In order for reporting users to receive information about an enterprise's investments in fixed assets and changes in such investments, fixed assets are recorded in accordance with IFRS 16 "Fixed assets". This standard is international and is used in the preparation of financial documentation mainly for foreign stakeholders.
Many former Soviet republics now apply IFRS 16 Property, Plant and Equipment. In the Republic of Kazakhstan, for example, accountants of all large enterprises know the procedure for keeping records both in accordance with international and national standards. If we talk about the Russian Federation, then domestic accountants use PBU when accounting for OS. Their individual provisions differ significantly from IAS 16 Property, Plant and Equipment. Kazakhstan also applies IFRS Section 17 for SMEs.
Features of terminology
According to IFRS 16, fixed assets are assets:
- Designed for use inthe production process, the supply of products, the lease of property, the provision of services, for administrative purposes.
- Which will apply beyond the 1st reporting period.
As you know, depreciation amounts are accrued on fixed assets in the course of their use. Depreciation of property, plant and equipment under IFRS 16 is the distribution of the cost of an object over the entire period of effective operation. Accrual is carried out systematically.
The term of effective use should be considered:
- The length of time an asset is expected to be available for use.
- The number of units of a commodity or similar units expected to be received when the asset is applied.
Next, consider some of the provisions of IFRS 16 Property, Plant and Equipment for 2016
Features of recognition
The conditions for recognition of the cost of property, plant and equipment under IFRS 16 are summarized as follows:
- There is a possibility of future asset-related economic benefits.
- The cost of an object can be measured reliably.
Spare parts, auxiliary equipment are usually reflected in stocks. They are charged to loss/profit as they are used. However, large spare parts, standby equipment are recognized by OS if the enterprise plans to use them longer than the reporting period. In a similar way, objects are recognized, the use of which is conditioned by the operation of fixed assets.
IFRS 16 is notestablishes the unit of measure to be used for recognition. Accordingly, professional judgment is required when using established criteria in a particular situation. In some cases, it is advisable to combine minor objects into one group. The recognition criteria in such a situation would be used relative to their aggregate cost.
Initial cost of property, plant and equipment under IFRS 16
An enterprise needs to value all fixed asset costs against an international standard as they arise. They include the costs caused by the acquisition/construction of fixed assets, as well as the costs subsequently incurred during the completion, maintenance and partial replacement of the object.
The cost of an object is the amount of cash and cash equivalents paid, the fair value of other consideration given to acquire an asset. The indicator is taken into account at the time of acquisition or during the construction period. Where possible, the cost is the amount at which the asset was recognized at first recognition based on the requirements of other IFRSs.
Asset valuation after recognition
According to IAS 16, property, plant and equipment is accounted for using the cost or revaluation method.
The first model assumes accounting at cost less depreciation and impairment losses.
When using the second method, the revaluation should be carried out with sufficientregularity. An entity must not allow material differences between the carrying amount and the fair value at the end of the period. The latter, as a rule, corresponds to the market value. It is determined through economic evaluation.
If market data on fair value are not available due to the specific nature of property, plant and equipment, IAS 16 provides for the option of using the yield method or the replacement rate model, taking into account accumulated depreciation.
Repricing frequency
The frequency of execution depends on changes in the fair value of property, plant and equipment. IFRS 16 provides for the need for additional revaluation if it differs significantly from the carrying price.
The fair value of individual items can vary arbitrarily and materially. They require an annual reassessment. For other property, plant and equipment, IFRS 16 allows a frequency of 1 time in 3-5 years.
Accounting for depreciation on the revaluation date
IFRS 16 Property, Plant and Equipment provides for the following accounting methods:
- Recalculation of the amounts in proportion to the change in the size of the book value in the gross valuation so that the book price becomes equal to the revalued value. This method is often used when revaluing an object to a residual replacement price using indexing.
- Subtraction from the balance sheet value of the asset; recalculation of the net value to its revalued value. This method is used when accounting for depreciation of buildings.
The adjustment amount arising from the recalculation/write-off of depreciation amounts is part of the total decrease/increase in the carrying amount.
When performing a revaluation of an individual fixed asset under IFRS 16, the revaluation must be carried out in relation to other objects included in the same asset class as this asset. This is necessary to avoid selectivity when reporting amounts in reporting.
Asset classes
Under IAS 16, fixed assets are divided into groups that are similar in use and nature. Examples of individual classes are:
- Plots of land.
- Equipment, machines.
- Lots and buildings.
- Aircraft.
- Office equipment.
- Motor transport.
- Furniture, built-in elements of engineering systems.
Depreciation specifics
In accordance with the standard, the depreciation of each component of an asset, the cost of which is significant in comparison with the total cost of the object, is calculated separately.
Enterprise needs to allocate the amount recorded in the fixed assets initially among significant elements. For example, it is useful to calculate the depreciation of the fuselage and engines of an aircraft, whether it is owned or subject to a finance lease.
Useful lives and depreciation methods for significant components of the same asset may overlap. These elements should be combined into groups when calculatingdepreciation amounts.
Important moment
If an organization calculates depreciation separately for a significant element of an object, then the rest of the fixed assets is also depreciated separately. It includes those components of an asset that cannot be considered significant on their own.
If plans change to use these minor components, approximation methods can be used to calculate depreciation. They provide a reliable reflection of the useful life or consumption (use) pattern of an asset.
Depreciation recognition
The amount of deductions for each period is reflected in loss / profit, except when it is part of the balance sheet of another asset.
In some cases, the future economic benefits that are contained in the asset, the company transfers during the production process to other facilities. In such situations, the depreciation allowance is considered part of the cost of another item and is charged to its book value.
Amount of wear
The depreciable amount of an asset should be paid off evenly over its effective life.
Residual value and period of use must be reviewed at least once a year (at the end of the year). If expectations differ from past accounting estimates, the changes are accounted for in accordance with the rules of IFRS 8.
Depreciation on fixed assets should be chargedeven when the fair value exceeds the carrying amount, provided that the residual value is not higher than the carrying amount. During the period of routine maintenance or repair, the calculation is not suspended.
The depreciable amount is determined after deducting the residual value, which is usually negligible and therefore does not have much effect on the calculation.
Residual value can increase up to an amount equal to or greater than the book price. In such cases, the depreciation charge becomes zero. However, this rule does not apply if the residual value subsequently falls below the book value.
Influencing factors
The upcoming economic benefits that are contained in the OS, the company consumes through the use of the object. Meanwhile, the influence of a number of factors (commercial/moral obsolescence, physical deterioration) in the event of downtime often contributes to a decrease in the benefits that a company could receive.
Consequently, when determining the useful life of the OS, you need to take into account:
- The nature of the object, the intended scope of its use. Operation is evaluated based on rated power or physical performance.
- Estimated production, physical wear and tear, depending on production factors. The latter should include the number of shifts using the operating system, the maintenance and repair plan, storage conditions during the downtime.
- Commercial/obsolescence. It arises as a result of an improvement or change in the production process, or in connection withchange in demand for services/products created by using the facility.
- Legal and other restrictions on OS operation, expiration of lease and other agreements.
Derecognition
It occurs when an asset is disposed of or when no benefits are expected from the decommissioning or operation of an asset.
Income or expense arising from the write-down of an asset is charged to loss/gain on disposal unless other IFRSs require sale and leaseback. Profit should not be regarded as revenue.
If a company, in the normal course of business, regularly sells leasehold assets to outside firms, it must inventory those items at book value when it ceases to use them for lease and intends to sell them. The proceeds from such disposals must be recognized as revenue in accordance with IAS 18. Standard 5 does not apply if items held for sale are transferred to inventories.
Disposal
It can happen in many ways. The most common sale, financial lease, donation. The rules in IAS 18 are used to determine the date of disposal.
The cost/income associated with the retirement of an asset is defined as the difference between the net gain on disposal (if received by the firm) and the carrying amount.
Refunds to be received are initially recognized at fair value. If adeferred payment is provided, recognition is carried out at the equivalent of the price, subject to immediate payment in cash. The difference between the replacement value (nominal) and the equivalent price in such situations is considered interest income under IFRS 18 and reflects the effective yield on receivables.
