Property, Plant and Equipment

1. Property, Plant and Equipment IAS 16, IAS 23, IFRIC 1 ARB 43, APB 21, APB 29, SFAS 34, SFAS 143, SFAS 153, SFAS 154, FIN 30, FIN 47

2. Initial Recognition • Comprises tangible assets held by an entity for use in production…expected to be used for more than one period • Initially recognized at cost; directly attributable costs are included • Interest on qualifying assets (building manufacturing plants, power generation facilities IAS 23) must be capitalized • Training costs, start up and pre-operating costs are not included in the cost of the asset • All of the above – similarities between US GAAP and IFRS

3. Decommissioning Costs • Cost of PPE includes estimated cost of dismantling and removing asset and restoring site • Liability recognized as a provision (IFRS); asset retirement obligation ARO (US GAAP) • AROs arising from inventory production added to PPE (US GAAP); added to cost of inventory (IFRS)

4. Decommissioning Costs • Re-measurement of provision includes effect of changes in interest rates (IFRS – provisions addressed in one standard IAS 37) • Re-measurement of ARO includes effect of changes in interest rates only with respect to changes in estimates of future cash flows; not all provisions require adjustments based on interest rates; different standards address different provisions (US GAAP)

5. Depreciation • Similarities between US GAAP and IFRS Depreciated in a systematic way over its useful life No specific method is required Depreciation charge included in statement of profit and loss Changes in useful life, residual value, depreciation method accounted for prospectively as changes in estimates

6. Depreciation • Similarities between US GAAP and IFRS Greater disclosure requirements for change in depreciation method (US GAAP) Subsequent expenditures capitalized if it is probable economic benefits will flow to the entity Routine service charge is expensed

7. Depreciation • Differences between US GAAP and IFRS Review all estimates and method used at each reporting date (IFRS) Review all estimates and method used whenever events or changes in circumstances indicate current estimates may not be appropriate (US GAAP) Component depreciation is required (IFRS) Component depreciation allowed but not required (US GAAP)

8. Revaluation • Not permitted under US GAAP • Revaluation of PPE allowed under IFRS • All assets in the same class must be revalued; selective revaluation not allowed • Increase in carrying amount of asset • If carrying amount increases, increase is recognized in comprehensive income under revaluation surplus • Shall be recognized in profit or loss to the extent it reverses a revaluation decrease of the same asset previously recognized in profit or loss

9. Revaluation • Decrease in carrying amount of asset • If the carrying amount decreases, the decrease shall be recognized in profit or loss • But first eliminate any revaluation surplus existing in equity, if any • Revaluation surplus can be transferred to retained earnings when asset is derecognized • Revaluation surplus can be transferred to retained earnings when asset is being used (difference in depreciation charge arising from using original cost versus revalued amount)

10. Impairment • US GAAP • Two part test: Impairment exists if carrying value exceeds sum of future cash flows (undiscounted) • Amount of impairment: Difference between carrying amount and present value of future cash flows • IFRS • Impairment exists if carrying amount exceeds recoverable amount • Recoverable amount is the higher of value in use (present value of future cash flows; specific details addressed in IAS 36) and asset’s net selling price

11. Disposal • Similarity between IFRS and US GAAP Difference between selling price and the carrying amount of the asset is gain or loss • Potential difference if revaluation model is used in IFRS Attributable revaluation surplus can be transferred to retained earnings (IFRS) Not an issue under US GAAP

12. Revaluation exercise • Clark Company owns a building that cost $800,000. The building has accumulated depreciation of $200,000 at the end of 2 years when Clark revalues the building to its current fair value of $1,000,000. Ratio = 600,000/800,000 = 0.75 • Question 1 Provide the journal entry for revaluation of the asset and treatment of accumulated depreciation under the first method. Buildings 533,333 • Accumulated Depreciation- buildings 133,333 • Revaluation Surplus 400,000 • (Note 400,000/.75 = 533, 333) • After this entry, ratio of carrying amount to gross amount is still 0.75 (1,333,333-333,333/1,333, 333)

13. Revaluation exercise • Question 2 Provide the journal entry for revaluation of the asset and treatment of accumulated depreciation under the second method. Accumulated depreciation 200,000 Buildings 200,000 Buildings 400,000 Revaluation Surplus 400,000 (After this entry Buildings = 1,000,000; accumulated depreciation = 0)

14. Revaluation exercise • Question 3 Which method provides better information for financial reporting purposes and why? Your answer must be clear, concise and precise. First method: can gauge ratio of carrying amount to gross amount; can assess relative age of assets; can estimate timing and amount of cash needed for asset replacements Second method: significant reduction of information available for making decisions