Property Plant and Equipment

1. Property, Plant and
Equipment
PRESENTED BY THEMBA MHLONGO

2. Learning objectives
 Describe property, plant and equipment and costs included in its initial valuation,
 Describe the accounting treatment for costs subsequent to acquisition.
 Explain the concept of depreciation.
 Identify the factors involved in the depreciation process.
 Compare activity, straight line and decreasing charge methods of depreciation.
 Describe the accounting treatment for the disposal of property, plant and equipment.

3. Definition
 According to Shuvo et.al (2017) Property Plant and Equipment are
defined as tangible assets that-
 Are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
 Are expected to be utilized in more than one period.

4. Assets
 An asset is a resource controlled by an entity as a result of past event and
from which future economic benefits will flow to the entity.
 According to Jain (2017) the cost of an item of Property, Plant and
Equipment shall be recognized as an asset if:
• It is probable that future economic benefits from PPE will flow to the entity;
• The cost of the item can be measured reliably.

5. Property, plant and equipment
 These are fixed assets which actually lasts for a period of more than one
year.
 Includes land, building, structures, machinery, vehicles and equipment.
 They are not held for resale.
 They are long term and are subject to depreciation (except land).
 They are tangible meaning you can actually touch and see them.

6. Measurement of PPE
 They are measured at historical cost.
 Historical cost means that assets should be recorded in the accounts of the
business at the amount that was originally paid for them.
 According to Harrison (2011) historical cost is the basis for determining
cost of Property Plant and Equipment.
 Historical cost includes:
 The asset’s cash or cash equivalent price, and
 The cost of readying the asset for use, this means all cost related to bringing
the asset in to use.

7. Reasons why PPE should be valued at
historical cost
 According to Aziz (2011) PPE should be valued at Historical Cost because:
 Historical cost is reliable.
 Companies should not anticipate gains and losses but should recognize
gains and losses only when the asset is sold.

8. What to include in the cost PPE items
 Cost of land,
 Cost of buildings and,
 Cost of equipment.

9. Land

10. Cost of land
 Includes all costs to acquire land and ready it for use. The costs typically
include:
 The purchase price;
 Closing costs, such as title to the land, attorney’s fees, and recording fees;
 Costs of grading, filling, draining, and clearing;
 Additional land improvements that have an indefinite life.

11. Buildings

12. Cost of building
 Includes all costs related directly to acquisition or construction. The costs
typically include:
 Materials, labor, and overhead costs incurred during construction and
 Professional fees and building permits.

13. Equipment

14. Cost of equipment
 Include all costs incurred in acquiring the equipment and preparing it for
use. The costs typically include:
 Purchase price,
 Freight and handling charges
 Insurance on the equipment while in transit,
 Cost of special foundations if required,
 Assembling and installation costs, and
 Costs of conducting trial runs.

15. Other PPE items not mentioned
above
 Vehicles and machinery are not mentioned above because the costs to
be included are the same as the costs of equipment.
 Measurement of PPE items can also be called initial recognition.

16. Machinery

17. Vehicle

18. Example on how to calculate cost
 AC Entity is a business that is well known for AC supplies. On 1 January
2017 AC Entity purchased a machine for R1 271 930. during January 2017,
AC Entity incurred the following costs;
 Delivery cost to deliver machine amount to R125 000
 Installation costs by an external service provider amount to R225 000
 Preparation cost for the machine to function amount to R150 000
 The present value of the dismantling and rehabilitation costs was
estimated at R215 000.

19. Solution to the above example
Purchase price R1 271 930
Delivery cost R125 000
Installation cost R225 000
Preparation cost R150 000
Present value of dismantling and rehabilitation costs R215 000
Total cost of machinery R1 986 930
 This means that the machine will be recognised at R1986 930.

20. Subsequent measurement of PPE
items
 Land at cost price less any accumulated impairment losses; and
 Other PPE items: cost price less accumulated depreciation and less any
accumulated impairment losses. In this slides I will not discuss anything
about impairment losses.
 In other words all PPE items are subsequently measured at Carrying
amount.

21. Important terms
 Carrying amount and depreciation and residual value
 According to Sonia (2015) Carrying amount is the amount at which an
asset is recognised after deducting any accumulated depreciation and
accumulated impairment losses.
 Residual value is the estimated amount that would currently be obtained
from the disposal of a PPE item after deducting cost of sale.
 Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life. This can also be the loss of value of an asset due
to wear and tear.

22. Two common methods of accounting
for depreciation
 Straight line method
 Depreciable amount divide by useful
life or multiply by depreciation rate.
 Depreciable amount x depreciation
rate.
 Depreciable amount is cost price less
residual value.
 Diminishing balance method
 Cost price less accumulated
depreciation multiply by depreciation
rate.
 Cost – accumulated depreciation =
carrying amount
 Then carrying amount x depreciation
rate.

23. Example on straight line method
 On 1 January 2017 AC Entity purchased an equipment R 500 000,
depreciation is calculated at 20% per annum on the straight line method.
On the purchased date the residual value was estimated to be R100 000.
Required
 Calculate the depreciation expense for the reporting date 31 December
2017.

24. Solution
Cost R500 000
Residual value R100 000
Therefore Depreciable amount to R400 000 (R500 000-R100 000)
Depreciation= R400 000 X 20/100= R80 000.

25. Example on the diminishing balance
method
 On 1 January 2017 AC Entity had an equipment costing R 500 000, with
an accumulated depreciation of R100 000. Depreciation is calculated at
20% per annum on the diminishing balance method.
Required
 Calculate the depreciation expense for the reporting date 31 December
2017.

26. Solution
 Cost price R500 000
 Accumulated depreciation R100 000
 Therefore: carrying amount R400 000 (R500 000-R100 000)
Depreciation R400 000 X 20/100= R80 000

27. Disposal of a PPE item
 When a PPE item no longer satisfies the definition and recognition criteria
of an asset, then the item can no longer be accounted for as an asset.
 This will occur at the stage when the PPE item is sold, or when it no
longer bring the economic benefits to the entity.
 Therefore the entity has to derecognise the item at its original cost price.

28. Disposal of assets(PPE items)
 According to Muhandiram (2014) all disposals should be identified and
the disposal profit or loss should be separately calculated.
 Inspect the sales invoices and bank statements for sales receipts.
 Document the details.
 Year of purchase,
 Cost of the assets
 Sales proceeds
 Accumulated depreciation
 Profit or loss on disposals

29. Example on disposal of PPE item
 On 31 December 2017 the AC Entity sold an equipment which was no
longer economically useful at R80 000. On 1 January 2017 the cost was of
the equipment was R150 000 and an accumulated depreciation of R30
000. depreciation is calculated at 20% per annum on cost.
Required
 Calculate the profit or loss on sale of the equipment.

30. Solution
First thing is to calculate current year depreciation
Depreciation R150 000 x 20/100 = R30 000
Therefore cost less accumulated depreciation= carrying amount
R150 000-R30 000-R30 000= R90 000
Carrying amount- amount received= profit or loss
NB if carrying amount is greater than amount received/selling price we have
a loss and if it is less we have a profit.
R90 000-R80 000= R10 000 loss on sale of equipment.

31. References
 Aziz, J.K. (2011) Acquisition and Disposition of Property, Plant and
Equipment. Available from Slideshare at
https://www.slideshare.net/umargul786/acquisition-and-disposition-of-
property-plant-and-equ?qid=e475757f-4aaf-4d1f-abeb-
cd146180ad37&v=&b=&from_search=5 (Accessed 7 September 2017)
 Harrison, B. (2011) Accounting for Property, Plant and Equipment. Available
from Slideshare at https://www.slideshare.net/Fordlovers/9-property-plant-
and-equipment?qid=90f7409c-13a3-475f-8cf8-
3144c4655386&v=&b=&from_search=4 (Accessed 7 September 2017).

32. References
 Jain, M. (2017) Property, Plant and Equipment. Available from Slideshare at
https://www.slideshare.net/ManulJain2/ind-as-16-property-plant-and-
equipment?qid=224334e8-3ed2-426c-990e-
a63f3fc7d93c&v=&b=&from_search=6 (Accessed 7 September 2017)
 Muhandiram, K.M.T.N. (2014) Property, Plant and Equipment. Available
from Slideshare at https://www.slideshare.net/TharinduNishshankaMu/lkas-
16-property-plant-amp-equipment?qid=4a37f389-1431-43e6-a173-
3549726a84c3&v=&b=&from_search=9 (7 September 2017)

33. References
 Shuvo, J, Rahman, S, Hasan, K, Ripon, H.S, Amin, R, Rana, M. (2017)
Property, Plant and Equipment. Available from Slideshare at
https://www.slideshare.net/Jahid_2974/ias-16-property-plant-equipment-
ppe?qid=7e263b91-0866-4a84-aa41-
d0daf5bdd75a&v=&b=&from_search=1 (Accessed 7 September 2017)
 Sonia, S. (2015) Property, Plant and Equipment. Available from Slideshare
at https://www.slideshare.net/MdMoazzemHossain/property-plant-
equipment-ias-16?qid=52213479-c812-428e-83ef-
2d8b1af8a637&v=&b=&from_search=3 (7 September 2017)