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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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17.2.3 Measurement at Initial Recognition
17.2.3.1 Extract from FRS 102 – Section 17.9-17.13
Initial Measurement
17.9 An entity shall measure an item of property, plant and equipment at initial recognition at its cost.
17.10 The cost of an item of property, plant and equipment comprises all of the following:
(a) Its purchase price, including legal and brokerage fees, import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
(b) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These can include the costs of site preparation, initial delivery and handling, installation and assembly, and testing of functionality.
(c) The initial estimate of the costs, recognised and measured in accordance with Section 21 Provisions and Contingencies, of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
(d) Any borrowing costs capitalised in accordance with paragraph 25.2 (Section 17.10).
17.12 The income and related expenses of incidental operations during construction or development of an item of property, plant and equipment are recognised in the profit and loss if these operations are not necessary to bring the item to its intended location and operating condition.
17.13 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the cost is the present value of all future payments.
17.2.3.2 OmniPro comment:
17.2.3.3 Directly attributable costs (see Section 17.9 and 17.10 of FRS 102)
Costs which would deem to meet the condition of a directly attributable cost on top of initial delivery, handling, installation and assembly are:
- The cost of employees that arise directly from construction and acquisition of the item. This includes social security and pension costs.
- Installation and assembly costs;
- Professional fees (however, costs on speculative projects, and cost of aborted plans should be expensed);
- Cost of site preparation and site selection but only for the final site;
- Cost of testing whether the asset is working.
Example 5: Employee costs during construction
A retail outlet is moving into a new premises and incurs the cost of renovation for the store. It also has to incur salary costs for putting stock into the store. In this instance the cost of renovation can be capitalised even where own staff are used, however, the salary costs of employees stocking the shelves must be expensed.
17.2.3.4 Not directly attributable costs
Examples of items which are not directly attributable costs given in Section 17.11 of FRS 102 are:
- costs of opening a new facility (note operating rental costs cannot be capitalised which incurred during the fit out stage and getting the store ready for opening);
- costs of introducing a new product or service (including costs of advertising and promotional activities);
- costs of conducting business in a new location or with a new class of customer (including costs of staff training); and
- administration and other general overhead costs.
17.2.3.5 Decommissioning costs (see section 17.19 of FRS102)
Section 17.10(c) of FRS 102 makes it clear that the cost of decommissioning, dismantling and removing an item to restore it to its original condition should be included in the cost of the asset but only where it meets the requirements for a provision as detailed in Section 21 (i.e. there is a present obligation as a result of a past event where there is a constructive obligation). This is particularly relevant for manufacturing companies or companies who have premises which are leased and have been altered substantially. The amount to be capitalised is the present value of the future obligation for the cost of decommissioning or restoring the site with a provision recognised for the same amount. This amount should then be depreciated over the life of the lease or up to the period when the liability crystallises. It is particularly relevant where a company enters into a lease for a period of time and alters the property for its own purposes (dilapidation provision). Note in order for the provision to be included in fixed assets there would have to be items capitalised in relation to the property lease initially, if not, the provision would be recognised in the profit and loss accounts as opposed to being capitalised.
There may be circumstances where the liability does not arise initially on recognition but instead after a new environmental regulation is introduced. It is at that time that the asset should be capitalised.
Once the related asset has reached the end of its useful economic life i.e. when it is no longer in use, any further movement on the provision is posted directly to the profit and loss (IFRIC 1 paragraph 7).
Given the degree of estimation involved in determining the cost of remediation at the date of recognition, where a change to the estimate is made no retrospective adjustment is required. Where an increase in the liability is required the additional amount is added to the related asset in that period (i.e. no retrospective adjustment required) subject to a review for impairment to ensure it is not over stating the asset or where a decrease in the liability is required, it is deducted from the related asset and if it is more than the carrying amount it is posted to the profit and loss. The updated asset carrying amount is then depreciated over its remaining useful economic life. The unwinding of the discount is posted to interest cost in the profit and loss over the useful life. This is discussed further in Section 21of this website. Note the cost is not allowable for capital allowance purposes on initial recognition.
Example 5A: Decommissioning
A manufacturing plant which leases land for 50 years and constructs a factory on this. As part of the lease agreement it must reinstate the land to its original condition. It builds a plant on the land. At that point a provision is made in the books at its estimated present value cost in 50 years time of CU500,000 assuming no residual value. The accounting required for this transaction is:
| CU | CU | |
| Dr Fixed Assets | 500,000 | |
| Cr Provision | 500,000 |
Being journal to recognise the decommissioning cost
In year 10 the new estimate of the present value cost to reinstate the land is CU600,000. The NBV at that date is CU400,000 (CU500,000/50 yrs*40yrs). The liability included in the accounts after unwinding of the discount is at that time is CU550,000. The journals required at this time are as follows:
| CU | CU | |
|
Dr Fixed Assets (600,000-550,000) |
50,000 | |
| Cr Provision | 50,000 |
Being journal to write the liability up to the new estimate
From that date the new carrying amount of the asset is CU450,000 (NBV of CU400,000+change in estimate of CU50,000). The depreciation over the remaining life is as follows: New cost of CU450,000/40 yrs =CU11,250
| CU | CU | |
| Dr Depreciation | 11,250 | |
| Cr Accumulated Depreciation | 11,250 |
Being journal to reflect the depreciation to be charged from year 10 on.
For revalued assets, where an increase in the liability is required, the additional amount is posted to the OCI and then to the revaluation reserve up to the point where the revaluation surplus is nil and at that stage the remainder is recognised in the profit and loss. Where a decrease in the liability occurs, the credit is posted to the OCI and then to the revaluation reserve except where this is reversing a previous revaluation surplus posted to the profit and loss account. Included in the disclosure section of this manual is an example of an accounting policy for decommissioning and restoration costs.
17.2.3.6 Self-constructed assets (see Section 17.9 to 17.13 of FRS 102)
The principals outlined in Section 17.2.3 to 17.2.3.5 above are still applicable. However, the cost of abnormal amounts of wasted material, labour or resource incurred in the construction process are expensed as stated in Section 17.12 of FRS 102. This includes cost of design errors, industrial disputes, idle capacity and production delays.
Only labour costs directly attributable to the assets construction should be capitalised. Therefore, any costs which would have been incurred regardless of whether the item was constructed or not is ignored in relation to administrative expenses for those individuals. Only labour costs for work on that property should be capitalised.
17.2.3.7 Cessation of capitalisation (see Section 17.10 of FRS 102)
Section 17.10 (b) of FRS 102 makes it clear that costs recognition should cease once an item of PPE is in the location and condition for it to be capable of operating in the manner intended by management. This is usually the date of practical completion of the physical asset. In essence, the recognition of relocation and reorganisation costs, costs incurred during the run up to full use once an item is ready to be used, and any initial operating costs is not allowed.
17.2.3.8 Computer software
Computer software for a machine that cannot operate without specific software is an integral part of the machine and is treated as PPE. However, where software is not an integral part it is treated as an intangible. This differs from old GAAP so transition adjustments may be required. A computer which includes both software and hardware is classified as PPE. However, website development costs and specific software is a separate asset and should be classified as an intangible asset. See the definition of intangible assets in Section 18 of FRS 102 at 18.3.
Property, plant and equipment are stated at cost less depreciation. Software which is considered to be an integral part of the related hardware is capitalised as property, plant and equipment.
17.2.3.9 Deferred payment terms – measurement of cost (see Section 17.13 of FRS102)
The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the cost is the present value of all future payments.
Example 6: purchasing on deferred credit terms
A company purchased a piece of equipment from a related party supplier on preferential terms for CU300,000. The company does not have to pay for the equpment until 2 years after delivery. Under normal trading conditions, the company would have to pay on delivery. As a result, the Company must present value the CU300,000 using the rate of interest that would be charged on this balance by a third party. Assume the interest that would be charged by a bank for 2 years on a loan of CU300,000 is 7%. The amount to be recognised as an asset is the present value for the future payment.
CU300,000 / (1+.07)^2 = CU262,031.
The difference of CU37,969 (CU300,000-CU262,031) is posted as an interest cost over the two year period assuming it does not meet the requirements for capitalising borrowing costs under Section 25 i.e. it is a qualifying asset where the asset takes a period of time to complete. This CU37,969 is charged to the profit and loss account under the effective interest rate method as detailed in Section 11 of this website.
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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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