Corporate Reporting - MFRS116, IAS16 Property Plant and Equipment_PPE

1. CORPORATE
REPORTING
Dayana
Mastura,
FCCA UK
CA(M)
MFRS116 –
Property, Plant
and Equipment

2. Learning
Outcomes
Identify a property, plant and equipment for specific industries based on
the standard and the conceptual framework
Identify
Discuss why a property, plant and equipment is classified as such based on
the standard and conceptual framework
Discuss
Analyze the circumstances in which an item shall not be classified as a
property, plant and equipment and ascertain the specific standards which
are more applicable to the items concerned
Analyze
Ascertain the initial and subsequent measurement for property, plant and
equipment in specific industries based on the provisions contained in the
standard and conceptual framework
Ascertain
Ascertain the derecognition of property, plant and equipment in specific
industries based on the provisions contained in the standard and conceptual
framework
Ascertain
Explain the disclosure requirements for property, plant and equipment
Explain

3. Importance of
Property, Plant
and Equipment
(PPE) to
Businesses
PPE is generally used in the course of
business operations. It enables a business
to carry out its normal trading activities.
PPE enabes an entuty to conduct its
business more efficiently.
A good, well-maintained PPE would add
further value to the company and may
help to improve its future cash flows.
PPE assists companies in reducing business
risks

4. Definition and Scope of MFRS116
Paragraph 6 of MFRS116 states that PPE is
tangible, i.e physically existing items that
can be physically touched. In addition,
these items:
(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

5. MFRS 116
does not
apply to ~
PPE classified as held for sale in accordance with
MFRS 5 – Non-Current Assets Held For Sale and
Discontinued Operations
Biological Assets related to agricultural activity,
MFRS 141 – Agriculture
The recognition and measurement of exploration
and evaluation asses: MFRS 6 – Exploration for
and Evaluation of Mineral Resources
Mineral rights and mineral reserve such as oil,
natural gas and similar non-regenerative
resources

6. Definition of an Asset
IN THE CASE OF PPE, THE DEFINITION COULD
BE SUMMARIZED AS FOLLOWS:
(I) AN ASSET IS A PRESENT ECONOMIC
RESOURCE CONTROLLED BY AN ENTUTY AS A
RESULT OF PAST TRANSACTION OR PAST
EVENTS, AND
(II) IT GIVES THE ENTITY THE RIGHT TO
FUTURE ECONOMIC BENEFIT WHICH COULD
BE MEASURED IN THE FORM OF CASH
INFLOW/CASH EQUIVALENT OR IN THE FORM
OF REDUCTION OF CASH OUTFLOW/CASH
EQUIVALENT

7. Initial
Recognition
Para 7 of MFRS116
outlines the criteria that
need to be present
before the items are
recognized as PPE.
Generally this is
summarized into 2
points as follows:
(1) that the entity
expects to obtain
economic benefits from
using the assets, and
that
(2) the costs can be
reliably measured

8. Initial
Measurement
According to MFRS116 Para 10, the cost
of an item of property, plant and
equipment shall be recognized as an
asset if an only if:
It is probable that future economic
benefits associated with the item will
flow to the entity and
The cost of the item can be measured
reliably

9. Subsequent
Measurement
• Paragraph 29 of MFRS 116 stipulates that
upon initial recognition, a business entity
can adopt either: (a) cost model , or (b)
revaluation model to value its PPE.

10. Cost Model
• PPE is subsequently measured at its book value
• Book value = Costs less accumulated depreciation less impairment
loss
• Impairment losses is defined in MFRS 136 – Impairment of Assets as
the situation in which the recoverable amount, i.e the fair value
of an asset less its expected selling costs is more than its carrying
value or book value. This generally implies that the occurrence of
impairment causes the asset to be worth less than what it is
actually worth

11. Revaluation Model
Assets are subsequently measured at its revalued amount, which is its fair value less accumulated
depreciation and any resulting impairment losses.
MFRS 116 outlines that business entity that uses the revaluation model must ensure that the
revaluation takes place regularly in a way the fair value does not differ materially from the carrying
amount in the SOFP date.
Where assets are exposed to highly volatile changes in fair values, annual revaluations may be
necessary.
In instances where the changes in fair values of the assets are immaterial, the assets could be valued
once in every 3 or 5 years.

12. Revaluation
Model contd
• MFRS 116 also emphasizes that the whole class of
property, plant and equipment shall need to be
revalued if an item in the class is revalued.
• In instances where an asset is being revalued
upwards, the difference will be recorded as a gain
in Other Comprehensive Income (OCI) and as a
revaluation surplus in accumulated Equity.
• In contrast, if an asset is being revalued
downwards, the difference will be recorded as a
loss in Other Comprehensive Income (OCI) and it
reduces the accumulated Equity contained in the
heading of revaluation surplus.

13. Revaluation Model - Treatment
In treating the revaluation amount,
MFRS116 allows two methods to be used
either:
Using a proportion basis based on the
amount of the asset before the revaluation
and after revaluation to determine the
amount of the asset and its corresponding
accumulated depreciation, or
Eliminating the gross amount of the asset
and then restating the asset at its revalued
amount

14. Self-Constructed Assets
• Determination of costs for self-constructed assets is similar with
the principles for an acquired asset.
• The initial recognition for a self-constructed asset is based on its
costs i.e all the related expenditures required to construct the
asset before it can be ready for the company’s own use.
• The costs which are normally associated in constructing the asset
include the materials used, labour and contractor’s costs.

15. Capitalization
of self-
constructed
assets
Initial recognition is based on costs involved in building the asset
Any internal profits arising from the construction of the asset should be excluded
Internal profits refer to savings arising from the construction of the asset
For example a company bought direct materials amounting to RM100,000 to
construct an asset, but only RM99,000 of direct material is actually used to
construct the asset. The difference of RM1000 (RM100,000 les RM99,000)
represents an internal profit to the company which needs to be excluded from
the costs of the asset.
Also excluded from the costs are inefficiencies arising in wastage of materials or
labour in constructing the asset.

16. Exchange of
Assets
Paragraph 24 of MFRS116 stipulates that th cost
of an asset obtained by the way of exchange is
measured by refering to the fair value of the
asset given up unless the fair value of the asset
received is more clearly evident
The exchange can involve exchanging non-
monetary assets or a combination of the non-
monetary and monetary assets.
The monetary assets are usually used to make
up for the difference of the value of the
exchanged non-monetary assets.

17. Derecognition
According to Paragraph 67 of MFRS 116,
an asset will be derecognized if it is
either disposed or the economic benefits
cease to flow to the entity as the entity
continues to use the asset.
Paragraph 68 of MFRS 116 further outlines
that upon derecognition of the asset the
arising gains or losses needs to be
included in profit and loss
In recognizing the gain arising from the
derecognition of the asset, care must be
exercised so as not to record and classify
the gain as revenue unless disposing the
PPE is part of the normal operating cycle.

18. Disclosure Requirement
MFRS116 requires business
entities to disclose the gross
carrying amount of PPE and its
corresponding accumulated
depreciation including any
impairment losses at the
beginning and ending of
period.
In addition, the measurement
bases to determine the gross
carrying amount of the PPE
are also required to be
disclosed.
Generally the objective of
disclosure is to assist users in
making economic decisions.

19. Q & A
session