Tangible fixed (non-current) assets

IAS 16 Property, plant and equipment Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period. Regarding property (land or building), IAS 16 Property, plant and equipment applies for so called owner-occupied property. Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. IAS 40 Investment property Investment property is property (land or a buildingor part of a buildingor both) held (by the owner or by the lessee under a finance lease) to earn rentals or for Share Capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. The following are examples of investment property: (a) land held for long-term Share Capital appreciation rather than for short-term sale in the ordinary course of business. (b) land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for Share Capital appreciation.) (c) a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases. (d) a building that is vacant but is held to be leased out under one or more operating leases. (e) property that is being constructed or developed for future use as investment property. IFRS 5 Non-current assets held for sale and discontinued operations According to IFRS 5, an entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The sale should be expected to be recognised within one year from the date of classification as held for sale.

IAS 16 Property, plant and equipment

Note: Explanations of possible differences are in shaded fields:

Depreciation component approach. According to IAS 16, each part of an item of property, plant and equipment with a useful life that is different from other parts of the same item and a cost that is significant in relation to the total cost of the item shall be depreciated separately. In many countries, the asset is depreciated in its entirety (i.e. component approach is not applied). Example depreciation component approach An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. At 1 st January of the year 1 the entity has acquired an aircraft for 1,000 in cash. The useful life of the airframe is 20 years, engines have useful lives of 5 years and the seats have useful lives of 2 years. The cost of airframe is 500, the cost of engines is 400 and the cost of seats is 100. According to the accounting rules in Country X, entire aircraft is depreciated for 20 years (i.e. Country X does not apply the component approach for depreciation). In both accounting systems, the method of depreciation used by the entity is straight-line, no residual value. In the Income statement, the entity recognises depreciation as a part of Cost of services sold. The date of IFRS Opening Balance sheet is 1st January of the year 2. For simplicity, the tax impact is ignored. Accounting entries year 1 (T accounts) Country X Cash OB 1,000 (1) 1,000 Share Capital OB 1,000 Property, plant and equipment (1) 1,000

Accumulated depreciation (PPE) (2) 50

(2)

Cost of services sold 50

(1) Purchase of the aircraft (2) Depreciation of the aircraft Depreciation in Country X, year 1 = 1,000 20 = 50; the net book value is 1,000 50 = 950 Depreciation IFRS: Airframe 500 20 = 25 Engines 400 5 = 80 Seats 100 2 = 50 Total IFRS depreciation 155 IFRS net book value is 1,000 155 = 845

Translation 1st January, year 2 Opening Balance sheet Country X Adjustment depreciation Aircraft 950 (105) Total assets 950 Share Capital Retained earnings Total liabilities and equity 1,000 (50) 950

IFRS 845 845 1,000 (155) 845

(105)

Accounting entries year 2 (T accounts) Country X Cash OB 0 Share Capital OB 1,000 Property, plant and equipment OB 1,000

Accumulated depreciation (PPE) OB 50 (1) 50

(1)

Cost of services sold 50

OB

Retained earnings 50

(1) Depreciation of the aircraft. IFRS IFRS net book value is cost 1,000 (2 depreciation 155) = 690 Translation 31st December, year 2 Balance sheet Country X Adjustment depreciation Aircraft 900 (210) Total assets 900 Share Capital Retained earnings Loss for year 2 Total liabilities and equity Income statement for the year 2 Cost of services sold Loss for the period Country X (50) (50) Adjustment depreciation (105) IFRS (155) (155) 1,000 (50) (50) 900

IFRS 690 690 1,000 (155) (155) 690

(105) (105)

 Measurement in IAS 16 Cost model or Revaluation model. After an initial recognition in the Balance sheet, an item of property, plant and equipment can be measured at cost less accumulated depreciation and accumulated impairment losses (Cost model) or at fair value less accumulated depreciation and subsequent accumulated impairment losses (Revaluation model). If measured at fair value, the revaluation surplus is a part of equity (revaluation reserve) in the Balance sheet, not a part of Profit or loss for the period. The change in Revaluation reserve for the period is explained in the Statement of Comprehensive Income as a part of Other comprehensive income. If the revaluation model is applied, the revalued asset is depreciated from the revalued amount (except for the land which is not depreciated).
Note: revaluation surplus in the Balance sheet is NEVER negative. According to paragraphs 39 and 40 of IAS 16 the Revaluation model works like this: 39 If an assets 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. 40 If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or los s. 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. Note: Paragraph 41 states the accounting treatment for Revaluation surplus that is included in the equity: The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the assets original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

Example revaluation of the land An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. During year 1, the entity acquired a piece of land that it planed to use in its agricultural activities. The cost of land was 1,000 and the amount was paid in cash. During year 1, no revaluation was performed (according to IAS 16, there is no need to perform the revaluation each year). At the end of year 2, the revaluation of the land was performed. At the date of revaluation, fair value of the land was 1,200. In Country X, the revaluation of the land is not permitted. The date of IFRS Opening balance sheet is 1st January of the year 2. Accounting entries year 1 (T accounts) Country X Property, plant and equipment Land (1) 1,000

OB 1,000

Cash (1) 1,000

Share Capital OB 1,000

(1) Purchase of the land

Translation 1st January, year 2 Balance sheet Country X Land Total assets Share Capital Retained earnings Total liabilities and equity 1,000 1,000 1,000 0 1,000

Adjustment no adjustment necessary

IFRS 1,000 1,000 1,000 0 1,000

Accounting entries year 2 (T accounts) Country X Property, plant and equipment Land OB 1,000

Cash OB 0

Share Capital OB 1,000

No accounting entry in year 2 in Country X Translation 31st December, year 2 Balance sheet Country X Adjustment revaluation of the land Land 1,000 200 Total assets 1,000 Share Capital Revaluation reserve Retained earnings Profit or loss for the period Total liabilities and equity 1,000 200 0 0 1,000

IFRS 1,200 1,200 1,000 200 0 0 1,200

There is no adjustment in the Income statement in the year 2, however the change in the IFRS Revaluation reserve (Revaluation surplus) must be explained in the Statement of Comprehensive income as a part of Other comprehensive income. IFRS Statement of Comprehensive Income for the year 2 Revenue 0 Expenses 0 Profit or loss for the period 0 Other comprehensive income Changes in Revaluation reserve 200 Total comprehensive income 200

Example revaluation of the building; revaluation surplus is transferred to the retained earnings as the asset is used by the entity An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. On 1 st January, year 1 the entity acquired a building that it planed to use for administration purposes. The cost of building was 1,000 and the amount was paid in cash. At the end of year 1 (31 st December), the revaluation of the building was performed. Fair value of the building was 1,500 at the date of revaluation. In Country X, revaluation of property, plant and equipment is not permitted. Management of the entity has estimated the useful life of the building for 20 years; method of the depreciation is straight-line; no residual value. Entitys accounting policy is to tr ansfer revaluation surplus to the retained earnings as the asset is used by an entity. The amount of the surplus transferred is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the assets original cost. (see Paragraph 41 of IAS 16). In both accounting systems, depreciation of the building is a part of Administrative expenses in the Income statement. The date of IFRS Opening balance sheet is 1st January of the year 2.

Accounting entries year 1 (T accounts) Country X Property, plant and equipment Building (1) 1,000

Cash OB 1,000 (1) 1,000

Share Capital OB 1,000

Accumulated depreciation (2) 50

(2)

Administrative expenses 50

Country X Depreciation: Cost 1,000 useful life 20 years = 50 Translation 1st January, year 2 Balance sheet Country X Property, plant and equipment 950 Total assets 950 Share Capital Retained earnings Revaluation surplus Total liabilities and equity 1,000 (50) 550 950

Adjustment revaluation 550

IFRS 1,500 1,500 1,000 (50) 550 1,500

In year 2, the entity continues in depreciation according to the rules in Country X (i.e. depreciation is based on the cost of the building). Accounting entries year 2 (T accounts) Country X Property, plant and equipment Building OB 1,000

Cash OB 0

Share Capital OB 1,000

Accumulated depreciation OB 50 (1) 50

Administrative expenses (1) 50

OB

Retained earnings 50

(1) Depreciation of the building IFRS Depreciation: Revalued amount 1,500 19 (residual useful life) = 79 (rounded) Net book value: Revalued amount 1,500 minus accumulated depreciation 79 = 1,421 Difference in depreciation: depreciation based on the revalued carrying amount of the asset 79 and depreciation based on the assets original cost 50 = 29. This difference is transferred from Revaluation surplus to the Retained earnings. Translation 31st December, year 2 Balance sheet Country X Adjustment revaluation Property, plant and equipment 900 521 Total assets 900 Share Capital Retained earnings Loss for the period Revaluation surplus Total liabilities and equity 1,000 (50) (50) 900

IFRS 1,421 1,421 1,000 (21) (79) 521 1,421

29 (29) 521

IFRS Statement of Comprehensive Income for the year 2 Revenue 0 Expenses administration (79) Loss for the period (79) Other comprehensive income Changes in revaluation reserve (29) Total comprehensive income (108)

 The cost of property, plant and equipment the initial estimate of dismantling and removing the item and restoring the site on which it is located. If the entity has an obligation to restore the site on which the asset is located, it must increase the initial cost of the asset by the estimated amount of the obligation. The same requirement applies when material costs relating to disposal of an asset exist. The accounting entry is: Dr Asset, Cr Provision (liability). Example An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. The entity operates a landfill. When the landfill is full of rubbish (normally after 3 years), the entity must restore the site (i.e. to cover the landfill by earth, grass and trees). At 1st January, year 1 the entity acquired the land on which it planed to operate the landfill. The cost of land was 1,000 and it was paid in cash. The entity estimates that it will operate the landfill for 3 years and at the end of year 3 it will pay 500 for restoring the site on which the landfill is situated. Depreciation of the landfill is included in the Cost of services sold in the Income statement. The useful life of the landfill is 3 years. In both accounting systems, the method of depreciation is straight-line, no residual value. (Note: Normally the land is NOT depreciated; however because by operating a landfill the entity completely destroys the land, a landfill is an exemption in this case and is depreciated.) The date of IFRS Opening Balance sheet is 1st January of the year 2. Scenario 1: In Country X, no provision for the restoration is accounted for. Scenario 2: In Country X, the provision for the restoration is accounted for; however it is accounted against the profit or loss (i.e. the amount of the provision is NOT a part of the cost of the landfill). In this scenario, Country X requires to measure the provision at undiscounted nominal amount of the estimated provision. Each year, the proportional part of the provision is accounted for as an expense in the Income statement.

Scenario 1 In Country X, no provision for the restoration is accounted for. Accounting entries year 1 (T accounts) Country X Property, plant and equipment Landfill (1) 1,000

Cash OB 1,000 (1) 1,000

Share Capital OB 1,000

Accumulated depreciation (landfill) (2) 333

Cost of Services sold (2) 333

(1) Purchase of the land (2) Depreciation of the landfill

Country X In Country X, the cost of the landfill is 1,000. Depreciation in Country X: 1,000 3 = 333 (rounded). The net book value of the landfill at the end of year 1 in Country X is 1,000 depreciation of 333 = 667. IFRS The amount of the provision and a part of cost of the landfill in IFRS is the PRESENT VALUE of the estimated amount of restoring the site according to the formula:

Where n is number of years and Interest rate is the estimated market interest rate for the next three years. Assume that the estimated interest rate is 10%. The calculation of the Present value of the obligation would be:

The result is 376 (rounded). According to IFRS, the cost of the landfill is 1,376, i.e. amount paid in cash plus the amount of the provision. IFRS depreciation: 1,376 3 = 459 (rounded). The IFRS net book value of the landfill at the end of year 1 is 1,376 depreciation of 459 = 917 Table of the movements in provision (IFRS) Year Liability at the start of the year 1 376 2 414 3 455
*)

Interest*) 38 41 45

Liability at the end of the year 414 455 500

The interest column was calculated using the effective interest rate method that multiplies the opening balance of the liability by the interest rate (10%). Translation 1st January, year 2 Opening IFRS Balance sheet Country X Adjustment cost of the landfill and the provision Landfill 667 250 Total assets 667 Share Capital Retained earnings Provision Total liabilities and equity 1,000 (333) 667

IFRS 917 917 1,000 (497) 414 917

(164) 414

Accounting entries year 2 (T accounts) Country X Property, plant and equipment Landfill OB 1,000

Cash OB 0

Share Capital OB 1,000

Accumulated depreciation (landfill) OB 333 (1) 333 (1) Purchase of the land

(1)

Cost of Services sold 333

OB

Retained earnings 333

At the end of year 2: The net book value of the landfill in Country X is 1,000 (2 depreciation of 333) = 334 The net book value of the landfill in IFRS is 1,376 (2 depreciation of 459) = 458 Provision: see the table of movements in provision above Translation 31st December, year 2 Balance sheet Country X Landfill Total assets Share Capital Retained earnings Loss for the period Provision Total liabilities and equity 334 334 1,000 (333) (333) 334

Adjustment cost of the landfill and the provision 124

IFRS 458 458 1,000 (497) (500) 455 458

(164) (167) 455

Income statement for year 2 Country X Revenue Cost of services sold Financial expenses Loss for the period 0 (333) Adjustment cost of the landfill and the provision (126) (41) (333) IFRS 0 (459) (41) (500)

Note: In the Income statement (adjustment column), 126 is the difference in depreciation and 41 is the interest on the provision (see Table of movements in provision).

Scenario 2 In Country X, the provision for the restoration is accounted for; however it is accounted against the profit or loss (i.e. the amount of the provision is NOT a part of the cost of the landfill). In this scenario, Country X requires to measure the provision at undiscounted nominal amount of the estimated provision. Each year, the proportional part of the provision is accounted for as an expense in the Income statement. The amount is recognised under Cost of services sold in the Income statement. Accounting entries year 1 (T accounts) Country X Property, plant and equipment Landfill (1) 1,000

Cash OB 1,000 (1) 1,000

Share Capital OB 1,000

Accumulated depreciation (landfill) (2) 333

Cost of Services sold (2) 333 (3) 167

Provision for restoration (3) 167

(1) Purchase of the land (2) Depreciation of the landfill (3) Creation of the provision

Country X In Country X, the cost of the landfill is 1,000. Depreciation in Country X: 1,000 3 = 333 (rounded). The net book value of the landfill at the end of year 1 in Country X is 1,000 depreciation of 333 = 667. Provision in year 1 = 500 3 = 167 (rounded) IFRS All workings for IFRS are explained in Scenario 1, including the Table of movements in the provision. Translation 1st January, year 2 Opening IFRS Balance sheet Country X Adjustment cost of the landfill and the provision Landfill 667 250 Total assets 667 Share Capital Retained earnings Provision Total liabilities and equity 1,000 (500) 167 667

IFRS 917 917 1,000 (497) 414 917

3 247

Accounting entries year 2 (T accounts) Country X Property, plant and equipment Landfill OB 1,000

Cash OB 0

Share Capital OB 1,000

Accumulated depreciation (landfill) OB 333 (1) 333

(1) (2)

Cost of Services sold 333 167

Provision for restoration OB 167 (2) 167

OB

Retained earnings 500

(1) Depreciation of the landfill (2) Creation of the provision

End of year 2 Provision at the end of the year 2 is 167 2 = 334. The expense of 167 was debited in the expenses during the year 2. Translation 31st December, year 2 Balance sheet Country X Landfill Total assets Share Capital Retained earnings Loss for the period Provision Total liabilities and equity Income statement for year 2 Country X Revenue Cost of services sold Financial expenses Loss for the period 0 (500) Adjustment cost of the landfill and the provision 41 (41) (500) IFRS 0 (459) (41) (500) 334 334 1,000 (500) (500) 334 334

Adjustment cost of the landfill and the provision 124

IFRS 458 458 1,000 (497) (500) 455 458

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