Question

3-IAS 16 Property, Plant and Equipment sets out the requirements for the recognition of the assets, the determination of their carrying amounts, and the depreciation charges and impairment losses in relation to them. Discuss the importance of two models under IAS 16 PPE and Identify the depreciation methods

Answer 1

Answer :-

Two Models can be followed by Entity:-

1. Cost Model

2. Revaluation Model.

After recognition, an entity chooses either the cost model or the revaluation model as its accounting policy and applies that policy to an entire class of property, plant and equipment:

1. Cost Model :

• under the cost model, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses.

2. Revaluation Model;-

• under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably is carried at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations must be made regularly and kept current.
• Revaluation increases are recognised in other comprehensive income and accumulated in equity unless they reverse a previous revaluation decrease. Revaluation decreases are recognised in profit or loss unless they reverse a previous revaluation increase.

Importance of these methods :

1. Cost method - For those assets whose fair value can't be determined or not changes frequently. Less complex to calculate.

2. Revaluation Method- For those assets whose fair value changes frequently. Revaluation method shows the actual value of an asset as on books closing date.

Depreciation.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Methods of Depreciations :

1. SLM - Straight Line Method

2. Diminishing balance method

3. Units of productions method.

However, it also mentions that there are variety of methods that could be used as long as it respects the pattern of assets.

1. SLM -

Over the useful life of asset cost of the asset is depreciated.

The example of Straight-line depreciation method would be, let say company have car value 10,000, and it is the company policy to depreciation its assets based on Straight-line depreciation. For such assets, the depreciation rate assumes 20%. Therefore, the depreciation per year would be USD 2,000 equally.

2. WDV - Written down value or diminishing balance method:

the depreciation amount for the first year will be high and decrease in the subsequent year.

example, but the basic of depreciation is based on the net book value of assets. Therefore, the depreciation expenses in the first year us the same but the second year it will be based on the next book value USD8,000 (USD 10,000 – USD 2,000). The depreciation in the second year is 1,600 (8,000 * 0.2). based on this figure, you could see the depreciation in the second years is less than the first year.

3.Units of Production method

Units of production method is the types of depreciation method that allow by IFRS. This method, the assets will be depreciated based on, for example, the unit of products that assets contribute for the period compare to total products that expected to be contributed. This method is a bit complicate as you require to estimate the production units that assets could run for in the whole useful lift. For example, the car could run for 10,000 kilometer per its useful lift, and this year it already run for 2,500 kilometer. Therefore, the depreciation for first year would be USD 2,500 [(2,500*10,000)10,000].