Understanding Property, Plant and Equipment Accounting in MFRS 116

Four key areas of accounting for property, plant and equipment

Part AThere are essentially four key areas when accounting for property, plant and equipment:(i)initial recognition(ii)depreciation(iii)revaluation(iv)derecognition (disposals).The basic principle of MFR 116, Property, Plant and Equipment (PPE)is that items of property, plant and equipment that qualify for recognition should initially be measured at cost.One of the easiest ways to remember this is that we should capitalise all costs to bring an asset to its present location and condition for its intended use.Once an item of PPE has been recognised and capitalised in the financial statements, a company may incur further costs on that asset in the future. MFRS116requires that subsequent costs should be capitalised if:-it is probable that future economic benefits associated with the extra costs will flow to the entity; and-the cost of the item can be reliably measured.All other subsequent costs should be recognised as an expense in the income statement in the period that they are incurred.Depreciation is defined in MFRS116 as being the systematic allocation of the depreciable amount of an asset over its useful life. In other words, depreciation applies the accruals concept to the capitalisedcost of a non-current asset and matches this cost to the period that it relates to.There are many methods of depreciating a non-current asset with the most common being:Straight line method and reducing balance method.MFR116 requires that these estimates be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful life remaining.MFRS 116 permits the choice of two possible treatments in respect of property, plant and equipment:-The cost model (carry an asset at cost less accumulated depreciation /impairments).-The revaluation model (carry an asset at its fair value at the revaluation date less subsequent accumulated depreciation impairment).

Part AThere are essentially four key areas when accounting for property, plant and equipment:(i)initial recognition(ii)depreciation(iii)revaluation(iv)derecognition (disposals).The basic principle of MFR 116, Property, Plant and Equipment (PPE)is that items of property, plant and equipment that qualify for recognition should initially be measured at cost.One of the easiest ways to remember this is that we should capitalise all costs to bring an asset to its present location and condition for its intended use.Once an item of PPE has been recognised and capitalised in the financial statements, a company may incur further costs on that asset in the future. MFRS116requires that subsequent costs should be capitalised if:-it is probable that future economic benefits associated with the extra costs will flow to the entity; and-the cost of the item can be reliably measured.All other subsequent costs should be recognised as an expense in the income statement in the period that they are incurred.Depreciation is defined in MFRS116 as being the systematic allocation of the depreciable amount of an asset over its useful life. In other words, depreciation applies the accruals concept to the capitalisedcost of a non-current asset and matches this cost to the period that it relates to.There are many methods of depreciating a non-current asset with the most common being:Straight line method and reducing balance method.MFR116 requires that these estimates be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful life remaining.MFRS 116 permits the choice of two possible treatments in respect of property, plant and equipment:-The cost model (carry an asset at cost less accumulated depreciation /impairments).-The revaluation model (carry an asset at its fair value at the revaluation date less subsequent accumulated depreciation impairment).

Measuring assets at cost

4Question 1Within the accountingsystem of a group ofcompanies,the following types of expenses are incurred.Reference numberTypes of expenses1Costs of opening a new facility2Costsof conducting business in a new location or with a new class of customer (including costs of staff training)3Costs of site preparation4Costs of testing whether the asset is functioning properly5Electrical installation costs6Costsof dismantling and removing the item and restoring the site on which it is located7Administration costs8Import dutyof an imported machine9Purchase of a five-year maintenance contract with Plant10Legal feesfor sales and purchase agreement for acquisition of land11Interest on loan on a self constructed property after the asset is ready for use12Architect fees incurred for self constructed building13General overheadsincurred for self constructed building14Commission paid for disposal of property15Cost relating to formal opening of new factory16Direct labour cost for construction of buildingsRequired:Complete the following table by placing each expense in the correct cost classification.Cost ClassificationReference NumberCost of property, plant and equipmentRevenue expenses[8 marks]5Question 2The following terms are mismatched with its definitions. TermsDefinitionsCarrying amountThe higher of an asset’s fair value less costs to sell and its value in use.CostThe cost of an asset, or other amount substituted for cost, less its residual value.Depreciable amountThe amount by which the carrying amount of an asset exceeds its recoverable amount.Entity-specific valueThe amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses.Fair valueThe amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or constructionRecoverable amountThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.Residual valueThe present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.Impairment lossThe estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.Required:Please match each terms to its correct definitions. Question 3Maxim Sdn Bhd bought alorry for business at cost of RM17,000. The lorry isexpected to last for 5 years and then be sold for scrap for RM2,000.The annual depreciation charged to profit and loss account of Maxim Sdn Bhd is as following:YearRM15,95023,86832,51441,63451,0346Required:(a)Explain the depreciation method used by Maxim Sdn Bhd(show relevant workings). (b)Explain the suitability of the depreciation method.Question 4Maxim Sdn Bhdcommenced business as kitchenware manufacturing on 1 January 2013. For the purpose of depreciation, Maxim Sdn Bhddecided the following.(i)Acquisition of a piece of land worth RM2,000,000 would not be depreciated.(ii)Factorybuilding worthRM300,000 would bedepreciated by the straight line method to a nil residual value over 30 years.On 1 January 2018, the board of directors decidedto revalue its assets after consulted property valuers as following:-Land -RM2,500,000Factory building -RM450,000The factory building is estimated still has further 25 years useful life remaining.Required:(a)Calculate the annual charge for depreciation for the first five years of thebuilding's life andthe statement of financial position value of the land and building as at theend of each ofthe first five years.(b)Demonstrate the impact the revaluation will have on the depreciation charge and thestatement of financial position value of the land and buildingQuestion 5Maxim Sdn Bhdbought a machine forRM100,000 and sold the machine for RM40,000 in cash, after having compiled RM65,000 of accumulated depreciation.Required:Prepare the journal entries to record the disposal of machine.[8 marks]7Question 6The Trial Balance of Supercomfort Sdn. Bhd. at30 June 2020 is given as follows:DRCRRMRMShare capital50,000Inventory at 30 June 201938,295Trade receivables26,890Trade payables12,31010% debentures20,000Revaluation reserve16,000Retained earnings3,940Debenture interest1,000Equipment at cost35,000Motor vehicles at cost28,500Bank3,619Cash in hand180Sales 99,500Purchases68,600Returns1,1502,250Carriage inwards240Wages & salaries11,000Rent, assessment and insurance5,170Discounts 1,246640Directors’ remuneration2,500Accumulated depreciation:8-Equipment8,400-Motor vehicles10,350223,390223,390The following information as at 30 June 2020 are as follows:i.Inventory at 30 June 2020 is valued at RM49,371.ii.The share capital consisted of 25,000 ordinary shares and 25,000 of 10% preference shares. The dividend on the preference shares was yet to be paid and a dividend of 20% on the ordinary shares was proposed.iii.Rent of RM1, 000 and directors’ remuneration of RM2,500 are accrued. Insurance prepaid is RM300.iv.Depreciation on cost: Equipment 10%; Motor vehicles 20%.v.Transfer to General Reserve RM1, 000.vi.Corporate tax is RM2, 000.Required: Prepare the Statement of Comprehensive Income, and Statement of Financial Position as at 30thJune 2020 for internal use.Question 7Angry Chair Furniture Sdn Bhd commenced their business on 2 January 2020.The following is the data for the next four months:JanuaryFebruaryMarchAprilSales (units)5304575Production (units)404060609Additional information: i.Standard