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FINANCIAL ACCOUNTING 5 – FAR320

SEMESTER SEPT 2017 – JANUARY 2018

TOPIC 1 : MFRS116 PROPERTY, PLANT AND EQUIPMENT

1.1 Course Outcomes

CO1 - Explain the relevant requirements of financial reporting standards pertaining to


non-current assets: property, plant and equipment, investment property, Agriculture-
biological assets, and intangible assets.

CO2 - Explain and apply the financial reporting standards in preparing financial
statements for public companies and in making professional judgement and estimates.

CO3 - Prepare the annual financial statements for publication purpose. These include
statement of financial position, statement of comprehensive income, statement of
changes in equity, and notes to the financial statements.

1.2 Program Outcomes

PO1 - Able to apply knowledge and understanding of accounting and accounting


related fields.

PO2 - Able to prepare accounts, budgets and costing information, and assist in tax
returns, the audit process, and finance functions

PO5 - Able to coordinate with different functions of the management team

1.3 At the end of the chapter, students are expected to be able to :

1.3.1 Define property, plant and equipment


1.3.2 Explain the recognition criteria of property, plant and equipment
1.3.3 Determine the initial costs of property, plant and equipment.
1.3.4 Show the relevant accounting entries for the acquisition of property, plant and
equipment and disclosure in the statement of financial position.
1.3.5 Explain the recognition criteria of subsequent expenditure as part of the
carrying value of property, plant and equipment.
1.3.6 Explain the accounting treatment of subsequent expenditure and show the
relevant accounting entries and disclosure in the statement of comprehensive
income and statement of financial position.
1.3.7 Explain the initial measurement of property, plant and equipment
1.3.8 Explain the accounting treatment of subsequent measurement of property,
plant and equipment.
1.3.9 Account for depreciation.
1.3.10 Explain the revaluation model and the cost model
1.3.11 Account for impairment.
1.3.12 Account for derecognition of property, plant and equipment
1.3.13 Explain the disclosure requirements of FRS 116 on property, plant and
equipment.

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1.4 Learning Model

1.4.1 Lecture
1.4.2 Tutorial

1.5 Assessment

1.5.1 Common test


1.5.2 Final Examination

1.6 Reference

Text Book : Jane Lazar, Huang Ching Choo. Malaysia Financial Reporting Standards,
Revised 4th edition, Mc Graw Hill.

1.7 Lecture/Tutorial Coverage

TB Pages
1.7.1 Basic concepts and definitions 433-434
1.7.2 Recognition
i. recognition criteria of PPE 434-435
ii. identification of PPE, Initial costs, Subsequent costs 435-436
1.7.3 Measurement of PPE at recognition – Elements of costs 436-437
i. Measurement of PPE if the assets are purchased (Initial Costs) 437
ii. Measurement of PPE if the assets are self-constructed PPE – 438
Initial costs, account for Borrowing costs if any (MFRS123 –
Borrowing costs)
iii. Measurement of PPE if the assets are exchanged 439
iv. Taking into account for Dismantling/Decommissioning costs 437
v. Deferred payment 439
1.7.4 Subsequent Costs – types of costs 441
i. replacement of parts 441
ii. major inspection 441-442
1.7.5 Costs that cannot be capitalized 442-443
1.7.6 Government Grants – (Account for MFRS120 Accounting for 443
Government Grants and Disclosure of Government Assistance)
1.7.8 Subsequent Measurement : Assets Revaluation 445
i. Cost Model 445
ii. Revaluation Model 446
iii. Accounting for surplus or deficit 446-448
iv. Depreciation 451-452
1.7.9 Depreciation of PPE 451-452
1.7.10 Impairment (account for MFRS136 Impairment of Assets) 454
1.7.11 Derecognition of PPE 455
1.7.12 Disclosure of PPE in Financial Statements 464

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1.8 Additional Notes and examples

A. Examples – items of property, plant and equipment

Property, plant and equipment are tangible assets 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.

A-1 An entity owns a factory building in which it manufactures its products. The
building is classified as an item of property, plant and equipment. It is a physical
asset used in the production of goods that is expected to be used during more
than one reporting period.

A-2 An entity owns a building occupied by its administrative staff. The building is
classified as an item of property, plant and equipment. It is a physical asset
used for administrative purposes that is expected to be used during more than
one reporting period.

A-3 An entity owns a fleet of motor vehicles. The vehicles are used by the sales
staff in the performance of their duties. The motor vehicles are classified as
items of property, plant and equipment. They are physical assets used in the
supply of goods during more than one reporting period.

A-4 An entity owns a motor vehicle for the exclusive business and private use of its
chief financial officer. The motor vehicle is classified as an item of property,
plant and equipment. It is a physical asset used in the administration of the
entity during more than one reporting period.

B Examples – not items of property, plant and equipment

Property, plant and equipment does not include:

(a) biological assets related to agricultural activity (see Specialised Activities),


or

(b) mineral rights and mineral reserves, such as oil, natural gas and similar
nonregenerative resources.

Notes

Property, plant and equipment also excludes assets held for sale in the ordinary
course of business, assets in the process of production for such sale, and
assets in the form of materials or supplies to be consumed in the production
process or in the rendering of services. Such assets are inventories (see MFRS
102 - Inventories).

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Intangible assets are also not items of property, plant and equipment. They are
accounted for in accordance with MFRS 138 Intangible Assets other than
Goodwill.

B-1 An entity owns a herd of cattle that form the breeding stock of its agricultural
activities. The entity also owns a tractor and trailer used to transport feed to
the cattle. Although the cattle arguably meet the definition of property, plant
and equipment—they are tangible assets used in the production of calves in
more than one accounting period—they are accounted for as biological assets.
They are outside the scope of Property, Plant and Equipment .

The tractor and trailer are classified as items of property, plant and equipment.
They are physical assets used in the supply of goods during more than one
reporting period. As the tractor and trailer are not biological assets.

B-2 An entity acquired a licence to operate a taxi in a major city. The taxi licence is
not an item of property, plant and equipment. It is an intangible asset.

C. Recognition

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.

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.

Examples – spare parts and servicing equipment

C-1 An entity manufactures chemicals. It services its manufacturing plant using


specialised servicing equipment that is unique to the servicing requirements of
its plant. The servicing equipment is classified as property, plant and
equipment. It can be used only in connection with the entity’s plant and is
expected to be used in more than one accounting period.

C-2 An entity manufactures chemicals. It services its manufacturing plant using


common low value tools acquired from a local hardware store. The servicing
tools are not items of property, plant and equipment. They are inventories in
accordance of MFRS 102 – Inventories. The tools are not unique to the
servicing requirements of the entity’s plant.

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C-3 A private hospital has installed two identical back-up generators. The first
back-up generator provides electricity when the supply from the national grid is
interrupted. The second back-up generator will be used in the unlikely event
that the first back-up generator fails when the supply from the national grid is
interrupted.

Both back-up generators are items of property, plant and equipment. The
stand-by equipment is expected to be used in more than one accounting period,
albeit irregularly.

D Replacement Parts

Parts of some items of property, plant and equipment may require replacement
at regular intervals (eg 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.

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.

Example – replacement parts

D-1 An entity that manufactures agricultural chemicals is required to have the


protective lining of its chemical processing plant inspected for corrosion at six-
month intervals. If an inspection reveals damage to the lining the entity is
required to replace the lining immediately. Experience has shown that linings
require replacement, on average, every four years. The entity depreciates
linings on the straight line basis over their estimated four-year useful life to a
nil residual value. The other parts of the plant are depreciated on the straight-
line basis over their estimated 20-year useful life.

During the current reporting period an inspection revealed that a three-year-old


lining with a carrying amount of RM100,000 was damaged. The lining was
immediately replaced at a cost of RM420,000. To recognise the replacement
lining the entity must record RM420,000 as an asset— property, plant and
equipment. The new lining (asset) will be recognised as an expense
(depreciation) in profit or loss evenly over its estimated four-year useful life.
During the current reporting period (ie when the old lining was removed), the
entity must record an expense in profit or loss of RM100,000 for the
derecognition of the damaged lining.

E- Major Inspection

A condition of continuing to operate an item of property, plant and equipment


(eg 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

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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.

E-1 An entity that operates an executive aviation service is required to have its jet
aircraft inspected for faults by the national aviation authorities every two years.
An inspection was made halfway through the current annual reporting period
at a cost of RM20,000. The entity must recognise an asset (property, plant and
equipment) of RM20,000 for the inspection. The inspection asset must be
recognised as an expense (depreciation) in profit or loss evenly over its
estimated two-year useful life (ie RM5,000 expense during the current reporting
period).

F- Land and buildings .

Land and buildings are separable assets, and an entity shall account for them
separately, even when they are acquired together.

1.9 Tutorial Questions

Common tests August 2015 Q1


January 2016 Q1
August 2016 Q1
January 2017 Q1
Final exam questions October 2015 Q1
Mac 2016 Q1
October 2016 Q1
Mac 2017 Q1