB     =    TTD   x 30% =   DTL
    150,000 – 100,000 = 50,000 x 30% = 15,000
     
    qThe revaluation model:
    revaluation increments (cont’d)
    qThe tax effect for plant A would be recorded as follows (30/6/2015):
      Dr  Income Tax Expense (OCI)  15,000
      Cr  Deferred tax liability  15,000
    qCombined 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
    qThe OCI accounts are then closed to establish the ARS (net of tax):
    Dr  Gain on revaluation (OCI)  50,000
      Cr  Income tax expense (OCI)  15,000
      Cr  Asset revaluation surplus (ARS)  35,000
    q
    q
    q
    q
    qThe revaluation model:
    revaluation decrements
    qThe accounting treatment of a revaluation decrement is as follows:
    Øimmediate recognition of an expense (through P&L);
    Øthe tax-effect entry is done later together with all other differences between accounting profit and taxable income (see week 4 topic).
    qThe revaluation of Plant B would be recorded as follows (30/6/2015):
      Dr  Accum. depreciation  40,000  *
      Dr  Loss on revaluation (P&L)  20,000  **
      Cr  Plant  60,000  ***
    q
    q
    q
    qThe revaluation model:
    reversing previous increments
    qA decrement reversing a previous increment eliminates any ARS before recognising an expense.
    qIn relation to plant B, assume that a gross revaluation increment of $10,000 had been made back in the financial year 2013/14.
    q
    qThe revaluation model:
    reversing previous increments (cont’d)
    qThe revaluation of plant B would be recorded as follows (30/6/2016):
      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
    q
    q
    qThe revaluation model:
    reversing previous increments (cont’d)
    qThe OCI accounts are then closed to adjust ARS (after tax) for the decrement (30/6/2015):
      Dr  Income tax expense (OCI)  3,000
      Dr  Asset revaluation surplus (ARS)  7,000
      Cr  Loss on revaluation (OCI)  10,000
    q
    q
    qThe revaluation model:
    reversing previous decrements
    qAn increment reversing a previous decrement is recognised through profit/loss (P&L).
    qAny excess is recorded as other comprehensive income (OCI) and increases ARS (net of related tax effects).
    qIn relation to plant A, assume that a revaluation decrement of $15,000 had been made in the financial year 2013/14.
    qThe revaluation model: reversing previous decrements (cont’d)
    qThe revaluation of plant A would be recorded as follows (30/6/2015):
      Dr  Accum. depreciation  100,000
      Dr  Income tax expense (OCI)  10,500
      Cr  Plant  50,000
      Cr  Gain on revaluation (P&L)  15,000
      Cr  Gain on revaluation (OCI)  35,000
      Cr  Deferred tax liability  10,500
     

    qThe revaluation model: reversing previous decrements (cont’d)
    qThe OCI accounts are the closed to establish the ARS (net of tax; 30/6/2015):
      Dr  Gain on revaluation (OCI)  35,000
      Cr  Income tax expense (OCI)  10,500
      Cr  Asset revaluation surplus (ARS)  24,500
     

    qThe revaluation model:
    depreciation of revalued assets
    qWhen 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.
    qThe revaluation model:
    comprehensive example
    qViborg Ltd purchased a new machine on 1 July 2013 for $79,600 cash. Transport and installation costs of $8,400 were paid on 5 July 2013. Useful life and residual value were estimated to be 10 years and $3,600, respectively. Viborg Ltd depreciates machines using the straight-line method to the nearest month, and reports annually on 30 June. The company tax rate is 30%.
    qOn 30 June 2014, the company adopted the revaluation model to account for the machine. An expert valuation was obtained showing that the machine had a fair value of $76,000 at that date. Remaining useful life and residual value were estimated to be 8 years and $2,400, respectively.
    qThe revaluation model:
    comprehensive example (cont’d)
    qOn 30 June 2015, the machine's carrying amount was remeasured to its fair value of $72,000. Remaining useful life and residual value were estimated to be 8 years and $4,000, respectively.
    qRequired
    ØPrepare general journal entries to record the transactions and events for the period 1 July 2013 to 30 June 2015 according to AASB 116, including the journal entries required to account for all future tax consequences (deferred taxes) according to AASB 112.
    qThe revaluation model:
    comprehensive example (cont’d)
    01/07/2013
    Dr  Machinery  79,600 
      Cr  Cash  79,600 
    05/07/2013
    Dr  Machinery   8,400
      Cr  Cash  8,400
    30/06/2014
    Dr  Depreciation expense  8,440
      Cr  Acc./Depr. - Machinery  8,440

    Dr  Acc./Depr. – Machinery  8,440
      Cr Machinery  8,440
    qThe revaluation model:
    comprehensive example (cont’d)
    30/06/2014 (cont’d)
    Dr  Loss on revaluation (P&L)  3,560
      Cr  Machinery  3,560

    30/06/2015
    Dr  Depreciation expense  9,200
      Cr  Acc./Depr. - Machinery  9,200

    Dr  Acc./Depr. – Machinery  9,200
      Cr Machinery  9,200

    qThe revaluation model:
    comprehensive example (cont’d)
    30/06/2015 (cont’d)
    Dr  Machinery  5,200
      Cr  Gain on revaluation (P&L)  3,560
      Cr  Gain on revaluation (OCI)  1,640

    Dr  Income tax expense (OCI)  492
      Cr DTL  492

    Dr  Gain on revaluation (OCI)  1,640
      Cr  Income tax expense (OCI)  492
      Cr  Asset revaluation surplus - Machinery  1,148


    qThe revaluation model:
    transfers from ARS
    qTransfers may be made from the ARS in the following circumstances:
    ØWhen a revalued asset is derecognised (ie scrapped or sold) → the balance in the ARS may be transferred to retained earnings.
    Ø
    ØWhen a revalued asset is being depreciated → the ARS may be progressively transferred to retained earnings over the useful life of the asset.
    ØBonus share issues may be made from the ARS
    qChoosing between the models
    qThere is a cost disincentive to adopt the revaluation model (Australian experience).
    qCost model harmonises with U.S. GAAP.
    qRevaluation model provides increased relevance & reliability.
    q
    qAccounting for gains/losses from derecognition
    qNote: 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’.
    qGain or loss from derecognition of an item of property, plant and equipment is to be calculated as the difference between (AASB 116):
    Ønet disposal proceeds (if any); and
    Øthe asset’s carrying amount.
    qDerecognition
    Øthe 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.
    q
    qAccounting for gains/losses from derecognition (cont’d)
    qExample:
    ØA Ltd acquired a machine on 1 July 2012 for $50,000;
    ØUseful life = 4 years; residual value = $10,000;
    ØOn 1 July 2014 the machine was sold for $45,000.
    qThe 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
     
      The gain on sale is
    qAccounting for gains/losses from derecognition (cont’d)
    qWhen an revalued asset is sold, any resulting balance in the revaluation surplus (AASB 116)
    Ømay be transferred directly to retained earnings;
    Øcannot be transferred to profit/loss (i.e. the so-called ‘recycling’ is not allowed);
    Øhence, 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.
    q
    qDisclosure requirements
    qFor each class of property, plant and equipment the following must be disclosed (AASB 116):
    Ømeasurement basis used for gross carrying amount;
    Ødepreciation methods used;
    Øuseful lives or depreciation rates used;
    Øgross carrying amount and accumulated depreciation at beginning and end of period;
    Øreconciliation of carrying amount at beginning and end of period.
    q
    qDisclosure requirements (cont’d)
    qThe required disclosures regarding asset revaluations
    (AASB 116) are:
    Øeffective date of revaluation;
    Øwhether an independent valuer was involved;
    Ømethods and assumptions applied;
    Øextent to which fair values were determined, with reference to observable prices in active markets or recent market transactions;
    Øfor each revalued class, the carrying amount if the cost model was used;
    Øthe revaluation surplus, indicating the change for the period and any restrictions on distribution of the balance to shareholders.
    代写ACCG224 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT