PRACTICAL PROBLEMS ENCOUNTERED IN THE ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT (PPE)
During 2007, in presenting the SAICA workshops on PPE, it became apparent that although IAS 16(AC 123) – Property, Plant and Equipment, was effective for annual periods beginning on or after 1 January 2005, there were still difficulties being encountered in implementing the Standard. These primarily related to:
- capitalising an item;
- derecognising a replaced part;
- splitting an asset into components; and
- calculating residual values.
In this article, I outline the common practice in South Africa, what IAS 16(AC 123) requires and the implication for preparers.
|Item||Common practice||IAS 16(AC 123) requirements||Implications|
|Capitalising an item||“The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:|
|Derecognising a replaced part||Companies do not remove parts from the fixed asset register that have been replaced (derecognise them), unless the part was recognised as a separate component.||“If, under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part of the item, then it derecognises the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately.”|
|Splitting an asset into components||“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 shall be depreciated separately.An entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part.”|
|Calculating residual values||“Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.|
The residual value of an asset is the 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.”
Many people are of the opinion that the biggest area of change in IAS 16(AC123) is the fact that an asset should be split into components. They relax once they believe they have no assets that should be split into components. However, it is evident from the above, that IAS 16(AC123) has some areas that are more complicated than many initially thought.
The majority of these requirements are also in the South African Statement of GAAP for SMEs that was issued during September 2007 by SAICA. The only difference (other than certain disclosures) is that subsequent costs should only be capitalised if they provide incremental benefits, which is not a concept that is currently in IAS 16(AC 123). Therefore, all companies should carefully assess whether what they have been doing in practice complies with the relevant Standards.
Glynnis Carthy CA(SA) is an independent financial reporting consultant on IFRS/SA GAAP and SME GAAP issues.