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Chapter 8 HKAS 16 Property, Plant and Equipment

1. Objectives

1.1 Define property, plant and equipment ( ).

1.2 Explain all the cost elements and initial measurement of property, plant and

equipment.

1.3 Discuss the requirements of HK! 1" in respect of the reco#nition criteria for

property, plant and equipment.

1.$ ccount for the exchan#e of assets.

1.% Discuss the accountin# treatment of re&aluation, diminution in carryin# &alue and

depreciation of property, plant and equipment.

1." Descri'e the disclosure requirements under HK! 1".

! u ' s e q u e n t

E x p e n d i t u r e

E x c h a n # e

o f s s e t s

( e & a l u a t i o n s

! u ' s e q u e n t

) e a s u r e m e n t

* a r r y i n #

m o u n t

D e p r e c i a t i o n ( e t i r e m e n t

+ D i s p o s a l s

, n i t i a l) e a s u r e m e n t

( e c o # n i t i o n

! c o p e +

D e f i n i t i o n

2. Scope and Definition

2.1 HK! 1" addresses the follo-in# issues

(i) reco#nition criteria for property, plant and equipment/

(ii) costs -hich can 'e included in the &alue of a non0current asset/

(iii) exchan#e of assets/

(i&) transfer 'et-een different types of assets, e.#. 'et-een non0current assets and

in&entories/

(&) re&aluation/

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(&i) accepta'le depreciation methods/ and

(&ii) the accountin# treatment of diminution in &alue of assets.

2.2 he !tandard does not apply to

(i) 'iolo#ical assets related to a#ricultural acti&ity (HK! $1 4#riculture5)/ or

(ii) mineral ri#hts and mineral reser&es such as oil, natural #as and similar non0

re#enerati&e resources/ and

2.3 Ho-e&er, the !tandard applies to property, plant and equipment used to de&elop or

maintain the assets descri'ed a'o&e.

2.$ DEFINII!NS

(a) Property, plant and equipmentare tan#i'le assets that

(i) are held 'y an enterprise for u"e in the produ#tion or "upply o$ %ood"

or "er&i#e", $or rental to other", or $or admini"trati&e purpo"e" / and

(ii) are expected to 'e u"ed durin# more than one period.

(') Depre#iation is the systematic allocation of the deprecia'le amount of an

asset o&er its estimated useful life.

(c) Depre#ia'le amount is the cost of an asset, or other amount su'stituted for

cost in the financial statements, less its estimated residual &alue.

(d) (e"idual &alueis the net amount -hich the enterprise expects to o'tain for an

asset at the end of its useful life after deductin# the expected costs of disposal.(e) Fair &alue is the amount for -hich an asset could 'e exchan#ed 'et-een

6no-led#ea'le, -illin# parties in an arm7s len#th transaction.

(f) Carryin% amountis the amount at -hich an asset is included in the 'alance

sheet after deductin# any accumulated depreciation and accumulated

impairment losses.

(#) (e#o&era'le amount ( ) is the hi#her of an asset7s net sellin#

price and its &alue in use.

3. Recognition of Property, Plant and Eqip!ent

3.1 (EC!)NII!N C(IE(IA

HK! 1" states that an item of property, plant and equipment should 'e re#o%ni*ed

as an asset in the 'alance sheet -hen

(i) it is pro'a'le that $uture e#onomi# 'ene$it"associated -ith the asset -ill

$lo+ to the enterpri"e (satisfied -hen ris6s and re-ards ha&e passed to

enterprise)/ and

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(ii) the #o"tof the asset to the enterprise can 'e mea"ured relia'ly.

3.2 he $ir"t #riterionis satisfied -hen there is a hi#h de#ree of certainty attached to the

flo- of future economic 'enefits at the time of the initial reco#nition. t is "ati"$ied

#enerally +hen the ri"" and re+ard" in#ident to the o+ner"hip o$ the a""et ha&e

pa""ed to the entity.

3.3 he "e#ond #riterion is easily "ati"$ied for items of property, plant and equipment

a#quired $rom the maret'ecause of the existence of an external transaction. 8or

internally #on"tru#ted items of property, plant and equipment, a relia'le

mea"urement of the costs in#urred in the #on"tru#tion is also often readily

a&aila'le.

". #o!ponent of #ost

$.1 C!-P!NEN !F C!S ./ P0(CHASE

he cost of an item of property, plant and equipment comprises

(i) its pur#ha"e pri#e, includin# import duties and non0refunda'le purchase

taxes, after deductin# trade discounts and re'ates/

(ii) any #o"t" dire#tly attri'uta'le to 'rin%in% the a""et to the lo#ation and

#onditionnecessary for it to 'e capa'le of operatin# in the manner intended

'y mana#ement/ and

(iii) the initial e"timated o$ the #o"t" o$ di"mantlin% and remo&in% the item and

re"torin% the "ite on +hi#h it i" lo#ated, the o'li#ation for -hich an entity

incurs either -hen the item is acquired or as a consequence of ha&in# used the

item durin# a particular period for purposes other than to produce in&entories

durin# that period.

$.2 n most cases, the purchase price is easily determina'le, #i&en that there is a purchase

transaction. Ho-e&er, -here the purchase price is not quoted or paya'le in cash, 4cash

price equi&alent5 of the purchase price -ould 'e rele&ant.

$.3 9here items of property, plant and equipments are purchased and to 'e paid for

'eyond normal #redit term", the concept of 4#a"h pri#e equi&alent5 should a#ain 'e

used. he cash price equi&alent -ill 'e equal to the pre"ent &alue o$ the #a"h

payment". he di$$eren#e 'et+eenthe #a"h pri#e equi&alentandthe total payment

is reco#nised a" intere"tco&er the period of credit unless such interest is reco#nised in

the carryin# amount of the item in accordance -ith the allo-ed alternati&e treatment

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in HK! 23 4:orro-in# *osts5.

$.$ Dire#tly attri'uta'le #o"t", for example, are

(i) costs of employee 'enefits (as defined in HK! 1; 4Employee :enefits5)

arisin# from the construction or acquisition of the item of property, plant and

equipment/

(i) the cost of site preparation for land/

(ii) initial deli&ery and handlin# costs for plant/

(iii) installation costs of plant/

(i&) professional fees such as for la-yers, architects and en#ineers/ and

(&) costs of testin# -hether the asset is functionin# properly, after deductin# the

net proceeds from sellin# any items produced -hile 'rin#in# the asset to that

location and condition (such as samples produced -hen testin# equipment).

$.% he !tandard specifically pro&ides that the $ollo+in% are not the #o"t" o$ an item of

property, plant and equipment

(i) costs of openin# a ne- facility/

(ii) costs of introducin# a ne- product or ser&ice/

(iii) costs of conductin# 'usiness in a ne- location or -ith a ne- class of customer/

and

(i&) administration and other #eneral o&erhead costs.

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$. 9hen machinery or equipment is purchased, the cost normally includes the purchase

price, tax, frei#ht char#es and installation costs. he testin# cost should also 'e

included in the purchase cost if the equipment needs to 'e tested 'efore proper

operation. oreo&er, any discount or re'ate should 'e deducted from the acquired

cost.

$.; EA-P2E 3

*ost of equipment may comprise

? ?

Bross in&oice price AA

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-arranty. :oth the -arranty and the insurance -ere for one year only.

*alculate the initial cost at -hich :* to 1 Fuly 2CC) 1%C,CCC

rchitect7s fees 2C,CCC

Beneral o&erheads 3C,CCC

%3,CCC

he follo-in# information is also rele&ant

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(a) aterials costs -ere #reater than anticipated. Gn in&esti#ation, it -as found

that materials costin# ?1C million had 'een spoiled and therefore -asted and a

further ?1% million -as incurred as a result of faulty desi#n -or6.

(') s a result of these pro'lems, -or6 on the 'uildin# ceased for a fortni#htdurin# Gcto'er 2CC> and it is estimated that approximately ?; million of the

la'our costs relate to this period.

(c) he 'uildin# -as completed on 1 Fuly 2CC and occupied on 1 !eptem'er

2CC;.

(equired4

ou are required to calculate the cost of the 'uildin# that -ill 'e included in tan#i'le

non0current asset additions.

Solution4

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$.13 EE(CISE 5

ns-er the follo-in# questions -ith reference to HK! 1" 4@roperty, @lant and

Equipment5.

(a) Explain

(i) the meanin# of property, plant and equipment and the criteria for reco#nition of

property, plant and equipment as an asset/ and ($ mar6s)

(ii) ho- the initial cost of property, plant and equipment should 'e measured.

($ mar6s)

(') he follo-in# schedule of the mo&ement of plant has 'een drafted for Hanford ) 3%C

efunda'le sales tax 1C.%

ncillary costs

!hippin# and handlin# costs $.%

nstallation costs 1C

@re0production testin# 12.%

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hree0year maintenance contract 3$

!ite preparation cost

Electrical ca'le installation 21

*oncrete reinforcement ".2%

G-n la'our costs 11.2% 3.%

$"C

Hanford had incorrectly specified the po-er loadin# of the ori#inal electrical ca'le to

'e installed 'y the contractor. he company incurred ?;,%CC to correct this error/ this is

included in the a'o&e fi#ure of ?21,CCC.

he plant is expected to last for 1C years. t the end of this period compulsory costs of

?2C,CCC -ill 'e incurred to dismantle the plant and ?%,CCC to restore the site to its

ori#inal condition.

(2) he disposal fi#ure of ?1CC,CCC is the proceeds from the sale of an item of plant

durin# the year. he plant had cost ?3CC,CCC on 1 Fanuary 2CC" and had 'een

correctly depreciated prior to disposal.

(3) Hanford char#es depreciation of 1C per annum on the cost of plant held at the

year end.

(equired4

(i) *alculate the amount at -hich the initial cost of the addition to the plant should

'e measured. (1C mar6s)

(ii) *alculate the accumulated depreciation on the plant disposed of. (1 mar6)

(iii) @repare a corrected schedule of the mo&ements on the cost and depreciation of

plant. (" mar6s)

(otal 2% mar6s)

(dapted HK @aper > d&anced ccountin# Decem'er 2CC2 *2)

Solution4

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A7 Su'"equent #o"t"

$.1$ fter the date of acquisitionIexchan#eIconstruction, additional (su'sequent) cost

relatin# to property, plant and equipment -ill normally ha&e to 'e incurred. 8or

example, after a motor &ehicle is acquired, cost on the replacement of motor oil and

tyre, installation of air0conditionin# system, and ma=or o&erhaul mi#ht ha&e to 'e

incurred. he 'asic question arises is -hether such cost should 'e reco#nised in the

carryin# amount of the asset, or in profit or loss as an expense -hen incurred.

$.1% n accordance -ith HK! 1", circumstances in -hich "u'"equent ependiture on

those assets 'ein# #apitali*edshould depend on -hether the expenditure incurred -ill

result in a pro'a'le $uture e#onomi# 'ene$it in e#e"" o$ the amount ori%inally

a""e""edfor the asset. ll other su'sequent expenditure should 'e reco#nied in the

income statement as it is incurred.

$.1" Examples of circumstances -here su'sequent expenditure should 'e capitalied are

(i) modification to the asset enhances the production capacity of an asset.

(ii) he up#radin# of an asset that -ill impro&e the quality of production or output.

(iii) n impro&ement of the existin# production process -hich results in cost

sa&in#s.

(i&) ma=or component of an asset that has 'een treated separately is replaced or

restored/ for example, ne- en#ines for a machine.

(&) ma=or o&erhaul of an asset that restores its pre&ious life/ therefore, the

consumption of the pre&ious economic 'enefits has 'een reflected 'y past

depreciation char#es.

(a) Day-to-day servicing costs

$.1> he !tandard pro&ides that an entity should not re#o%ni*ein the carryin# amount of

an item of property, plant and equipment the #o"t" o$ the day9to9day "er&i#in%(often

referred as 4repair and maintenance5) of the item. ather, these costs are re#o%ni"edin pro$it or lo""as incurred.

(b) Major components requiring regular replacements

$.1 @arts of some items of property, plant and equipment may require replacement at

re#ular inter&als. 8or example, a furnace () may require relinin# after a specified

num'er of hours of use, or aircraft interiors such as seats and #alleys may require

replacement se&eral times durin# the life of the airframe. tems of property, plant and

equipment may also 'e acquired to ma6e a less frequently recurrin# replacement, such

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as replacin# the interior -alls of a 'uildin#, or to ma6e a non0recurrin# replacement.

$.1; Jnder the #eneral reco#nition principle, an entity reco#nises in the carryin# amount of

an item of property, plant and equipment the #o"t o$ repla#in% partof such an item

-hen that cost is incurredi$ the re#o%nition #riteria are met

. he carryin# amount of

those parts that are replaced is dereco#nised in accordance -ith the dereco#nition

pro&isions.

(c) Major inspections or overhauls ()

$.2C condition of continuin# to operate an item of property, plant and equipment (for

example, an aircraft) may 'e performin# re#ular ma=or inspections for faults

re#ardless of -hether parts of the item are replaced.

$.21 9hen each ma=or inspection is performed, its cost is reco#nised in the carryin#

amount of the item of property, plant and equipment as a replacement if the

reco#nition criteria are satisfied. ny remainin# carryin# amount of the cost of the

pre&ious inspection (as distinct from physical parts) is dereco#nised.

$.22 his occurs re#ardless of -hether the cost of the pre&ious inspection -as identified in

the transaction in -hich the item -as acquired or constructed. f necessary, the

estimated cost of a future similar inspection may 'e used as an indication of -hat the

cost of the existin# inspection component -as -hen the item -as acquired or

constructed.

$.23 EA-P2E 5

Entity purchases a ne- ship for HK?$C million. his ship -ill 'e required to

under#o a dry doc6 o&erhaul e&ery fi&e years to restore its ser&ice potential. t the

time of purchase, the cost of the existin# inspection component, estimated 'y the cost

of an inspection if it had 'een performed at the time of the purchase of the ship, -as

HK?$ million. herefore, the cost of HK?3" million, excludin# the o&erhaul cost of

HK?$ million, -ill 'e depreciated o&er the -hole estimated useful life of the ship,for example 3C years, resultin# in an annual depreciation char#e of HK?1.2 million.

he cost on o&erhaul of HK?$ million -ill 'e depreciated o&er % years, resultin# in

an annual depreciation of HK?C. million. n year " -hen a dry0doc6in# is carried

out, the inspection expenditure is capitalised (assumin# that the reco#nition criteria

are satisfied), -hich is then depreciated o&er the period of fi&e years to the next

o&erhaul. f Entity is not a'le to estimate relia'ly the cost an existin# inspection

-hen it acquired the ne- ship, the -hole of HK?$C million should 'e depreciated

o&er 3C years.

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$.2$ EE(CISE :

n each of the follo-in# cases =ustify -hether or not the expenditure should 'e

capitalied and 'e included in the carryin# amount of an item of property, plant and

equipment

(a) ne- en#ine is fitted to a machine -hich -ill increase its production

capacity from 1CC,CCC units a year to 1$C,CCC units a year.

(') eplacement of rottin# -indo-s in the head office.

(c) eplacement of an aircraft en#ine e&ery fi&e years.

Solution4

$. E%c&ange of 'ssets

%.1 9hen an item of property, plant and equipment is acquired in exchan#e for a non0

monetary asset, the cost of the asset acquired should 'e mea"ured 'a"ed on the $air

&alueunless (a) the exchan#e transaction lac6s commercial su'stance or (') the fair

&alue of neither the asset recei&ed nor the asset #i&en up is relia'ly measura'le.

%.2 f an entity is a'le to determine relia'ly the $air &alue o$ either the a""et re#ei&ed

or the a""et %i&en up, then the $air &alue o$ the a""et %i&en upis u"ed to mea"ure

the #o"t o$ the a""et re#ei&ed unless the fair &alue of the asset recei&ed is more

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clearly e&ident.

%.3 f an exchan#e la#" #ommer#ial "u'"tan#e or $air &alue #annot 'e mea"ured

relia'ly, the acquired item in the exchan#e is not measured at fair &alue and is

mea"ured at the #arryin% amount o$ the a""et %i&en up.

%.$ EA-P2E :

ssume that *ity

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A7 Co"t model 7

".2 Co"t -odel

fter reco#nition as an asset, an item of property, plant and equipment should 'e

carried at its #o"t le"" any a##umulated depre#iation and any a##umulated

impairment lo""e".

.7 (e&aluation model 7

".3 (e&aluation -odel

fter reco#nition as an asset, an item of property, plant and equipment -hose fair

&alue can 'e mea"ured relia'lyshould 'e carried at a re&alued amount, 'ein# its

fair &alue at the date of the re&aluation le"" any "u'"equent a##umulated

depre#iation and "u'"equent a##umulated impairment lo""e".

(a) Basis and frequency of valuation

".$ f re&aluation is adopted, the asset should 'e &alued at its fair &alue. he fair &alue of

land and 'uildin#s is usually determined from maret9'a"ed e&iden#e'y appraisal

that is normally underta6en 'y professionally qualified &aluers, and the fair &alue of

other items of property, plant and equipment is usually their mar6et &alue determined

'y appraisal.

".% n compliance -ith the !tandard, items of property, plant and equipment that

experience si#nificant and &olatile mo&ements in fair &alues -ould ha&e to 'e

re&alued annually. Ho-e&er, for property, plant and equipment -ith only insi#nificant

mo&ements in fair &alues, annual re&aluations -ould 'e unnecessary. nstead a

re&aluation e&ery three or fi&e years may 'e sufficient."." Item" +ithin a #la"" of property, plant and equipment should 'e re&alued

"imultaneou"ly. lternati&ely, a class of assets may 'e re&alued on a rollin# 'asis,

pro&ided that the re&aluation of the class of assets is completed -ithin a short period

of time and that the indi&idual re&aluations are 6ept up to date.

(b) Accounting for revaluation

".> e&aluation surpluses or deficits are measured as the difference 'et-een the re&alued

amounts and the carryin# amounts at the date of the &aluation.

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". Jpon an initial re&aluation, an increase in net carryin# amount (re&aluation surplus)

should 'e credited directly to equity under a separate headin#, 4re&aluation "urplu"

or re"er&e75, and a decrease in net carryin# amount (deficit on re&aluation) should 'e

reco#nised in profit or loss.

".; Ho-e&er, upon a su'sequent re&aluation, a re&aluation surplus should 'e reco#nised

in profit or loss to the extent that it re&erses a re&aluation decrease in respect of the

same asset pre&iously reco#nised in profit or loss.

".1C Gn the other hand, a deficit on re&aluation should 'e de'ited directly to the

re&aluation reser&e to the extent that of any credit 'alance existin# in the re&aluation

reser&e in respect of that (same) asset.

".11 t is important to note that the term 4that same asset5 refers to an indi&idual item of

property, plant and equipment. portfolio approach to re&aluation is therefore

precluded.

".12 o record the effects of the re&aluation, the !tandard pro&ides for t-o methods

(i) 'oth the #ross carryin# amount and the accumulated depreciation are restated

proportionately in order to #i&e a net carryin# amount equal to the net re&alued

amount. his method is often used -hen an asset is re&alued 'y means of

applyin# an index to its depreciated replacement/ and

(ii) the a##umulated depre#iation i" eliminatedand the net re&alued amountis

treated a" the ne+ %ro"" #arryin% amount.

".13 he #eneral accepted practice in Hon# Kon# is to use the second method. he

rationale for this method is that after re&aluation, the asset is deemed to 'e a 4ne-5

asset.

".1$ EA-P2E ;

ssume the follo-in#s

*ost of machine at 1.1.1;;$ ?C,CCCDepreciation method !trai#ht line $C years

e&alued amount in 31.12.2CC3 ?12C,CCC

he accountin# entries to record the re&aluation -ould 'e

31.12.2CC3 Dr. (?) *r. (?)

achine $C,CCC

ccumulated depreciation (?C,CCCI$C x 1C) 2C,CCC

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sset re&aluation reser&e "C,CCC

".1% EA-P2E 6he cost and fair &alue of land is #i&en as follo-s

?m

*ost of land 1CC

8air &alue of land

t 2CC2 2CC

t 2CC3 ;C

t 2CC$ 1%C

Dr. (?m) *r. (?m)

2CC2

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$or etra depre#iationon the re&alued amount compared to cost (measured as the

difference 'et-een depreciation char#e 'ased on re&alued amount and the char#e

'ased on historic cost). t depends on the company policy.

Fournals

? ?

Dr Depreciation char#e @+< A

*r ccumulated depreciation A

(he follo-in# is optional entries, depends on

company policy)

Dr e&aluation reser&e A

*r etained earnin#s A

".1> lso, the re"idual &alueof the asset should 'e re&ie+ed at lea"t at ea#h $inan#ial

year9end.

".1 herefore, -hen an a""et is re&alued, the depre#ia'le amount ha" to 'e

re#al#ulated, 'ased on the re&alued amount and the ne-ly estimated residual &alue.

he ne- deprecia'le amount thus calculated is then allocated o&er the remainin#

useful life of the asset.

".1; EA-P2E .3 Gther methods include the sum of the years di#its method and the sin6in# fund and

annuity methods, -hich include the imputed interest in the computations.

A7 Eample" o$ depre#iation method"

>.$ EA-P2E = > -a#hine hour" method or output method7

he useful life of a motor &ehicle is estimated to 'e 1CC,CCC miles, -ith a nil residual

&alue at the end of this milea#e. he purchase cost of the &ehicle is ?"C,CCC. he

depreciation char#es are as follo-s

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ear ilea#e Depreciation

(?)

1 3%,CCC (3%,CCC

1CC,CCC)

?"C,CCC M 21,CCC2 3C,CCC (3C,CCC 1CC,CCC) ?"C,CCC M 1,CCC

and so on in later years.

>.% EA-P2E 1? > Sum o$ the year di%it" method

*ost of assets ?1C,%CC

esidual &alue ?%CC

Estimated useful life $ years

!um of year di#its $ L 3 L 2 L 1 M 1C

Depreciation, year 1 M $I1C (?1C,%CC ?%CC) $,CCC

Depreciation, year 2 M 3I1C ?1C,CCC 3,CCC

Depreciation, year 3 M 2I1C ?1C,CCC 2,CCC

Depreciation, year $ M 1I1C ?1C,CCC 1,CCC

1C,CCC

>." he depre#iation methodapplied to an asset "hould 'e re&ie+ed at lea"t at ea#h

$inan#ial year9end. f there has 'een a si#nificant chan#e in the expected pattern of

consumption of the future economic 'enefits em'odied in the asset, the method should

'e chan#ed to reflect the chan#ed pattern. he !tandard pro&ides that a chan#e in

depreciation method should 'e accounted for as a chan#e in an accountin# estimate in

accordance -ith the pro&isions of HK! .

.7 Not to depre#iate

>.> frequently as6ed question is -hether there is a need to pro&ide for depreciation if

the fair &alue of the asset concerned is #reater than its cost. his question arises

'ecause depreciation is often misconstrued as a &aluation process.

>. t should 'e noted that depre#iation i" de$ined a" "imply a pro#e"" o$ allo#atin% the

depre#ia'le amount o$ the a""et to the &ariou" a##ountin% period" durin% +hi#h

the a""et i" u"ed to earn re&enue. t is not a process of accountin# for the chan#e in

the &alue of assets.

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>.; f the &alue of an asset is #reater than its cost (or net carryin# amount) and it is

decided that the &alue of the asset 'e ta6en into account, then -hat needs to 'e done is

a separate re&aluation exercise. fter the re&aluation exercise, depreciation -ould still

ha&e to 'e accounted for to allocate the re&alued amount o&er the remainin# life of the

re&alued asset.

>.1C Ho-e&er, it is possi'le that, at a certain point in time, the residual &alue of the

deprecia'le asset may 'e lar#er than its carryin# amount, such that the deprecia'le

amount is ero or ne#ati&e and therefore no depreciation is required.

>.11 he a'o&e ar#ument is ta6en into account in the !tandard. he residual &alue of an

asset may increase to an amount equal to or #reater than the asset7s carryin# amount. f

it does, the asset7s depreciation char#e is ero unless and until its residual &alue

su'sequently decreases to an amount 'elo- the asset7s carryin# amount.

>.12 nother ar#ument commonly used to support not to depreciate an asset is that if an

entity has an effecti&e repair and maintenance policy, the useful life of the asset may

'e extended indefinitely andIor the residual &alue -ill increase. he !tandard

specifically pro&ides that repair and maintenance of an asset do not ne#ate the need to

depreciate it. hus, depreciation should 'e continued, not-ithstandin# an effecti&e

repair and maintenance policy.

+. and and -ildings

A7 Freehold land

.1 n countries other than HK, land is normally freehold land and has indefinite useful

life and, in most cases, it retains its &alue indefinitely/ it is accordin#ly not re#arded as

a deprecia'le asset.

.7 2ea"ehold land and 'uildin%"

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.3 9here land and 'uildin#s in the course of de&elopment or re0de&elopment are held for

re0sale, they should 'e re#arded as in&entories of an enterprise and as such, should 'e

accounted for in accordance -ith HK! 2 4n&entories5.

(b) Held for other purposes

.$ 9here land and 'uildin#s in the course of de&elopment or re0de&elopment are held for

production, rental or administrati&e purposes or -here no decision has yet 'een ta6en

to re0sell the land and 'uildin#s, they should 'e included in the financial statements as

property, pro&ided that the reco#nition criteria for an asset are satisfied.

. Disclosre Reqire!ents

;.1 he financial statements should disclose, in respect of each class of property, plant and

equipment

(i) the measurement 'ases used for determinin# the #ross carryin# amount. 9hen

more than one 'asis has 'een used, the #ross carryin# amount for that 'asis in

each cate#ory should 'e disclosed/

(ii) the depreciation methods used/

(iii) the useful li&es or the depreciation rates used/

(i&) the #ross carryin# amount and the accumulated depreciation at the 'e#innin#

and end of the period/

(&) a reconciliation of the #ross carryin# amount and the accumulated depreciation

at the 'e#innin# and end of the period sho-in#

(a) additions/

(') disposals/

(c) acquisitions throu#h 'usiness com'inations/

(d) increases or decreases resultin# from the re&aluations and from impairment

losses reco#nied or re&ersed directly in equity under HK! 3"/(e) impairment losses reco#niedIre&ersed in the profit and loss account under

HK! 3"/

(f) depreciation char#e/

(#) the net exchan#e differences arisin# on the translation of the financial

statements of a forei#n entity/

(h) the net exchan#e differences arisin# on the translation of the financial

statements of a forei#n entity/

(i) transfers 'et-een different types of assets/

(=) transfers 'et-een different classes of property, plant and equipment/ and

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(6) other mo&ements.

;.2 he financial statements should also disclose

(i) the existence and amounts of restrictions on title, and property, plant and

equipment pled#ed as security for lia'ilities/

(ii) the accountin# policy for costs of restorin# the site of items of property, plant

or equipment/

(iii) the amount of expenditures on account of and the amount of 'orro-in# costs

capitalied on property, plant and equipment in the course of construction/

(i&) the amount of commitments for the acquisition of property, plant and

equipment/ and

(&) the #ains or losses arisin# from the retirement or disposal of property, plant and

equipment, and ho- the amounts are arri&ed at.

;.3 9hen items of property, plant and equipment are stated at re&alued amounts, the

follo-in# should 'e disclosed

(i) the 'asis used to re&alue the assets/

(ii) the effecti&e date of the re&aluation/

(iii) the names and qualifications of persons ma6in# the re&aluation/

(i&) -hether the &aluer -as independent of or connected to the enterprise

concerned/

(&) the nature of any indices used to determine replacement costs/

(&i) the carryin# amount of each class of property, plant and equipment that -ould

ha&e 'een included in the financial statements had the assets 'een carried

under the treatment in para#raph 2/ and

(&ii) the re&aluation reser&e, indicatin# the mo&ement for the period and any

restriction on the distri'ution of the 'alance to shareholders.

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Eamination Style @ue"tion"

@ue"tion 1

he 'road principles of accountin# for property, plant and equipment in&ol&e distin#uishin#

'et-een capital and re&enue expenditure, measurin# the cost of assets, determinin# ho- they

should 'e depreciated and dealin# -ith the pro'lems of su'sequent measurement and

su'sequent expenditure. HK! 1" @roperty, plant and equipment has the intention of

impro&in# consistency in these areas.

(equired4

(a) Explain

(i) Ho- the initial cost of property, plant and equipment should 'e measured.

($ mar6s)

(ii) he circumstances in -hich su'sequent expenditure on those assets should 'e

capitalied. (3 mar6s)

(') Explain HK! 1"Ns requirements re#ardin# the re&aluation of non0current assets and the

accountin# treatment of surpluses and deficits on re&aluation and #ains and losses on

disposal. ( mar6s)

(c) (i) :roadoa6 has recently purchased an item of plant from @lantco, the details of this

are

? ?

:asic list price of plant 2$C,CCC

rade discount applica'le to :raodoa6 12.% on list price

ncillary costs

!hippin# and handlin# costs 2,>%C

Estimated pre0production testin# 12,%CC

aintenance contract for three years 2$,CCC!ite preparation costs

Electrical ca'le installation 1$,CCC

*oncrete reinforcement $,%CC

G-n la'our costs >,%CC

2",CCC

:roadoa6 paid for the plant (excludin# the ancillary costs) -ithin four -ee6s of

order, there'y o'tainin# an early settlement discount of 3.

:roadoa6 had incorrectly specified the po-er loadin# of the ori#inal electrical

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ca'le to 'e installed 'y the contractor. he cost of correctin# this error of ?",CCC

is included in the a'o&e fi#ure of ?1$,CCC.

he plant is expected to last for 1C years. t the end of this period there -ill 'e

compulsory costs of ?1%,CCC to dismantle the plant and ?3,CCC to restore the site

to its ori#inal use condition.

(equired4

*alculate the amount at -hich the plant -ill 'e measured at reco#nition. (#nore

discountin#.) (% mar6s)

(ii) :roadoa6 acquired a 12 year lease on a property on 1 Gcto'er 2CAC at a cost of

?2$C,CCC. he company policy is to re&alue its properties to their mar6et &alues

at the end of each year. ccumulated amortisation is eliminated and the property

is restated to the re&alued amount. nnual amortisation is calculated on the

carryin# &alues at the 'e#innin# of the year. he mar6et &alues of the property

on 3C !eptem'er 2CA1 and 2CA2 -ere ?231,CCC and ?1>%,CCC respecti&ely. he

existin# 'alance on the re&aluation surplus at 1 Gcto'er 2CAC -as ?%C,CCC. his

related to some non0deprecia'le land -hose &alue had not chan#ed si#nificantly

since 1 Gcto'er 2CAC.

(equired4

@repare extracts of the financial statements of :roadoa6 (includin# the mo&ement on the

re&aluation reser&e) for the years to 3C !eptem'er 2CA1 and 2CA2 in respect of the

leasehold property. (% mar6s)

(otal 2% mar6s)

(** 2.%(HKB) 8inancial eportin# Decem'er 2CC1)

@ue"tion 3

Elite

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t 3C !eptem'er 2CC$ no further capital expenditure had 'een incurred on the ship.

n the year ended 3C !eptem'er 2CC$ the ship had experienced a hi#h le&el of en#ine trou'le

-hich had cost the company considera'le lost re&enue and compensation costs. he measured

expired life of the propulsion system at 3C !eptem'er 2CC$ -as 3C,CCC hours. Due to the

unrelia'ility of the en#ines, a decision -as ta6en in early Gcto'er 2CC$ to replace the -hole

of the propulsion system at a cost of ?1$C million. he expected life of the ne- propulsion

system -as %C,CCC hours and in the year ended 3C !eptem'er 2CC% the ship had used its

en#ines for %,CCC hours.

t the same time as the propulsion system replacement, the company too6 the opportunity to

do a limited up#rade to the ca'in and entertainment facilities at a cost of ?"C million and

repaint the ship7s fa'ric at a cost of ?2C million. fter the up#rade of the ca'in and

entertainment area fittin#s it -as estimated that their remainin# life -as fi&e years (from the

date of the up#rade). 8or the purpose of calculatin# depreciation, all the -or6 on the ship can

'e assumed to ha&e 'een completed on 1 Gcto'er 2CC$. ll residual &alues can 'e ta6en as

nil.

(equired4

*alculate the carryin# amount of Elite

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Gn 1 Gcto'er 2CC> Dearin# decided to up#rade the machine 'y addin# ne- components at a

cost of ?2CC,CCC. his up#rade led to a reduction in the production time per unit of the #oods

'ein# manufactured usin# the machine. he up#rade also increased the estimated remainin#

life of the machine at 1 Gcto'er 2CC> to $,%CC machine hours and its estimated residual &alue

-as re&ised to ?$C,CCC.

(equired4

@repare extracts from the income statement and statement of financial position for the a'o&e

machine for each of the three years to 3C !eptem'er 2CC. (1C mar6s)

(** 8> (HKB) 8inancial eportin# Decem'er 2CC O%)

@ue"tion :

8li#htline is an airline -hich treats its aircraft as complex non0current assets. he cost and

other details of one of its aircraft are

o residual &alues are attri'uted to any of the component parts.

t 1 pril 2CC the aircraft lo# sho-ed it had flo-n 1C,CC hours since 1 pril 2CC%. n the

year ended 31 arch 2CC;, the aircraft fle- for 1,2CC hours for the six months to 3C

!eptem'er 2CC and a further 1,CCC hours in the six months to 31 arch 2CC;.

Gn 1 Gcto'er 2CC the aircraft suffered a P'ird stri6e7 accident -hich dama#ed one of the

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en#ines 'eyond repair. his -as replaced 'y a ne- en#ine -ith a life of 3",CCC hours at cost

of ?1CQ million. he other en#ine -as also dama#ed, 'ut -as repaired at a cost of ?3 million/

ho-e&er, its remainin# estimated life -as shortened to 1%,CCC hours. he accident also caused

cosmetic dama#e to the exterior of the aircraft -hich required repaintin# at a cost of ?2

million. s the aircraft -as out of ser&ice for some -ee6s due to the accident, 8li#htline too6

the opportunity to up#rade its ca'in facilities at a cost of ?$Q% million. his did not increase

the estimated remainin# life of the ca'in fittin#s, 'ut the impro&ed facilities ena'led 8li#htline

to su'stantially increase the air fares on this aircraft.

(equired4

*alculate the char#es to the income statement in respect of the aircraft for the year ended 31

arch 2CC; and its carryin# amount in the statement of financial position as at that date.

ote the post accident chan#es are deemed effecti&e from 1 Gcto'er 2CC.

(1C mar6s)

(** 8>(HKB) 8inancial eportin# Fune 2CC; O%)