Introductory Accounting: AASB 116 Application to Tangible Assets

This report provides an overview of tangible assets and their measurement on the balance sheet according to AASB 116, focusing on initial and subsequent costs, depreciation, and useful life estimation. It emphasizes the importance of adhering to accounting standards for accurate financial reporting, using Woolworths Group as an example. The report covers the recognition, measurement, and disclosure requirements for tangible assets, including property, plant, and equipment, and details the costs that should and should not be included in asset valuation. Furthermore, it addresses the treatment of asset replacements, spare parts, and the determination of functional lives, highlighting the significance of management's judgment in these estimations. Desklib offers additional resources, including past papers and solved assignments, to support students in their studies.

Introductory Accounting

Contents
Executive Summary.........................................................................................................................3
Introduction......................................................................................................................................4
Question 1........................................................................................................................................5
Question 2........................................................................................................................................8
Question 3......................................................................................................................................11
References......................................................................................................................................14
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Executive Summary
The aim of the assignment is to make understand the measurement of depreciable assets on
the balance sheet which is very important from company’s point of view. Not only this it
includes the measurement of initial cost and the subsequent cost, which will enable a person
to determine the outlay that could be incorporated in the cost of a tangible asset .i.e. property,
plant and equipment and also inform the depreciation that needs to be deferred every year
based on the calculation of the useful life of said piece of tangible asset. It suggests the
disclosure of initial and substantial cost, estimation of functional life of the asset based on the
market standards, and the reduction to be charged for an item tangible asset. It covers the
aspect of AASB 116 Property, plant and Equipment.
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Introduction
Tangible assets are any physical asset owned by the company that are used to carry out the
business and has finite monetary value which depreciates over the period of time. For
Example, land, furniture, building, machinery or equipment, etc. This assignment aims to
make understand the measurement of depreciable assets on the balance sheet. It involves
measurement of various assets in decisive financial amount at which assets are recognized
and conceded in balance sheet. It reflects the basis for measuring the tangible assets on the
balance sheet, initial recognition and subsequent by the company and the disclosure
requirements for usefulness of the decision makers. For this purpose WOODWORTH
GROUP has been selected to showcase the examples of the same.
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Question 1
Tangible assets are any physical asset owned by the company that are used to carry out the
business and has finite monetary value which depreciates over the period of time. For
Example, land, furniture, building, machinery or equipment, etc. The term used to denote the
tangible assets today is Property, plant & equipment that are long lived tangible assets .i.e.
used for more than one year. Tangible assets in the books of accounts of the organization
hold important side in view of the fact that it reflects the resources that a company owns and
has deployed to produce its products. Therefore, while recording tangible assets, certain rules
and standards need to be follow (Mohamad, Et. AL, 2019).
A Property, Plant & Equipment item that qualifies for the condition to be an asset is
considered for cost apart from Not-for-Profit organizations that is require to consider the cost
of tangible assets item at the fair price as per AASB 13 in which measurement of the asset is
below fair price which facilitate organization to supplement its goals. However, for the
rational of AASB 116 tangible assets, Not-for-Profit organization’s initial recognition and
measurement at fair value does not constitute a revaluation (Naim, 2017).
The cost of tangible asset item would only be accepted if,
 Potential financial payback resultant from the item produce better results to the
organization’s current production
 The cost of the item is quantifiable and reliable
The items that are identified as replacements or duplicate parts, .i.e. spare parts are
recognized as inventory as per AASB 116. The evaluation of tangible assets is done
considering that all its Property, Plant & Equipment costs occurred at the time they arouse.
These costs have inclusion like initial cost incurred to obtain or build tangible assets item and
subsequent cost incurred while adding, replacing or servicing any part of it. It may include
cost relating to leases of assets as well.
The cost of Property, Plant & Equipment item have following inclusion:
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 It’s bought up price inclusive of taxes imposed while importation and various other
taxes and exclusive of discounts and rebates.
 Cost incurred to bring the assets to the place where it needs to be used or any cost that
bring the asset in operating condition.
 The approximate preliminary costs of demolishing piece and upgrade the site on
which it is positioned, the responsibility of the enterprise incurs if item is achieved or
if the item is used during the period for purpose apart from production of stock during
that period.
For Example,
 Costs relating to staff payback directly originating from structuring or possession of
tangible asset item
 Costs of site preparations
 Preliminary deliverance and treatment cost
 Fitting and congregation costs
 Testing Cost if asset is working appropriately
 Specialized fees
Costs that are not recognized while measuring the cost of an item of:
 Costs of new facility inauguration
 Introduction cost of a new manufactured goods or service .i.e. commercial or
promotional costs
 Operational cost of new business in a new locality including the cost of personnel
preparation
 Administrative and overheads
The cost incurs to redeploy an item would not form part of the carrying amount of that
particular item. The following are the costs that do not form the part of the carrying amount
of tangible asset:
 Costs incurred at the time when the asset was yet to be brought up into use as per the
management operational manner.
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 Opening operating losses
 Costs of carrying fraction or the entire operation of the entity.
The cost of own build up asset is considered in the same way as for purchased asset. If any
asset or a part of asset is sold as stock in business, the cost of asset remains equivalent to the
cost of building up the asset (AASB 102). No in-house incomes are added to arrive at the
cost, and in the same way no irregular or casualty are included.
The cost of tangible assets item is cash correspondent at the realization date. If the
disbursement is postponed outside the standard credit limit, then the differentiation is
considered as interest of credit period except if this interest is capitalized as per AASB 123.
One or more tangible assets items may be picked up in trade of non-monetary asset. The cost
of such tangible asset item is considered at fair value except in case there is an absence of
profit-making essence or the fair price of the asset is not receive nor it can be considered
reliably. If such brought up item does not consider the value at fair price then its cost is
considered at the carrying sum of the tangible asset given up. The fair price of asset is
unfailingly considered if the unevenness of fair price measurements is not important for the
asset or the anticipation of estimation can be accessed while considering fair price (Standard,
2015).
In Woolworths Group, tangible asset are considered at cost that is net of assembled
reduction/ amortization and assembled impairment losses. The cost of own builds up have
the inclusions of material, direct labor and a fraction of overheads. The cost of assets that are
being building up or those constructed for potential use shall consist of borrowings cost
(interest), and the cost incurring till the asset is complete.
An evaluation of carrying sum of the Woolworth’s freehold assets .i.e. freehold ground,
storehouse, retail, etc. is performed on 24th June 2018. The amalgamation of exterior markets
valuations and interior assessments were the basis for the evaluation. External valuations are
obtained every three years (Woolworth, 2018).
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Question 2
According to AASB 116, the cost of Property, Plant & Equipment item shall be accepted
only if,
 The potential trade and industry payback resultant of the item will produce better
results to the organization’s current production
 The cost of the item is quantifiable and reliable
The items that are identified as replacements or duplicate parts, .i.e. auxiliary part are
realized as stock according to AASB 116. The evaluation of entity’s tangible assets under
this realization standard is that entire assets cost should be written at the time they incurred.
These costs have inclusion like initial cost incurred to obtain or build Property, Plant &
Equipment item and subsequent cost incurred while adding, replacing or servicing any part
of it. It may include cost relating to leases of assets as well. It may include cost relating to
leases of assets as well (Otegbulu, 2019).
Tangible Asset item possibly is acquired for security or ecological reason. Such items of
tangible asset meet the criteria for the realization as assets for the reason that they facilitate
an organization to obtain potential financial reimbursement from associated assets in surplus
of what could be if those items were not been possessed. However, the resultant carrying
sum of such tangible asset and related assets is reassess for impairment as per AASB 136
Impairment of Assets.
Under recognition method, the organization does not realize the carrying amount of tangible
assets item, the outlay of the day – to – day service of the tangible assets item. In fact these
outlays are realized in income or expense as incurred. Costs of day – to – day service are first
and foremost the cost of manual labor and consumables and this might be inclusive of the
cost of few parts. The rationale of these expenditure is characterized as “repair &
maintenance” of the tangible assets item.
Some parts of tangible assets items necessitate substitute at habitual intervals. Under
recognition principle, the cost of carrying amount equals cost of substitute fraction if the
realization benchmark is met. A condition that continues to operate a tangible assets item
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might perform at usual key scrutiny for blunder despite of the fact whether that part of item
is changed. When each key scrutiny is done, its cost is realized in the carrying sum of the
tangible assets item as a substitute if the realization condition is fulfilled. Any previous
carrying amount will be derecognized (Gonçalves, Et, AL, 2017).
In Woolworths Group, tangible assets are considered at cost net of assembled reduction/
amortization and assembled impairment losses. An evaluation of carrying sum of the
Woolworths’s freehold assets as at 24th June 2018 was done. The appraisal basis was an
amalgamation of external markets assessment and internal assessments. External assessment
is obtained every three years.
Property, Plant & Equipment is reduced on a constant basis over their anticipated practical
lives. Leasehold advancements are amortized during the residual period of the entity leases
or the predictable functional life of the developing Woolworths Group. Practical lives of
tangible assets are appraised each phase. If parts of tangible assets item have different useful
lives, then it has separate accounting. The probable functional lives of Woolworths’s assets
are;
Building 25 - 40 years
Plant & Equipment 2.5 - 10 years
Leasehold advancement is up to highest of 25 years (retail properties) or 40 years (hotels)
The gross incomes from the deal of property, plant & equipment are recognized at the day
that an unqualified agreement deal of sale is swapped with the procurer. The disposable
profit / loss are realized in consolidate statement of profit & loss.
Estimation of outstanding functional lives need noteworthy administration conclusion and is
inspected at least yearly. If the constructive lives are altered, the net written down value of
the property, plant & equipment is reduced or amortized from the day of modification as per
the revise functional lives. Depreciation realized in previous period is unchanged
(Woolworth, 2018)
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Question 3
According to AASB 116, the financial reports of an entity shall reveal, for each tangible
asset item, the following:
 The basis use for define the gross carrying sum
 Depreciation method applied
 The functional life of the asset or the reduction rates applied
 Gross carrying sum and assembled reduction at the commencement and at the
conclusion of the year.
 Squaring off of the carrying sum at the commencement and conclusion of the year
showing detailed classification or disposal of asset, impairment adjustments, and
depreciation charged, exchange differences incurred while converting functional
currency into presentation currency.
The financial reports shall also reveal:
 The continuation and amount of limitations on identity and tangible asset item pledge
as protection for liability.
 The total of expenditure realized in the carrying sum of tangible asset in the route of
its production
 The total of contractual engagement for procurement of tangible asset
 If the disclosure is not done independently in the statement of income the sum of
reimbursement from external party for the items of tangible asset that were impair, or
given up in profit or loss
Assortment of reduction method and judgment of functional life of tangible asset are the
matters of professional decision. Hence, disclosures of method adoption and useful life
estimation or depreciation rate should be provided in the financial statements with the
knowledge that allow the users of financial statement, analyze the programs preferred by the
organization and enable comparison to be made with other organization (Hossain, 2019).
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For same reason it is essential to reveal:
 Reduction, if realized in profit and loss or as a element of charge to other assets,
during a period
 Assembled reduction at the conclusion of the period
If the items of tangible asset are changed, the following additional disclosures would be
required:
 Successful day of revaluation
 If the person valuing the assets was independent
 For every revalued set of tangible asset, the carrying sum is realized whether the
assets are approved in cost model.
 The re-assessment gain representing the modification for the phase and any
limitations on the allocation of the balance to shareholders
The disclosure of the relevant accounting policy, estimate and judgment of the organization
is practical to the consumer of financial reports since it helps them to take various investment
related decisions and to determine the financial position and performance of the organization.
The disclosures in financial statements facilitate users of financial reports to compare the
reports of one company with that of other or within the company with its previous
performances (Kundu, 2019).
In Woolworths Group, disclosures regarding tangible assets like useful life estimation, sale
proceeds, impairments have been made. Property, Plant & Equipment is reduced on a
constant basis over their anticipated useful lives. Leasehold advancements are amortized
during the residual period of the entity leases or the predictable functional life of the
developing Woolworths Group. Practical lives of tangible assets are appraised each phase. If
parts of tangible assets item have different useful lives, then it has separate accounting.
Estimation of outstanding functional lives need noteworthy administration conclusion and is
inspected at least yearly. If the constructive lives are altered, the net written down value of
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the property, plant & equipment is reduced or amortized from the day of modification as per
the revise functional lives. Depreciation realized in previous period is unchanged
(Woolworth, 2018)
The probable functional lives of the assets are;
Building 25 - 40 years
Plant & Equipment 2.5 - 10 years
Leasehold improvements up to maximum of 25 years (retail properties) or 40 years (hotels)
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Conclusion
According to the AASB 116 Property, Plant & Equipment, tangible assets are now denoted
and classified as Property, plant & equipment which includes land, building, furniture and
machinery, etc. According to AASB 116, the cost of any tangible fixed asset is measured
after evaluating the functional life of the asset. The functional life of the asset is determined
after the internal and external market research of the organization. After that the evaluation
of initial cost and the subsequent are performed to work out the value of tangible asset to be
shown in the balance sheet. Subsequent to this, depreciable amount is calculated for the asset
that would be reduced each year. For the explanation purpose, Woolworth’s group has been
taken up to know the applicability of the accounting standard and to know the functional life
calculation, initial and subsequent cost treatment, and the depreciable amount. This
assignments aims, detailed discussion of tangible assets, their recognition, valuation,
treatment according to standards and their disposal on various circumstances.
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References
 Mohamad, D. K. H. A., Husain, N. H., Mat, S. F., Yatin, S. A. I., Shuhaimi, H.,
Sulaiman, S., &Jaris, J. (2019). Establishing Information as Tangible
Asset. Sciences, 9(6), 539-547.
 Naim, A. Y. (2017). The extent of compliance by international NGOs with
International Accounting Standard No. 16 Property, Plant and Equipment–(Case
study on Islamic Relief Palestine). The extent of compliance by international NGOs
with International Accounting Standard No. 16 Property, Plant and Equipment–(Case
study on Islamic Relief Palestine).
 Abbott, M., & Tan‐Kantor, A. (2018). Fair Value Measurement and Mandated
Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian
Accounting Review, 28(2), 266-278.
 Otegbulu, A. C. (2019). Methodological lapses in plant and equipment valuation
amongst Lagos valuers. Property Management.
 Kundu, S. (2019). AN OBSERVATION OF DISCLOSURE PRACTICE
REGARDING PROPERTY, PLANT AND EQUIPMENT ON TEN LISTED
INDIAN COMPANIES. International Journal on Recent Trends in Business and
Tourism, 3(1), 85-90.
 Gonçalves, R., Lopes, P., & Craig, R. (2017). Value relevance of biological assets
under IFRS. Journal of International Accounting, Auditing and Taxation, 29, 118-
126.
 Hossain, M. S. (2019). Disclosure of Property, Plant and Equipment as per BAS# 16:
A Study on Selected Pharmaceutical Companies in Bangladesh. The Millennium
University Journal, 4(1), 1-11.
 Standard, I. A. (2015). Presentation of Financial Statements. Balance Sheet, 54, 80A.
 Woolworth Group Limited. (2018). Annual Report 2018
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