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17.2.2.2 Replacement of a major components and periodic replacement
17.2.2.3 Separation of land and buildings
17.2.3 Measurement at initial recognition
17.2.3.1 Extract from FRS 102 – Section 17.9-17.13
17.2.3.3 Directly attributable costs
17.2.3.4 Not directly attributable costs
17.2.3.5 Decommissioning costs
17.2.3.6 Self-constructed assets
17.2.3.7 Cessation of capitalisation
17.2.3.9 Deferred payment terms – measurement of cost
17.2.4.1 Extract from FRS 102 – Section 17.14
17.2.5 Measurement after Initial Recognition
17.2.5.1 Extract from FRC – FRS 102 – Section 17.15-17.15F
17.2.5.2.2.1 Frequency of revaluations
17.2.5.2.2.2 Meaning of fair value
17.2.5.2.2.3 Accounting for revaluation surpluses/deficits
17.2.5.2.2.4 Treatment of depreciation on upward revaluations
17.2.6 Depreciation, residual value and useful lives
17.2.6.0 Extract from FRS 102 Sections 17.16 to 17.23
17.2.6.1.2 Depreciation and useful economic life
17.2.6.1.4 Change in residual value, depreciation rate or useful economic life – change in estimate
17.2.6.1.5 Non-depreciable assets
17.2.6.1.6 Commencement and cessation of depreciation
17.2.6.1.7 Depreciation methods
17.2.6.1.5.1: Straight line method
17.2.6.1.5.2: Diminishing balance method/sum of digits
17.2.6.1.5.3: Units of production method
17.2.7 Recognition and measurement of impairment.
17.2.7.1 Extract from FRS 102 Section 17.24-17.26
17.2.8.1 Extract from FRS 102 Section 17.27-17.30
17.2.9.0 Extract from FRS 102 – Section 17.31-17.32A
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The below extracts and guidance is applicable for periods beginning before 1 January 2019 and are based on the September 2015 version of FRS 102. For periods beginning on or after 1 January 2019, the March 2018 version of FRS 102 applies which incorporates the changes made by the Triennial review of FRS 102. Note the March 2018 version of FRS 102 can be voluntarily applies for periods beginning before 1 January 2019. For the extracts from the March 2018 version of FRS 102 and the related guidance please click on the following link. For details of a summary of the main changes as a result of the triennial review please see the following link.
17.2 Recognition
17.2.1 Extract from FRS 102 – Section 17.4-17.8
17.4 An entity shall apply the recognition criteria in paragraph 2.27 in determining whether to recognise an item of property, plant or equipment. Therefore, the entity shall recognise the cost of an item of property, plant and equipment as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and
(b) the cost of the item can be measured reliably.
17.5 Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts and stand-by equipment are property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are considered property, plant and equipment.
17.6 Parts of some items of property, plant and equipment may require replacement at regular intervals (e.g. the roof of a building). An entity shall add to the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised in accordance with paragraphs 17.27 to 17.30. Paragraph 17.16 provides that if the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life.
17.7 A condition of continuing to operate an item of property, plant and equipment (e.g. a bus) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous major inspection (as distinct from physical parts) is derecognised. This is done regardless of whether the cost of the previous major inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed.
17.8 Land and buildings are separable assets, and an entity shall account for them separately, even when they are acquired together.
17.2.2 OmniPro comment
17.2.2.1 Spare parts
Section 17.5 of FRS 102 makes it clear that spare parts and standby equipment are classified as property plant and equipment when they are expected to be used during more than one period or only used in connection with an item of property plant and equipment. Where this is the case the spare part is depreciated over its useful life which cannot be more than the useful life of the main asset for which the spare parts are utilised. In the notes to the financial statements, an entity should disclose the depreciation rate on spare parts.
Example 1: Spare parts
A manufacturing company holds a significant stock of critical spare parts for its production equipment. Given that these spare parts are specific to the production equipment itself, and given that they will be used over more than one period, these assets are classified as PPE and depreciated over their expected useful life. In reality on transition the value if previously included in inventory should equal the cost to be transferred to PPE.
A similar example would be where plastic boxes are used for carrying and distributing the main products e.g. vegetables boxes which are used again and again and are not provided to customers on a long term basis as they must be returned. These are classified as fixed assets as opposed to spare parts.
Section 17 does not provide much detail on how to classify items where minimum levels of inventory are maintained i.e. to classify these as inventory or PPE. Generally, where an item of inventory is not held for sale or consumed in the production process or during the process of rendering services, but is necessary to operate or benefit from an asset during more than one operating cycle and cannot be recouped through sale, this item is then accounted for as a PPE item.
17.2.2.2 Replacement of a major component and periodic replacement. (see Section 17.6 to 17.7 of FRS 102)
Where some items of PPE require replacement at regular intervals, which provide future economic benefits then the element replaced/updated needs to be derecognised and the additional expenditure capitalised and depreciated over its useful life. Where the previous expenditure was not separately identified from the main asset, an entity can use the depreciated replacement cost i.e. what would the cost have been based on current cost to update/replace less accumulated depreciation from the date it was acquired.
Where each major component of an item of PPE have significantly different patterns of consumption, there is a requirement to separately depreciate these over their useful life.
Example 2: Replacement of a major component which was previously not separated
In 2015 a company purchases a new piece of production equipment for CU2,000,000. This equipment incorporates a pump which at the date of acquisition is assumed to have the same useful life of the whole asset of 20 years. However, in year 10, the pump fails, and a new pump has to be purchased for CU400,000. Given that the pump is a large component of the main asset and given that the replacement pump will provide future economic benefits, the new pump will need to be capitalised and the old pump derecognised. At the date of acquisition, the company did not separate the CU2,000,000 cost between the pump and main asset. Therefore, at the date of purchasing the new pump, the company can use the cost of the replacement part to estimate the carrying value of the original pump at the end of year 10 i.e. the estimated NBV of the pump would then be CU200,000 (CU400,000 / 20 years * 10 years). Therefore, in year 10 a loss on disposal of CU200,000 would be posted to the P&L and a CU400,000 addition capitalised and depreciated from that date over the remaining 10 years of the main asset. It cannot be depreciated for longer than the remaining useful life of the main asset of 10 years.
Example 3: Periodic replacement
A company purchased a warehouse for CU2,000,000 which has a specialised ventilation unit which requires replacement every 5 years. The useful life of the warehouse itself is 50 years with no residual value. In accordance with Section 17, each major component part needs to be separately identified and the useful life determined for each. On acquisition, the company can use the estimated future cost of replacing the ventilation unit every 5 years (with no residual value), which was CU300,000. Therefore, at the end of year 5, the company will dispose of the specialist equipment at which stage there is a nil NBV and at the same time capitalise the cost of the new specialised ventilation unit.
17.2.2.3 Separation of land and buildings (see Section 17.8 of FRS 102)
Land and buildings are required to be separately identified, even when they are acquired together. This will mean that on acquisition, an exercise will have to be carried out to separate the land element from the buildings element and then depreciate the buildings element accordingly based on the useful life.
Example 4: Separation of land and buildings
Company A purchased a property on one acre of land for CU1,000,000. Under Section 17, it will be necessary for the company to allocate the purchase price between the land and property. The company asks a valuer to split the CU1,000,000 between these two components. It was determined the allocation of CU400,000/CU600,000 to land and buildings respectively was appropriate. The building cost of CU600,000 is depreciated over its useful life from the date of acquisition. The land element is not depreciated.
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Example 2: Replacement of a major component which was previously not separated
Example 3: Periodic replacement
Example 4: Separation of land and buildings
Example 5: Employee costs during construction
Example 6: purchasing on deferred credit terms
Example 7: Exchange of assets- assets that lack commercial substance
Example 8: Revaluation of assets of the same class
Example 9: Accounting for revaluations and subsequent movements – depreciable assets
Example 11: Transfer of depreciation on revalued amount from profit and loss reserves
Example 12: Revising a residual value of an asset
Example 13: Change in accounting policy disclosure
Example 14: Commencement of depreciation
Example 15: Depreciation on basis of units of production
Example 17: Extract from notes to the financial statements (assuming revaluation upwards)
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