Detailed Analysis of Accounting for Property, Plant & Equipment

This report provides a comprehensive overview of accounting for Property, Plant, and Equipment (PPE), adhering to the guidelines of AASB 116. It outlines the conditions for asset recognition, emphasizing probable future economic benefits and reliable cost measurement. The report delves into elements of cost, including purchase price, direct costs, and site restoration, while excluding certain costs like initial operating losses and internal profits. It discusses measurement methods, such as the cost model and revaluation model, and addresses depreciation, including methods, rates, and disclosure requirements. The report also examines revaluation frequency, recognition, and the use of revaluation surplus. Furthermore, it incorporates examples from BHP Billiton's annual reports to illustrate practical applications and concludes with a list of relevant references.

Accounting for
Property, Plant &
Equipment

 The following conditions are to be satisfied
for recognition of any cost spent on PPE as
asset (AASB 116, para.7)
◦ Probable future economic benefits arising from
the PPE
◦ Reliable measurement of the cost
 Includes assets which do not directly
contribute in any future economic benefits
to the controlling entity (AASB 116, para.11)
Recognition

 Carrying amount of consumable and other
PPE required for continuous servicing would
not be recognised under PPE but rather as
expenses under “Repair & Maintenance”
(AASB 116, para.12)
 For frequently replaced or inspected parts,
derecognition of replaced parts and
previous inspections must be done (AASB
116, para.13,14)
Recognition (Contd..)

 A PPE recognised as asset is to be measured
at cost (AASB 116, para.15)
 For not-for-profit entities, asset may be
acquired for free and hence the fair value is
to be considered (AASB 116, para.15.1)
 Elements of Cost (AASB 116, para.16)
◦ Purchase Price
◦ Direct costs associated with transporting and
installing the asset
◦ Site restoration (including previous item removal)
Measurement (Acquired
Assets)

 Deployment costs incurred after the equipment
is in place initially (AASB 116, para.20)
◦ Relocation Costs
◦ Initial Operating Losses
◦ Incurred costs due to machine not being deployed
despite being in deployable condition
 Construction or Development cost related to
the asset which are incurred despite not being
considered necessary for intended use (AASB
116, para.21)
Costs that are not included

 Same principles apply as to acquired assets
 Internal profits are eliminated
 Any cost on wasted inputs such as raw
material, labour would not be considered in
the asset cost
 Borrowing costs in accordance with AASB
123 is included in the asset cost
Measurement (Self-Constructed
Asset)

 Following two choices available to reporting entity
(AASB 116, para.29)
◦ Cost Model – Cost Minus Accumulated Depreciation and
accumulated Impairment losses(if any) (AASB 116, para.30)
◦ Revaluation Model – Fair Value Minus Accumulated
Depreciation and accumulated Impairment losses(if any) (AASB
116, para.31)
 Policy cannot be selectively applied and cover entire
class of PPE
Measurement (After Initial
Recognition)

 Frequency: Revaluation to be done
whenever carrying value and fair value
significantly differ. Minimum is once in 3-5
years (para.34)
 Revaluation has to be carried out in a class
of PPE simultaneously (para. 36)
 Recognition of revaluation
◦ Increase/Decrease in revaluation amount
(para.39)
 Balance sheet – Revaluation Surplus (Equity)
 Income Statement – Comprehensive income
Revaluation Method
(Details)

 Depreciation to be charged separately to all
components of PPE having significant cost (para.43)
 Depreciation charge to be recognised in P&L
(para,48)
 Depreciation method to be decided by the reporting
entity considering the pattern of economic benefits
arising from asset in future (para.60)
 Method to be reviewed annually and change
permissible only if change in pattern (para.61)
Depreciation

 Measurement Bases (Determination of
Gross Amount)
 Depreciation Method
 Depreciation rates deployed
 Period beginning and ending carrying
amount & depreciation
 Reconciliation of carrying amount
 Restrictions on Title & Amount
 Construction related expense considered
part of carrying cost
Disclosure

 Contractual commitments for acquisition of
PPE
 Disclosures regarding Revaluation
◦ Effective Date
◦ Involvement of an independent valuer
◦ Carrying amount recognised under cost method
◦ Revaluation Surplus
Disclosure (Contd..)

BHP Billiton (Annual Report
FY17)

BHP Billiton (Exerpts)

BHP Billiton (Excerpts
contd..)

 AASB (2014), AASB 116- Property, Plant And Equipment, [online]
Available at http://
www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun
14_07-14.pdf
[Accessed March 26, 2018]
 AASB (2016), AASB 116, [online] Available at http://
www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun1
0_07-09.pdf
[Accessed March 26, 2018]
 Australian Government (2004), Property, Plant & Equipment, [online]
Available at https://www.legislation.gov.au/Details/F2005B00678
[Accessed March 26, 2018]
 BHP (2017) Annual Report 2017, [online] Available at
https://www.bhp.com/-/
media/documents/investors/annual-reports/2017/bhpannualreport201
7.pdf
[Accessed March 26, 2018]
 Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney:
McGraw-Hill
References