Accounting for Property, Plant and Equipment (PPE) PDF

CHAPTER 3 INCOME TAXES Objectives: Identify the recognition of property, plant and equipment Define the deferred taxes and current taxes PAS 12 Income Taxes 1  Accounting profit vs. Taxable profit...

CHAPTER 3 INCOME TAXES Objectives: Identify the recognition of property, plant and equipment Define the deferred taxes and current taxes PAS 12 Income Taxes 1  Accounting profit vs. Taxable profit The varying treatments of economic activities between the PFRSs and tax laws result to permanent and temporary differences: Permanent differences Permanent differences are those that do not have future tax consequences Examples: - Interest income on government bonds and treasury bills - Interest income on bank deposits - Dividend income - Fines, surcharges, and penalties arising from violation of law - Life insurance premium on employees where the entity is the irrevocable beneficiary 2 Temporary differences Temporary differences are those that have future tax consequences. Temporary differences are either: - Taxable temporary differences – arise, for example, when financial income is greater than taxable income or the carrying amount of an asset is greater than its tax base - Deductible temporary differences arise in case of the opposites of the foregoing Taxable temporary differences result to deferred tax liabilities while deductible temporary differences result to deferred tax assets. Deferred taxes - If the increase in deferred tax liability exceeds the increase in deferred tax asset, the difference is deferred tax expense. If it is the opposite, the difference is deferred tax income or benefit - A deferred tax asset is recognized only to the extent that it is realizable - Deferred taxes are measured using enacted or substantially enacted tax rates that are applicable to the periods of their expected reversals - Deferred tax assets and liabilities are not discounted - Deferred tax asset and liabilities are presented as non-current 3 PAS 16 Property, Plant and Equipment Characteristics of PPE - Tangible assets – items of PPE have physical substance - Used in normal operations – items of PPE are used in the production or supply of goods or services, for rental, or for administrative purposes - Long-term in nature – items of PPE are expected to be used from more than a year Examples of items of PPE 4  1. Land used in business 2. Land held for future plant site 3. Building used in business 4. Equipment used in the production of goods 5. Equipment held for environmental and safety reasons 6. Equipment held for rentals 7. Major spare parts and long-lived stand-by equipment 8. Furniture and fixture Recognition The cost of an item of property, plant and equipment shall be recognized as an asset only if: - it is probable that future economic benefits associated with the item will flow to the entity - the cost of the item can be measured reliably Measurement of Cost The cost of an item of PPE is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with PAS 23 Borrowing Costs Cost Model After recognition, an item of PPE is measured at its cost less any accumulated depreciation and any accumulated impairment losses Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life. When computing for depreciation, 5 each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Depreciation begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation ceases when the asset is derecognized or when it is classified as “held for sale” under PFRS 5, whichever comes earlier The Straight-line method of Depreciation Straight line method – depreciation is recognized evenly over the life of the asset by dividing the depreciable amount by the estimated useful life Depreciation = (Historical cost – Residual value) ÷ Estimated useful life Revaluation Model After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses Revaluation surplus Fair value* xx Less: Carrying amount (xx) Revaluation surplus – gross of tax xx The fair value is determined using an appropriate valuation technique, taking into account the principles set forth under PFRS 13 Derecognition: 6  The carrying amount of an item or PPE shall be derecognized: - on disposal - when no future economic benefits are expected from its use or disposal PAS 19 Employee Benefits Employee benefits are “all forms of consideration given by an entity in exchange for service rendered by employees. Four categories of employee benefits under PAS 19 - Short-term employee benefits - Short-term employee benefits are employee benefits (other than termination benefits) that are due to be settled within 12 months after the end of the period in which the employees render the related service - Post-employment benefits - are employee benefits (other than termination benefits) that are payable after the completion of employment 7 - Other long-term employee benefits - are employee benefits (other than post-employment benefits and termination benefits) that are due to be settled beyond 12 months after the end of the period in which the employees render the related service - Termination benefits - are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: 1. an entity’s decision to terminate an employee’s employment before the normal retirement date 2. an employee’s decision to accept an entity’s offer of benefits in exchange for the termination of employment For further discussion please refer to the link provided: PAS 12 – Income Taxes https://www.youtube.com/watch?v=puCzQ3duUhI For further discussion please refer to the link provided : PAS 16 - PPE https://www.youtube.com/watch?v=Z7SfSVmychY For further discussion please refer to the link provided: PAS 19 – Employee Benefits https://www.youtube.com/watch?v=2xTUfFcE6wE Reference Book: Conceptual Framework and Accounting Standards By: Zeus Vernon B. Millan, 2019 8