ACCOUNTING FOR LONG TERM ASSETS

PROPERTY PLANT AND EQUIPMENT (IAS 16)

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The
principal issues are the timing of recognition of assets, the determination of their carrying amounts, and
the depreciation charges to be recognised in relation to them .

Property, plant and equipment should be recognised when (a) it is probable that future benefits will flow
from it, and (b) its cost can be measured reliably.

Property, plant and equipment is initially recognised at cost. Subsequent to initial recognition, property,
plant and equipment is carried either at:
 Cost, less accumulated depreciation and any accumulated impairment losses, or
 Revalued amount, less subsequent accumulated depreciation and any accumulated impairment
losses. The revalued amount is fair value at the date of revaluation. The choice of measurement is
applied consistency to an entire class of property, plant and equipment. Any revaluation increase
is credited directly to the revaluation surplus in equity, unless it reverses a revaluation decrease
previously recognised in profit or loss. Any revaluation decrease is recognised in profit or loss.
However, the decrease is debited directly to the revaluation surplus in equity to the extent of the
credit balance in revaluation surplus in respect of that asset.
Depreciation is applied on a component basis. That is to say, each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item is depreciated separately.
The depreciable amount of an asset is allocated on a systematic basis over the useful life of the asset.
Impairment is recognised in accordance with IAS 36 Impairment of Assets.

 Depreciation:
o Long-lived assets other than land are depreciated on a systematic basis over their useful lives.
o Depreciation base is cost less estimated residual value.
o The depreciation method should reflect the pattern in which the asset's economic benefits are
consumed by the enterprise.
o If assets are revalued, depreciation is based on the revalued amount.
o The useful life should be reviewed periodically and any change should be reflected in the
current period and prospectively.
o Significant costs to be incurred at the end of an asset's useful life should either be reflected by
reducing the estimated residual value or by charging the amount as an expense over the life of
the asset.

 Revaluations (allowed alternative):

o Revaluations should be made with sufficient regularity such that the carrying amount
does not differ materially from that which would be determined using fair value at the
balance sheet date.
o If an item of PP&E has been revalued, the entire class to which the asset belongs must be
revalued (for example, all buildings, all land, all equipment).
o Revaluations should be credited to equity (revaluation surplus) unless reversing a
previous charge to income.
o Decreases in valuation should be charged to income unless reversing a previous credit to
equity (revaluation surplus).

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 o If the revalued asset is sold or otherwise disposed of, any remaining revaluation surplus
either remains as a separate component of equity or is transferred directly to retained
earnings (not through the income statement).
o If an asset's recoverable amount falls below its carrying amount, the decline should be
recognised and charged to income (unless it reverses a previous credit to equity).

The gain or loss on derecognition of an item of property, plant and equipment is the difference between
the net disposal proceeds, if any, and the carrying amount of the item. It is included in profit or loss.

QUESTION
Denticare Limited makes its accounts on 30 June every year.
On 1 July 2001, the company's balance sheet included the following figures for non-current assets:

Cost Accumulated
Depreciation
Sh. Sh.
‘000’ ‘000’
Land 40,000 Nil
Buildings 22,000 8,000
Plant and machinery 16,000 6,000
Motor vehicles 6,000 2,000

The company's policy is to charge depreciation at the following rates:

Rate
Land Nil
Buildings 2% on cost
Plant and machinery 15% on cost
Motor vehicles 20% on cost

A proportionate charge is made in the year of purchase, sale or revaluation of an asset.

During the year ended 30 June 2002, the following transactions took place:
1. On 1 January 2002 the company decided to adopt a policy of revaluing its buildings. A
professional valuer engaged for this purpose revalued the buildings at Sh.34 million.
2. On 1 Ja nuary a plant that had cost Sh.3 million was sold for Sh.500, 000. Accumulated
depreciation on this plant on 30 June2001 amounted to Sh.2.3 million. A new plant was then
purchased at a cost of Sh.4 million.
3. On 1 April 2002 a new motor vehicle was purchased for Sh.300, 000 Part of the purchase
price was settled by exchanging another motor vehicle at an agreed value of sh.120, 000 The
balance of Sh.180,000 was paid in cash. The vehicle which was given in part exchange had
cost Sh.200, 000 and had a net book value of Sh.100, 000 as at 30 June 2001

Required:
(a) The following ledge accounts to record the above transactions:
(i) Buildings account.
(ii) Provision for depreciation: Buildings.
(iii) Plant and machinery account.
(iv) Provision for depreciation: Plant and Machinery.
(v) Motor vehicles account.

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 (vi) Provision for depreciation: Motor vehicles. (9 marks)
(b) Property, plant and equipment movement schedule for the year ended 30 June 2002.
(6 marks)
(Total: 15 marks)

SOLUTION
Buildings account
Shs’000 Shs’000
Cost 22,000
Revaluation 12,000 Bal c/d 34,000
34,000 34,000

Provision for depreciation on Buildings account

Shs’000 Shs’000
Bal b/d 8,000
Bal c/d 8,560 P & L _560
8,560 8,560

Plant & Machinery account

Shs’000 Shs’000
Cost 16,000 Disposal 3,000
Bank _4,000 Bal c/d 17,000
20,000 20,000

Provision for depreciation on Plant & Machinery account

Shs’000 Shs’000
Disposal 925 Bal b/d 6,000
Bal c/d 7,550 P & L 2,475
8,475 8,475

Motor Vehicle account

Shs’000 Shs’000
Cost 6,000 Disposal 200
Motor vehicle exchange 120 Bal c/d 6,100
Cash __180 ____
6,300 6,300

Provision for depreciation on Motor vehicle account

Shs’000 Shs’000
Disposal 130 Bal b/d 2,000
Bal c/d 3,075 P & L 1,205
3,205 3,205

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QUESTION TWO
A company depreciates its plant at the rate of 20 per cent per annum, straight line method, for
each month of ownership. From the following details draw up the plant account and the
provision for depreciation account for each of the years 1999, 2000, 2001 and 2002.

1999 Bought plant costing £900 on 1 January.

Bought plant costing £600 on 1 October.
2001 Bought plant costing £550 on 1 July.
2002 Sold plant which had been bought for £900 on 1 January 1999 for the sum of
£275 on 30 September 2002.

You are also required to draw up the plant disposal account and the extracts from the balance
sheet as at the end of each year.

Example
Plant a/c
1999 £ 1999 £
1/1 Cashbook 900
1/10 Cashbook 600 31/12 Bal c/d 1,500
1,500 1,500

2000 £ 2000 £
1/1 Bal b/d 1,500 31/12 Bal c/d 1,500

2001 £ 2001 £
1/1 Bal b/d 1,500
1/7 Cashbook 550 31/12 Bal c/d 2,050
2,050 2,050

2002 2002
1/1 Bal b/d 2,050 30/9 Disposal 900
31/12 Bal c/d 1,150
2,050 2,050

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 Plant Provision for Depreciation a/c

1999 £ 1999 £
31/12 Bal c/d 210 31/12 P&L 210

2000 2000
1/1 Bal b/d 210
31/12 Bal c/d 510 P&L 300
510 510

2001 2001
1/1 Bal b/d 510
31/12 Bal c/d 865 P&L 355
865 865

2002 2002
31/12 Disposals 675 1/1 Bal b/d 865
Bal c/d 555 P&L 365
1,230 1,230

Calculation for Depreciation

Date Cost Months Depreciation charge £
1999
1/1 900 12 20/100 x 900 x 12/12 = 180
1/10 600 3 20/100 x 600 x 3/12 = 30
210

2000
1/1 1,500 12 20/100 x 1,500 x 12/12 =
300

2001
1/1 1,500 12 20/100 x 1,500 x 12/12 =
300
1/2 550 6 20/100 x 550 x 6/12 = 55
355

2002
30/9 900 9 20/100 x 900 x 9/12 = 135
31/12 550 12 20/100 x 550 x 12/12 = 110
31/12 600 12 20/100 x 600 x 12/12 = 120
365

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 Plant Disposal a/c
2002 £ 2002 £
Plant a/c 900 30/9 Provision for depreciation 675
P&L 50 30/9 Cashbook 275
950 950

Balance Sheet (Extract)

Total
Non Current Assets Cost Depreciation NBV
1999 Plant 1,500 (210) 1,290

2000 Plant 1,500 (510) 990

2001 Plant 2,050 (865) 1,695

2002 Plant 1,150 (555) 595

Plant Account
Sh. Sh.
Balance brought forward 4,100,000.00
Transfer to Lorries 1,050,000.00
Lorry (cost of Account
Sh.1,050,000 less trade in
of old lorry Sh.350,000 700,000.00 Balance c/d 3,750,000.00
4,800,000.00 _________
4,800,000.00

Provision for Depreciation - Plant

Sh. Sh.
Overprovision for prior 339,500.00 Balance b/f 3,050,000.00
periods 2,817,500.00
P & L charge for year 107,000.00
Balance c/d 3,157,000.00 3,157,000.00

Lorries Account
Sh. Sh.
Transfer from plant 1,050,000.00
Balance c/d 1,050,000.00
1,050,000.00 1,050,000.00

Provision for Depreciation - Lorries

Sh. Sh.
Transfer from 200,000.00
P & L charge for 200,000.00
plant 200,000.00
year 200,000.00

b) Uzee Ltd

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 Balance Sheet as on 31 December 2001
Sh. Sh.
Non Current Assets: Plant 3,750,000.00
(2,817,500.00) 932,500.00
Lorry 1,050,000.00
(200,000.00) 850,000.00

c) Changes in the charges for depreciation has affected the profit as follows;
Plant reduced by sh. 303,000 from sh.410,000 to sh.107,000
Lorry increased by sh. 130,000 from sh. 70,000 to sh. 200,000
Net Increase sh 303,000 - sh. 130,000 = sh. 173,000.